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.

On June 22, 2020, the Federal Trade Commission (FTC or “Commission”) issued its staff report on the Made in USA workshop, held in 2019, and its long-awaited proposed Made in USA (MUSA) rule (“Rule”). Under the Rule, advertisers would be prohibited from making unqualified Made in USA claims unless:

  • Final assembly or processing of the product occurs in the United States;
  • All significant processing that goes into the product occurs in the United States; and
  • All or virtually all ingredients or components of the product are made and sourced in the United States.

The proposed Rule would grant significant enforcement latitude to the Commission. The FTC takes the position that the proposed MUSA Rule, adopted under 15 U.S.C. §45a, will not impose any new substantive requirements on advertisers and states in the Notice of Proposed Rulemaking (NPRM) that the Rule would make it easier for businesses to comply with the law “by codifying the existing standards applicable to MUSA claims.” The Rule defines “Made in the United States” to broadly encompass any term that the FTC determines represents United States-origin. Specifically, the Rule defines “Made in the United States” to mean “any unqualified representation, express or implied, that a product or service, or a specified component thereof, is of U.S. origin, including, but not limited to, a representation that such product or service is ‘made,’ ‘manufactured,’ ‘built,’ ‘produced,’ ‘created,’ or ‘crafted’ in the United States or in America, or any other unqualified U.S.-origin claim.” (emphasis added.)

The FTC’s enforcement of the Made in USA advertising standards, thus far embodied in a Guide, has been consistently aggressive during this and previous administrations. The FTC routinely receives trade complaints submitted by activists and competitors regarding allegedly unsupported MUSA claims. Many such complaints are resolved informally with closing letters. However, when and if the current rule goes into effect, the stakes for violating the rule will go up dramatically. The Rule will authorize the Commission to seek civil penalties of $43,280 per violation. With this change, the Commission will be able to more quickly and easily obtain financial penalties without the litigation risks of Section 13(b) of the FTC Act. Until now, the FTC has struggled to obtain financial penalties even from the advertisers that knowingly falsely labeled imported products as “Made in the USA” and has been criticized for its weak enforcement. But, if the MUSA Rule is adopted, we can expect to see more and steeper penalties for unsubstantiated, unqualified Made in USA advertising claims.

We also expect some controversy regarding the scope of the Rule. The proposed Rule defines “labels” to include making unqualified MUSA claims appearing in mail order catalogs or mail order advertising, which it defines to include online advertising. However, the Commissioners disagree on this scope, foreshadowing likely challenges that defendants may raise if the Rule is finalized and the FTC initiates enforcement activity. Commissioners Noah Phillips issued a dissenting statement and Commissioner Christine Wilson issued a statement dissenting in part, arguing that the proposed Rule exceeds the scope of the FTC’s authority because the “plain language” of Section 45a references only “labels on products”—verbiage that does not include online advertising.

Given the significant potential impact of the proposed MUSA Rule, advertisers currently making Made in USA claims that have concerns about the proposal’s wording or scope should consider filing a public comment. Comments on the proposed Rule can be submitted through https://www.regulations.gov for sixty days after the publication of the NPRM and all comments must include “MUSA Rulemaking, Matter No. P074204.” In addition, the FTC’s rulemaking procedures are designed to be more rigorous and complex than standard APA notice and comment rulemaking, and require the appointment of a Presiding Officer and a live “informal hearing.” If requested by commenters, this may even include live testimony and cross examination. One can expect the applicability of this proposed rule to online advertising to be a subject of comment and debate in the ongoing proceedings.

Retail tenants are experiencing unprecedented difficulties stemming from the COVID-19 pandemic, including government shutdown orders for non-essential businesses and shelter-in-place rules that have virtually stopped all in-person shopping. Even as these restrictions are finally being relaxed to a limited degree, the dramatic effects of the pandemic will long be felt in the retail industry. This alert addresses just one of the consequences in the wake of COVID-19: the expected rise in bankruptcy filings by commercial landlords and, as a corollary, what retail tenants should do to protect their rights and seek available remedies when faced with a landlord’s bankruptcy.

