Rideshare bicycles and scooters have become increasingly ubiquitous in cities across the United States over the past few years.  While many rideshare bicycles are conventional, others feature pedal-assist technology and are commonly referred to as “electric bicycles” or “e-bikes.”  As for scooters, electric versions are offered to consumers by rapidly growing micromobility companies such as Lime and Bird.  Given the increasing popularity and expansion of these rideshare vehicles across the country, we provide a brief overview of the regulatory landscape that ensures the safety of these products.

Bicycles

In 1972, the Congress established the U.S. Consumer Product Safety Commission (CPSC) to regulate the safety of consumer products at the federal level.  One of the first products to be regulated by the Commission was bicycles.  In 1978, the CPSC promulgated its first rules regulating traditional human powered bicycles (16 CFR part 1512) with the goal of establishing requirements for their assembly, braking, and structural integrity.  It was not until twenty-five years later, in 2003, that the Commission, pursuant to an act of Congress, updated the federal safety standard for bicycles to include low-speed electric bicycles.  Thus, electric bicycles, including most of those used for ridesharing purposes, are regulated by the CPSC and must comply with the mandatory federal safety standard for bicycles at 16 CFR part 1512.

The current CPSC definition of bicycle is “(1) a two-wheeled vehicle having a rear drive wheel that is solely human-powered or (2) a two- or three-wheeled vehicle with fully operable pedals and an electric motor of less than 750 watts (1 h.p.), whose maximum speed on a paved level surface, when powered solely by such a motor while ridden by an operator who weighs 170 pounds, is less than 20 mph (i.e., a low-speed electric bicycle).” This definition is significant because it allows electric bicycles to travel faster than 20 mph when that bicycle is powered by both a motor and human (through pedals).

As for the specific requirements that bicycles must meet, the federal safety standard sets forth detailed mechanical requirements along with those for a bicycle’s many component parts and systems including steering, brakes, pedals, drive chain, protective guards, tires, wheels (and hubs), front fork, frame assembly, seats, and even reflectors.  The standard also addresses operation and safety instructions to be provided to consumers and requisite labelling that provides consumers with certain identifying information and manufactures and private labelers with traceability information.  If a bicycle, conventional or electric, fails any of these requirements, it is a banned product under the Federal Hazardous Substances Act (FHSA).

It is also worth mentioning that electric bicycles are frequently regulated at the state level.  Over half of the states have promulgated some form of safety related regulation regarding the operation, registration, and/or licensing of electric bicycles.  State laws and regulations for electric bicycles (and scooters) will be explored further in a future post.

Scooters

Like rideshare bicycles, electric scooters have taken the streets of American cities by storm.  However, unlike bicycles, electric scooters are unregulated consumer products.  In other words, while scooters can still be defective and create a substantial product hazard to consumers under the Consumer Product Safety Act (CPSA), and therefore be subject to a corrective action, there is no mandatory federal safety standard that addresses scooters specifically.  Electric scooters, at least those that are incapable of a top speed of 20 mph, are also not considered “motor vehicles” that must be manufactured to comply with all applicable Federal Motor Vehicle Safety Standards (FMVSS) enforced by the National Highway Traffic Safety Administration (NHTSA).

Rather, a patchwork of voluntary safety standards, as well as state and local laws and regulations, seek to ensure the safety of these products.  The most prominent voluntary safety standard for electric scooters is ANSI/CAN/UL 2272 – Standard for Electrical Systems for Personal E-Mobility Devices.  This standard, initially designed and intended for hoverboards (also referred to as “self-balancing” electric scooters), tests and evaluates the electrical drive train system, battery system, and charger system of electric scooters – in other words, the standard seeks to address electrical and fire safety given the presence of lithium ion batteries.  The standard, however, does not address all operational or mechanical safety aspects of riding an electric scooter.

At the end of last year, the American Society for Testing and Materials (ASTM) announced that its Consumer Products Subcommittee on Powered Scooters and Skateboards (F15.58) would bring stakeholders together to discuss and develop a proposed standard on electric-powered scooters that would establish performance requirements and corresponding test methods to minimize common potential hazards associated with electric scooters.  CPSC staff, and at least one Commissioner at the agency, has participated in or observed teleconferences held by this subcommittee related to this standard’s development.  Time will tell whether such a consensus standard comes to fruition.

Over the coming weeks, we will be publishing a series of blog posts on the legal landscape for micromobility products (electric bicycles and scooters, and hoverboards) in anticipation of the Commission’s September 15 Micromobility Product Forum on the more technical aspects of micromobility products.

The new United States Mexico Canada Agreement (USMCA), which replaced the 1994 North American Free Trade Agreement (NAFTA), became effective on July 1, 2020. Historically, free trade agreements like the NAFTA have been criticized for their lack of strong labor provisions to address low wages and inadequate labor standards that advocates argue support worker rights and improve economic growth in developing countries. The USMCA seeks to address those concerns. In fact, as a precondition to the passage of the USMCA, the U.S. Congress reopened the negotiations at the end of 2019 and amended the agreement to bolster Mexican workers’ rights and to include stronger enforcement provisions like the Rapid Response Mechanism to hold companies in Mexico accountable for violating the rights of free association and collective bargaining.

What is the Rapid Response Mechanism?

The Rapid Response Mechanism is perhaps the most novel aspect of the labor provisions of the USMCA. It applies between the U.S. and Mexico, and between Canada and Mexico, but not between the U.S. and Canada. Within the U.S., the Rapid Response Mechanism can be triggered when any person in the U.S. files a petition claiming the “denial of rights” at a “covered facility” in a “priority sector” in Mexico to the Interagency Labor Committee for Monitoring and Enforcement (“Interagency Labor Committee”), co-chaired by the U.S. Trade Representative and the Secretary of Labor. The Interagency Labor Committee can request that Mexico conduct a review to determine whether there is indeed a denial of rights, or. If Mexico does not agree to conduct a review, the Interagency Labor Committee may request a panel to be convened to conduct its own verification under the USMCA.

