Tuesday, January 31st, 2023
While most commentary and handwringing has focused on the Federal Trade Commission’s (“FTC”) Notice of Proposed Rulemaking released on January 5, 2023, many are unaware of the FTC actions taken the day before. On January 4, 2023, the FTC announced the successful launch of what it calls an enforcement “crackdown” against noncompete agreements by heralding forced settlements with three (3) different companies that made regular use of noncompete agreements with a broad range of employees, and not just with low-wage or low-skilled workers.[1] Each of the FTC Complaints alleged the “unfair use of noncompetes in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45,” and the Press Release indicated that each of the three (3) companies had agreed to the entry of a consent order that will be entered after the thirty (30) day public comment period.
As part of the Consent Orders, once finalized, each of the companies and their individual owners will be prohibited from enforcing, threatening to enforce or imposing noncompete agreements against the employees identified in the rulings. Moreover, each of the companies will be also required to nullify the challenged noncompetes without imposing any penalty on the employees and each post a notice in a conspicuous place in their workplaces for the next ten (10) years to let their workforce know that employees are free to seek or accept a job with any company, run their own business or to compete with them at any time. Ominously, the FTC’s Press Release included the following statement “The agency continues to investigate noncompete restrictions and other restrictive terms in employment contracts that may violate the law. If you are aware of an unfair noncompete you can report it to the FTC staff.”
So, let’s look at what is known about the three (3) companies targeted by the FTC based on the allegations in the Complaints:
- A Michigan-based security services company required more than 1,500 low-wage security guards to enter into noncompete agreements that prohibited them from working for any business within a 100-mile radius of their last job site for two (2) years, and also imposed a $10,000 penalty for violations. The company had been aggressive in enforcing the agreement and the FTC alleged that it continued to require employees to sign-off on the agreement even after a state court had found the restrictions were unreasonable and unenforceable.
- The other two (2) companies were identified as being the two (2) largest glass container manufacturers in the United States. The FTC noted that it pursued these matters because the glass container industry in the United States is highly concentrated, and it is very difficult for a new competitor to enter into this market without having access to highly skilled and trained workforce in this niche market.
- One of the glass container manufacturers required a contract with more than 1,000 employees that imposed a one (1) year ban “from going to work for, owning or being otherwise involved in a business in the United States that sold similar products or services without prior written consent.” The other manufacturer had a contract with approximately 700 employees that imposed a two (2) year ban from “performing the same or substantially similar services for a business in the United States, Canada or Mexico that is involved with or supports the sale, design, manufacture or production of glass containers in competition with the employer.” In both cases, the agreements were not just with hourly employees, but the challenged agreements were required of many salaried employees who were involved in various aspects of the glass production process or who worked as engineers or in a role involving quality assurance.
Keep in mind what lead to these Consent Orders was a complaint filed by the FTC’s staff against a business, not in a lawsuit filed in federal or state court, but as an administrative complaint filed internally with the agency itself[2] and a majority of Commissioners make the decision.[3] In her published statement in first of the three cases, Christine Wilson, the dissenting Commissioner, expressed concern that these cases foreshadows how the Commission intends to apply the new Section 5 Policy Statement released on November 10, 2022.[4] She criticized her fellow commissioners by saying, “Unfortunately…[these actions] foreshadow how the Commission will apply the new Section 5 Policy Statement. Practices that three (3) unelected bureaucrats find distasteful will be labeled with nefarious adjectives and summarily condemned with little to no evidence of harm to competition.” [5]
Commissioner Wilson also noted that the complaints against the two (2) glass manufacturers were very brief and “woefully devoid of details that would support the Commission’s allegations.” Moreover, she noted that the allegations failed to allege that the noncompete provisions at issue were unreasonable, which was a significant departure from legal precedent and noted that the Commission makes no reasonableness assessment regarding the duration or scope of the noncompete clauses involved, “Instead [the Commission], seems to treat the noncompete clauses as per se unlawful under § 5 of the FTC Act.” She pointed out that the complaints asserted that the noncompete clauses impeded entry or expansion of rivals into the industry but made no factual allegations regarding the inability of any rival to enter or expand its operations. The complaints further further alleged without evidence that the noncompete provisions reduced employability and caused lower wages and salaries, reduced benefits, less favorable working condition and personal hardships on employees. In concluding, she expressed concerns for due process because, “The allegations here depart from a century-long line of precedent regarding the appropriate analysis of the legality of noncompete provisions and conflict with the 7th Circuit holdings specific to § 5 of the FTC Act… the complaints in these matters challenge conduct [by the manufacturers] that predate the FTC’s November 2022 Section 5 Policy Statement… Given the state of the law for hundreds of years prior to this enforcement challenge I believe notice was lacking.”[6]
In response to Commissioner Wilson’s statement, the FTC Chair Lina M. Kahn and the other two (2) commissioners released a statement taking issue with the claim that the FTC’s actions were a “radical departure” from precedent. She pointed out in a footnote that “there is long-standing legal precedent which firmly affirms that Section 5 reaches beyond the [anti-trust provisions] of the Sherman and Clayton Acts. Reactivating Section 5 [referring to the July, 2021 rescission of investigative limits, see ftn.3], and ensuring that our approach is fully faithful to the legal authorities that Congress gave us is critical to promoting the rule of law and ensuring the democratic legitimacy of our work.”[7] The FTC indicated that it will publish the final Consent Decree in the Federal Register for each of the three cases soon after the 30 day period closes for receiving public comment.
It should be no real surprise that the current appointees to the FTC have aggressively pursued an effort to reduce or eliminate the ability of employers to require or enforce a noncompete provision with workers. One need only recall that on May 5, 2016, during the Obama administration, the White House released a report on the overuse and misuse of noncompete agreement that attracted significant attention at the time, and later on October 26, 2016, released a Call to Action based on a report from a working group[8] that led to several Democratic Senators to introduce the Workforce Mobility Act of 2018, which would have banned the use of noncompete agreements with employees. Notably, it was not only the Democrats who expressed concern about the impact of noncompete agreements. Senator Rubio introduced the Freedom to Compete Act in January 2019 that would have banned the use of noncompete agreements for most nonexempt workers. None of these legislative efforts have been successful at the federal level as Congress is in stalemate. In contrast many state legislatures have been active in this area, including Virginia which passed a new law that prohibits employers from enforcing or requiring “low-wage” employees to enter into a noncompete agreement, which is defined to include a restriction that would prohibit an employee from providing services or products to a customer during a post-employment, unless the employee initiates contact with or solicited the customer.[9] So, the desire to ban the use of post-employment noncompete agreements has not disappeared.