When a landlord files for bankruptcy, it has the right under the Bankruptcy Code to “assume” (to keep in place) or “reject” (to elect to breach the lease as of the date of the bankruptcy) its unexpired tenant leases (see 11 U.S.C. § 365(a)). Neither of these options under the Bankruptcy Code changes the terms of a lease. But a tenant who is unaware of the operation of bankruptcy law, or who is unfamiliar with the rights provided under its lease, risks losing or impairing its lease rights. The unprepared tenant could also lose potential opportunities unique within bankruptcy to improve the position of its lease viz-à-viz other tenants and creditors of a landlord. A summary of a bankrupt landlord’s options, and a retail tenant’s responses to protect and even improve its lease position, are discussed in turn below.

When the Bankrupt Landlord Wishes to Keep a Retail Lease: Tenant Has Full Rights to Require a Landlord to Cure Breaches if the Landlord Seeks to “Assume” the Lease

Most landlord bankruptcies begin with the debtor-landlord seeking to reorganize (as opposed to liquidate). The landlord thus will desire to assume and retain existing retail leases with terms favorable to it. Retaining rent-paying tenants is the lifeblood of every commercial landlord, especially those tenants under leases commencing prior to the COVID-19 shutdown that now may have an above-market rental rate.

To assume and retain a lease, a bankrupt landlord must cure all breaches, with monetary breaches paid 100 cents on the dollar.

The prospect of being tied to an above-market lease is considerably less appealing to a retail tenant. Fortunately, the Bankruptcy Code requires that prior to lease assumption the landlord must promptly cure all existing defaults. These would include non-payment of a tenant’s improvement allowance or failure to maintain the property to the required standard. Perhaps most significantly, a landlord could not assume a lease in the face of breaches of conditions regarding tenant mix, shopping-center occupancy, and other obligations regarding quality of the leasehold.

Some lease defaults that cannot, as a practical matter, be cured, such as a landlord’s failure to provide cleaning services or building security prior to assumption, are not required to be cured. But even in regard to these breaches, the tenant is entitled to a monetary payment for resulting losses. And, finally, the landlord can assume a lease only after it demonstrates “adequate assurance of future performance,” meaning that the landlord will not default in the future.

Any monetary cure payment is not paid as a pre-petition unsecured claim, which type of claim typically only receives pennies on the dollar. In order to keep the lease, landlords will need to pay in full any monetary damages that are established. If those payments cannot be made, or if conditions to the effectiveness of the lease cannot be satisfied, a tenant’s objection in the bankruptcy court will prevent the landlord from keeping the lease until damages are paid or conditions satisfied.

A tenant with a full understanding of the provisions of its lease may, by objecting to assumption, create powerful leverage for negotiations to obtain affirmative recoveries or rent concessions on the lease.

That the landlord is required by law to cure breaches presents an excellent opportunity for a retail tenant to renegotiate its existing lease on more favorable terms. The tenant may accomplish this by carefully analyzing its existing lease and preparing a detailed and documented list of the landlord’s past and ongoing breaches. This analysis should include not only “pecuniary loss” stemming from defaults but crucial non-monetary breaches that negatively affect the value of the leasehold to a tenant.

The prepared retail tenant will be armed with hard data to back up its request to the bankruptcy court that the landlord be required to cure its breaches and pay all monetary losses before it is allowed to assume the lease. In the face of such a detailed objection by the tenant, the landlord will be compelled to come to the table. In contrast, if a tenant fails to prepare and instead opposes assumption by relying on general allegations of a landlord’s noncompliance, then it is more likely the bankruptcy court may permit assumption based on nothing more than the landlord’s general assurances to cure. Such assurances are of course worth little.

When the Bankrupt Landlord Wishes to Rid Itself of a Retail Lease: Tenant Has the Right to Remain in Possession Even Upon “Rejection” of the Lease

Where a retail lease contains terms unfavorable to the bankrupt landlord, it may elect to reject the lease. Fortunately for tenants, the Bankruptcy Code contains special protections so that a landlord cannot reject a lease in order to simply evict a tenant.