Denial of rights is defined as the denial of the right of free association and collective bargaining under Mexican legislation that complies with the USMCA. A covered facility is defined as a facility in a priority sector that (i) products a good, or supplies a service, traded between the parties; or (2) produces a good, or supplies a service, that competes in the territory of a party with a good or service of the other party. Priority sectors are those that manufacture goods, supply services, or involve mining. Manufactured goods include, but are not limited to, aerospace products and components, auto and auto parts, cosmetic products, industrial baked goods, steel and aluminum, glass, pottery, plastics, forgings, and cement.

While the Rapid Response Mechanism is ongoing, the U.S. may suspend liquidation of imports from the covered facility. If a denial of rights has been found at a Mexican covered facility after the Rapid Response Mechanism has concluded, the U.S. may suspend the preferential treatment of goods manufactured at the covered facility, impose penalties on the covered facility, or deny entry of the goods from the covered facility if the covered facility had two prior denial of rights determinations.

What is Mexico doing to implement its obligations under the USMCA?

Mexico’s labor law reform, passed in May 2019 in response to the negotiations under the USMCA, drastically modified labor matters in Mexico, notably through the implementation of a new labor justice system and the creation of the Federal Conciliation & Labor Registry Center (CFCRL), whose main tasks will be to: (i) supervise the proper conduct of collective affairs; and (ii) act as a conciliation authority before any judicial proceeding.

The CFCRL, once it is created and operating, will also be in charge of carrying out the internal investigation process that constitutes the first step of the Rapid Response Mechanism in Mexico. In the meantime, the Mexican Ministry of Labor and Social Welfare and the Federal Conciliation and Arbitration Board will carry out the internal investigation process.

Accordingly, even though the CFCRL does not yet exist, the Rapid Response Mechanism could still be triggered to enforce existing obligations in collective affairs, as the USMCA and its dispute mechanisms or proceedings are not contingent on the creation of government bodies or other domestic issues pursuant to the implementation of the Labor Law Reform by Mexico.

What are the other labor provisions in the USMCA?

The USMCA contains an entire chapter on labor within its main agreement. The labor chapter, Chapter 23, requires that parties adopt and maintain laws consistent with the rights as stated in the International Labor Organization Declaration of Fundamental Principles and Rights at Work, which includes the freedom of association and recognition of the right to collective bargaining, the elimination of forced labor, the effective abolition of child labor, and the elimination of discrimination with respect to employment and occupation.

Specifically, each party shall prohibit importation of goods produced in whole or in part by forced or compulsory labor, including forced or compulsory child labor. The USMCA states that each party must prohibit discrimination on the basis of sex (including sexual harassment), pregnancy, sexual orientation, gender identity and caregiving responsibilities, although the U.S. is deemed to have fulfilled its obligations with respect to discrimination by virtue of Title VII of the U.S. Civil Rights Act of 1964.

Mexico, however, is required under the USMCA to implement specific labor reforms to ensure the right of workers to engage in collective bargaining and to organize. As mentioned above, many of these reforms have already been enacted with the new Mexican legislation that went into force in May 2019. As for other notable modifications, all existing collective bargaining agreements in Mexico also must be revised at least once during the four years after the legislation went into effect (by 2023), and unions will need to follow new requirements to negotiate collective bargaining agreements within work centers to ensure employees’ accurate representation.

With respect to automobile production, the USMCA introduces the concept of Labor Value Content (LVC), which, along with a higher Regional Value Content threshold (75%, up from 62.5%), determines whether an automobile import qualifies for tariff-free treatment. The LVC rules require that at least 40% of a passenger car be made by workers earning at least $16 an hour, with at least 25% of those high-wage workers be involved in materials and manufacturing. These new LVC rules will be fully phased in over three years.

How do those labor provisions in the USMCA affect multinational companies?

One major goal of the USMCA is to effect changes in Mexico’s labor rules. While a major reform of Mexico’s labor legislation was implemented in May 2019 in anticipation of the USMCA becoming effective, many of the rules ensuring worker’s freedom of association and collective bargaining are still being discussed in the Mexican legislation process. In addition, the Mexican labor law reform is still in its early implementation stage, meaning that years could pass before the new legislation be effectively and fully enforced. Multinationals that relocated parts of their operations or manufacturing to Mexico to take advantage of NAFTA or otherwise have operations in Mexico are facing a changing landscape in terms of labor relations, and likely increased costs, over the next few years as Mexico updates its laws to comply with the labor provisions of the USMCA.

Multinationals should also keep an eye on the activities of the Interagency Labor Committee, which has been created as part of the U.S. Department of Labor. While the Interagency Labor Committee is tasked to receive petitions from private companies as part of the Rapid Response Mechanism discussed above, the legislation implementing the USMCA in the U.S. also grants the Interagency Labor Committee the power to monitor Mexico’s compliance with the USMCA’s labor requirements, including by creating a hotline for workers in any of the USMCA countries to report labor violations in Mexico. The enforcement actions triggered by these petitions and reports may lead to factory inspections, the loss of preferential tariff treatment or denial of imports of products.

What should employers be doing now that the USMCA is in effect?

U.S. Customs and Border Protection has announced that, through the first six months of implementation, it will “show restraint” in its enforcement and will instead focus on supporting companies’ efforts to comply. Despite this announcement, the above labor provisions described above, became fully enforceable immediately on day one.

  • Employers should invest time and effort to understand the various labor provisions and the reporting and enforcement mechanisms built into the USMCA, especially if they or their competitors have operations in Mexico.
  • Employers that have operations in Mexico should update their employment rules and agreements, if they have not done so already, to align with the new 2019 labor reforms in Mexico and to monitor upcoming labor changes.
  • Companies that rely on suppliers with facilities in Mexico may consider methods to ensure that those suppliers are appropriately complying with Mexican labor laws.
  • HR and labor relations professionals should review the terms of their collective bargaining agreements and policies relating to labor organizations to ensure compliance with the new rules under the USMCA and Mexican laws, as well as prepare training for managers and employees on the new requirements.
  • Employers in the automobile industry (including downstream suppliers) will need to educate their employees who have oversight over operations and trade compliance on the LVC rules to maximize potential opportunities as automobile manufacturers in North America shift production over the next three years to qualify for preferential tariff treatment under the USMCA.

