Month: September 2019

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You Can’t Win if You Don’t Play

In a terse opinion, Judge Jackson dismissed the claims of the plaintiff in Mortensen v. SeaWorld Parks & Entertainment, LLC, 4:19-cv-00038.  The defendant served discovery on May 15, 2019.  But the plaintiff apparently never communicated with her attorney despite attempts on May 23, May 31, June 1, June 4, June 5, and June 10.  Hearing nothing but silence, plaintiff’s counsel moved to withdraw.  On August 6, 2019, having still never received any discovery responses, the defendant moved to dismiss the case.

Judge Jackson concluded dismissal with prejudice was the appropriate remedy.  Citing plaintiff’s “disengagement with her counsel and nonparticipation in discovery,” the Court concluded that dismissal was the only appropriate remedy.

A copy of Judge Jackson’s opinion is here.

U.S. Department of Labor Increases FLSA Salary Threshold

On September 24, 2019, the U.S. Department of Labor (“DOL”) issued the final rule on the salary threshold, making 1.3 million American workers newly eligible for overtime pay.  The final rule raises the standard salary level up from its current level of $455 per week to $684 per week ($35,568 per year for a full-year worker) under the Fair Labor Standards Act (“FLSA”).  The rule also raises the total annual compensation requirement for “highly compensated employees” from the current level of $100,000 per year to $107,432 per year.  In addition, for the first time, employers will be allowed to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level for purposes of determining the salary level for exemption from overtime. The final rule also revises the special salary levels for workers in the motion picture industry and workers in U.S. territories. 

The final rule will mark the first time the DOL has raised overtime thresholds since 2004. This new rule is less drastic than a similar measure the DOL approved during the Obama Administration in 2016.  The Obama-era rule was blocked by a federal district court shortly before going into effect, and will be officially rescinded as part of the new final rule.  While a similar outcome is possible for the new final rule, it is unlikely.  The final rule is set to become effective on January 1, 2020. 

Employers should plan now for this change by reviewing their exempt employees’ salaries to determine if any employees will need to be reclassified as nonexempt and, if so, what the potential overtime costs will be. In some circumstances, such as where an employee performs exempt duties but has a salary less than  the new salary threshold, it may be more cost effective to give the employee a weekly salary increase  in order to maintain the exemption for that employee.

As always, employers should consult their labor and employment law counsel for specific advice about whether certain employees are exempt or non-exempt from overtime payments.

House Moves to Ban Employment Arbitration Agreements

On September 20, 2019, the U.S. House of Representatives passed a bill to ban mandatory arbitration of employment or consumer claims. The House voted 225 to 186 in favor of the Forced Arbitration Injustice Repeal (FAIR) Act, which would make unenforceable any pre-dispute arbitration agreement that requires arbitration of an employment, consumer, antitrust, or civil rights dispute.

In recent years, the U.S. Supreme Court has repeatedly affirmed that agreements requiring parties to submit disputes to arbitration are enforceable under the Federal Arbitration Act. Arbitration has grown in popularity with businesses as a means to control litigation costs and resolve disputes quickly and privately. Although the FAIR Act bill faces an uphill struggle in the Republican-controlled Senate, it is a noteworthy assault on arbitration and should be watched closely by employers—especially those using arbitration agreements.

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DoD publishes final rule limiting the use of LPTA procurements effective October 1, 2019

Contractors have frequently been heard to complain about the government’s persistent use of “Lowest Price Technically Acceptable Procurements,” or “LPTA” as a race to the bottom in both price and quality.  While the Federal Acquisition Regulation (FAR) has provided that price may play a dominant role in source selection where “the requirement is clearly definable and the risk of unsuccessful contract performance is minimal,” Contracting Officers in the era of budget cuts and sequestration had greatly expanded the use of LPTA for procurements with more complex requirements that were arguably better suited for a “best value” determination with deliberate trade-offs between technical approach, past performance, and price.  The use of LPTA simplifies the analysis for the source selection team but has sometimes resulted in awards to offerors ultimately unable to capably perform the work at the price offered.  LPTA can result in higher employee turnover and lower productivity due to dissatisfaction as salaries and benefits costs are driven down.  LPTA also removes any incentive for a contractor to propose new approaches or technology that may result in a better product because it will come at a higher cost.  The GAO recently published a study that found that in FY18 DoD used LPTA in approximately 25% of all competitive procurements valued at $5 million or more, while civilian agencies used the process in just 7% of such procurements.