Despite the gridlock in Congress, President-elect Biden in December, 2020 identified noncompete reform as part of his platform where he said he would work with Congress to “eliminate all noncompete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets.”[10] In February, 2021, shortly after Biden’s inauguration, four Democratic Senators, including Virginia’s Tim Kaine, reintroduced a version of the Workforce Mobility Act to ban employee noncompete agreements. Then on July 9, 2021, two things happened. First, President Biden issued an Executive Order[11] promoting competition in the American economy where he encouraged the FTC to consider the exercise of the FTC’s rule-making authority to “curtail the unfair use of non-compete clauses and other clauses that may unfairly limit a worker’s mobility.”[12] Next, Senator Rubio reintroduced the Freedom to Compete Act. None of this proposed federal legislation has been acted upon since that time. But earlier this month, the FTC stepped into this 18-month void and publicly announced the “crackdown” discussed above. The next day it released its Notice of Proposed Rulemaking to Ban Noncompete Agreements with Employees.
At this point, the business community is on notice that the current FTC takes a very dim view of employers who make broad use of noncompete provisions or other agreements they believe effectively keep employees from having the mobility to work where they want. Serious questions have already been raised about the FTC’s power to enact a nationwide ban on employment noncompete, as well as the terms of the proposed regulations. We have separately addressed the FTC’s Notice of Proposed Rulemaking in a separate article, here, and will be hosting a webinar in February to discuss pro-active steps businesses can take to manage the risk that either the federal government or state law may impose new limits or bans on traditional noncompete agreement and how to make sure you are protecting your confidential information and trade secrets.
If you have questions about your company’s current policies, practices and/or contracts that are designed to protect valuable confidential information, including trade secrets, and prohibit unfair competition, please contact any member of our Labor & Employment Team and join us in our upcoming webinar.
[1] https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-cracks-down-companies-impose-harmful-noncompete-restrictions-thousands-workers
[2] Pre-complaint investigations by the FTC are generally non-public and can be commenced as an administrative investigation if it has reason to believe a violation of law has occurred. The FTC has subpoena power and can compel the testimony of witnesses and production of documents in connection with its investigations. 15 USC §49. If the company contests the charges, the complaint is adjudicated before an administrative law judge, who will issue an initial decision with findings of fact and recommendations. Either side can appeal to the Commission for the final decision. The FTC’s decision can then be appealed to the applicable United States Circuit Court of Appeals, which, in Virginia, is the Fourth Circuit.
[3] There are five (5) Commissioners to the FTC, and all are political appointees. Like several other federal agencies, including the EEOC and NLRB, when a new President from the opposite party is elected, the majority changes. At present there are only 4 Commissioners sitting on the FTC, and three of the Commissioners who approved these three decisions as well as the Proposed Rule Banning Non-Competes issued on Jan. 5, 2023, will form the majority for some time, at least until the new President takes office.
[4] This result was somewhat expected after the FTC on a 3-2 vote rescinded an early 2015 Policy that limited its enforcement ability under the FTC Act. https://www.ftc.gov/news-events/news/press-releases/2021/07/ftc-rescinds-2015-policy-limited-its-enforcement-ability-under-ftc-act
[5] While she found the employers actions in the security services complaint to be unreasonable and oppressive, she nevertheless objected to the FTC’s approach. https://www.ftc.gov/system/files/ftc_gov/pdf/wilson_dissenting_statement_-_prudential_security_-_final_-_1-3-23.pdf
[6] https://www.ftc.gov/system/files/ftc_gov/pdf/wilson-dissenting-statement-glass-container-cases.pdf
[7] Chair Kahn’s full statement joined by Commissioner Slaughter and Bedoya dated Jan. 4, 2023 can be found here https://www.ftc.gov/system/files/ftc_gov/pdf/21100262110182prudentialardaghkhanslaughterbedoyastatements.pdf. The Chair went on to note that the Supreme Court had previously confirmed the FTC’s authority to challenge inherently coercive practices like those challenged in the security services case, citing ATL. Refin. Co. v. FTC, 381 U.S. 357 (1965); FTC v. Texaco, Inc., 393 U.S. 223 (1968).
[8] https://obamawhitehouse.archives.gov/the-press-office/2016/10/25/fact-sheet-obama-administration-announces-new-steps-spur-competition
[9] Va. Code §40.1-28.7:8, effective July 1, 2020.
[10] https://faircompetitionlaw.com/2020/12/02/president-bidens-proposed-ban-of-most-noncompetes-protection-strategy-and-steps-to-take-now/
[11] This Executive Order followed by one week the FTC’s decision to rescind the 2015 Policy on enforcement where the FTC made it clear that it no longer believed its investigative authority was limited to anti-trust and other violations of the Sherman and Clayton Acts.
Monday, January 23rd, 2023
On January 5, 2023, the Federal Trade Commission (“FTC”) created a stir when it released a 218-page Notice of Proposed Rulemaking and a Proposed Rule that if implemented will prohibit the use of post-employment, noncompete provisions. The Proposed Rule extends to all workers, whether paid or not, and would require employers to rescind existing noncompete agreements within 180 days of publication of the Final Rule.[1] The FTC estimates that approximately 30 million workers are bound by a post-employment noncompete provision.
Much has been said about the Proposed Rule, but these are several initial observations in advance of a webinar Gentry Locke will host in February 2023 to discuss in more detail these and other related issues:
- The Proposed Rule is simply “proposed” and is unlikely to be adopted without changes and will not become effective during calendar year 2023. The 60-day comment period now runs through March 20, and the FTC is then required to evaluate and respond to these comments, which will take time. Once the FTC issues a Final Rule later this year, companies will then have 180 days to challenge the new provision or comply. During this six (6) month period a broad range of legal challenges will be made to the FTC’s ability to issue a nationwide ban on this agreement, e.g., the U.S. Chamber of Commerce has already announced that it is “blatantly unlawful.”[2] In short, there is no reason to panic.