Recalls in Review: A monthly spotlight on trending regulatory enforcement issues at the CPSC.

As we launch into the third quarter of 2020, we are taking a look at the trends from the CPSC’s recalls through the first half of the year.  The Commission has conducted 145 total recalls so far this year.  As is usually the case, the types of products recalled have varied widely, including ceiling fans, cleaning products, furniture, inclined sleepers, portable generators, pajamas, and strollers.  But some product categories have appeared multiple times, including: Dressers and Drawer Chests, Essential Oils, and Recreational Vehicles such as ATVs, UTVs, and Golf Carts.

In 2020 so far, Dressers, Drawer Chests, and Essential Oils have seen an increase in number of recalls as compared to recent years. Recreational Vehicles have historically been highly regulated, however, and the rate of recalls conducted in 2020 is comparatively similar to past years.

Reviewing the recall announcements shows that risk of poisoning was the most common hazard addressed by recalls in the first half of the year.  As mentioned in our previous post on child resistant packaging recalls, over 20 recalls have been conducted this year due to failure to meet the requirements of the Poison Prevention Packaging Act (PPPA) with a recent emphasis on essential oils containing methyl salicylate (wintergreen oil).  This recent rise in recalls correlates with at least one consumer advocate helping the CPSC identify wintergreen oil products in violation of PPPA requirements by reporting at least 45 such products through saferproducts.gov.

The second most common hazard driving recalls this year has been a burn or fire hazard.  Product types recalled due to a burn or fire risk include some recreational vehicles, home appliances, lamps, personal electronics, and apparel and mattresses.  Consumers and retailers should continue to carefully monitor products that may pose these common types of risks.

A review of the data shows that children’s product recalls represent a smaller proportion (19%) of the total number of 2020 recalls as compared to recent years—24% in 2019, 20% in 2018, and 33% in 2017.  The number of children’s product recalls did not rise proportionately with the total number of recalls in March, April, or July.  Despite the numbers from the first half of the year, recalls for children’s products could certainly increase in the months ahead as back-to-school supplies and holiday toys begin to hit the market.

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About Recalls in Review: As with all things, but particularly in retail, it is important to keep your finger on the pulse of what’s trending with consumers.  Regulatory enforcement is no different – it can also be subject to pop culture trends and social media fervor.  And this makes sense, as sales increase for a “trending” product, the likelihood of discovering a product defect or common consumer misuse also increases.  Regulators focus on popular products when monitoring the marketplace for safety issues.

As product safety lawyers, we follow the products that are likely targets for regulatory attention. Through Recalls in Review, we share our observations with you.

Blockchain is a digital, decentralized, distributed ledger that provides a way for information to be recorded, shared and maintained by a community. Below we review the impact blockchain can have on increasing product safety, reducing recall expense, combatting counterfeits and otherwise assisting retailers in managing risk and protecting customers. By allowing for near real time, immutable tracking that is easily accessible to suppliers, manufacturers and government entities, blockchain technology has the capacity to revolutionize the retail industry.

Key features of the blockchain include:

  • Near real time – enables almost instant settlement of recorded transactions, removing friction and reducing risk.
  • Reliable and available – as multiple participants share a blockchain, it has no single point of failure and is resilient in the face of outages and attacks.
  • Transparent – transactions are visible to all participants, with identical copies maintained on multiple computer systems, increasing the ability to audit and trust the information held.
  • Irreversible – it is possible to make transactions irreversible, which can increase the accuracy of records and simplify back-office processes.
  • Immutable – it is nearly impossible to make changes to a blockchain without detection, increasing confidence in the information it carries and reducing the opportunities for fraud.

Helping Product Safety, Reducing Recall Costs and Protecting Brands

Increasing traceability in the supply chain to increase the safety of products has long been a goal of federal regulators.  In a 2011 law, the FDA Food Safety Modernization Act (FSMA), Congress directed the agency to establish product traceability requirements for businesses that would protect public health and to designate high-risk foods that warrant additional record keeping.  Congress weighed in as well in the Consumer Product Safety Improvement Act (“CPSIA”) where it ordered tracking labels for children’s products to ensure the traceability of a children’s product down to the batch and lot in an effort to respond to the flood of toys on the market with lead paint.

Demanding traceability provided the CPSC with some visibility into overseas manufacture to identify when and how lead paint might be introduced inadvertently due to material level changes on production lines.  Section 103 of the CPSIA amended section 14(c) of the Consumer Product Safety Act (“CPSA”) (15 U.S.C. 2063(c)), which authorizes the Commission to require, by rule, the use of traceability labels (including permanent labels) where practicable, on any consumer product.  CPSC guidance goes even further stating that to prevent inadvertent use of prohibited materials, clear identification and labeling of raw, finished and semi-finished material is essential to ensuring compliance. CPSC Handbook for Manufacturing Safer Products at 29, July 2006.

The traceability demanded by regulators aligns directly with the benefits blockchain offers. Yet blockchain can go farther to provide visibility into the component parts and raw materials introduced through the supply chain.  Using blockchain technology for supply chains increases the end-to-end visibility of the products by bringing suppliers and manufacturers together on a single platform. Through blockchain:

  • Manufacturers can issue purchase orders and goods received notes, split goods in lots, and assign them to products.
  • Suppliers can process purchase orders received, share logistics information, and process invoices.
  • Since both share the same ledger, they can remain informed at each step without explicit information being sent out.

In the case of a defective product that needs to be recalled, the faulty product can be identified and marked on the ledger by the manufacturer. The ledger helps the manufacturer identify affected batch(es) of products, identify the exact supplier, and thus plan the replacement of the part if needed and initiate recall.

Since the supplier has a near real-time copy of the ledger, he also gets notified of the defect and then can initiate an investigation into the cause, take the necessary corrective action, and plan to provide replacement of the faulty part. In turn, this minimizes the impact and cost of the recall by isolating only the affected products immediately and allowing for swift action to take place.