This week, DoD published a final rule in the Federal Register (available here) implementing direction from Congress in the 2017 National Defense Authorization Act to impose limits on the use of LPTA.  The Rule goes into effect on October 1, 2019. 

The stated intent of the rule is “to identify meaningful circumstances that must exist for an acquisition to use the LPTA source selection process and certain types of requirements that will regularly benefit from the use of tradeoff source selection procedures.”  It specifies limitations on when LPTA may be used, sets forth situations in which LPTA should be avoided if practicable, and specifies other situations where the use of LPTA is prohibited.

Under the new rule, LPTA is only appropriate when the minimum requirements for technical acceptability can be clearly described and evaluated; there is little value to be realized from a proposal exceeding those minimum requirements; the analysis requires only minimal subjective judgement in comparing proposals; review of additional technical proposals would not identify different approaches that could provide increased value; there is no prospect of additional innovation or future technological advantage; and the products being procured are predominantly expendable in nature, nontechnical, or have a short life expectancy or shelf life.  The Contracting Officer must document in the contract file the circumstances justifying the use of the LPTA and a determination that the lowest price reflects full life-cycle costs of the product or service.

LPTA should be avoided, to the maximum extent practicable, for procuring Information technology services, cybersecurity services, systems engineering and technical assistance services, advanced electronic testing, or other knowledge-based professional services; for procurement of personal protective equipment; or for knowledge-based training or logistics services in contingency operations.

LPTA (as well as use of Reverse Auctions) is specifically prohibited for procuring any personal protective equipment or aviation critical safety items when the level of quality or failure of the equipment could result in combat casualties.  The use of LPTA is also prohibited in acquiring engineering and manufacturing development for a major defense acquisition program and for awarding auditing contracts.

For DoD procurements that appear to violate the new rule, contractors should discuss the matter with their counsel to consider whether it may be appropriate to challenge the solicitation by filing a pre-bid protest.

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Government Adds Australia as a World Trade Organization Country

If your contract includes Buy American Act (BAA) or Trade Agreement Act (TAA) requirements you need to know the approved list of source countries. On September 10, 2019, the Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) published in the Federal Register a final rule, FAC 2019-06; FAR Case 2019-011; Item IV; Docket No. FAR2019-0011; Sequence No. 1, amending the Federal Acquisition Regulation (FAR) to add Australia as a World Trade Organization Government Procurement Agreement (WTO GPA) country. It applies to acquisitions over the WTO GPA threshold, as well as to acquisitions for commercial items and commercial off the shelf (COTS) items. Australia is a designated country because it is a Free Trade Agreement country. You should always review the procurement to determine which BAA and TAA clauses are included, and check the current thresholds and lists of allowable source countries. You may then also need to learn various details about the manufacturing process to determine country of origin. Always assure you have properly completed your certifications in ORCA regarding the BAA and TAA. Further restrictions apply on Department of Transportation (DOT) funded contracts which often mandate only American made items. You should also consider applicable tariffs. Bottom line is that you want to make sure that you comply with the law and that your quoted prices account for all of these considerations.

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Service on an Incompetent Man?

Judge Davis entered an interesting ruling, or “non-ruling” as the case may be, on August 8, 2019 in a case captioned Mid-Century Insurance Company v. Thompson,  Civ. No. 2:18cv459.  The Plaintiff was an insurance company subrogated to the interest of Dwight Mills.

The suit stems from a fire that the Defendant allegedly  started with a cigarette.  A default judgment was entered ordering the Defendant to pay $176,564.81, the amount the Plaintiff had paid the owner for the loss.

But after the default judgment was entered, a motion to set aside the default was filed arguing that the Plaintiff was incompetent at the time he was served because he suffered from dementia.  And it claimed the Plaintiff must have known of this incapacity.  At the time of service, the Defendant had signed a power of attorney in favor of his daughter—the spouse of the subrogor-plaintiff.

The Order explains that under North Carolina law, a plaintiff who knows a defendant is incompetent must either serve the defendant’s guardian or a guardian ad litem.  Here, however, there is a factual dispute about whether the Defendant was incompetent at the actual time of service.  An affidavit was filed that the Defendant had dementia and was unable to care for himself.  But Judge Davis notes that little documentation was provided to support that conclusion.  Rather than rule on the issue now, the Court provided an additional 60 days for submission of additional affidavits or medical documentation.