A landlord cannot remove a tenant from its leasehold premises by rejecting the lease; instead, it is the tenant’s choice whether to stay or go.

Section 365(h) of the Bankruptcy Code provides that if a debtor-landlord rejects a real estate lease, the tenant has two choices. First, the tenant may treat the lease as terminated and vacate the premises (and file an unsecured claim in the bankruptcy case for damages caused by the landlord’s termination). Second, so long as the lease term has commenced, the tenant may elect to remain in possession at the same rental rate for the remaining term, including any renewal or extension period, as provided in the lease and permitted by state law.

If the tenant elects to remain in possession, then it must continue to pay rent and perform all its other obligations under the lease. The landlord, however, will no longer be required to perform its lease obligations, such as repairs, maintenance, or building security, thus potentially compelling the tenant to perform the landlord’s obligations. The tenant is entitled to offset its expenditures in performing the landlord’s duties, as well as damages related to the landlord’s failure to meet lease conditions such as tenant mix and shopping-center occupancy, against future rent. These requirements are expressly protected by the Bankruptcy Code. Notably, the rent offset is the tenant’s sole recourse against a rejecting landlord.

Even where a bankrupt landlord seeks to reject a lease, and the tenant’s rights appear assured by the Bankruptcy Code, the tenant must be vigilant to ensure that the landlord does not take steps in the bankruptcy to eliminate those rights.

A tenant’s rights upon landlord rejection should be preserved by law. Nevertheless, debtors in bankruptcy frequently take advantage of the willingness of some bankruptcy courts to allow a debtor to take acts that are beyond the written powers of the law itself. In practice, many proceedings in bankruptcy are done on what is colorfully called a “scream or die” basis. The debtor mails (or sometimes merely emails) a short notice to what might be thousands of creditors, seeking court authorization to act in furtherance of the debtor’s reorganization. Unfortunately, where creditors have not been diligent in reviewing such notices and therefore fail to “scream,” they may find that their rights have effectively “died.” A landlord might, for example, ask the court to set a deadline for all tenants under rejected leases to elect to keep their lease and stay on the premises, with a tenant’s failure to object on a short timeline constituting an abandonment of the tenant’s leasehold. Tenants must remain vigilant throughout a bankruptcy proceeding to avoid being caught in such a trap.

When the Bankrupt Landlord Seeks to Sell the Property in which a Retail Tenant has a Leasehold

Along with assumption of leases by a reorganizing landlord, a retail tenant may find that its landlord intends to raise needed cash by selling the property in which its leasehold exists. This sale would occur to a new entity, such as a different commercial landlord. The purchaser might even be a newly created entity that looks very much like the old landlord, but which is not burdened by the bankrupt landlord’s debt incurred prior to the COVID-19 crisis. Courts dealing with this scenario have developed case law that is far less clear on whether a tenant has the right to remain in possession of the premises, and of the benefits of its existing lease.

A tenant must be alert to the possibility that its landlord may seek to strip off its lease rights by selling the property to a different landlord.

The sale of a property subject to a retail lease would occur as a “363 sale” in bankruptcy. Section 363 of the Bankruptcy Code allows a debtor, under certain circumstances, to sell its assets “free and clear” of existing liens and interests. See 11 U.S.C. § 363(f). This provision was used, for example, to allow “new General Motors” and “new Chrysler” to acquire the working assets of their predecessor companies while shedding original liabilities. The “interests” that may be affected by such a bankruptcy sale include retail leases. Consequently, an apparent conflict arises between Sections 363(f) (which appears to allow the sale of real property free of leases) and 365(h) (which preserves a tenant’s rights).

Federal courts are split on which section trumps the other. See In re Spanish Peaks Holdings II, LLC, 872 F.3d 892, 898 (9th Cir. 2017) (citing cases taking the “majority” approach and “minority” approach). The majority view holds that the possessory interests of tenants under Section 365(h) are superior to the rights of asset purchasers under Section 363(f), which means the retail tenant can continue to possess and operate its business even after a 363 sale. The minority view says that a 363 sale can be free and clear of tenant interests if the leases are not rejected under Section 365(h). Even the minority position, however, allows for tenants to protect themselves by demanding adequate protection under Section 363(e) in response to a proposed sale free and clear. Adequate protection may include the right to remain in possession of the leased premises.