The CPSC, FDA and other government regulators would greatly benefit from the specificity of such traceability in announcing recalls and blockchain could help to end the over-expansive, blanket recalls that occur because there is no reliable way to pinpoint exactly which products to recall.  Blockchain allows companies to isolate specific products containing a contaminated ingredient, raw material or component part, which can and will translate to less waste and reduced costs. Brand reputations are protected and the adverse consequences of a recall are minimized.

Reducing the Impact of Counterfeiting

Companies have limited visibility because of fragmented data, networks, and sourcing arrangements, which make it difficult to trace and authenticate goods. Fraudulent parts and goods affect every stage of the product life cycle—from the manufacturing floor to the point of sale, to the servicing function and beyond—driving up costs, eroding revenues, and damaging company reputations and brands. Companies invest significant time and money into tracking parts, validating provenance, communicating with partners, and filling out copious documentation to ensure the authenticity of their products, protect customers, and satisfy regulatory and compliance demands.

Advances in blockchain-with-IoT counterfeit detection provide at-a-glance visibility, tracing, and recording of provenance data from source to sale and beyond. IoT provides unique identification and traceability while blockchain provides a tamperproof chain of custody information. Together, they can create a shared, distributed ledger capable of recording the origin, location, and ownership of raw materials and products at each stage of the value chain. This provides manufacturers, partners, and customers the transparency and authentication they need.

Blockchain and IoT can inhibit counterfeiting in ways that traditional technologies cannot through the ability to immutably track and share genealogy across multiple stakeholders. To thwart counterfeiting, suppliers and manufacturers join a single blockchain platform and use “smart tags” (unique cryptographic identifiers) to track and confirm the provenance and location of each item:

  • Only genuine, verified tags and products are entered onto the blockchain.
  • Each tagged item or batch is tracked at every stage along the manufacturing, shipping, distribution, and sales journey
  • Relevant data is logged at each step.

Smart tags capture the complete genealogy of a product and are hard to replicate:

  • Counterfeit tags won’t show up on the blockchain.
  • If a smart tag is duplicated, a quick scan of the blockchain will indicate when and where the genuine item was manufactured and sold, thus revealing the duplicate item as a fake.
  • Improved tracing and authentication combined with a tamperproof chain of custody can reduce counterfeiting and associated losses.
  • End-to-end oversight of raw materials reduces product defects.
  • Reduced likelihood of fraudulent sales.
  • Better tracing helps support centers prevent unnecessary servicing and repair.

Barriers to Blockchain Adoption

Despite the numerous advantages to using blockchain for supply chain management, various barriers still exist. These include:

  • Knowledge of blockchain
  • Implementation – Trouble replacing or adapting existing legacy systems.
  • Regulatory and legal concerns – Data privacy issues, intellectual property, and enforceability of contracts.
  • Cost
  • Uncertain ROI
  • Lack of trust – Many companies are skeptical about blockchain.

Loyalty Programs

Blockchain tokens can be used for optimization and enhanced fraud protection in loyalty programs. Retailers sometimes use infrastructure to track loyalty rewards for customers that is less secure than that of “real” payments, which has led to a substantial increase in loyalty-fraud crime in recent years. Due to this lack of security, personal data is subject to theft. Additionally, many reward programs fall short of providing enough value to customers because ways of spending what the consumer feels are hard-earned points are limited.

Blockchain can help retailers address both issues. With blockchain, hackers and fraudsters will have a much harder time penetrating a system that relies on a distributed ledger than one that stores all the data in a centralized database. In terms of consumer value, creating a token-based rewards ecosystem open to third-party businesses is a means of giving customers a wealth of diverse ways to spend their points.

Retailers Accepting Crypto

Cryptocurrency payment gateways allow businesses to accept transactions of cryptocurrencies as payment from customers in exchange for goods. When the customer makes a purchase using a cryptocurrency as payment, the transaction goes through the payment gateway at a fixed exchange rate and automatically converts to traditionally recognized fiat currency so the merchant can avoid the volatility of the cryptocurrency markets. This benefits the consumer by allowing them to use cryptocurrency, which offers lower fees than traditional credit card payment systems.

The implementation of blockchain technology into the retail space provides unique opportunities to increase product safety, reduce recall expense, combat counterfeits and otherwise manage risk and protect customers.

 

 

At 9:30 a.m. Central European Time, privacy professionals around the world were refreshing their browsers to read the long-awaited judgment of the Court of Justice of the European Union (CJEU) principally addressing the viability of Standard Contractual Clauses (SCCs) and the EU-U.S. Privacy Shield (Privacy Shield) as means to transfer personal data from the European Union (EU) to the United States (U.S.).

When the judgment arrived, it landed with a bang: though the CJEU upheld the use of SCCs, it invalidated the Privacy Shield, the well-known mechanism to transfer personal data from the EU to the U.S.  The decision also cast doubt on the viability of other options, including SCCs, for making transatlantic transfers.

The foundation of this decision and previous decisions affirming challenges to U.S. privacy practices is that the protection of personal data is a fundamental right in the EU, akin to a constitutional right in the U.S.  The General Data Protection Regulation (GDPR) enshrined these fundamental rights and established uniform data protection standards across the EU designed to protect the personal data of EU-based individuals.

Protecting these fundamental rights when data is transferred abroad falls to the European Commission (EC). The EC can decide that certain countries provide an “adequate” level of protection for personal data thereby permitting the transfer of personal data to those countries.

In 2000, the EC put in place an adequacy mechanism known as the “Safe Harbour” for personal data transfers to the U.S. It was invalidated by the CJEU in 2015 (Schrems I, case C‑362/14) due in large part to U.S. surveillance practices that arose in the wake of 9/11. It was replaced in 2016 by the Privacy Shield, which aimed to address the concerns that the CJEU outlined in its Schrems I judgment.

The CJEU has now also invalidated the Privacy Shield (Schrems II, case C-311/18) based on ongoing concerns regarding certain U.S. surveillance programs and their effect on the guaranteed privacy rights of EU-based individuals under the GDPR.