The case serves as a good reminder that default judgments are often only the beginning of the litigation process.

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Qualified Opportunity Zones: A Reciprocal Vehicle to Minimize Capital Gains

The recently adopted Qualified Opportunity Zone Program (QOZ), introduced in 2017’s Tax Cuts and Jobs Act, is emerging as a potentially significant federal economic development tool that could improve the outcomes of distressed communities throughout the United States. Through the QOZ program, investors can inject capital into government-designated, economically-depressed communities and promote long-term economic growth through a variety of investment vehicles.

The program’s benefits include gain deferral and gain elimination for taxpayers who roll over capital gain into a Qualified Opportunity Fund (“QOF”). Specifically, if an investor (i) recognizes capital gain from the sale of an asset to an unrelated person, (ii) invests an amount equal to all or part of the capital gain in a QOF within 180 days of the date the gain is recognized, and (iii) makes an election (on IRS Form 8949) to treat the investment as a QOZ investment, the investor may be eligible for QOZ benefits. A fund which is merely a partnership or corporation for federal income tax purposes (and not a disregarded entity), may qualify as a QOF if 90% or more of its assets are comprised of (i) Qualified Opportunities Zone Business Property (QOZBP) and/or (ii) interests in a partnership or corporation (and not a disregarded entity) that qualifies as a Qualified Opportunities Zone Business (QOZB).

QOZBP’s must be (i) acquired after December 31, 2017 and (ii) “substantially improved” within the 30-month period after acquisition, rather than simply held. The definition of substantial improvement requires that improvements be worth at least as much as the tax basis of the QOZBP at the time of acquisition.

Taxpayers can also be eligible for other tax benefits if they hold their investment in the fund for a specified time. If a taxpayer holds a QOF investment for 5 or more years, 10% of the deferred gain is forgiven permanently (i.e., the tax basis is increased by 10% of the amount of the deferred gain).  If a taxpayer holds a QOF investment for 7 or more years, 15% of the deferred gain may be forgiven permanently (i.e., 10% plus 5%, not an additional 15%; the tax basis is increased by 15% of the amount of the deferred gain).  If investors hold for 10 years, no capital gains tax is paid on the appreciation in the investment (i.e., the basis is deemed to equal the fair market value on the sale date). Deferred gains are taxable on the earlier of (i) sale or (ii) December 31, 2026.  However, on December 31, 2026 investors may have a liquidity issue (i.e., taxable income with no cash flow), unless the QOF makes a distribution to its investors to cover the tax liability or another funding mechanism is employed.

Unlike a 1031 tax deferred exchange (“1031”), there is no requirement that a qualified intermediary hold the cash from sale of the property before it is used to acquire replacement property. In other words, the taxpayer can receive the cash proceeds from the sale, freely use the cash for any purpose, and then later invest cash equal to the capital gain in a QOF to get a tax deferral.  The key distinction from a 1031 is that any capital gain can be rolled into QOF.

The requirements to invest in QOZBP or funds are complex and nuanced, and it is important to assemble a strong team to properly document the investment. While there may be substantial tax advantages, such advantages would not make up for (i) a bad real estate investment decision or (ii) not having the right team to execute on the business plan. A team should include members with investment, tax, legal, finance experience and deep knowledge of the QOF requirements. If you have any questions about investing in or forming and operating a QOF or QOZB, please contact an attorney or accountant before proceeding too far down that road.

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A Proposed Amendment to Rule 7.1 

The Advisory Committee on Civil Rules has released a proposed amendment to Rule 7.1 regarding disclosure statements filed in district courts.  The proposed modification requires parties in diversity cases to file a disclosure statement that “names—and identifies the citizenship of—every individual or entity whose citizenship is attributed to that party at the time the action is filed.”

The change is intended to address the complicated issue of determining diversity jurisdiction of an LLC or other non-corporation who takes on the citizenship of all its members.  But the citizenship can be quite convoluted if an LLC has a lot of members or if there is a series of telescoping LLCS, where one LLC is a member of another LLC.

The need for this information is clear, the Court cannot determine diversity jurisdiction without it.  And federal appeals courts are often confronted with final orders in cases where there was never any jurisdiction at the inception of the case.  But the new rule will provide a real challenge for some defendants to try and track down complex and extensive residency information for their clients before their first responsive pleading.

You can monitor any comments about the proposal here.  It will be interesting to see if any objections are raised.

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