A timely objection in the landlord’s bankruptcy is necessary for a tenant to have any chance of preserving its lease rights in a 363 sale.

So how does the retail tenant avoid this potential trap? Simple answer: be vigilant! In Spanish Peaks, for example, the Ninth Circuit (governing nine western states including California) adopted the minority view that disfavors tenants. But even worse for the tenant, the Circuit declined to address what adequate protection would be due the tenant (which is available under the minority view) because it had failed to ask for adequate protection at the bankruptcy court level. The bottom line is simple but critical: before your landlord files for bankruptcy, know your lease terms and the rights created therein, and as soon as your landlord files for bankruptcy ensure you are on the electronic notice list in order to receive immediate notification of all filings by the debtor-landlord. Read the notices to stay abreast of any activity in the case which could interfere with your leasehold rights, such as a motion to assume or reject under Section 365 or motion to authorize a 363 sale. The retail tenant who is not actively aware of developments in its landlord’s bankruptcy risks losing its lease, possession of the premises, and other rights it may have against the landlord.

Conclusion

The retail industry has been among the hardest hit by the COVID-19 pandemic. As society moves through the shutdown stage and begins reopening, if only gradually, economic suffering will remain. Thus, in COVID-19’s wake, retail tenants must be prepared to know and pursue their rights and remedies in a landlord’s bankruptcy proceeding. This requires knowledge not only of the Bankruptcy Code’s treatment of assumption and rejection of an unexpired lease, but, critically, a detailed understanding of rights granted in the unexpired lease itself. Where threat of landlord bankruptcy exists, retail tenants should be preparing now to face a potential rapid onslaught of actions in a bankruptcy proceeding which likely will affect their leasehold rights. Forewarned is forearmed.

Stung by repeated criticisms of content moderation decisions in which it either acted or refused to act to remove controversial content such as obviously-doctored political videos, Facebook has developed a new Independent Oversight Board to hear petitions to appeal from those decisions brought by platform users and Facebook itself.  The Oversight Board has been set up and funded by an independent trust, which is designed to allay concerns that Facebook might interfere in its decisions.

As many retailers rely on content creation for their marketing efforts, Facebook’s news is worth noting. For content creators, an adverse Facebook decision to take down content can be disastrous to their livelihood which depends on monetizing that content.  Such a potential adverse business impact is part of the reason why due process on Facebook is long overdue.

Last month, Facebook announced its initial Board composition and published the long awaited bylaws, which detail how the Oversight Board will be operated.

Facebook Oversight Board Procedures

  • The Oversight Board will be made up of an independent, international panel, reportedly selected to reflect a diverse set of viewpoints, expertise, and languages. There will, at peak, be 40 members who will serve 3-year terms.  The Board currently includes three prominent law professors from the United States, including co-chair Michael McConnell, who is currently a Stanford Law Professor and formerly a Judge on the Tenth Circuit.
  • The right to appeal will not be automatic. The Board will constitute a rotating Case Selection Committee that will develop criteria for selecting among the most meritorious among what are expected to be thousands of petitions for review.  It “will prioritize cases that potentially impact many users, are of critical importance to public discourse, or raise questions about Facebook’s policies.”  Some content decisions, such as assessments of copyright concerns or involving clear violations of law, will not be appealable to the Board.
  • Upon acceptance of the case, the Board will forward it to a 5-member board panel. The case submission will include:
    • A statement by the person who submitted the case (and/or who posted the original content);
    • A case history (from Facebook);
    • A policy rationale (also from Facebook);
    • Clarifying information (also from Facebook) if requested by the board; and
    • All additional outside information, if requested by any member of the panel.
  • In reviewing individual cases, the panel will seek to determine whether the content complies with Facebook’s “content policies and values.” It will draft a decision for full Board review.
  • Once approved for release, the administration will approve the publication of the final decision on the board’s website and promptly notify the persons involved and Facebook.
  • The board will publish its decision as soon as it is complete and will translate it into the board’s official languages

Implications

We have yet to see any published decisions from the Board, so the real operational standards and quality of the Board decision-making have yet to be assessed.  Some of the most difficult issues that could arise may stem from allegations of systematic bias that are often leveled against social media platforms, and in the leadup to the United States Presidential Elections, the Boards’ decisions regarding political content are certain to receive significant attention.