The CJEU came to this conclusion despite the fact that the U.S. “[…] participated actively in the case with the aim of providing the court with a full understanding of U.S. national security data access laws and practices and how such measures meet, and in most cases exceed, the rules governing such access in foreign jurisdictions, including in Europe,” as underlined in today’s statement of U.S. Secretary of Commerce Wilbur Ross.

The Court also looked at SCCs for processors, a mechanism that was created by the EC to facilitate international data transfer from the EU to non-EU vendors. While the CJEU did not invalidate this mechanism, it did underline that it is up to the exporting and importing organizations to verify that the legal system of the country where the recipient organization resides provides sufficient safeguards.

The Court’s decision places EU transferring companies and recipient U.S. companies in a bind. U.S. companies can no longer rely on the Privacy Shield to receive data from the EU. While the CJEU upheld the legality of the SSCs, it now leaves it up to each EU exporting company to make its own decision regarding the integrity of U.S. privacy practices before deciding whether to transfer EU data to a U.S. company. And given that the CJEU has itself now invalidated the Privacy Shield based on its finding that the privacy practices of the U.S. government are deficient, an EU company contemplating entering into SCCs with a U.S. company will be faced with a difficult decision.

The Irish Data Protection Commission, the authority that passed this case to the CJEU, raises similar concerns in its statement: “[…] it is clear that, in practice, the application of the SCCs transfer mechanism to transfers of personal data to the United States is now questionable.” It adds that the issue “will require further and careful examination, not least because assessments will need to be made on a case by case basis.”

Today’s judgment is expected to significantly disrupt cross-Atlantic personal data transfers and the business models that rely on them in the short term. It remains to be seen what position European data protection authorities will take with regard to companies that rely on existing Privacy Shield certifications. A pragmatic approach with a de facto grace period (which, for the avoidance of doubt, is not foreseen in the CJEU’s judgement), at least until there is a solid data transfer solution, seems to make the most sense.

Until these issues are resolved, affected businesses would likely benefit from ensuring that all data transfers and the corresponding data transfer mechanisms are duly mapped. Organizations relying on Privacy Shield certifications should also consider implementing other data transfer mechanisms such as SCCs while they remain an option or assessing whether derogations such as consent or contractual necessity can be relied upon.

Binding Corporate Rules that are approved by EU data protection authorities, may provide another solution to affected businesses recognizing that they can be used only for companies of the same corporate group or companies engaged in a joint economic activity.

 

Now that some businesses are attempting to re-open and must sanitize their locations for employees and the public, Attorneys General will vigilantly monitor for unsupported claims that products can cure or prevent the transmission of COVID-19. They will also watch for claims that a location using these products will be safe for the public. Several Attorneys General have already initiated enforcement actions and issued cease and desist letters admonishing companies who made such representations, and more are sure to follow.

On June 27, Arizona Attorney General Mark Brnovich sent a cease-and-desist letter to Clean Air EXP imploring that the company stop claiming their air purification systems neutralize “99.9% of viruses that are ‘COVID-19 surrogates.’” The letter explains that such representations imply that products can prevent the transmission of COVID-19, while there is currently no scientific support demonstrating that any air treatment product is able to avert transmission of the virus. Attorney General Brnovich’s Office also sent a similar letter to Dream City Church regarding statements it made about an air filtration system it bought from Clean Air EXP, such as that 99% of the virus would be gone when visitors came into the church auditorium and that churchgoers would be “safe and protected.” The church was warned that because it rents its facility for other reasons besides church functions, misrepresentations about the safety of the church could violate the Arizona Consumer Fraud Act.

On June 26, Oregon Attorney General Ellen Rosenblum announced settlements with six clinics and companies who sold and advertised products they claimed could cure the virus or possessed immunity boosting properties, though the products were not approved by the FDA or recommended by the CDC. Under the settlement agreements, the companies may no longer make such claims unless they are first approved by the FDA and supported by “competent and reliable scientific evidence.” On June 16, Arkansas Attorney General Leslie Rutledge announced a lawsuit against The Jim Bakker Show for telling consumers in Arkansas that colloidal silver products could eliminate the virus, resulting in the sale of over $60,000 worth of products. The FDA has previously advised that such products “are not scientifically recognized to be safe and effective.”

Companies should be aware that Attorneys General are watching for unsupported claims that products can cure or rid the air of COVID-19 or that a business location is free of the virus, as well as other similar scams. To avoid liability, they should carefully ensure that any claims they make about air purification, curing or preventing transmission of the virus, or the safety and cleanliness of business locations are backed by scientific support.

Companies in the online marketplace have been paying close attention to Section 230 of the U.S. Communications Decency Act of 1996 (CDA) in recent weeks and months. As noted in our previous client alert, CDA Section 230 “is a powerful law that provides websites, blogs, and social networks that host third-party speech with liability protection against a range of laws that might otherwise hold them legally responsible for what their users say and do.”

On July 1, the new U.S.-Mexico-Canada (USMCA) trade agreement went into effect. The USMCA for the first time in any trade agreement requires U.S. trading partners to adopt provisions modeled on Section 230.  This furthers the policy of the U.S. as articulated in the CDA “to promote the continued development of the Internet and other interactive computer services and other interactive media” with the purpose to “preserve the vibrant and competitive free market” for “Internet and other interactive computer services.” Congress articulated its policy broadly to “maximize user control” and facilitate “political diversity”, “cultural development” and “intellectual activity” and “maximize user control.” The online liability provisions of USMCA are aligned with CDA Section 230. The purpose of these provisions is to ensure that interactive computer service providers are not held liable for third party content published on their platforms. An interactive computer service provider is defined in the USMCA as a “system or service that provides or enables electronic access by multiple users to a computer server.” Article 19.17 of USMCA Chapter 19 (Digital Trade) states:

… no Party shall adopt or maintain measures that treat a supplier or user of an interactive computer service as an information content provider in determining liability for harms related to information stored, processed, transmitted, distributed, or made available by the service, except to the extent the supplier or user has, in whole or in part, created, or developed the information.