- Setting aside the FTC’s Proposed Rule for a moment, businesses with employees working in Virginia must be mindful of and comply with Virginia Code § 40.1-28.7:8, a state law that already limits the ability to use noncompete agreements. Since July 1, 2020, Virginia has prohibited all employers from entering into or attempting to enforce noncompete provisions with “low-wage” employees, and also requires employers to post a copy of the statute or a notice summarizing its provisions in the workplace.[3] Virginia’s law has real consequences now, and defines a “covenant not to compete” to include any agreement that restricts an employee from providing a service to a customer or client of their former employer, if the employee was not the one who initiated the contact with or solicited the client or customer.[4] The statute’s definition of “low-wage employee” is a moving target. “Low Wage” means average weekly earnings during the twelve (12) month period before termination[5] are less than the average weekly wage for Virginia as determined annually.[6] In other words, the standard used for who is a “low-wage” employee will change and likely increase every year. The statute provides for civil penalties for violations from Virginia’s Labor Commissioner, as well as a civil action by the employee where the court has jurisdiction to not only void the covenant, but to order all other appropriate relief, including an award of lost compensation, damages, liquidated damages, litigation costs and reasonable attorney’s fees. Likewise, an employer’s failure to post a copy of this statute (or a summary approved by the Department of Labor) will also subject an employer to civil penalties.[7]
- In light of the Proposed Rule, it does makes sense to review and create an inventory of all existing agreements (and templates) your company uses and identify those that involve a post-employment “noncompete clause”[8] regardless of the context. The FTC’s Proposed Rule defines a “noncompete clause” to be “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after conclusion of the worker’s employment with the employer.”[9] On its face this definition is somewhat limited in that it only applies to post-employment restrictions in contracts between employers and workers;[10] however, the Proposed Rule goes on to say that a functional test will be used to determine whether a contractual term is a “de facto non-compete clause because it has the effect of a “noncompete clause.’”[11]
The Proposed Rule includes two examples of a de facto noncompete clause that will be prohibited: (i) an overbroad non-disclosure/confidentiality agreement that prevents the worker from working in the same field after separation, and (ii) a provision that requires a worker to repay training costs if termination occurs before expiration of a fixed period, and required payment is deemed to unreasonable related to the costs for the training. Since some form of the FTC’s Proposed Rule will be adopted, even if it’s later invalidated, it makes sense to prepare now, especially since you may already have a Virginia statutory obligation to meet.[12]
- The FTC’s Proposed Rule states that its ban does not apply to a contract that restricts competition entered into between two (2) companies,[13] and the Proposed Rule contains an express exception for a noncompete agreement made by a person selling a business entity or otherwise disposing of all or substantially all of an ownership interest in a business or substantially all of the business’ assets.[14] However, under the FTC’s Proposed Rule is if the buyer wants a restrictive covenant with the seller’s key executives and/or with minority shareholders there is a problem. The current version of the FTC’s proposed ban on noncompete provisions contains no carve out for senior executives,[15] and the shareholder exception will only apply to those deemed to be a “substantial” owner, member or partner in the business at the time the person enters into the noncompete clause. The FTC’s definition of who is considered to have “substantial” ownership interest is someone who holds “at least a 25% ownership interest in a business entity.”[16]
This aspect of the Proposed Rule is particularly problematic and would be a marked departure from long-standing legal precedent. In many, if not all, mergers and acquisitions one of key provisions to making the deal happen is to ensure that former executives of the acquired business as well as prior owners do not compete against the business post-closing. Absent the ability to prevent competition from key members of management post-closing, the value of transaction is likely to be greatly diminished, assuming there is a deal at all. Likewise, it is common in many privately held businesses that a number of people, e.g., key executives, directors, etc., to have stock ownership in a company that falls well below the 25% threshold. In Virginia, noncompete provisions that are tied to the sale of a business are generally enforceable and are viewed much more liberally than employee restrictions.[17] This part of the Proposed Rule is particularly troublesome and warrants comments to be sent to FTC from businesses and business associations.
- Nondisclosure and confidentiality agreements, which are used to protect trade secrets and other confidential business information, will, in most cases, be outside the scope of the FTC’s Proposed Rule and are not governed by Virginia’s noncompete statute.[18] The FTC observed that research suggests that between 33% and 57% of US workers are parties to at least one NDA. The FTC highlighted California’s “alternative” approach, where noncompete provisions have been banned, but companies are still able to protect their trade secrets and competitive advantage through the enforcement of confidentiality agreements.[19] The FTC also noted that 47 states, including Virginia, have adopted a version of the Uniform Trade Secrets Act and in 2016 Congress enacted a comprehensive trade secrets law to provide robust protection of confidential information that qualifies as a “secret” and provide access to federal courts to prevent and remedy criminal and civil misappropriations.[20]
The Proposed Rule is an important word of caution to all companies to review their non-disclosure and confidentiality agreements (templates) and policies to make sure they actually protect the company’s trade secrets and other information that is critical to the business’ operations. There are a number of issues to be evaluated:
- Make sure that the business is actually limiting access to confidential information and trade secrets to the right people, and that there are appropriate nondisclosure agreements in place with third parties, as needed.
- If the company makes use of one or more share drives, evaluate what steps are being taken or may need to be implemented to regulate which employees have access to the information on those drives, such as, financial and R&D projects.
- Determine if the company needs to revisit its policy to allow employees to use personal devices for business purposes, and if so, what additional steps or protocols, if any, may need to be taken to reclaim confidential information from personal devices.
- Identify situations at work where key information is accessed or downloaded and make sure the company knows where all of the information is actually stored in the cloud, on flash drives, etc., and determine if there are additional protective measures that can or need to be taken.
- Make sure your agreements provide the remedies that the company will want in the event of a breach and consider including as a remedy a court-ordered injunction to prevent working for a competitor when the employee has violated the agreement or misappropriated a trade secret.
- Keep in mind the FTC’s Proposed Rule currently will apply retroactively to all severance agreements entered into where an executive has been paid a significant severance, as well as an agreement to redeem stock options and stock grants given to employees upon termination, if those agreements contain a noncompete clause. As a result, those noncompete provisions would become invalidated unless the Proposed Rule is changed to prevent retroactive application and/or to exclude those types of agreements. If you anticipate in 2023 needing a severance agreement with a high paid executive, consider using a garden leave provision opposed to simply relying on a traditional noncompete that might have a liquidated damage provision in it if there is a violation.[21] These situations will require careful consideration of the options at the time.
- All businesses and members of the public should submit comments and concerns to the FTC through March 10. Consider how the proposed rule might impact your business or industry and consider organizing with others in your industry or lobbying organization to submit public comments objecting to the FTC’s jurisdiction or right to issue such a nationwide ban, the FTC’s proposal to make the ban retroactive, the “de facto” functional approach to defining the noncompete provision, and the inclusion of certain agreements that should not be banned: (i) sale of business; (ii) agreements with owners (shareholders, members or partners), even if the person is also an employee; (iii) senior executives – top 5 employees in the organization; (iv) key employees who are paid above a specific dollar amount, i.e. $150,000 (v) severance agreements; (vi) ownership redemption agreements even if the owner is also a “worker”; (vii) confidentiality and NDA agreement; (viii) agreements that prevent the worker from providing services to a company’s customer post-termination if it is a customer was one the worker serviced during employment; and (ix) an agreement to pay damages if the employee is provided or is reimbursed for specialized training within a reasonable period of time.
For more information, please feel free to contact any member of our Labor & Employment team, and plan to sign up for the webinar we are planning in February 2023.