Facebook needs this experiment in independent oversight to succeed.  The drumbeats for reform, or even repeal, of Section 230 of the Communications Decency Act is growing louder every day – attracting proponents from both sides of the political spectrum.  An effective and independent Oversight Process might calm the political waters, much as the creation of the industry self-regulatory National Advertising Review Program did in the 1980s.

On June 3, 2020, the United States Bankruptcy Court for the Northern District of Illinois issued one of the first decisions to apply a force majeure clause to a commercial tenant’s rent obligations in the wake of a COVID-19 government-mandated shutdown. Pursuant to an Illinois executive order, restaurant operations were limited to curbside pickup.

The court ultimately concluded that the force majeure clause in the parties’ lease supported a 75% reduction in rent. The decision in In re Hitz Restaurant Group, No. BR 20 B 05012, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020), suggests that courts may be increasingly receptive to arguments tying rent to tenant’s actual and/or permitted operations under “shelter in place” orders.

Background

The tenant debtor, Hitz Restaurant Group (“Hitz”), leased space from landlord creditor Kass Management Services, Inc. (“Kass”). The force majeure provision in the lease provided:

Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, orders of government . . . . Lack of money shall not be grounds for Force Majeure.

On February 24, 2020 (prior to the issuance of any COVID-19 “shelter in place” orders), Hitz filed for bankruptcy. It also did not pay rent for March or subsequent months. In March, Illinois Governor J. B. Pritzker issued Executive Order 2020-7 in response to the growing COVID-19 pandemic. Section One of that order required restaurants such as that operated by Hitz to “suspend . . . on-premises consumption” effective March 16, but permitted such businesses to use delivery, “drive-through, and curbside pick-up.”

Hitz argued that this executive order, as well as subsequent orders extending the limitation on restaurant activity, triggered the force majeure clause in the lease such that Hitz did not owe rent from March onward. Kass moved the bankruptcy court to order Hitz to pay post-petition rent and “to timely perform all future rent obligations.” In re Hitz Rest. Grp., 2020 WL 2924523, at *1.

Force Majeure “Unambiguously Applies”

The court found that Governor Pritzker’s order “unambiguously triggered” the force majeure clause in the lease and that the clause “unambiguously applies” to rent payments that became due thereafter (April, May, and June). Id. at *2.

The executive order triggered the force majeure clause because the order (1) “unquestionably” constitutes “governmental action” or “order of government” as enumerated in the provision; (2) “unquestionably ‘hindered’”—pursuant to the clause—Hitz’s ability to perform under the lease by proscribing on-site food consumption; and (3) was “unquestionably” the proximate cause (a requirement for the analysis of force majeure provisions under Illinois law) of Hitz’s inability to pay rent because “it prevented [Hitz] from operating normally and restricted its business to take-out, curbside pick-up, and delivery.” Id.

To determine whether—and to what extent—Hitz was obligated to pay rent for the duration of the executive order and its extensions, the court scrutinized the uses expressly permitted and encouraged by Governor Pritzker’s directive. The court relied on Hitz’s estimation that 75% of the restaurant’s square footage, including the dining room and bar, was “rendered unusable” by the order. Id. at *4. Hitz conceded that the 25% of the premises occupied by the kitchen “could have been used” for activities permitted by Governor Pritzker’s order: namely, carry-out, curbside pick-up, and delivery. Id. The court determined that Hitz’s rent obligation was “reduced in proportion to its reduced ability to generate revenue due to the executive order” and ultimately concluded that Hitz owed 25% of the rent due for April, May, and June. Id. at *3-4.

