Can Coronavirus be a Force Majeure to Excuse Contract Performance?

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Can Coronavirus be a Force Majeure to Excuse Contract Performance?

Businesses dealing with Coronavirus developments are suddenly faced with many pressing concerns, from whether they will be allowed to continue to operate, to employee relations and supply and delivery issues. One question that may become urgent is: What are the effects of Coronavirus and COVID-19 events on your business’ existing contracts? Can you cancel that big product order you placed, when government closure orders or other disruptions will make it difficult for you to sell it? Can you be forced to deliver products when you can no longer get the ingredients due to supply chain disruptions? Who bears those risks?

First, Does Your Contract Have a Force Majeure Clause?

All contracts are in some ways a method of allocating risks between the parties. Many (but not all) contracts contain what is commonly called a force majeure clause. These clauses explain what will happen when an unexpected and uncontrollable event disrupts performance of contractual obligations. Such a force majeure event is sometimes loosely referred to as an “Act of God,” but it is more accurately an unanticipated event that the parties could not have controlled. A key element is that the parties could not have reasonably anticipated the event at the time of contracting. As a result, the contract date becomes an important consideration: In a force majeure analysis, a contract entered into during March 2020 may well be treated differently than one entered into in March 2019.

Next, Read and Comply with the Requirements of the Force Majeure Clause

The primary purpose of a force majeure clause is to allocate the risk of such unanticipated events – effectively excusing one party’s failure to perform a contractual obligation due to such an event. It is regarded as a term that is negotiable between the parties, like price or delivery time. Whether the parties have any force majeure clause, and its specific terms, will vary from contract to contract. So it is essential to read your contracts carefully and be sure to comply with their terms.

If a contract has a force majeure clause, the first question that will arise is what kind of event can trigger it? Common events identified may be floods, earthquakes, wars and terrorism. Relatively few force majeure clauses refer to “pandemic,” “epidemic” or “state of emergency,” which seem most applicable here. But some may, and others may include events that result from such occurrences, such as “government action or order.” Others may refer to inability to obtain supplies, which could also be triggered by worldwide Coronavirus effects. And some may just generally refer to “force majeure” without identifying any specific event, or include a “catch all” term of some kind. Courts tend to apply such non-specific force majeure terms narrowly, so it is important to read and understand your specific contract and how its terms are likely to be applied.

Many force majeure terms include written notice requirements. Strict compliance with such notice requirements is often required, including giving written notice of inability to perform the contract within a specified time after the unanticipated event. Here, the Coronavirus pandemic and its effects, such as new government orders, may be viewed as a series of events that have varying effects – whether any one or more triggers the required notice will depend heavily on the contract terms and the specific circumstances.

The decision about whether and when to give the required notice can be daunting: Giving notice too early may itself be a breach of the contract – an anticipatory repudiation in legal terminology – but giving notice too late may waive the force majeure excuse. In many instances, it may be advisable to have communications with the other side about the issues, without formally giving notice.

Then, Give Consideration to the Controlling Law

Another important consideration is what jurisdiction’s laws control the contract. Many contracts include an agreement on which state or country’s law will control. But when the contract does not include such an agreement, it may become a fact question driven largely by where the parties were located, where the contract was made and where the performance was required.

The law of the controlling jurisdiction can be very important because states differ in what they require to apply a force majeure excuse for non-performance. California, for example, invokes a standard of “commercially impracticability,” which is more flexible than the standards of many other states. Some states require that actual impossibility be shown. All states require some showing of causation – meaning that the alleged disruption in fact was a cause of the inability to perform. But some states require that the force majeure be shown to be the sole cause of the inability to perform, and not just one among many causes.

Some states, including California, require substantial effort to mitigate the disruption (meaning, taking all reasonable alternative measures to eliminate or limit the effects of the force majeure), but other states are less demanding of mitigation efforts. For example, if the seller has unanticipated problems getting expected supplies of required ingredients, a court may require that the seller seek other more expensive supplies, or may even require that the seller take legal action against its suppliers. Courts may also require partial performance, if the unanticipated disruption does not preclude all performance.

Be Judicious in Your Use of the Force Majeure Clause

In all instances, the focus will be on the event that caused the disruption, not on the disruption itself. Just showing that performance has become more costly, difficult or inconvenient will not usually suffice to establish a force majeure. Courts may assume that the parties allocated ordinary risks of post-contract changes in costs and profitability, although contract terms can set different standards that could control this assessment.

Business managers should readily see that a contract’s force majeure clause can be a powerful tool in this Coronavirus emergency, but it can be double-edged if not wielded carefully. Managers may also have to face the difficult position of being on both sides of this issue – on the one hand, dealing with a business partner that is unable to perform a contractual obligation, and on the other hand, being unable to perform yourself. Conkle, Kremer & Engel attorneys routinely help clients with complex business matters, including contract terminations and force majeure disputes. In our next blog post on this subject, we will turn to what happens when your contract did not include any force majeure clause. In California, as in many states, the Uniform Commercial Code or other doctrines of Impossibility of Performance and Frustration of Purpose can come into play.

