On April 24 , Crowell & Moring’s Frances Hadfield will speak at the Sports & Fitness Industry Association’s (SFIA) Business & Risk Management Summit. Frances will provide best practices and strategic advice for sports industry retailers who are struggling to protect their products and businesses from increased manufacturing costs overseas. Her presentation, “Trade, Tariffs & Trump” will explore some of today’s most pressing trade issues, including:
• China tariffs, MTB and GSP bills
• How to protect yourself in today’s unpredictable trade environment
• Compliance issues

Click here for more information about the event or to register.

On March 28, 2019, the Department of Labor (“DOL”) offered hope to retailers and others in the employer community seeking clarity regarding compliance with the Fair Labor Standards Act’s overtime calculation rules, by issuing a notice of a final rule to update the principles applicable for calculating the “regular rate.” It has been more than 50 years since the DOL last updated its regulations on this issue. While compensation practices have evolved, employers have been discouraged from offering certain benefits and perks to employees in the absence of clarity as to whether they should be included in the “regular rate” calculation. The DOL’s new rule promises to resolve some of this uncertainty.

The proposed rule would exclude from the regular rate:

  • The cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, and employee discounts on retail goods and services;
  • Payments for unused paid leave, including paid sick leave;
  • Reimbursed expenses, even if not incurred “solely” for the employer’s benefit;
  • Reimbursed travel expenses that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System and that satisfy other regulatory requirements;
  • Benefit plans, including accident, unemployment, and legal services; and
  • Certain tuition programs, such as reimbursement programs or repayment of educational debt.

DOL’s proposed rule also clarifies what does and does not constitute a discretionary bonus, which is traditionally excluded from the regular rate calculation. The proposed rule clarifies that simply calling a bonus “discretionary” does not make it so for purposes of overtime calculation. Retailers should note, in particular, that bonuses the proposed rule excludes from the regular rate include spot bonuses and employee-of-the-month awards. Included in the regular rate are bonuses paid according to an agreement (e.g. promised to an employee when she is hired) and those announced to employees to encourage them to remain with the organization or work more efficiently.

The proposed rule has been published for public comment pursuant to the Administrative Procedure Act. Comments are due on or before May 28, 2019. The final rule will likely be promulgated a few months after close of the comment period.

 

On Friday, a federal grand jury in California returned an indictment against two business executives, Simon Chu and Charley Loh, for their alleged roles in distributing defective dehumidifiers and, critically, failing to report required information to the U.S. Consumer Product Safety Commission (CPSC). In announcing the indictment, the U.S. Department of Justice proclaimed that this is the first criminal prosecution of an individual or firm for failing to report to the Commission under 15 U.S.C. § 2064(b), commonly referred to as “Section 15(b)” of the Consumer Product Safety Act (CPSA). This is a newsworthy development that deserves attention across the product safety community.

The Consumer Product Safety Act (CPSA): As many of our readers know, Section 15(b) of the CPSA requires that every manufacturer, importer, or distributor of a consumer product who obtains information that its product(s) “may contain a defect which could create a substantial product hazard,” has a duty to furnish certain information to the CPSC immediately. The same holds true for products that are non-complaint with mandatory federal safety standards or could create “an unreasonable risk or serious injury or death.” Failing to furnish such information to the Commission is a “prohibited act” under Section 19 of the CPSA.

Historically, “failure to report” cases have been handled civilly by the agency and/or DOJ. For example, the CPSC has announced numerous civil penalties levied against firms over recent years for failing to report. However, Section 21 of the CPSA provides that knowing and willful violations of Section 19—a list of prohibit acts including failure to furnish information required by Section 15(b)—may be punishable criminally. In other words, the product safety laws provide the Government with the option of seeking criminal penalties for knowing and willful violations.

The Indictment: Although the indictment does not name companies or conspirators (in addition to defendants Chu and Loh), the operative facts underlying the indictment appear to stem from the Gree matter before the CPSC—recalls involving Chinese dehumidifiers in the 2013-2014 time period that ultimately led to a (then record) $15.4 million civil penalty agreement between the Commission and various foreign and domestic Gree entities, including Gree USA Sales, Ltd. of California.