The Advisory Committee on Trade Policy and Negotiations (ACTPN), which is required by U.S. statute to review all proposed FTAs, considered both the USMCA’s digital trade chapter (Chapter 19) containing this provision and its intellectual property chapter (Chapter 20). It noted that it “is pleased with these high-standard chapters and recommend they serve as models for future trade agreements.”

ACTPN effectively recognized the value of adding both liability protection for interactive computer services for user-posted content in Chapter 19 as well as the expanded intellectual property provisions of Chapter 20.  Article 19.17 makes clear that liability protections are not applicable to expanded protection of intellectual property, a long-standing negotiating priority of the U.S.

Annex 19-A provides that Article 19.17 shall not apply to Mexico until three years after USMCA enters into force. An equivalent to section 230 does not exist in Canadian law, although the obligations are applicable to Canada and will require future clarity by Canadian law and practice.

With President Trump’s recent Executive Order on Preventing Online Censorship, which seeks to curb some of the statutory provisions enumerated in Section 230, the steps the U.S. will take to ensure that Canada and Mexico meet their new obligations remain unclear. What is known, however, is that with the USMCA’s entry into force, the principles of Section 230 are now included in U.S. trade obligations as effectively affirmed by the U.S. Congress when considering USMCA and its implementing legislation. As in all trade agreements, national sovereignty is protected, including the ability of Congress to make legislative adjustments to underlying statues in the future.

Companies will find that the USMCA provides many new benefits as well as processes to enhance the flow of goods, services and, for the first time, digital trade across North America. USMCA reflects a growing recognition across North America of the purposes and value of the approach that the U.S. Congress initiated through the 1996 Communications Decency Act. To review other significant provisions in the USMCA see the webinar by our colleagues on the future impact of the agreement.

New Business Guidance to Address Supply Chain Risks and Considerations

The Departments of State, Treasury, Commerce, and Homeland Security issued guidance on July 1, 2020 titled “Risks and Considerations for Businesses with Supply Chain Exposure to Entities Engaged in Forced Labor and other Human Rights Abuses in Xinjiang” (the “advisory”).  The advisory broadly recommends that businesses with potential exposure in their supply chain to the Xinjiang Uyghur Autonomous Region of China (“Xinjiang”) be aware of the reputational, economic, and legal risks involved with conducting business in the region and implement human rights due diligence policies and procedures to address the risk.  The advisory highlights that since March, 2017, more than one million ethnic Uyghurs, Kazakhs, Kyrgyz, and other Muslim minorities have been held in internment camps designed to eradicate the detainees’ cultural and religious identities and to indoctrinate them with Chinese Communist Party ideology.  Detainees have been subject to overcrowding, sleep and food deprivation, medical neglect, physical and psychological abuse, forced labor, sexual abuse, denial of religious practices, and forced studying of Communist Party propaganda.

The advisory recommends businesses and individuals remain aware of these abuses and urges them to evaluate exposure to risks, implement due diligence policies, procedures, and internal controls to ensure compliance practices are appropriately accounting for potential risk throughout supply chains.  The advisory identifies three primary areas of risk: (1) assisting in developing surveillance tools for the Chinese government in Xinjiang; (2) relying on labor or goods sourced in Xinjiang in their supply chains, given the prevalence of forced labor and other labor abuses in the region; and (3) aiding in the construction of internment facilities or manufacturing facilities in close proximity to them.

A number of potential indicators of forced labor are laid out in the advisory.  Of note for businesses are lack of transparency among firms operating in Xinjiang and factory location.  These firms often use shell companies to hide the origin of their goods, use contracts with opaque terms, and conduct financial transactions that make it difficult to determine where the goods were produced or by whom.  Factories built near internment camps, within their confines, or in industrial parks nearby are often additional indicators that forced labor may be utilized.

Businesses are recommended to collaborate with each other and with industry groups to exercise leverage in conducting human rights due diligence.  Businesses should examine the end users of their products, technology, research, and services to reduce the likelihood that they are being used to advance the human rights abuses in Xinjiang.  Furthermore, businesses providing construction materials to Chinese entities that may be operating in Xinjiang are encouraged to conduct due diligence practices to reduce the likelihood that internment camps are the ultimate beneficiaries of their business.  These due diligence efforts should be well-documented in the event that businesses inadvertently engage in sanctionable activity or activity that violates U.S. law.

Despite the importance of due diligence efforts, the advisory points out the challenges presented with doing so.  In particular, third-party audits may not be as reliable a source of information in Xinjiang as they typically are.  At issue are repeated instances of auditors facing detention and harassment, the use of government translators who convey misinformation, and interviews with workers that may be unreliable.  The advisory suggests that businesses pool and share information to better identify and assess indicators of forced labor.

While the penalties for the use of forced labor are varied, the advisory focuses on the use of Customs and Border Protection prohibitions against importing and benefitting from supply-chain related use of goods produced with forced labor.  Penalties may include civil or criminal actions, including denying entry to goods produced with or benefitting from forced labor, seizure and forfeiture of such goods, and the issuance of penalties against the importer and other parties.  Criminal investigations may be opened to prosecute individuals and/or corporations for their roles in the importation of goods into the U.S. in violation of U.S. law.

Uyghur Human Rights Policy Act of 2020

Prior to the issuance of the guidance, on June 17, 2020, President Trump signed the Uyghur Human Rights Policy Act of 2020 (the “Act”).  The Act aims to address human rights violations and abuses by the Government of the People’s Republic of China (“China”) through the mass surveillance and internment of over 1,000,000 Uyghur and other minority ethnic groups in Xinjiang.  The Act was passed with broad bipartisan support, passing the Senate unanimously and clearing the House in a 413-1 vote.

The Act requires the President to submit a number of reports to Congress providing detailed information on the scope and perpetrators of human rights abuses in Xinjiang.  In particular, the Act requires the President to submit a public report to Congress within six months and annually thereafter identifying any foreign person and official of the Government of China that is responsible for the denial of human rights in the Xinjiang Uyghur Autonomous Region.  Sanctions will then be imposed against each individual identified in the President’s report.  Such sanctions shall include blocking the property of identified individuals and denying admission to the United States.  Importantly, these sanctions shall not include the authority or a requirement to impose sanctions on the importation of goods into the U.S.