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23
MAR
0

Banking and Finance, Beauty Industry, Contracts, Contracts, Business and Finance, Fashion, Food, Craft Beer and Nutrition, Litigation, Arbitration and Mediation, Manufacturing, Personal Care Products, Real Estate & Construction, Sales, Technology

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The Personal Care Product Industry as “Essential Activity” in the Coronavirus Pandemic

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The Personal Care Product Industry as “Essential Activity” in the Coronavirus Pandemic

March 20, 2020 Update to Post:

Very Fast-Moving Developments on the Subject of Essential Business Activity

Since Conkle, Kremer & Engel’s first publication of this blog post on March 18, 2020, there have already been significant additional developments, including more government orders. In the early evening of March 19, Los Angeles County and the State of California each issued “stay-at-home” orders that have noteworthy differences from the March 16 San Francisco Bay Area orders. All of these orders appear to be operating in parallel effect, so different requirements may apply depending on your business locations.

With respect to the Los Angeles County order, both establishments selling “personal care products” and “businesses that supply other essential businesses [like grocery stores and pharmacies]” are categorized as “Essential Business” and exempt from the closure effects in Los Angeles County. This “personal care products” exemption is like the Bay Area orders. The Los Angeles County order additionally includes establishments providing “personal grooming services,” like salons and barber shops, emphasizing the importance of personal hygiene to combat the Coronavirus and indicating that, top to bottom, the supply chain of personal care products should continue to operate in Los Angeles County. At least, for now.

The State of California’s order, which applies statewide, appears to be much broader in general application than many county orders, but is quite vague as to what activities are “Essential” and therefore permitted. Instead of listing the specific exempt businesses like the county orders, the California state order refers to the federal Cybersecurity and Infrastructure Security Agency’s (“CISA”) list of 16 “Critical Infrastructure Sectors,” which are somewhat malleable business categories that may cause confusion as to which businesses might be exempt. On March 19, CISA released a guidance memorandum that appears to contemplate the manufacture of personal hygiene and cleaning products as being “critical,” but again is not nearly as specific to personal care products as are the various California county orders. Even though it is possible that the California state order supersedes county, city or other local orders, the state order is somewhat unclear as to what business activity is prohibited or remains permitted. For that reason in particular we have, for now, continued to look to the various more specific county orders to provide advice to clients.

CK&E’s personal care product industry sources inform us that there will likely be additional official guidance on the California state order sometime next week, and it is anticipated that such guidance should include specific permission for personal care products manufacturers and sellers to continue at least some scope of business activity. Underlying the various orders there continues to be a strong policy argument to keep personal care products businesses running – they make products that can help reduce the risk of spreading and being infected by Coronavirus.

CK&E will continue to monitor events as they develop and provide up-to-date information to its clients in personal care and other industries in order to assist in navigating through these uncertain and fast-changing circumstances.

Original March 18, 2020 Post:

With states and counties temporarily shuttering certain categories of businesses to combat the Coronavirus pandemic, many manufacturers, distributors, and retailers of personal care products and cosmetics may wonder whether their businesses fall under such executive orders and are required to close. If the March 16, 2020 “stay-at-home” orders issued by six of California’s San Francisco Bay Area counties are any indication, it appears that at least some categories of personal care products, and the businesses that deal in them, may be considered “Essential Activities,” allowing such businesses to remain in operation.

Those Bay Area executive orders (used as a model by Orange County, California for a similar March 17 order, subsequently amended and narrowed March 18) have two pertinent “Essential Activities” sections. The first includes “personal care products” and “products necessary to maintain the sanitation of residences,” and the second includes “businesses that supply other essential businesses [like grocery stores and pharmacies] with the supplies necessary to operate.” These two categories certainly should include personal cleaning and protective items like shampoos, soaps, washes, lotions, balms, and creams, as these products are essential elements of the personal hygiene deemed necessary to combat the Coronavirus. The California Health and Safety Code has long required workers to maintain standards of personal cleanliness with respect to hair, hands, and skin, and in the wake of government directives to wash hands frequently, news outlets like the Washington Post and the Boston Globe have recently quoted medical experts for the importance of moisturizing skin to keep a strong barrier against disease.

With respect to “elective” or “non-hygienic” personal case products such as hair treatments, coloring products, makeup, and nail polish, while the Bay Area orders do refer to the continued sale of all “personal care products” without limitation, it is unclear whether manufacturers or sellers of non-hygienic personal care products will be considered “Essential Activities” in practice. Many hair and nail salons have been closed, and governments have already begun issuing warnings and citations to non-essential companies who have remained open in the face of lockdown orders.

For comparison, the U.S. Department of Transportation’s Federal Motor Carrier Safety Administration (FMCSA) issued a national emergency declaration to provide “hours-of-service regulatory relief to commercial vehicle drivers transporting emergency relief in response to the nationwide coronavirus (COVID-19) outbreak.”  Among the transported products that are within emergency FMCSA regulatory exemptions are: “Supplies and equipment, including masks, gloves, hand sanitizer, soap and disinfectants, necessary for healthcare worker, patient and community safety, sanitation, and prevention of COVID-19 spread in communities.” US DOT’s FMCSA reportedly considers its regulatory exemptions applicable to mixed shipments of general consumer goods and some of these types of products that are important to healthcare worker, patient and community safety.

Based on these developments, and to the extent possible, businesses dealing in a variety of personal care or cosmetics products may want to consider pivoting to a larger share of production of hygiene-centric products to remain “essential” until issuance of further guidance.

Conkle, Kremer & Engel has decades of advising clients in the personal care, cosmetics, and beauty industry, including with respect to a wide range of regulatory and employment-related matters. CK&E is working with the Personal Care Products Council and closely monitoring the fast-developing Coronavirus legal landscape in order to assist clients with their immediate business, workplace, and workforce needs in this uncertain time.