[1] Some industries and companies are exempt from FTC jurisdiction, i.e., certain banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and persons subject to the Packers and Stockyard Act of 1921, and those entities that are not “organized to carry on business for its own profit or that of its members.” 15 U.S.C. §44. Additionally, certain private entities covered by the state action doctrine may claim to be exempt. Goldfarb v. Va. State Bar, 421 U.S. 773791-92 (1975)
[2] https://www.uschamber.com/finance/antitrust/the-ftcs-noncompete-rulemaking-is-blatantly-unlawful
[3] Unlike the FTC’s Proposed Rule, Virginia law does not invalidate noncompete agreements entered into before July 1, 2020.
[4] The Virginia statue, like the FTC’s Proposed Rule, allows employers to continue to use a non-solicitation provision that is designed to prevent a former employee actively soliciting customer in an effort to disrupt or divert existing business. There have been no reported cases involving this part of the Va. statute as most existing litigation over traditional nonsolicitation agreements also prohibit a former employee from providing services to the customer (regardless of who initiates contact/solicitation) were entered into prior to July 1, 2020.
[5] The Virginia statute provides an exclusion for a low-wage employee whose earnings are “wholly or predominately derived” from sales commissions or bonuses, but this would apply under the FTC’s Proposed Rule and the federal rule would supersede this provision of state law.
[6] The statute, however, does apply to interns, students and trainees, regardless of whether they are being paid, and also extends to an individual who is treated as an independent contractor, if that person is compensated at an hourly rate that is less than the median hourly wage for the Commonwealth for all occupations as published annually by the U.S. Department of Labor.
[7] For 2022, the “low-wage” amount was $1,290/week or $67,080 a year with a separate threshold for independent contractors. The 2023 figure has not yet been released by the Va. Dept of Labor and Industry (VDOLI). A copy of the summary notice with the 2022 wages provided by VDOLI is attached. Employers are encouraged to update this posting annually, so the notice has the most current “low-wage” calculation.
[8] Keep in mind that severance agreements negotiated at the time of termination that contain post-employment noncompete clause will be covered by this definition, unless a change is made. However, the FTC has indicated that the Proposed Rule would not apply to concurrent employment restraints, i.e., restrictions on what the worker may do while employed.
[9] FTC NPRM, Non-Compete Rule, Subchapter J, 16 CFR § 910.1, Definitions, pp.211-12 (Jan. 5, 2023) (“FTC NPRM”)
[10] The term “worker” is broadly defined to be anyone who works for an employer, regardless of whether s/he is paid or not and includes those classified as independent contractors and sole proprietors who provides services to a client or customer.
[11] For example, the FTC notes that state courts generally treat restrictions that require an employee to pay damages if they compete as the functional equivalent to a prohibition. FTC NPRM, p. 107.
[12] It is not just Virginia that has passed laws restricting the use of or prohibiting noncompete provision. In the past decade, 28 states plus the District of Columbia have changed their noncompete laws and enforcing a noncompete has become increasing difficult.
[13] Since no “worker” is involved, the Proposed Rule does not apply. However, the FTC also made it clear that the use of such agreements, including anti-poaching agreements, will continue to be subject to federal anti-trust law and all other applicable law. FTC NPRM, pp.107, 128-131.
[14] FTC NPRM, §910.3, p. 215.
[15] The FTC made it clear that the Proposed Rule is a categorical ban on all noncompete clauses with any worker but has invited comment on whether there should be a carve out for “high wage” earners or “senior executives.” FTC NPRM, pp. 150-152.
[16] FTC NPRM, §910.1(e), p, 212,
[17] Enforcement of Restrictive Covenants in Business Sale (Aug. 20, 2015) https://www.gentrylocke.com/article/enforcement-of-restrictive-covenants-in-business-sales/
[18] The FTC noted that non-disclosure agreements (NDA) can contain post-employment restrictions can be enforceable unless they are overbroad and found to be a de facto noncompete provision. FTC NPRM, p. 10-11
[19] There are two (2) other states, like California have banned the use of employment noncompete provisions for close to 100 years, North Dakota and Oklahoma.
[20] The FTC noted that in 2021 alone, 1,382 trade secret lawsuits were filed in federal court. This federal law is the Defend Trade Secrets Act of 2016, 18 USC §§1836, et seq. The criminal statute often used to prosecute the misappropriation of trade secrets where a foreign entity is involved is the Economic Espionage Act of 1996. 18 USC §§1831 – 1832.
[21] Garden leave is a transition period for employees who have been given notice of termination which keeps them on the payroll, but away from the workplace. During such leave the employee is prohibited from working for the competition or for themselves. Garden leave can be an effective, but it also carries with it legal risks which will need to be reviewed with the company’s attorney.
Thursday, January 12th, 2023
From the Journal of Transportation Law, Logistics and Policy, Volume 89, Number 2
© Copyright 2023 ATLP
Friday, January 6th, 2023
We all have bad days and even bad weeks, but waiting over a year to serve a defendant in a civil lawsuit in Virginia is just too long—and the rules agree.
Rule 3:5(e) of the Rules of the Supreme Court of Virginia (the “Rules”) states that “[n]o order, judgment, or decree will be entered against a defendant who was served with process more than one year after the institution of the action against that defendant unless the court finds as a fact that the plaintiff exercised due diligence to have timely service on that defendant.” When the Advisory Committee on Rules of Practice and the Supreme Court took actions to shorten this one-year rule, the General Assembly passed S.B. 482 in 1994, codifying the 12-month standard for timely service.[1] As codified, the legislation requires service on a defendant within “twelve months of commencement of the action or suit” and states that service after one year shall only be “timely upon a finding by the court that the plaintiff exercised due diligence to have timely service made on the defendant.”[2]
With these authorities in mind, you can quickly determine what to do if your client is named as a defendant in a civil suit and comes to your office for help more than one year after the underlying complaint was filed. As a preliminary matter, make sure your client is not in default and determine whether or not he or she has been served with process to decide which way to proceed under Virginia Code § 8.01-277.
First, in a situation where the underlying complaint was filed more than a year later and your client has not yet been served, you can simply make a special appearance pursuant to Virginia Code § 8.01-277(B) and file a motion to dismiss. If the other side can prove that it exercised due diligence in trying to serve the defendant within one year, then the motion will be denied and the defendant will have 21 days to file a responsive pleading to the complaint. A determination of due diligence is a “factual question to be decided according to the circumstances of each case,” but the concept has been described as a “devoted and painstaking application to accomplish.”[3] However, if the court finds that the plaintiff did not exercise due diligence in attempting to serve the defendant, then the court will dismiss the action.