Kass made three arguments to support its claim that the force majeure clause should not apply, each of which the court quickly rejected. First, Kass argued that Governor Pritzker’s executive order did not prohibit the continued functioning of banks or the post office, making payment of rent physically possible. The court summarily rejected this “specious” argument. Id. at *3. Second, Kass argued that the force majeure provision, by its express terms, did not apply to Hitz’s inability to perform based on “lack of money.” The court rejected this characterization by emphasizing that Hitz argued that it was the government-mandated prohibition on its business—and not lack of money—that was the proximate cause of its inability to pay rent. Third, Kass argued that Hitz could have applied for a Small Business Administration loan to cover its rent, which the court rejected given that there was no affirmative duty of Hitz to do so.

The court also considered the “lack of money” exclusion “general” language, and that the more specific inclusion of governmental orders controlled. Id. at *3 n.2.

The court cited authority that force majeure clauses supersede the common law doctrine of impossibility. The parties and court did not address other legal theories raised by commercial tenants, such as frustration of purpose.

Implications for Future Cases

As one of the first decisions to appraise the effects of force majeure provisions on rent obligations during the COVID-19 pandemic, the decision could serve as important persuasive authority for other disputes. The key takeaways include the following:

  • A proportionate rent reduction may be appropriate if limited uses are allowed. The In re Hitz Restaurant Group court found that a tenant’s “obligation to pay rent is reduced in proportion to its reduced ability to generate revenue due to the executive order.” Id. at *3. The concept of tying rent amounts to allowable tenant use could prove to have increased purchase as courts confront the practical effects of shelter-in-place orders on restaurants, retail, and services.
  • Tenant’s invocation of force majeure may prevail. The court rejected the landlord’s attempt to re-frame Hitz’s argument as an inability to pay rent due to a “lack of money,” which would have been excluded as a viable excuse pursuant to the force majeure provision. In doing so, the court embraced Hitz’s argument that the proximate cause of its inability to pay rent stemmed from the executive order and its effects on Hitz’s business. This should give tenants confidence in making arguments based on force majeure provisions. That said, it will be interesting to see if other courts will follow the court’s reasoning in minimizing the impact of the “lack of money” exception.
  • Unclear impact on force majeure clauses that exclude rent payment. Unlike many force majeure provisions, the clause at issue in this case did not expressly exclude payment obligations from performance excused pursuant to a force majeure event. This made it easier for the tenant to argue that its rent obligation should be suspended because of its inability to operate fully as a result of governmental mandates. It remains to be seen how a court would interpret a clause that expressly carves out rent obligations.
  • Uncertain what affect—if any—landlord counterarguments regarding partial use may have. The court acknowledged that the landlord’s counterarguments were weak and that the landlord did not make an argument regarding the square footage that the tenant could have used while remaining within the terms of the order. The degree of use by a tenant will likely prove a serious point of contention in future disputes.

 

In March, we wrote about President Trump’s nomination of Dr. Nancy Beck to serve as Commissioner and Chairman of the U.S. Consumer Product Safety Commission (CPSC). Yesterday, Dr. Beck moved one step closer to assuming the chair of the agency as the Senate Committee on Commerce, Science and Transportation held a hearing to consider Dr. Beck’s nomination.

As expected, the hearing became contentious at times as committee Democrats criticized Dr. Beck’s experience and expressed opposition to the nomination.  They questioned Dr. Beck extensively on her background, in particular her most recent service in EPA’s Office of Chemical Safety and Pollution Prevention and at the White House’s National Economic Council (NEC).  Ranking Member Maria Cantwell (D-WA), along with Tom Udall (D-NM), Richard Blumenthal (D-CT), and Jon Tester (D-MT), pressed Dr. Beck on her role in important regulatory matters involving PFAS chemicals, TCE, methylene chloride, asbestos, and even COVID-19, and proceeded to criticize her for, in their view, disregarding science and siding with the chemical industry over public health and safety.