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18
MAR
0

Beauty Industry, California Trade Regulations, Food, Craft Beer and Nutrition, Personal Care Products, Regulatory Compliance, Sales

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What California Employers Must Know About Coronavirus and COVID-19

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What California Employers Must Know About Coronavirus and COVID-19

Federal, California and other state and local governments continue to grapple with responding to and reducing the spread of Coronavirus (severe acute respiratory syndrome coronavirus 2 
(SARS-CoV-2)) and the disease caused by it, COVID-19. In addition to grappling with the personal and family effects, employers must ensure that they have a response plan in place to address Coronavirus’ impact on their business. In doing so, employers must be conscious of responding appropriately in light of the legal and business implications. In some ways, employers are in uncharted territory, but there are guideposts in existing laws and regulations. Here are some of the important considerations for employers to keep in mind in responding to Coronavirus:

Stay Up to Date on Government Guidance

In order to make an educated decision regarding what course of action will best protect employee safety, employers need to stay informed about the latest developments regarding the spread of the virus and adhere to government guidance for responding to the virus.

The Center for Disease Control (“CDC”) has provided Interim Guidance for Business and Employers  meant to help prevent workplace exposures based on the information currently known about the virus. Given the rapidly evolving nature of this situation, employers should check the CDC’s website frequently for updates.

Employee Education to Prevent the Spread of COVID-19 in the Workplace

Some basic steps employers should take to help prevent the spread of Coronavirus and protect workers’ health and safety include:

  • > Educate employees on Coronavirus signs and symptoms and precautions to take to minimize the risk of contracting the virus
  • > Encourage employees to wash hands frequently with soap and water for at least 20 seconds, and avoid touching their mouth, nose, and eyes with unwashed hands
  • > Practice social distancing, including minimizing non-essential travel, meetings and visitors
  • > Provide employees who continue to work in the office with hand sanitizer, flu masks, disinfecting wipes and paper towels, instruct them on proper use, and direct them to diligently clean frequently touched surfaces and objects (such as doorknobs, telephones, keyboards and mice)
  • > Actively encourage employees who show any symptoms of the disease caused by Coronavirus (COVID-19) or are close to others who have, to stay home and not come to work

Formulate a Response Plan

Employers should move quickly to implement workplace policies to prevent the spread of the virus and protect employees. Some examples of potential elements of an employer’s response plan may include:

  • > Establish processes to communicate information to employees and business partners on your infectious disease outbreak response plan
  • > Review human resources policies to make sure that policies and practices are consistent with public health recommendations and existing state and federal workplace laws
  • > Increase the frequency and thoroughness of worksite cleaning efforts, particularly in common areas such as bathrooms, break rooms and kitchens
  • > Seriously consider new policies and practices to reduce congregations and increase the physical distance between employees, customers, vendors and others, to reduce the chances for exposure – for example, staggered break times, phone or video conferences instead of meetings
  • > To the extent feasible, ensure that employees have the requisite computer, phone and other technological capabilities to perform their work from home
  • > Formulate plans for suppliers and workers whose jobs cannot be performed remotely, such as staggered schedules and breaks, off-hours deliveries, or having some tasks performed by outside contractors
  • > Encourage employees who are feeling sick to stay home or work remotely, even if they are not showing Coronavirus symptoms
  • > Prepare to respond to employees who may be nervous or concerned about contracting COVID-19. Employers should be understanding of  employees’ concerns and evaluate each request or issue based on the individual employee’s specific circumstances.

Legal Implications of Workplace Strategy

Although there is currently no California law or regulations addressing an employer’s legal obligations relating specifically to Coronavirus, workplace safety and health regulations in California require employers to protect workers exposed to airborne infectious diseases. Therefore, it is important for employers to understand the legal issues implicated by Coronavirus and the guiding legal principles which will inform the employer’s response to the virus.

OSHA Standards for Maintaining a Safe Workplace

Employers have a legal obligation to provide a safe workplace for employees, and the best way to prevent infection is to avoid exposure. The General Duty Clause, Section 5(a)(1) of the OSH Act of 1970, 29 U.S.C. 654(a)(1) requires employers to provide workers with working conditions free from recognized hazards that are causing or are likely to cause death or serious physical harm, to receive information and training about workplace hazards; and to exercise their rights without retaliation, among others.

Cal/OSHA Requirements

The Aerosol Transmissible Diseases (ATD) standard (California Code of Regulations, title 8, section 5199) requires employers to take certain actions to protect employees from airborne diseases and pathogens such as Coronavirus. The regulations apply only to specific industries, such as health care facilities, law enforcement services and public health services, in which employees are reasonably expected to be exposed to suspected or confirmed cases of aerosol transmissible diseases.

The ATD requires such employers to protect employees through a written ATD exposure control plan and procedure, training, and personal protective equipment, among other things. However, the requirements are less stringent in situations where the likelihood of exposure to airborne infectious diseases is reduced. For more information, Cal/OSHA has posted guidance to help employers comply with these safety requirements and to provide workers information on how to protect themselves.

Medical Leave, Paid Sick Leave Issues and Disability Discrimination

If an employee is forced to miss work due to the need to be quarantined or the need to care for a family member for similar reasons, employers must determine whether the Family and Medical Leave Act (FMLA) or other leave laws apply to an employee’s absence. If the employee has exhibited symptoms and is required to be away from work per the advice of a healthcare provider or is needed to care for a family member, leave laws may apply to the absence.