Here, in sum, the DOJ’s indictment alleges that from July 2012 through April 2013, defendants Chu and Loh received multiple consumer reports that their Chinese-made dehumidifiers were catching on fire. Despite these reports, and subsequent test results that showed the material used in the dehumidifiers did not meet the UL safety standard for dehumidifiers and/or fire resistance, defendants did not contact the CPSC until March 2013. And even when defendants and their unindicted and unnamed co-conspirators did notify the Commission, they made representations that they had not concluded that the dehumidifiers were defective or that a recall was necessary. One report made on April 30, 2013 went as far as stating that the dehumidifiers were “safe for use as intended.” Ultimately, the unindicted companies and CPSC announced a joint recall of approximately 2.2 million of these Chinese humidifiers in the U.S.

What This Means: Consumer product companies, and their officers and executives, should pay close attention to this development—up until Friday, the most egregious violations of the consumer product safety laws seemed to be resolved through civil channels—penalties and occasional lawsuits commonly filed to enjoin certain bad actors from continuing to sell defective or otherwise violative products. This indictment, however, demonstrates a willingness on behalf of the Government to prosecute individuals or firms criminally for, at a minimum, the most egregious violations of the product safety laws. Companies and executives in consumer product industries must remain aware and cognizant of their legal obligations to report and otherwise under the CPSC, as defined through the CPSA, Federal Hazardous Substances Act, and other product safety laws.

For additional analysis that focuses on the import angle of this matter, please see my colleague Frances Hadfield’s post here.

The U.S. Department of Labor recently issued a proposed final rule that would increase the minimum salary required for most ‘white collar’ employees to remain exempt from the FLSA’s overtime requirements. DOL anticipates that the new rule will make one million more U.S. workers eligible for overtime, many of whom work in the retail sector. The DOL proposed rule will increase the minimum salary to $35,308 annually, or $679 per week, from the current $455 per week level.

In addition to raising the minimum salary for most exempt employees, the proposed rule makes several other changes that will be important for many retailers. One of the specific topics on which DOL seeks public comment is its proposal to increase the minimum salary again, every four years.

On Friday, March 22, DOL announced that it will accept public comments on the rule until May 21. The proposed rule and request for comments can be viewed in full here. It is likely that the DOL’s proposed rule will be finalized sometime yet this year.

Our clients often ask us what happens after a recall has been completed and what to expect from a visit from a regional CPSC inspector. We advise to be prepared to demonstrate what actions were taken regarding the Corrective Action Plan (CAP). The main purpose of the inspection appears to be to provide confirmation that CAP tasks (such as distribution of retailer letters and posters) are underway and/or have been completed.

The Commission staff will check that notice of the recall is available on the company website and often go to retail establishments to look for posters.  The documents that an inspector may request at an on-site inspection include:

  1. Copies of all notifications to consumers and any other documents sent out regarding the recall;
  2. Copies or other demonstration that agreed social media was posted;
  3. If the company agreed to monitor wholesale/auction websites, records to show that such a process has been established;
  4. Records to demonstrate what the total number of units in the recall population, what inventory exists or what was done with any units under the company’s control at the start of the CAP;
  5. Incident records to confirm the total number of incidents, whether there have been new incidents discovered post-recall, and when the company first learned of incidents that gave rise to the CPSC filing.

Collecting and organizing these documents from the start can make the CPSC post-recall inspection much less time-consuming.  And the inspection can provide an opportunity to resolve any problems that may have arisen in recall execution. Much of the information requested is necessary for completion of CPSC monthly status reports and can make that process work smoothly as well.

A recent decision by a California appellate court may increase the frustration level for retailers trying to implement effective flexible work scheduling plans. In Ward v. Tilly’s Inc., No. B280151, 2019 WL 421743 (Cal. Ct. App. Feb. 4, 2019 ), a majority of the court reversed a trial court’s decision and reinstated a class action filed against an Orange County retailer. The complaint alleges that the company’s employee call-in procedures violated provisions of a California Wage Order requiring reporting pay, by not paying employees who were required to call-in two hours before a previously-scheduled ‘on call’ shift. The dissenting judge strongly criticized the outcome, observing that it was nonsensical for California employers to face “tens of millions of dollars in liability” as a result of an erroneous interpretation of the language of the Wage Order.

The Company’s Practices and the Lawsuit

Like many retailers, Tilly’s uses on-call shifts to optimize scheduling. Tilly’s required its employees to call their stores two hours before the start of an on-call shift, to determine whether they would actually be needed to work the shift. If the employee was told not to come in, Tilly’s did not consider the employee to have “reported for work” within the meaning of the relevant California Wage Order.