Note that there is no statutory authority allowing a plaintiff to prospectively obtain an order granting an extension of the one-year rule.[4] Aside from proving due diligence, a plaintiff’s only recourse is a voluntary nonsuit, as discussed below. Further, the Supreme Court has specifically held that unless a voluntary nonsuit is taken before the motion to dismiss is granted, the dismissal will be with prejudice in order to preserve the policy behind the rule: “to provide for timely prosecution of lawsuits and to avoid abuse of the judicial system.”[5]
Even if a plaintiff fails to exercise the necessary due diligence to serve the defendant, he or she can still take refuge by taking a voluntary nonsuit and then refiling the complaint before the entry of an order granting the motion to dismiss. While this nonsuit avenue appears to sidestep the purpose of Rule 3.5(e), the Virginia Supreme Court has held that a plaintiff’s nonsuit rights do not conflict with the timely service rules.[6] Nevertheless, even with the possibility of a voluntary nonsuit, filing the motion to dismiss under Virginia Code § 8.01-277(B) will put the court on notice of the untimely service and restrict additional nonsuits in the future. After all, subsequent nonsuits are only permitted with leave of the court and may subject the twice-nonsuiting party to costs and fees pursuant to Virginia Code § 8.01-380(B).
Second, if your client has actually been served more than twelve months after the plaintiff’s complaint was filed, you should file a motion to quash service. Under Virginia Code § 8.01-277(A), the defendant may raise objection to the untimely service through a motion to quash, which must be filed before or together with a responsive pleading in order to preserve the objection to the deficient service.[7] Virginia Code § 8.01-277.1 provides a handy list of litigation “conduct” that amounts to a general appearance, which again waives your objection to untimely service if done without the motion to quash.
Bottom line, if more than 12 months has passed in a civil lawsuit before your client learns, from service or otherwise, that he or she has been named as a defendant, quickly consult Virginia Code § 8.01-277 and Rule 3:5(e) of the Rules of the Supreme Court of Virginia to raise an appropriate objection through a motion to dismiss or quash. While a voluntary nonsuit is likely to follow, you will have done your own due diligence to ensure that the lawsuit is timely prosecuted.
[1] See Kent Sinclair and Leigh B. Middleditch, Jr., Virginia Civil Procedure (7t. ed. 2020).
[2] Virginia Code § 8.01-275.1.
[3] Dennis v. Jones, 240 Va. 12 (1990) (quoting, in part, Webster’s Third New International Dictionary (1981)).
[4] See Bowman v. Concepcion, 283 Va. 552 (2012).
[5] Gilbreath v. Brewster, 250 Va. 436, 441 (1995).
[6] See McManama v. Plunk, 250 Va. 27 (1995).
[7] See Lyren v. Ohr, 271 Va. 155 (2006).
Wednesday, December 21st, 2022
A recent opinion by the United States Court of Appeals for the Eleventh Circuit highlights the importance of obtaining and including a borrower’s correct name in the Form UCC-1 to be filed in the Virginia State Corporation Commission and other jurisdictions with statutory provisions similar to that of Virginia.
In the case of 1944 Beach Boulevard, LLC v. Live Oak Banking Company, 2022 U.S. App. LEXIS 27330, the Court found that the Uniform Commercial Code financing statements filed by Live Oak with the Florida Secretary of State was “seriously misleading” because Live Oak listing the Debtor’s Name as “1944 Beach Blvd., LLC”, using the common abbreviation of “Boulevard” rather than the full legal name of the Debtor listed in its articles of incorporation filed with the Florida Secretary of State. The use of the abbreviation “Blvd”, was “seriously misleading.” because those statements did not sufficiently provide the name of Debtor in accordance with the applicable Florida statute and would not result in identifying the financing statement filed by Live Oak in a search using the borrower’s full name. For that reason, the Court found that the filed Uniform Commercial Code financing statement was ineffective to perfect the security interest of Live Oak in the Debtor’s assets under Florida law.
The Eleventh Circuit’s decision is consistent with the holding in a 2006 opinion by the United States Bankruptcy Court for the Eastern District of Virginia, Official Committee of Unsecured Creditors for Tyringham Holdings, Inc. v. Suna Bros., Inc. (In re Tyringham Holdings, Inc.), 354 B.R. 363 (Bankr. E.D.VA 2006). There, the Court held that in Virginia (i) Section 8.9A-503(a) of the Code of Virginia (the “Virginia Code”) specifies the sufficiency of the debtor’s name to be “the name that is stated to be the registered organization’s name on the public organic record most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name,” and (ii) as provided by Virginia Code Section 8.9A-506(b), with the exception provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with Virginia Code Section 8.9A-503(a), is “seriously misleading”.
Consistent with Virginia Code Section 8.9A-506, the State Corporation Commission has promulgated Rule 5VAC5-30-70, Search requests and reports. For the preparer of a Form UCC-1 financing statement for filing with the Virginia State Corporation Commission, it bears reading. Of particular importance is section (B)(1) of the rule, which provides in part that “[a] search request will be processed using the exact name provided by the requestor.” Taken together, the two court decisions cited above, the provisions of Title 8.9A of the Code of Virginia, and Rule 5VAC5-30-70 require more that the simply ministerial task of completing Form UCC-1. For example, if the preparer of a search for all Form UCC-1 financing statement filings uses “Mtn.” for the word “Mountain” in the borrower’s name, the search by the State Corporation Commission will not search for the borrower’s name in the records of the State Corporation Commission.
Why is this diligence important? A properly prepared and filed Form UCC-1 financing statement protects the lender against all future parties asserting a superior lien against the property of the borrower listed in the Form UCC-1 financing statement.[1] This is especially important in the context of a borrower’s filing of a petition in bankruptcy. Section 544(a) of the United States Bankruptcy Code (11 U.S.C. §101, et seq.) provides that the trustee (which can mean either a trustee appointed in a case or, in a case under Chapter 11 of the United States Bankruptcy Code, the debtor) has, as of the commencement of the case, the rights and powers of a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains at that time a judgment on all the property, or an unsatisfied execution against the creditor. With these powers, the trustee (or the debtor in a Chapter 11 case) will have priority over any lien not properly perfected and may avoid any such lien. In plain terms, this means the holder of a lien not properly perfected is likely to be treated in the bankruptcy case of their borrower as not having a lien at all.
This diligence is also important in the loan approval process. The identification of all security interests in the collateral in which the borrower will grant a security interest to the lender insures that the lender will have the collateral it expects to secure the repayment of the loan being made. Careful preparation of a Form UCC-11 Information Request begins with the confirmation of the exact name of the entity to be named as the Debtor, which can be obtained by a search of the appropriate state agency in which corporate filings are made and maintained, and is completed when the preparer can confirm that the name on the completed Form UCC-11 is identical to the name of the entity as shown in the records of the State Corporation Commission or similar governmental entity in the state in which the filing is to be made.
Lenders who carefully take the steps to identify the full correct name of their borrower and precisely use that name in searching for previously perfected security interests in the collateral that will secure their loan and in perfecting their security interest in that collateral will avoid the fate of the unfortunate lenders in the two cases described in this article.