The FMLA regulations state that the flu ordinarily does not meet the Act’s definition of a “serious health condition,” it may qualify if it requires inpatient care or continuing treatment by a health care provider. In addition, eligible employees might be entitled to FMLA leave when taking time off for examinations to determine if a serious health condition exists, and evaluations of the condition, under the FMLA definition of “treatment.”

In contrast, if the employer itself implements health and safety precautions that require the employee to be away from work, an employer should proceed with caution before designating any time away from work as leave under a specific law. Doing so may require that the employee provide such leave when it otherwise would not be required to do so.

Review your sick leave, PTO (paid time off), or vacation policies. Consider reminding workers that the use of paid sick leave (PSL) is available to help workers who are sick to stay home. However, the employer cannot require that the worker use PSL – that is the employee’s choice. Employers may require employees use their vacation or PTO benefits before they are allowed to take unpaid leave, but cannot mandate that employees use PSL.

Employees in California at worksites with 25 or more employees may also be provided up to 40 hours of leave per year for specific school-related emergencies, such as the closure of a child’s school or day care by civil authorities (Labor Code section 230.8). Whether that leave is paid or unpaid depends on the employer’s paid leave, vacation or other PTO policies.

Paying Workers During a Pandemic

Depending on your organization’s business, some employees may be directed to work from home, temporarily furloughed, or work a reduced schedule.

Furloughs and Layoffs

Short-term layoffs or furloughs are generally permitted as long as the criteria for selection are not protected classes such as race, national origin, gender, etc. Exempt employees generally should continue to receive their full salary for each workweek in which they perform work. In contrast, hourly workers need not be paid for time not worked. A short-term layoff or furlough of less than six months should not implicate notice obligations under the Federal Worker Adjustment and Retraining Notification (“WARN”) Act, but may require advance notice under the California WARN Act, which was recently interpreted as having been triggered by certain short-term furloughs.

If non-exempt employees’ work schedules are reduced due to a temporary closure, they need not be paid according to their regular schedule under the Fair Labor Standards Act (FLSA). However, they may be eligible for state Disability Insurance (“DI”), and Paid Family Leave (“PFL”) benefits for caring for themselves or their family members. Employees receiving reduced hours because of the effects of COVID-19 may be eligible for unemployment insurance (“UI”). In California, the Governor’s Executive Order waives the one-week unpaid waiting period for DI and UI, so workers can collect those benefits for the first week out of work.

Resources for Additional Information about Coronavirus from the CDC

For more information about the Coronavirus and how businesses and individuals should best respond, refer to the below resources provided by the CDC and California’s Employment Development Department:

CDC: About Coronavirus and COVID-19

CDC: What You Need to Know About Coronavirus

CDC: Interim Guidance for Businesses and Employers

CDC: Frequently Asked Questions and Answers

EDD: Coronavirus 2019 and COVID-19

CK&E Can Help

During these uncertain and rapidly changing developments, employers need to be proactive and careful as to the steps they take to protect their businesses, employees, customers and vendors. Lawyers at Conkle, Kremer & Engel have decades of experience advising California employers and companies doing business in California about labor, regulatory, consumer and contract concerns. We remain available and ready to help our clients navigate these difficult times. Please contact John Conkle, Amanda Washton or any of our attorneys to discuss your concerns.

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14
MAR
0

Banking and Finance, Beauty Industry, California Trade Regulations, Class Actions, Contracts, Contracts, Business and Finance, Discrimination, Employment Law, Fashion, Food, Craft Beer and Nutrition, Industries Represented, Manufacturing, Real Estate & Construction, Regulatory Compliance, Sales, Technology

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California Air Resources Board Moves to Update Consumer Product VOC Limits

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California Air Resources Board Moves to Update Consumer Product VOC Limits

If you are a manufacturer of Hair Finishing Spray, No Rinse Shampoo, Personal Fragrance Products, Hair Shine or Temporary Hair Color (as well as a number of other consumer products) who sells in California, you might want to start thinking about product reformulation options.

Over the past few months, California’s Air Resources Board (“CARB”), the state agency responsible for investigating, regulating, and enforcing air pollution and emissions standards, has been developing revisions to the regulations relating to volatile organic compounds (“VOCs”) in various consumer products. VOCs are potentially harmful chemical compounds released into the indoor and outdoor environment, including through the manufacture and use of everyday products like cleaning sprays, air fresheners, hair care products, waxes and polishes, insect repellant, and laundry products. CARB consumer product regulations provide definitions for various categories of products and establish limits on the percentages of VOCs for many of the various categories.

From time to time, CARB revisits certain categories and schedules reductions in the permissible VOC limits. The latest round of proposals for VOC limit reductions include the Hair Finishing Spray, No Rinse Shampoo, Personal Fragrance Products, Manual Aerosol Air Freshener, Aerosol Crawling Bug Insecticide, and Charcoal Lighter Material product categories, including substantial reductions of up to 25% of VOCs by product weight. CARB is also considering adding the Hair Shine and Temporary Hair Color product categories to the list of planned reductions. The reductions are proposed to be phased in incrementally, effective 2023 and 2027, to permit manufacturers the time necessary to phase out current product lines and replace them with compliant products.

Final rules have not yet been set, but manufacturers who make and sell such consumer products would be wise to begin preparing to reformulate products to meet the requirements on the anticipated timetable. CARB will be conducting workshops and meetings throughout 2020 to continue to discuss VOC limits and definitions for these categories and others, including working with manufacturers and other industry experts to determine the feasibility of the proposed changes. Conkle, Kremer & Engel will monitor the results of CARB’s work in reducing VOCs and continue to report on the developments.