Tilly’s was sued in a class action complaint alleging that its practices violated the Industrial Welfare Commission (“IWC”) Wage Order 7. The complaint alleged that Tilly’s was required by Wage Order 7 to pay reporting time pay to employees who utilized the company’s call-in procedure.

Tilly’s filed a demurrer to the complaint, arguing that Wage Order 7 did not apply to its call in policy because the only way an employee could “report for work” within the meaning of the Wage Order was by physically appearing at the store at the start of a shift. The trial court agreed, and dismissed the lawsuit.

The Appellate Court’s Decision

On appeal, Plaintiff argued that Wage Order 7 is triggered by any manner of reporting, whether in person, telephonic, or otherwise. The court’s majority accepted this position and concluded that Tilly’s employees were entitled to reporting pay if they were told not to come into work when they called in two hours before the shift.

Wage Order 7 does not define the phrase “report for work.” The court analyzed the phrase’s meaning in context, beginning with several dictionary definitions of the word “report.” The majority concluded that those definitions do not conclusively establish whether the phrase “report for work” requires the employee’s presence at a particular time and place, or whether it is satisfied by an employee “presenting” himself or herself in whatever manner the employer has directed, such as the telephone call-in required under Tilly’s system.

The court’s opinion gets more interesting when it gets to the legislative intent of Wage Order 7. Tilly’s argued for an originalist interpretation of the phrase, to reflect the understanding of the phrase at the time of the language’s adoption in the 1940s.  The majority acknowledged that, back in the day, the phrase would have been understood to require the employee’s physical presence at the work site. The majority cited statistics suggesting that telephones were not widely available to the public in the 1940s, in support of the conclusion that physical presence would have been the common understanding of the phrase. The court then observed that the advent of the cell phone and other technologies has altered the way in which employees communicate with their employer. The court concluded that, given the employee protection objectives of the California Wage Orders, it was appropriate to ask how the IWC would have addressed this question had it anticipated the realities of modern technology. In what some might call a presumptuous form of mind-reading, the court concluded that, had the IWC addressed the issue, it would have concluded Tilly’s alleged on-call system triggers the payment of reporting time pay.

The majority gave the following explanation for the policy supporting its interpretation of the phrase: “[O]n-call shifts burden employees, who cannot take other jobs, go to school, or make social plans during on-call shifts—but who nonetheless receive no compensation from [the employer] unless they ultimately are called in to work. This is precisely the kind of abuse that reporting time pay was designed to discourage.”

The Dissent

Justice Egerton dissented in a robust and colorful opinion. Her review of the legislative history of the Wage Order clearly reflected “the drafters’ intent that―to qualify for reporting time pay―a retail salesperson must physically appear at the workplace: the store.”Tilly’s at *15. Justice Egerton rejected the majority’s focus on cell phone technology. “But there has been no technological change pertinent to proper statutory interpretation in this case. Nothing turns on whether a cord or a cell tower connects the phone. The notion that phones were unfamiliar in the 1940s is ahistorical: spend some enjoyable time listening to Glenn Miller’s 1940 hit Pennsylvania 6-5000. (The Andrews Sisters’ rendition is delightful.)” Id. at *18.

Justice Egerton relied on a district court decision (Casas v. Victoria’s Secret Stores, LLC (No. CV 14-6412-GW) 2014 WL 12644922, at * 5 (C.D. Cal., Dec. 1, 2014), which held on-call shifts do not trigger reporting time pay under Wage Order 7 unless employees actually reported to work in the traditional sense of the term, rejecting contrary “interpretations that promote the Court’s view of good policy.’” Id.  While Justice Egerton acknowledged the hardships an on-call system may impose on employees, she reasoned employers do not have on-call systems just to “torture employees”  Id. at *18.

What this Means for California Employers

The majority’s decision in Ward endorses the view of advocates who oppose employer predictive scheduling initiatives and other flexible staffing strategies. While the decision may be reviewed by the California Supreme Court, California retailers should be aware that Ward may well represent the current view of California courts as to on-call scheduling practices. And, because other Wage Orders implemented by the IWC contain the same language regarding reporting pay, California employers in other industries should assume that advocates will seek to extend the rationale of Ward to their businesses.