[1] In some circumstances, the filing of a Form UCC-1 is not the proper manner of perfection of a security interest or is not the only method of perfection of a security interest. For example, perfection of a security interest in a motor vehicle must be perfected by the placement of lender’s name on the Certificate of Title issued by a state’s division of motor vehicles. In some instances, a lien may be perfected by possession of the property by the lender. The reader should consult with counsel for the appropriate method of perfection.
Monday, December 12th, 2022
Three attorneys walk into a law firm…
It’s not the start of some joke. It’s the beginning of big news for Gentry Locke, which recently welcomed three attorneys as partners whose vast experience in government and the corporate world will help clients navigate issues where the public and private sectors meet.
Carlos L. Hopkins, the Virginia Secretary of Veterans and Defense Affairs under former Virginia governors Terry McAuliffe and Ralph Northam, and a legal counsel to McAuliffe; Noah P. Sullivan, also a former counsel to McAuliffe who previously worked in the Washington, D.C. office of Gibson, Dunn & Crutcher LLP; and John M. Scheib, former chief legal officer and an executive vice president of Norfolk Southern Corporation each joined Gentry Locke in recent months.
Bringing aboard such a trifecta of talent is like winning the lawyer lottery.
“Already there’s a buzz,” said Kathleen Lordan, Gentry Locke’s Business Development Support Manager, describing the impact of bringing Hopkins, Sullivan and Scheib on board.
“This shows that Gentry Locke works at a high level to be able to attract top-notch talent,” said Monica Monday, Gentry Locke’s managing partner. “We’re really pleased that these lawyers see Gentry Locke as a good place to build their practices.”
The hirings of Hopkins, Sullivan and Scheib add a wealth of experience to the firm’s impressive roster when it comes to helping clients steer through regulatory and corporate affairs that involve government, transportation, business and other legal issues.
“We came on around the same time but from totally different places when we joined,” said Sullivan, who moved to Gentry Locke’s Richmond office from Washington, D.C. “The unifying theme is what it says about Gentry Locke and the people who are here. How many firms would love to have in-house counsel from a major company come and help them build their law firm, or have a former cabinet secretary who has tons of different experiences across being a lawyer and running big organizations come in and help solve government-facing problems? Every law firm wants that.”
“We all came to Gentry Locke and that’s because the people are great. And the trajectory of the firm spanning across Virginia to serve the Commonwealth and the legal needs here is the unifying thing. The firm has a ton of potential that we can contribute to and be part of the overall strategy of serving clients across the state,” said Sullivan.
All three attorneys have worked at the nexus of government and business, experience that came at the highest levels of public and private partnerships.
Hopkins and Sullivan served the Commonwealth during the McAuliffe administration, helping streamline regulatory rules and smooth procedures between business, government and the private sectors.
Hopkins, a former deputy commonwealth’s attorney and colonel and staff judge advocate of the 29th Infantry Division of the Virginia National Guard, was appointed by McAuliffe in 2017 as Secretary of Veterans and Defense Affairs, a massive job that required oversight of Virginia veterans’ issues that included suicide prevention, healthcare, financial wellbeing and working with military communities across Virginia.
Sullivan served two stints over nine years as a litigator with Gibson Dunn, with his stint in state government in between, giving him a depth of experience that stretches from governmental to business affairs.
Scheib, who in addition to being a former Norfolk Southern executive once sat on the boards of directors for Conrail and the United States Chamber of Commerce, said that his work in the “C suite” of a Fortune 500 Company offers a unique view on how attorneys can better serve clients. Scheib once led a team of lawyers that fought off a corporate takeover, a fight that combined law, political acumen and solid public relations.
All three men say that their work as in-house counsel provides distinct perspective about clients’ views and expectations from a law firm.
“For me, it’s always been about public service, whether it’s my time in the military, time in local government or in state government,” said Hopkins, who works in Richmond. “All the work I’ve done is centered around that. At this stage of my career, having done what I’ve done in the public sphere, I still wanted to maintain that connection to public service and help people find solutions.”
“You have to bring multifaceted strategies to the table to protect a company’s interest,” said Scheib, who is based in Hampton Roads.
All told, the attorneys’ experience in working with clients as in-house counsel will help make them better lawyers for clients of Gentry Locke.
“Sometimes, at a big law firm you only interact with lawyers, but with an in-house position you might be the only person with a law degree,” Sullivan said. “You can gain a ton of perspective from what I call ‘normal’ people and how they think. You learn what their priorities are. You become solutions-oriented and not siloed in your thinking. You learn to think creatively and find solutions for the client.”
Hopkins gained that perspective before he worked in state government, while serving as deputy city attorney for the City of Richmond, where outdated policies had made it difficult for the city to collect property taxes from owners of dilapidated buildings. Hopkins put together a cross-departmental team that worked with bureaucratic, private, and economic development interests to improve collection procedures, making sure all voices were heard.
“We got folks talking who hadn’t talked to each other before,” Hopkins said.
Hopkins’ expertise will serve him well as a member of the Gentry Locke Consulting team, advocating for clients with government affairs and strategic communications needs, especially when it comes to dealing with Virginia governmental leaders and staff.
“He’ll be a force of nature in that environment,” Monday said.
The trio’s experience can benefit other Gentry Locke attorneys, Scheib said.
“It’s an enhancement to the firm’s ability to communicate with clients by letting other [firm] members know how clients think,” Scheib said. “That shows me that this is a firm that is self-aware and wants to engage clients in a different way.”
The three attorneys are also multi-faceted in ways outside of law practice. Hopkins is musically gifted, which includes talents for playing trumpet, cornet and flugelhorn and being part of what he calls a vibrant salsa-dancing community in Richmond. He loves to scuba dive, and he is an avid golfer whose favorite course is Ballybunion Golf Club in County Kerry along the southwest coast of Ireland.
Both he and Scheib are big fans of Pittsburgh sports teams — they love the football Steelers (Hopkins said that he bleeds team colors black and gold), and Scheib has collected 18 bobbleheads of Pirates baseball players. Scheib is an outdoorsman, having spent more than 380 nights outside in tents. He, his son and daughter are all Eagle Scouts.
Sullivan’s arrival at Gentry Locke comes in the midst of a slew of big life changes in recent months. In addition to the career change, he and his wife bought a new house, she gave birth to a baby and even welcomed a new puppy to the family.
Now, Hopkins, Scheib and Sullivan are part of the Gentry Locke family.
“We have such a diversity of experiences,” Hopkins said. “Having been lead counsel within organizations, and now working here together, that’s an incredible benefit to clients. We’ve been in the halls of power. We have extensive networks. There’s not much that we will see or face that we don’t have some background in already. It’s great to have us here under one roof.”
Monday, September 26th, 2022
The Virginia Administrative Process Act (“VAPA”) and Part 2A of the Rules of the Supreme Court of Virginia govern judicial review of determinations by certain administrative agencies in Virginia. A party appealing an agency decision under the VAPA must operate within these parameters, and the Court’s review of an agency decision is limited. In this context, the party contesting the agency decision bears the burden to “designate and demonstrate an error of law subject to review by the court.” Va. Code § 2.2-4027.