CK&E routinely assists manufacturers who sell products in California to ensure that their products meet CARB VOC standards and that their product labeling is appropriate, per CARB regulations, for the types of product being sold. CK&E works directly with CARB regarding VOCs and labeling, including representing manufacturers in CARB enforcement actions, in which CARB has the power to levy substantial fines against manufacturers whose products do not comport with VOC limits. With CK&E’s knowledge and assistance, manufacturers can avoid or reduce liability and business disruptions from such potential issues. If your business is facing CARB-related or other regulatory issues, please contact CK&E for a free consultation.

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11
MAR
0

Beauty Industry, California Air Resources Board, California Trade Regulations, Manufacturing, Personal Care Products, Sales

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US Takes New Steps to Combat Counterfeit Products

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US Takes New Steps to Combat Counterfeit Products

On January 31, 2020, the White House issued an executive order outlining several new steps to address the ongoing and growing issue of the sale of counterfeit goods through e-commerce platforms over the internet, which harms both manufacturers and sellers of authentic products and the consumers who purchase the fake (and sometimes physically harmful) products. Estimates show that the annual value of counterfeit goods traded internationally rose from $200 billion in 2005 to $509 billion in 2016. U.S. Customs and Border Protection reports 27,599 shipment seizures stemming from intellectual property violations in fiscal year 2019. Those most commonly affected by the sale of counterfeit goods include the personal care, apparel, electronics, luxury goods, software, entertainment and media, and automotive industries.

Several agencies, including CBP, the Department of Homeland Security, Immigration and Customs Enforcement, and the U.S. Postal Service are involved in the anti-counterfeiting efforts. New steps include (1) the revocation or suspension of Importer of Record numbers for those caught importing counterfeit goods; (2) requirements for consigners, carriers, hub facilities, and customs brokers to notify CBP of any importers known to be dealing in counterfeit goods and to cease transacting with such parties, with increased scrutiny and penalties for noncompliance; (3) the creation of a task force between the CBP, DHS, and USPS in order to determine permissible ways to prevent and deter the transport of counterfeit goods through the postal system, including the targeting of particular international posts (for example, the Chinese postal system) for repeated violations; (4) the periodic publishing by DHS of information relating to seizures and violations; (5) DHS and CBP recommendations of best practices for e-commerce platforms and third-party marketplaces; and (6) the prioritization by Federal prosecutors of offenses involving counterfeiting or piracy.

Importantly, per DHS reports, CBP will “treat domestic warehouses and fulfillment centers,” like ones operated by e-commerce giant Amazon, “as the ultimate consignee for any good that has not been sold to a specific consumer at the time of its importation.” As such, e-commerce platforms that store violative products, even if those products are technically in the possession of third-party sellers while they are being stored, will have a “greater responsibility” to cooperate in the identification and removal of such products, and “greater liability” for failure to cooperate. This could potentially benefit private litigants as well – if e-commerce stores have a greater responsibility to inspect, identify, and address counterfeit products, the threshold for a finding of willful or knowing infringement, which can lead to damage multipliers and attorney fee awards, could be reduced. Even the prospect of such increased penalties can create powerful leverage for settlements beneficial to infringement plaintiffs.

Conkle, Kremer & Engel has extensive experience helping product manufacturers and distributors investigate and enforce their rights to stop and remedy counterfeiting, parallel importation, gray market and other trademark- and intellectual property-infringement claims. CK&E attorneys are well-versed in the careful initial steps that should be taken promptly when sales of illicit products are suspected. CK&E keeps abreast of the latest laws and techniques that permit manufacturers and distributors to identify, prevent, and report counterfeiters and other IP violators. Stay tuned for additional CK&E blog posts as we monitor important developments relating to e-commerce counterfeiting.

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21
FEB
0

Beauty Industry, Brand Protection, Copyrights, Fashion, Food, Craft Beer and Nutrition, Intellectual Property, Manufacturing, Patents, Personal Care Products, Sales, Technology, Trademarks, Unfair Competition

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AB 51 at a Crossroad: Can California Employers Still Compel Employees to Arbitrate Disputes?

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AB 51 at a Crossroad: Can California Employers Still Compel Employees to Arbitrate Disputes?

California Assembly Bill 51 (“AB 51”) has been in the news because it imposes a far-reaching ban on California employers requiring employees to arbitrate employment disputes. AB 51 was set to take effect on January 1, 2020, but its effect was temporarily stopped by a court injunction issued by U.S. District Judge Kimberly Mueller on December 30, 2019, in a lawsuit filed by the U.S. and California Chambers of Commerce. A fuller hearing on whether the court will extend the injunction is set for January 10, 2020. If the injunction is extended, AB 51 will remain in limbo as long as that case remains pending, and very possibly permanently.

AB 51, if it is allowed to take effect, would have far-reaching implications for California employers who use arbitration agreements for resolution of disputes with employees. AB 51 was signed into law by Governor Gavin Newsom on October 10, 2019, and applies to “contracts for employment entered into, modified, or extended on or after January 1, 2020.” The law prohibits any person from requiring applicants and employees, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to waive any rights, forum, or procedure established by the California Fair Employment and Housing Act (“FEHA”) and the California Labor Code.