 

Over the past couple of years there have been several important conversations regarding intellectual property issues in the beauty industry. This industry faces a persistent issue of copycat beauty looks that are not credited to the original inspiration. For example, earlier this year Instagram account Diet Prada called out two editorial beauty looks worn by Rihanna in a magazine, arguing that the two makeup artists and creative teams had ripped off looks from their peers. Diet Prada commented that in its opinion, Rihanna’s silver glitter coated lids, lips and tongue were directly copied from a 2014 design by another artist for a 2018 Allure magazine story. Two years prior, Snapchat made headlines when it released a new batch of face-altering filters that seemed to be inspired directly by the creations of independent make-up artists. These filters weren’t just replicas of simple beauty looks. In fact, they were exact replicas of intricate works of art, arguably plucked directly from the make-up artists’ feeds.

The issue that many beauty artists face is that the industry does not have adequate avenues to protect their creations and take legal action for copyright infringement. Peter Philips, a well-known makeup artist and Creative Image Director of Christian Dior Beauty, saw his Swarovski crystal-rimmed eyes at the Dries van Noten Spring 2018 show replicated by many other makeup artists. Commenting on the copycats, he stated to website Fashionista: “what drives me is the creative process and trying to do different things than other people do.” He also said “I do respect the skills of people [re]doing my makeup, but on the other hand, I feel you miss out on something because doing our job is not only about repeating and what’s been done. That could be a starting point to push it further — that’s just the fun of it”. But what happens when no such “pushing further” occurs, and there are mere copies on the runway?

Present State of US Copyright Law

Copyright is a right given to its owner to prevent the unauthorized use of his/her work. Copyright may only subsist in certain categories of “works” including those that are literary, artistic, and musical.

Copyright is automatic. As soon as a work is produced, it is protected by copyright. One does not need to register the work or apply a copyright notice to it in order to be protected by copyright. As a general rule, a person who reproduces a substantial portion of the original work without the permission of the copyright owner is a prima facie infringer, and therefore must prove some affirmative defense such as fair use in order to escape liability.

A turning point for this issue came in 2000 when the Southern District of New York clarified that certain intricate tattoos and stage makeup qualify for copyright protection. In Carell v. Shubert, the Court held that the stage makeup featured in the Broadway musical Cats was protectable under copyright law, as even though actors in the show could change, the makeup was sufficiently fixed in the same way. They also considered choreography (with its ever-changing dancers) to be fixed. The Cats makeup required up to eight layers of products and several hours of work each night. This was found to be an original work of authorship that is fixed in a tangible medium, thereby satisfying the elements necessary for copyright protection under 17 U.S.C. §102.

Existing Issues for the Beauty Industry

One of the main issues with granting copyright protection to makeup looks is that makeup disappears and washes off instantly whereas clothing, artwork or even photography is long lasting. Makeup artists do not fit squarely into the protections afforded by US copyright law because these looks are not permanent. However, semi-permanence is part of the beauty of makeup—it allows the wearer to become whoever he/she wants to be.

Additionally, everyday hair and makeup, generic tattoos, and nail art would likely not be sufficiently original to qualify for copyright protection. The artwork done by a makeup artist would have to meet the definition of “sufficient originality” to be considered copyrightable. Under a portion of the Copyright Act known as the Visual Artists Rights Act (VARA), certain “works of visual art” may qualify for protection against distortion and other wrongs. In relevant part, section 101 of the Copyright Act defines a “work of visual art” to include: a painting, drawing, print, or sculpture, existing in a single copy or in a limited edition of 200 copies or fewer, which are signed and consecutively numbered by the author.

An artist may attempt to apply the same makeup design on different people, or even the same person. The definition of “work of visual art” appears to distinguish a work existing in a single copy from a work existing in multiple copies on the basis of copies of the latter work being derived from a common mechanical process (such as the multiple casting of a sculptural work or the manufacture of several photographs from the same negative). See id. § 101 (defining a work of visual art). Because the second and further applications of a makeup design are not mechanical, each application may count as a separate work of art.

Conclusions

Even though Carell held that makeup is protectable under copyright law, the landscape of makeup art and copyright law is still relatively undeveloped and requires some clarity on how to allocate copyright when no long-term record can be obtained.

This article originally appeared in FashionUnited.