Under the VAPA, an “error of law” contemplates a decision that is not: (1) in accordance with constitutional right, power, privilege or immunity; (2) in compliance with statutory authority, jurisdiction limitations, or right as provided in the basic laws as to subject matter, the stated objectives for which regulations can be made, and the factual showing respecting violations or entitlement in connection with case decisions; (3) in observance of required procedure where any failure therein is not mere harmless error; or (4) substantially supported by the evidence for findings of fact. In other words, an “error of law” under the VAPA contemplates one of two basic inquiries: (1) whether the agency acted within its authority; or (2) whether the agency decision was supported by substantial evidence.
While it is well-established that a Circuit Court acts as a appellate court in this context –conducting a “review” of the agency decision consistent with traditional appellate concepts – the reality created by the VAPA scheme and Part 2A of the Rules actually place the Circuit Court into a “hybrid” role somewhere in between a purely appellate tribunal and a traditional trial court. On one hand, and consistent with traditional appellate principles, the Rules prohibit discovery in VAPA appeals absent extraordinary circumstances, and traditional doctrines of waiver and preservation of error apply. On the other hand, however, the Rules authorize for preliminary motions practice on an appellant’s petition for administrative appeal – such as demurrers, pleas, or motions dismiss – which are typically used in traditional civil litigation at the trial court level. Accordingly, the Rules provide a respondent to an administrative appeal (that has an interest in defending the agency’s decision) with an avenue to challenge the appeal at a threshold stage.
A classic challenge to an administrative decision is whether the decision was supported by “substantial evidence.” While it is difficult for an appellant to ultimately prevail on such challenges, because the applicable legal standard requires the Court to give great deference to any agency’s factual findings, such claims nevertheless generally require a review of the agency’s record to resolve as a factual matter. Therefore, they are generally not susceptible to preliminary motions practice.
By contrast, however, an appellant may challenge an agency decision based on purely legal grounds. For example, the petitioner may claim that the agency misinterpreted or misapplied an applicable statute or regulation. Such cases rest on threshold questions of law regarding the proper interpretation/application of applicable law, which the Court can resolve without reviewing the record that was before the agency. It is these kinds of administrative appeals in which threshold motions practice can be readily used to achieve summary dismissal of the appeal on the grounds that the agency’s decision was correct as a matter of law under the applicable statute or regulation, and thus prevent a costly and time-consuming judicial review process involving consideration of the entire agency record.
Respondents to a VAPA appeal can also utilize the traditional appellate doctrines of waiver and preservation of error in connection with preliminary motions practice. Just as in a trial court, parties to an agency proceeding may waive or fail to adequately preserve issues for appeal by, for example, failing to lodge an appropriate objection to an agency action or determination at the proper time. Similar to threshold questions of law, issues of preservation and waiver present preliminary, discrete matters that the Circuit Court can determine before engaging in a comprehensive review of the agency’s decision and the evidence on which it was based. And, they may be dispositive of the appeal as a whole. Threshold motions practice is an ideal vehicle to raise such matters at an early stage in the proceeding and potentially short-circuit the appeal at the outset.
Friday, September 9th, 2022
By John G. Danyluk, Erin M. Harrigan and Andrew E. Hayhurst
Timely cover story about the data privacy rules that take effect Jan. 1, 2023. Click the below cover to read the full article in the VBA Journal or click here.
Thursday, August 18th, 2022
Congratulations! You’ve decided to start a business or to be an entrepreneur. Or you’ve decided it is time to grow your business further. Now, if you can just raise the capital to give your business a go…
Perhaps you tapped into your savings or nest egg. Maybe the business is generating enough revenue to get by. But eventually, you may need outside funding – whether from friends and family or from other investors. It could come in the form of debt or equity from private or institutional investors. Today, let’s focus on raising capital.
Beware! Raising capital is fraught with peril. There are complex federal and state laws that regulate raising capital, regardless of whether the business is a corporation, LLC, or limited partnership. Entrepreneurs seeking investors must know about these laws and regulations to keep their company (and themselves) out of legal trouble. In particular, these laws require you to comply with disclosure, filing, and form requirements – with only limited exemptions
The risks from non-compliance are real. Startups that fail to comply with the applicable securities laws expose themselves to substantial financial penalties, rescission of investment agreements, and other civil and criminal fines and penalties.
Here is some general guidance for staying clear of trouble, but consulting the right legal, tax, and financial advisors are necessary to prevent making critical mistakes in raising capital. Taking the time to raise money correctly is important. So take a beat, think it through, and get the help you need now to avoid costly problems later.
Beware of General Advertising – Consider Targeted Investors
Fight your excitement and urge to look far and wide for investors. “General advertising” or “general solicitation” is prohibited as a means to raise capital unless the onerous (and expensive) SEC registration requirements or the additional requirements of Rule 506(c) are complied with. The SEC interprets the term “general advertising very broadly. The term includes any communication published on a website, the internet, newspaper, magazine, and other outlet. No Facebook, LinkedIn, Snapchat or Instagram posts. No TikTok videos either. The SEC generally also prohibits any requests via mail, e-mail or other electronic transmission, unless there is a “substantial and pre-existing relationship” between the startup and the prospective investor. Thus, for example, entrepreneurs should not solicit investors generally via broadcast mails unless they are prepared to register with the SEC or comply with additional disclosure and filing rules. Direct communications to a person with whom you’ve had a substantial and pre-existing relationship might be acceptable. Getting specific guidance from an attorney experienced in securities laws is imperative here.
“Accredited Investors”
To steer clear of cumbersome and expensive filing and disclosure requirements, startups should aim to offer and sell their shares to “accredited investors” under SEC Rule 506.
What is an “accredited investor” under current SEC regulations? An accredited investor is an individual with who had an income in excess of $200,000 in each of the two most recent years or joint income with his/her spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; a net worth exceeding $1 million not including the value of the person’s primary residence; or is a director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer.
It is favorable to target only accredited investors because written disclosure requirements and required filings are greatly reduced compared to sales involving non-accredited investors and outright full registration of the securities under federal and state law. Although the exemptions do allow for a limited number of unaccredited investors to be targeted, doing so opens up many significant issues and federal and state disclosure and filing requirements quickly become more complicated and expensive.
Using an accredited investor questionnaire is essential.