The Impact of AB 51
Although AB 51 was originally promoted to target the #MeToo movement and was characterized as a anti-sexual harassment law, because many sexual harassment claims against employers have been kept from public view by resolutions in private arbitrations rather than public court proceedings. But the new law covers much more than just sexual harassment claims. In practical effect, AB 51 would prohibit most employers from requiring employees to sign mandatory arbitration agreements for nearly all types of employment law claims, including any discrimination claims covered under FEHA and for any claims brought under the California Labor Code. AB 51 also precludes employers from threatening, retaliating or discriminating against, or terminating any job applicant or employee for refusing to consent to arbitration or any other type of waiver of a judicial “right, forum, or procedure” for violation of the FEHA or the Labor Code.

Nor can employers avoid AB 51 by having a standard arbitration agreement that requires applicants or employees to “opt out” to avoid. The law effectively prohibits employers from using voluntary opt-out clauses to avoid the reach of the bill. New California Labor Code Section 432.6(c) states that “an agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights is deemed a condition of employment.”

In addition, new Government Code Section 12953 states that any violation of the various provisions in AB 51 will be an unlawful employment practice, subjecting the employer to a private right of action under FEHA. Although this will presumably require an employee to exhaust the administrative remedy under FEHA, this provision would nevertheless lead to further exposure for California employers who utilize arbitration agreements with their employees. Importantly, however, AB 51 explicitly does not apply to post-dispute settlement agreements or negotiated severance agreements.

Federal Preemption of AB 51?
Generally, the Federal Arbitration Act, 9 U.S.C. § 1, et seq., (“FAA”) preempts state laws like AB 51 that attempt to regulate or restrict arbitration agreements. Under the FAA, a state may not pass or enforce laws that interfere with, limit, or discriminate against arbitration, and state laws attempting to interfere with arbitration have repeatedly been struck down by the U.S. Supreme Court as preempted by the FAA. AB 51, however, expressly states that it does not invalidate a written arbitration agreement that is otherwise enforceable under the FAA. Proponents of AB 51 argue that it is not preempted by the FAA because it only impacts “mandatory” arbitration agreements and does not affect “voluntary” agreements.

Impending Court Challenges
Many questions surrounding the validity and application of AB 51 remain unanswered. Therefore, legal challenges on the ground that AB 51 is preempted by the FAA were inevitable. On December 6, 2019, the U.S. and California Chambers of Commerce filed a complaint in the U.S. District Court for the Eastern District of California, alleging that AB 51 is preempted by the FAA. The complaint seeks a permanent injunction to halt enforcement of AB 51 until its legality is determined. The January 10, 2020 hearing of the preliminary injunction may give strong indication which way the Court will turn on the issue for the time being, but the ultimate determination will likely take years to wend its way through the Ninth Circuit Court of Appeal and perhaps the U.S. Supreme Court.

What Should Employers Do In Response to AB 51?
As this challenge to AB 51 makes its way through the courts, employers with ongoing arbitration agreements (or those interested in implementing arbitration programs) face a difficult choice starting in 2020: Play it safe and strike all mandatory arbitration agreements, or maintain the status quo until the litigation plays out. There is no one-size-fits-all approach that will work for every employer.

Employers currently using arbitration agreements should consider either staying the course based on the assumption that AB 51 will be held preempted by the FAA and therefore unenforceable, or suspending their arbitration programs until more clarity on AB 51 is provided. Employers implementing arbitration programs after January 1, 2020 should consider including in their arbitration agreements specific language to conform with Labor Code 432.6 and emphasizing the voluntary nature of the agreement.

The attorneys at Conkle, Kremer & Engel remain vigilant on employment law developments to advise businesses on all aspects of employee legal relations, including updates on the use of arbitration agreements as uncertainty looms.

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2
JAN
0

Banking and Finance, Beauty Industry, California Trade Regulations, Class Actions, Contracts, Contracts, Business and Finance, Discrimination, Employment Law, Fashion, Food, Craft Beer and Nutrition, Litigation, Arbitration and Mediation, Manufacturing, Real Estate & Construction, Sales, Sales Commissions, Technology

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The Conkle Firm Presents at Personal Care Product Council’s Emerging Issues Conference in Marina del Rey

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The Conkle Firm Presents at Personal Care Product Council’s Emerging Issues Conference in Marina del Rey
Zachary Page and Eric Engel being introduced for PCPC Emerging Issues Panel on Product Counterfeiting and Brand Protection

Conkle, Kremer & Engel attorneys Eric S. Engel and Zachary Page presented to beauty industry professionals on hot and developing legal issues in brand protection, grey market and product counterfeiting at the Personal Care Products Council’s November 20, 2019 Emerging Issues Conference. The Conference was held on the 10th Floor of the Marina del Rey Marriott, with a spectacular view over the nearby marina and beach.

Among the topics covered by Zach were issues of registering U.S. trademarks for CBD products, and other previously unregisterable brands. The 2019 U.S. Supreme Court decision in Fourth Estate Public Benefit Corp. v. Wall-Street.com put new importance on registering important copyrights well in advance of their need for infringement claims, and Zach discussed the close relationship with the Digital Millennium Copyright Act’s “DMCA Clock” to takedown infringing online publications. Trends toward false advertising claims based on “natural” and “organic” labeling were also discussed, as were the dramatic increase in medical claim class action and other lawsuits. Zach also briefed the gathered industry experts on the various issues that affect uses of models and others without adequate documentation of consent, which can raise serious right of publicity as well as copyright concerns.