Chairman Roger Wicker (R-MS) asked Dr. Beck how, if confirmed, she would prevent unauthorized releases of confidential business information by CPSC in violation of Section 6(b) of the Consumer Product Safety Act.  Dr. Beck responded that she would ensure all staff and managers were appropriately trained in how to handle confidential business information.

When provided the opportunity, Dr. Beck expressed her priorities for the Commission if confirmed.  She stated that she will ensure that:

  • CPSC takes appropriate and timely action to protect the public from risks, consistent with statutory mandates;
  • CPSC has effective communication and outreach tools — in particular, to address the changing ways consumers purchase products and receive important information; and
  • CPSC has the full confidence of the American public. Dr. Beck emphasized that CPSC programs must be run as effectively as possible to provide the highest level of protection to consumers and families.

On this last point, Dr. Beck’s written testimony emphasized her support for hiring a Chief Technologist, as recommended by the Senate, to make certain that CPSC decisions are informed by the best available data and information.  Interestingly, however, the CPSC has already posted a job announcement seeking a Chief Data Analytics Officer with the capabilities to query data, create reports, dashboards and data visualizations for reporting to the Commission on emerging hazards.

Dr. Beck stated multiple times during the hearing that she believes that public safety should be promoted through policy supported by “objective and transparent science.”  She claimed not to have enough knowledge to answer specific questions on safety threats such as the threat of furniture tip-over and the death of children.

Dr. Beck’s confirmation is hardly a done deal.  Senate Democrats are expected to block Dr. Beck’s nomination, which may necessitate roll call votes before the Commerce Committee and eventually the full Senate.  In the coming weeks, all eyes will be on a small handful of Senate Republicans, some up for re-election, to see if they throw their support behind Dr. Beck.  For example, at yesterday’s hearing, Senator Shelley Moore Capito (R-WV) questioned Dr. Beck about her involvement in the regulation of PFAS chemicals while at EPA and on detail at the NEC.  Senator Capito’s questioning suggested some doubts on the nomination.  Other Republican Senators to watch include Lisa Murkowski (R-AK), Susan Collins (R-ME), and Tom Tillis (R-NC).

3:30pm ET Update: Both Sen. Shelley Moore Capito (R-WV) and Sen. Susan Collins (R-ME) have since gone on the record voicing opposition to Dr. Beck’s nomination.

Cheri Falvey contributed to this article.

On May 14, 2020, the U.S. Senate unanimously passed the Uyghur Human Rights Policy Act of 2020 (the “Act”). Introduced by Sen. Marco Rubio (R-FL), the Act aims to direct U.S. resources to address human rights violations and abuses, including forced labor, in the Xinjiang Uyghur Autonomous Region in Northwestern China. Credible research and investigations have pointed out that more than 1,000,000 ethnic minorities, including Uyghurs, ethnic Kazakhs, Kyrgyz, and Muslim minority groups have been detained in internment camps where they face political indoctrination, torture, beatings, food deprivation, forced labor, and other human rights abuses.

If passed by the House of Representatives and signed by the President, the Act would require the President to submit a report to Congress identifying any 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 would require the Secretary of State to submit a report 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 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; and an assessment of the use of forced labor and a description of foreign industries and companies benefiting from such labor.

The Act differs in substantial ways from a prior bill, also introduced by Sen. Rubio that was introduced in the Senate on March 12, 2020. The Uyghur Forced Labor Prevention Act would have gone further to create a rebuttable presumption that goods produced by labor occurring in Xinjiang China, or by persons working with the Region’s government under poverty alleviation, or mutual pairing assistance programs, are prohibited for entry into the U.S. This bill would have flipped the burden of proof under Section 307 of the Tariff Act of 1930. Normally, before prohibiting entry of goods into the U.S due to suspected use of forced labor, the U.S. Government must demonstrate that information reasonably indicates that the goods were produced using forced labor. The Forced Labor Prevention Act would flip this burden, requiring importers to demonstrate that goods produced in Xinjiang, China were not produced using forced labor before entry into the U.S. would be permitted. In addition, the Forced Labor Prevention Act would have required the imposition of sanctions as required under the Act.