No Unregistered Finders
In the excitement to get going, some startups make a big mistake. They turn to a “finder” to seek out investors where that finder is not registered as a broker-dealer as classified by the SEC. Beware of the well-connected consultant, financial advisor or employee who might offer to raise capital for your startup. If the finder is receiving some form of commission or transaction-based compensation (which is usually the case), she will generally be deemed a broker or dealer. If the finder is not registered with the SEC or the Financial Industry Regulatory Authority (FINRA) and sells securities on behalf of a startup, the startup will have violated applicable securities laws and the offering will be invalid. Further, the investors have the right to rescind the invalid sale and get their money back. Lawsuits are not a great way to start a relationship with your investors.
The Right Investment Vehicle
Unless you are raising close to $1 million or more, issuing preferred stock is probably not the best idea. Preferred stock financings are complicated, time-consuming and expensive. Furthermore, they may require the startup to get a valuation. Valuing the company at such an early stage is highly speculative, very difficult, and could result in heavy dilution to the founders’ shares which harms their equity position relative to future investors.
A better option to consider for seed investors is issuing convertible notes or using SAFE (“Simple Agreement for Future Equity”) agreements. A convertible note, is a way for investors to loan money to the startup, and that loan would automatically convert into equity in the first professional (the “Series A”) round of financing. Compared to issuing preferred stock, this approach is less complex, relatively inexpensive, and defers the company’s valuation until the Series A round. A SAFE is another instrument that is similar to a convertible note, but it is not a loan because it has no interest rate or maturity date.
Thursday, August 11th, 2022
Per-and polyfluoroalkyl substances (collectively, “PFAS”) are a group of nearly 5,000 human-made chemicals that are resistant to heat, water and oil. Due to these “resistance” properties, since the 1940s, PFAS have been used in a broad spectrum of industrial applications and commercial products, including everyday household items and packaging. Some examples of PFAS usage include carpeting, waterproof clothing, upholstery, food paper wrappings, cookware, personal care products, fire-fighting foams, and metal plating.
In the environment, PFAS rapidly move through groundwater. Thus, PFAS frequently are found in public and private water sources throughout the United States.
Unfortunately, the same resistance to water, heat and oil that lead to the use of PFAS in industrial applications and commercial products, also makes them slow to naturally biodegrade and difficult to remove from environmental media using the technologies traditionally used to remediate environmental conditions.
The United States Environmental Protection Agency (the “EPA”) has concluded that “most people in the United States have been exposed to PFAS”, “due to their wide-spread use and persistence in the environment.”[1] Scientific studies have shown that regular exposure to even low concentrations—in the range of parts per trillion (“ppt”)—of PFAS may cause certain adverse health effects. Such adverse health effects include: reproductive effects such as decreased fertility or increased likelihood of high blood pressure in pregnant women; developmental effects in children, including low birth weight, developmental delays, accelerated puberty, bone variations or behavioral changes; increased risk of some cancers, including prostate, kidney, and testicular cancers; reduced ability of the body’s immune system to fight infections, including reduced vaccine response; interference with the body’s natural hormones; and increased cholesterol levels and/or risk of obesity.
In response to concerns over the potential adverse consequences of exposure to PFAS on human health, recently, the EPA has taken certain steps to regulate PFAS in a number of contexts. In one of its first actions relative to PFAS, in 2012, the EPA directed operators of public drinking water systems to begin testing for the presence of PFAS in their drinking water supplies. Then, in 2016, the EPA issued drinking water health advisories at 70 parts per trillion for Perfluorooctanoic acid (“PFOA”) and perfluorooctane sulfonic acid (PFOS), two PFAS chemicals. The analogy frequently used to describe parts per trillion is drops of water in an Olympic-sized swimming pool. So, 70 ppt would be equivalent to 70 droplets of water in an Olympic-sized pool. The purpose of such EPA health advisories is to provide technical information to state agencies and other public health officials on health effects, analytical methodologies, and treatment technologies associated with drinking water contamination by PFAS.
On June 15, 2022, the EPA released updated drinking water health advisories for PFOA and PFOS as well as new health advisories for hexafluoropropylene oxide-dimer acid (“GenX”) and perfluorobutane sulfonate (“PFBS”). These updated 2022 health advisories significantly reduced the concentrations of PFOA and PFOS from 70 ppt to 0.004 ppt and 0.02 ppt respectively—about the equivalent of 4/1000th and 2/100th of a drop of water in an Olympic-sized pool. The 2022 drinking water health advisory set concentrations of 10 ppt and 2,000 ppt for GenX and PFBS.
In June 2020, the EPA added 172 PFAS chemicals to the Toxics Inventory Reporting (“TRI”) requirements for 2020. Three other PFAS chemicals were added to TRI reporting requirements in 2021.
In early 2019, the EPA commenced two significant regulatory process PFOA and PFOS; (1) promulgating a Maximum Contaminant Level (“MCL”) for PFOA and PFOS under the Safe Drinking Water Act and (2) adding the PFOA and PFOS to the list of chemicals identified as “hazardous substances” under CERLCA.
On October 18, 2021, the EPA issued comprehensive plan for promulgating regulations governing PFAS under various environmental regulatory programs, titled “PFAS Strategic Roadmap: EPA’s Commitments to Action 2021-2024” (the “Strategic Roadmap”). The Strategic Roadmap identifies goals and implementation strategies for addressing PFAS moving forward, such as holding “polluters accountable”, placing “responsibility for limiting exposures and addressing hazards of PFAS on manufacturers, processors, distributors, importers, industrial and other significant users, discharges, and treatment and disposal facilities” and enhancing PFAS reporting.[2] Furthermore, the EPA identified the following industrial sectors as “priorities” for additional investigation and evaluation as suspected PFAS users: printing; chemical manufacturing and blending; plastics and resins; oil & gas; metal coating; mining and refining; electronics; aviation; waste management; treatment and disposal; and potable water management, treatment and distribution.
The EPA is in the process of implementing the plan set forth in the Strategic Roadmap. As that plan is implemented, we anticipate that the entities that used PFAS, and entities that own or operate property on which that may be present PFAS in environmental media such as groundwater or soil, may be affected by the coming PFAS regulations. We foresee regulatory developments relating to PFAS under the following regulatory programs: CLERCLA; TRI National Pollutant Discharge Elimination System permitting, Industrial Wastewater Discharge permitting, Solid and Hazardous Waste Management and Disposal, and Toxic Substances Control.
In preparation for the coming PFAS regulations, businesses—especially in the “priority” industrial sectors listed above—should conduct their own assessments of the nature, scope and extent of their potential exposure to PFAS- related risk. Such assessments should include careful review and analysis of current operations and anticipated future compliance obligations, and develop of a plan to manage potential PFAS-related risk and comply with anticipated PFAS regulations that will likely affect their business.
PFAS is coming. The time to prepare is now.
[1] Lifetime Health Advisories and Heal Effects Support Document for POFA and PFOS, 81 Fed. Reg. 33250 (EPA May 25, 2016).
[2] PFAS Strategic Roadmap: EPA’s Commitments to Action 2021-2024 (Oct. 18, 2021).