Eric addressed grey market and counterfeiting case development, including the importance of creating “materially different” packaging for U.S. and foreign products. Simple and low-cost ways to help DHS/CBP protect brands against importation of foreign-labeled versions of their own products, as well as counterfeits, was outlined. Also outlined were cost-effective techniques such as recording trademarks online with CBP’s IPR e-Recordation system, Lever Rule Protection, providing CBP with effective Product Identification Training Guides (PITG), conducting IPR Webinars for CBP distribution, and posting e-Allegations online. On combating counterfeiting, Eric addressed Amazon.com specifically because it now accounts for more than half of U.S. online consumer sales, and more than half of Amazon’s online sales are on behalf of third parties in its “marketplace.” Amazon acknowledges no responsibility for sales in its marketplace, beyond closing seller accounts and refunding its customers’ money when they can show that they were sold counterfeit and defective products. Eric discussed the developments in Amazon’s selling and fulfillment practices and in the law of counterfeiting and products liability that suggest that Amazon’s currently-strong denials of responsibility for third party’s products and sales practices may be less compelling in coming years.

CK&E attorneys regularly give presentations to personal care product industry professionals to help them understand and proactively address the latest legal concerns that affect and can inhibit growth of their businesses.

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22
NOV
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Advertising and Labeling, Beauty Industry, Brand Protection, California Organic Products Act, California Trade Regulations, Consumer Legal Remedies Act, Copyrights, Intellectual Property, International Trade, Litigation, Arbitration and Mediation, Manufacturing, Patents, Personal Care Products, Sales, Trademarks

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The Conkle Firm is at Cosmoprof Asia, Hong Kong

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The Conkle Firm is at Cosmoprof Asia, Hong Kong

Conkle, Kremer & Engel attorneys John Conkle and Sherron Wiggins are busy at Cosmoprof Asia in Hong Kong. CK&E is again the proud sponsor of California Trade Alliance’s California Pavilion, providing the meeting lounge so California businesses can be in the room where it happens.

The first day for CK&E at Cosmoprof Asia was largely devoted to catching up with old friends of the firm and meeting new ones. Many of the attendees have been CK&E clients or employees of clients for years. One such person is Greg Starkman who, as an executive of Joico in the early 90’s, worked with CK&E on numerous matters. Greg and his wife Joanne now head up Innersense Organic Beauty, which manufactures and sells a line of natural and organic hair care products “dedicated to purity, peace of mind, and the practice of self-care.”

We also viewed outstanding and innovative products that are finalists for the annual Cosmoprof Asia Awards. Several caught our attention, including two products selected due to their packaging. One uses a container made of recycled coffee grounds and polylactic acid (aka polylactide or PLA), which is a thermoplastic aliphatic polyester derived from renewable resources that gives the package a small carbon footprint. The other notable package is manufactured from industrial waste. Other innovative products of interest include a hair dryer weighing only .6 lbs, and a patented plastic makeup container that features a magnetic closure.

So far, attendance at this year’s Cosmoprof Asia appears to be reduced from last year. Many of the attendees believe that the reduced attendance may be affected by the citizen protests that have taken place in Hong Kong over the past few months. Some attribute the attendance drop-off more specifically to the reluctance of Chinese citizens from the “Mainland” to come to Hong Kong during the protests. But there’s a bright side to the smaller crowds – CK&E attorneys have more time available to meet with clients and prospective clients, and to learn about the new products and trends in the beauty industry.

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13
NOV
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Advertising and Labeling, Beauty Industry, Brand Protection, International Trade, Manufacturing, Personal Care Products

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New California Law to Classify Employees and Independent Contractors

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New California Law to Classify Employees and Independent Contractors

On September 11, 2019, California lawmakers passed California Assembly Bill 5 (AB 5), codifying and clarifying the California Supreme Court’s landmark 2018 decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which fundamentally altered the test for determining the classification of workers as employees or independent contractors in California. We previously blogged about the Dynamex decision, under which workers are presumed to be employees for purposes of claims for wages and benefits arising under Industrial Welfare Commission wage orders, and companies must meet a three-pronged “ABC” test to overcome this presumption and establish that an individual is an independent contractor. AB 5 would codify the ABC test into law.

AB 5 has been sent to Governor Gavin Newsom, who recently endorsed it in an op-ed for the Sacramento Bee, and he is expected to sign it into law.

Under AB 5, a new Section 2750.3 would be added to the California Labor Code. Section 2750.3, subsection (a)(1), will state that, for purposes of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
(B) The person performs work that is outside the usual course of the hiring entity’s business; and
(C) The person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

Under the new law, California workers can generally only be considered independent contractors if the work they perform is outside the usual course of a company’s business. Conversely, a company must classify workers as employees if the company exerts control over how the workers perform their duties, or if their work is part of a company’s regular business.

AB 5 has far-reaching implications for California businesses who classify their workers as independent contractors because it extends the scope of the Dynamex ruling from only Industrial Wage Commission Orders to include claims for wages and benefits under the Labor Code and Unemployment Insurance Code. The Dynamex decision applied only to rules governing minimum wages, overtime and meal and rest breaks, but under AB 5, individuals classified as employees must also be afforded workers’ compensation in the event of an industrial injury, unemployment and disability insurance, paid sick days and family leave.