 

Crowell & Moring has issued its fifth annual report on regulatory trends for in-house counsel. “Regulatory Forecast 2019: What Corporate Counsel Need to Know for the Coming Year” explores a diverse range of regulatory developments coming out of Washington and other leading regulatory centers of power, and it takes a deep dive into international trade—examining the challenges and opportunities that will arise in the year ahead as global businesses compete in the digital revolution and operate their businesses across borders.

The cover story, “Trade Winds: How Global Businesses are Navigating Trade, Tariffs, and the Uncharted Waters Ahead,” examines how changing international trade policies are causing businesses to rethink strategies for everything from supply chains to data transfers, while uncovering new opportunities along the way. The article forecasts changes on the horizon that include how new tariffs and trade barriers may drive up costs and cause companies to rearrange their supply chains; how some countries are restricting the flow of data across borders; and the impact of the growing number of stronger enforcement of financial crimes regulations, among others. The article also identifies hot spots for 2019 in an international trade infographic.

The Forecast examines how the pace of technological change has revolutionized commerce and industry, and those charged with developing and enforcing regulations are working to keep up. The government affairs article, “Congressional Influence on Rulemaking Is on the Rise,” explores how congressional input on rulemaking is increasing as the Trump administration pursues deregulation, while the energy article, “Electricity—Prepare for Continuous Disruption,” explores how the digital transformation is bringing extraordinary risks and opportunities to incumbent utilities, competitive suppliers, and consumers.

Be sure to follow the conversation on social media with #RegulatoryForecast.

 

The American Manufacturing Competitiveness Act of 2016 (AMCA) directed the U.S. International Trade Commission (ITC) to establish a process for the submission and consideration of Miscellaneous Tariff Bill (MTB) petitions for duty suspensions and reductions. The Miscellaneous Tariff Bill (MTB) Act of 2018 (MTB Act) temporarily reduced or eliminated import duties on specified raw materials and intermediate products used in manufacturing that are not produced or available domestically. This is because it was intended to insure that companies were not at a disadvantage to their foreign competitors when sourcing components.

The ITC is currently issuing a mandatory questionnaire to companies that previously benefitted from the 2018 MTB Act. The purpose of the questionnaire is to collect information that will allow the ITC to prepare a report to examine the effect of duty suspensions and reductions contained in the MTB Act on the U.S. economy. The MTB Act requires the ITC to solicit and append this report the agency’s recommendations with respect to domestic industry sectors or specific domestic industries that might benefit from permanent duty suspensions and reductions. Once the ITC report is completed, it will be posted at https://www.usitc.gov/mtbeffects for public comment.

Originally announced in the Federal Register on October 9, 2018, the ITC has also instituted a new fact-finding investigation (Inv. No. 332-565; American Manufacturing Competitiveness Act: Effects of Temporary Duty Suspensions and Reductions on the U.S. Economy) to examine the effects of the newly enacted miscellaneous tariff bill (MTB). However, as a consequence of the Government Shutdown, a yet to be published Federal Register Notice will formally announce new deadlines for filings. These deadlines are:

  • Filing requests to appear at the public hearing – March 18 2019;
  • Filing prehearing briefs and statements – March 21, 2019;
  • The public hearing is now scheduled for April 8, 2019;
  • Filing post-hearing briefs – April 15, 2019;
  • Filing all other written submissions – April 23, 2019; and
  • The USITC will transmit its report to the House Committee on Ways and Means and the Senate Committee on Finance (Committees) by October 18, 2019.Keep following the blog for updates regarding the MTB petition process.
  • All other dates pertaining to this investigation remain the same as in the notice published in the Federal Register on October 9, 2018.

On March 5, Lauren Aronson will moderate the panel, “Guidance on Reliable Testing to Support your Advertising Claims,” at the National Advertising Division’s West Coast Conference. Joining Lauren will be Benjamin Sarbo – Product Development Lead at Kimberly-Clark, Ray Iveson – Director and Senior Research Fellow, The Duracell Company, and Martin Zwerling – Deputy Director, NAD.

The panel will cover issues related to testing products to support advertising claims. Using real-life product examples, they will discuss key questions that advertising should address, including Is there an industry standard or, in the absence of an industry standard, what type of test method is reasonable and reliable? Is the test method consumer relevant? Do the test results correlate to the claim? This panel will explore these challenges from the perspective of in-house R&D, an in-house lawyer, and outside counsel.

Click here to register for the event.