In addition to sanctions, the Act requires the Secretary of State to submit a public report, within six months, on human rights abuses in Xinjiang Uyghur Autonomous Region to Congress.  The report must include detailed information regarding the number of individuals detained in internment camps; a description of the conditions in such camps, including an assessment of methods of torture, efforts to force individuals to renounce their faith, and other human rights abuses; the number of individuals in forced labor camps; methods used to reeducate detainees in the camps, including identification of government agencies in charge of reeducation; an assessment of the use of forced labor and a description of foreign industries and companies benefitting from such labor; an assessment of the level of access to the Xinjiang Region granted by China to foreign diplomats and consular agents, independent journalists, and representatives of nongovernmental organizations; an assessment of the mass surveillance, predictive policing, and other methods used to violate the human rights of persons in Xinjiang; a description of the frequency with which foreign governments are forcibly returning refugees and other asylum seekers to Xinjiang; a description of U.S. diplomatic efforts to address human rights abuses in Xinjiang and to protect asylum seekers from the region and the identification of the Department of State offices responsible for leading these efforts.

A number of additional reports must also be submitted to Congress to report on issues related to the treatment of Uyghurs.  For example, within 90 days, the Director of the Federal Bureau of Investigation shall submit a report to Congress that outlines all of the efforts taken to protect U.S. citizens and residents, including Uyghurs and Chinese nationals, legally studying or working in the U.S. who have experienced harassment or intimidation within the U.S. by officials or agents of the Government of China.

Lastly, within 6 months, the Director of National Intelligence shall submit a public report to Congress outlining an assessment of the national and regional security threats posed to the U.S. by China’s policies in Xinjiang; a description of the acquisition or development of technology by China to facilitate internment and mass surveillance in Xinjiang, including technology related to predictive policing, large-scale data collection and analysis, and threats the acquisition, development and use of this technology poses to the U.S.; and a list of Chinese companies involved in the construction or operation of internment camps in Xinjiang or in providing mass surveillance technology.  The Director of National Intelligence shall also submit a classified report to Congress that assesses the ability of the U.S. to collect and analyze intelligence related to the scope and scale of detention and forced labor in Xinjiang, the gross violations of human rights perpetrated in the internment camps, and other Chinese policies in Xinjiang that constitute gross violations of human rights.

The Act comes on the heels of increased scrutiny related to the use of forced labor, both in Xinjiang and more generally.  On June 5, 2020, the Department of Commerce’s Bureau of Industry and Security (“BIS”) designated nine Chinese entities to its Entity List for their involvement in forced labor and mass surveillance in Xinjiang, prohibiting their participation in an export transaction.  And, on May 1, 2020, a Withhold Release Order was issued by Customs and Border Protection against Hetian Taida Apparel Co., Ltd. for its use of forced or prison labor in Xinjiang, prohibiting imports of its goods into the U.S.

Prior to the Act, a March 2020 report by the Congressional-Executive Committee on China outlined the difficulty of receiving reliable information about Chinese supply chains, stating that audits are not likely to be effective tools to identify forced labor in a company’s supply chains.  As a result, some suggest that the only viable solution for companies seeking to avoid sanctions by the Act is to consider the entire region of Xinjiang as “tainted” with different forms of forced labor.  Furthermore, some reports have indicated that Uyghurs and Kazakhs from Xinjiang have been relocated to other parts of China for forced labor, potentially tainting supply chains that do not touch Xinjiang.  As a result, the report recommends U.S. companies do not source materials or products from within Xinjiang or from companies that work with the government in Xinjiang.

The immediate impact of the law and the advisory is to increase visibility of the forced labor issues; some see implementation linked to the US-China trade negotiations in the short-term, but in the longer term the reports required by the law will increase pressure for designations by OFAC in addition those already made by BIS.  It is, however, also another opportunity for anyone sourcing from China to take additional steps to evaluate suppliers.  Just as KYC has become the rule for banks and exporters, “know your supplier” is increasingly carrying the same weight.

On June 29, 2020, the United States District Court for the Southern District of New York dismissed a challenge by several landlords to quash New York Governor Andrew Cuomo’s Executive Order 202.28 (the “Executive Order”), issued on May 7, 2020.

The Executive Order, among other things, imposed a moratorium on commercial and residential evictions during the COVID-19 pandemic.  The court found that the eviction restrictions imposed by the Executive Order do not violate landlords’ rights under federal law and that the court has no jurisdiction over state law questions they may raise.

Background

Plaintiffs are three residential landlords who sought an injunction prohibiting the enforcement of two provisions of the Executive Order: (i) the “Eviction Moratorium,” which temporarily suspends both commercial and residential landlords’ ability to commence eviction proceedings for nonpayment of rent against commercial or residential tenants facing financial hardship until August 19; and (ii)  the “Security Deposit Provisions,” which temporarily permitted residential tenants to apply their security deposit funds to rents due and owing, provided the tenants replenish those funds at a later date.

Landlords argued the Executive Order violated their rights under the United States Constitution’s Contracts Clause, Takings Clause, Due Process Clause, and Petition Clause. Landlords also argued that Governor Cuomo “effectively legislated new laws” in violation of the New York Executive Law and the New York Constitution.

The parties cross-moved for summary judgment on the pleadings.  In granting defendant’s motion for summary judgment and dismissing the action, the court held that it lacked jurisdiction to adjudicate the New York state law arguments and rejected each of the landlords’ constitutional challenges.

A. Takings Clause Challenge

The court rejected landlords’ argument that the Executive Order violates the Takings Clause because suspending evictions forces landlords to provide their property for use as housing without just compensation.  The court determined that the challenged provisions of the Executive Order were neither a “physical” nor a “regulatory” taking.

The court explained that a physical taking only occurs when “a government has committed or authorized a permanent physical occupation of property.”[1]  The Supreme Court has ruled that “a state does not commit a physical taking when it restricts the circumstances in which tenants may be evicted.”[2]  Relying on this precedent, the court held that no physical taking occurred because Landlords have retained control of their properties and their rights to collect rent, even if those rights have been temporarily impacted by the Executive Order.