However, AB 5 is also narrower than the Dynamex decision in that it exempts certain occupations from the new test. The new Labor Code section would provide limited exemptions for certain occupations, including direct sales salespersons, licensed estheticians, licensed electrologists, licensed manicurists (until January 1, 2022), licensed barbers and licensed cosmetologists from the application Labor Code Section 2750.3 and the holding in Dynamex, provided that the individual:
• Sets their own rates, processes their own payments, and is paid directly by clients;
• Sets their own hours or work and has sole discretion to decide the number of clients and which clients for whom they will provide services;
• Has their own book of business and schedules their own appointments;
• Maintains their own business license for the services offered to clients; and
• If the individual is performing services at the location of the hiring entity, then the individual issues a Form 1099 to the salon or business owner from which they rent their business space.

If a company can meet its burden of showing that the individual meets the above criteria, then the determination of proper classification for that individual would be governed by S.G. Borello & Sons, Inc. v. Department of Industrial Relations, the 1989 decision that has been the prevailing law for wage order cases in California prior to Dynamex. Borello established an 11-factor inquiry into the degree of control a company exerts over the worker’s performance of his or her duties: whether the hiring entity has the right to control the manner and means of accomplishing the result desired; the right to discharge at will, without cause; whether the worker is engaged in a distinct occupation or business; the kind of occupation and the skill required in the particular occupation; who supplies the instrumentalities, tools and the place of work for the person doing the work; the length of time for which services are to be performed; the method of payment; whether or not the work is part of the hiring entity’s regular business; and whether or not the parties believe they are creating an employer-employee relationship.

Another aspect of AB 5 worth noting is that it would not allow an employer to reclassify an individual who was an employee on Janaury 1, 2019 to an independent contractor due to the measure’s enactment.

With the law set to become effective on January 1, 2020, companies, particularly in the salon and beauty industry, would be wise to reassess the classification of their workers to ensure compliance with the new law. The attorneys at Conkle, Kremer & Engel have extensive experience advising businesses on best practices regarding proper worker classification, and will be continually monitoring developments related to AB 5 as they occur.

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12
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Banking and Finance, Beauty Industry, California Trade Regulations, Contracts, Business and Finance, Employment Law, Fashion, Food, Craft Beer and Nutrition, Industries Represented, Manufacturing, Real Estate & Construction, Regulatory Compliance, Sales, Technology

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FTC Warns Manufacturers About CBD Claims

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FTC Warns Manufacturers About CBD Claims

The Federal Trade Commission (FTC) announced today that it had sent warning letters to three companies over their advertising of products containing cannabidiol or CBD, one of the many active compounds of the cannabis plant. The letters reinforce the FTC’s position that advertisers may not make health-related representations for CBD products without satisfying FTC substantiation standards.

According to the FTC’s press release, the companies – which have not been identified publicly – advertised oils, tinctures, capsules, “gummies” and creams containing CBD as treating or curing serious diseases and health conditions. Disease claims require scientific proof, making it illegal for companies to advertise that a product can prevent, treat or cure human disease without competent and reliable scientific evidence to support such claims.

The FTC took issue with the following:
• A claim that CBD “works like magic” to relieve “even the most agonizing pain” better than prescription opioid painkillers
• A claim that the company has participated in “thousands of hours of research” with Harvard researchers, to bolster its claims that CBD has been “clinically proven” to treat cancer, Alzheimer’s disease, multiple sclerosis (MS), fibromyalgia, cigarette addiction, and colitis
• A claim that CBD products are proven to treat autism, anorexia, bipolar disorder, post-traumatic stress disorder, schizophrenia, anxiety, depression, Alzheimer’s disease, Lou Gehrig’s Disease (ALS), stroke, Parkinson’s disease, epilepsy, traumatic brain injuries, diabetes, Crohn’s disease, psoriasis, MS, fibromyalgia, cancer, and AIDS
• A claim that CBD is a “miracle pain remedy” for both acute and chronic pain, including pain from cancer treatment and arthritis
• A claim that CBD gummies are highly effective at treating “the root cause of most major degenerative diseases, including arthritis, heart disease, fibromyalgia, cancer, asthma, and a wide spectrum of autoimmune disorders”
• A claim that CBD cream relieves arthritis pain
• A claim that CBD oil may effectively treat depression, PTSD, epilepsy, heart disease, arthritis, fibromyalgia, and asthma

According to the FTC, the letters urge the recipient companies to review all claims made for their products, including consumer testimonials, to ensure they are supported by competent and reliable scientific evidence, and also include a warning that selling CBD products without such substantiation could violate the FTC Act and may result in legal action that could result in an injunction and an order to return money to consumers.

The recent warning letters follow similar joint warning letters issued by the FTC and the U.S. Food and Drug Administration (FDA) in March 2019 to three sellers of CBD supplements – Nutra Pure LLC, PotNetwork Holdings, Inc., and Advanced Spine and Pain LLC d/b/a Relievus. The letters alleged that the companies made false or unsubstantiated health claims in violation of the FTC Act as well as sold unapproved drugs in violation of the Federal Food, Drug & Cosmetic Act (FD&C Act).

As the market for CBD goods – including cosmetics and supplements – continues to explode, companies vying for market position must be aware of action taken by the FTC and FDA and stay away from making health or drug claims that could subject them to enforcement by these agencies. Conkle, Kremer & Engel attorneys stay current on the latest developments to help those how manufacture, distribute and sell products containing CBD avoid regulatory trouble.

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10
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Advertising and Labeling, Beauty Industry, Food, Craft Beer and Nutrition, Manufacturing, Personal Care Products, Regulatory Compliance, Sales

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