In evaluating whether a regulatory taking occurred, the court analyzed the Executive Order under the three relevant factors set forth in Penn Central Transportation Co. v. New York City: (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with distinct investment-backed expectations; and (3) the character of the governmental action.[3]  The court found that all three factors weighed against landlords.  Under the first factor, landlords failed to provide evidence that the Executive Order “effectively prevented Plaintiffs from making any economic use of their property.”[4]  Second, the court held that “because landlords understand that the contractual right to collect rent is conditioned on compliance with a variety of state laws, their reasonable investment-backed expectations cannot extend to absolute freedom from public programs adjusting the benefits and burdens of economic life to promote the common good.”[5]  The third factor also weighed against the landlords, primarily because the Executive Order’s “reallocation of resources” was “purely temporary,” and “such burden shifting does not, without more, amount to a regulatory taking.”

B. Contracts Clause Challenge

The court likewise rejected landlords’ argument that the Executive Order violates the Contracts Clause by allowing security deposit funds to be disposed contrary to the terms of the parties’ leases, and by denying the landlords a forum in which to commence eviction proceedings for nonpayment of rent.

The court explained that the Contracts Clause “does not trump the police power of a state to protect the general welfare of its citizens.”[6]  The Contracts Clause has its own three factor test:  (1) whether the contractual impairment is substantial; (2) whether the law serves a legitimate public purpose such as remedying a general social or economic problem; and (3) whether the means chosen to accomplish this purpose are reasonable and necessary.  The court found that the Executive Order did not substantially impair the landlords’ contract rights, primarily because the Executive Order only postponed and did not deprive landlords of their contractual remedies for the nonpayment of rent and eviction.  The court therefore held that the Executive Order was consistent with the states’ “wide berth to infringe upon private contractual rights when they do so in the public interest.”

C. Procedural Due Process Challenge

The court dismissed landlords’ procedural due process claim for failure to satisfy the requisite elements.[7] The court found that no due process violation occurred because landlords did not identify any property interest other than those dealt with in the court’s analysis under the Takings Clause and the Contracts Clause.  And for the same reasons that the court found no substantial impairment of landlords’ contract rights, it also found no deprivation of any property interest.

D.  Petition Clause Challenge

Landlords claimed that the Eviction Moratorium violates the Petition Clause because it denies them access to the courts to initiate eviction proceedings.  To prove a “denial of access” claim, the plaintiff must show that the government “took or was responsible for actions that hindered a plaintiff’s efforts to pursue a legal claim.”[8]  The court found landlords were unable to show that the Eviction Moratorium “had the actual effect of frustrating their efforts to pursue a legal claim”[9] because they will be able to bring eviction proceedings when the Executive Order expires, and they are able to bring breach of contract actions in New York state court even while the Executive Order is in effect.

Implications for Commercial Landlords and Tenants

Although the court’s decision is instructive, its analysis of the constitutionality of the Executive Order Eviction Moratorium is limited to the impact on residential landlords.  There are material differences in how this and other Executive Orders have impacted commercial landlords and tenants that may lead to a different result when analyzed in the commercial context.

The decision also does not shed light on judicial approaches to private disputes between landlords and tenants.  Commercial leases include conditions, covenants, and obligations with respect to landlord’s and tenant’s rights and obligations, including with respect to the payment or abatement of rent during the COVID-19 pandemic.  Disputes regarding these rights are governed principally by leases rather than the constitutional provisions evaluated in this case.

For more information, please contact the professional(s) listed above, or your regular Crowell & Moring contact.

 

References

[1] Southview Assocs., Ltd. v. Bongartz, 980 F.2d 84, 92-93 (2d Cir. 1992).

[2] Yee v. City of Escondido, 503 U.S. 519, 527 (1992).

[3] 438 U.S. 104 (1978).

[4] Sherman v. Town of Chester, 752 F.3d 554, 565 (2d Cir. 2014).

[5] Penn Central, 438 U.S. at 124.

[6] Buffalo Teachers Fed’n v. Tobe, 464 F.3d 362, 367 (2d Cir. 2006).
[7] To establish a procedural due process claim plaintiffs must:  (1) identify a property right; (2) show that the state deprived that right; and (3) show that the deprivation was made without due process.
Progressive Credit Union v. City of New York, 889 F.3d 40, 51 (2d Cir. 2018) (citations omitted).

[8] Davis v. Goord, 320 F.3d 346, 351 (2d Cir. 2003).

[9] Oliva v. Town of Greece, 630 Fed. Appx. 43, 45 (2d Cir. 2015).

Recalls in Review: A monthly spotlight on trending regulatory enforcement issues at the CPSC.

In the past year, the Commission has significantly ramped up its monitoring of products for compliance with special packaging safety standards (16 CFR § 1700), resulting in a jump in recalls for failure to meet those standards.  The CPSC has conducted at least 62 recalls for failure to meet the child-resistant packaging requirements since 2011—including 23 recalls in 2020 alone.  There appears to be a recent enforcement focus on essential oils containing methyl salicylate.

A review of the recalls shows that the recalls tend to focus on products involving a few specific substances which trigger the child-resistant packaging requirements.  Most of the recalls from 2020 involved products containing methyl salicylate, commonly used to treat muscular pain, while most recalls between 2017 and 2019 involved products containing lidocaine, commonly used as a numbing agent.

All but one of the products recalled in 2020 that contain methyl salicylate are essential oils.  The other products recalled this year contain iron, lidocaine, and sodium hydroxide.  Twenty-two of the twenty-three recalls were conducted despite having no reported incidents involving consumers.

About Recalls in Review: As with all things, but particularly in retail, it is important to keep your finger on the pulse of what’s trending with consumers.  Regulatory enforcement is no different – it can also be subject to pop culture trends and social media fervor.  And this makes sense, as sales increase for a “trending” product, the likelihood of discovering a product defect or common consumer misuse also increases.  Regulators focus on popular products when monitoring the marketplace for safety issues.

As product safety lawyers, we follow the products that are likely targets for regulatory attention. Through Recalls in Review, we share our observations with you.