Whether or not either of these bills is signed into law, it is likely that Customs and Border Protection (CBP) will be more diligent in its forced labor enforcement activity, which may have broad implications for goods imported from China and other regions suspected of using forced labor.

 

On April 8, 2020, the Federal Trade Commission (FTC) published a blog post titled, “Using Artificial Intelligence and Algorithms,” that offers important lessons about the use of AI and algorithms in automated decision-making.

The post begins by noting that headlines today tout rapid improvements in AI technology, and the use of more advanced AI has enormous potential to improve welfare and productivity. But more sophisticated AI also presents risks, such as the potential for unfair or discriminatory outcomes. This tension between benefits and risks is a particular concern in “Health AI,” and the tension will continue as AI technologies are deployed to tackle the current COVID-19 crisis.

The FTC post reminds companies that, while the sophistication of AI is new, automated decision-making is not, and the FTC has a long history of dealing with the challenges presented by the use of data and algorithms to make decisions about consumers.

Based on prior FTC enforcement actions and other guidance, the FTC post outlines five principles that companies should follow when using AI and algorithms, while adequately managing consumer-protection risks. According to the post, and as expanded upon below, companies should (1) be transparent with consumers about their interaction with AI tools; (2) clearly explain decisions that result from the AI; (3) ensure that decisions are fair; (4) ensure that the data and models being used are robust and empirically sound; and (5) hold themselves accountable for compliance, ethics, fairness, and nondiscrimination.

It should be noted that the FTC and state attorneys general already look at whether companies give clear and conspicuous disclosures to consumers in order to evaluate regulatory compliance and some state attorneys general are already looking at issues related to AI. This FTC guidance emphasizes the importance of transparency even further. The guidance’s principles – especially those related to ensuring data accuracy and preventing discriminatory outcomes – will also be important as companies deploy AI to respond to COVID-19. For example, a recent article in The Hill highlighted how companies are working with hospitals to establish patient-monitoring programs that use AI-powered wearables, like smart shirts, that continuously measure patients’ biometrics (e.g., cardiac activity) so that hospital staff can better monitor patients and possibly limit the number of required visits to infected patients.. Although these wearables are promising, companies must make sure that these devices are also effective and that they satisfy principles outlined in this guidance (as well as patient-privacy and HIPAA concerns). Thus, companies will want to pay attention to the FTC’s actions here as these AI technologies are being created and improved.

Summary of the FTC’s Guidance

(1) Be transparent: Companies should be clear about how they are using AI to interact with customers. For instance, if a company uses an AI chatbot to interact with consumers, the company should be transparent to the consumers that they are interacting with a chatbot, not a person. If the company’s use of such a technology misleads consumers, the company could risk FTC enforcement. Companies must also be careful about how they collect sensitive data that will be used in their algorithms: for example, secretly collecting audio or visual data to feed an algorithm could also give rise to an FTC action.

Further, using AI-modelled information may lead to obligations under the Fair Credit Reporting Act (FCRA). That is, if a company makes automated decisions based on information from an AI-enabled third-party vendor (e.g., denies someone an apartment because of an AI model’s credit report), the company may need to provide the consumer with an “adverse action” notice, which explains the consumer’s right to review the credit report and correct any mistakes.

(2) Clearly explain decisions: Companies using AI tools that deny customers access to credit should explain the reasons for the denial. It may not be good enough for companies to give general reasons for the rejection (e.g., simply telling the customer “you don’t meet our criteria”); instead, companies should be specific (e.g., explaining that “you have an insufficient number of credit references”). As a result, companies using AI should know what data is used in its model and how that data is used to arrive at a decision. And if a company changes the terms of a credit agreement based on an automated tool (e.g., reducing a consumer’s credit limit based on his or her purchasing habits), the company should tell the consumer that the terms have changed. Failing to do so can lead to enforcement.

The FTC could potentially apply this guidance to Health AI as well. For example, as mentioned above, AI-powered wearables would allow clinicians to make better decisions regarding which COVID-19 patients to visit or not visit. This FTC guidance suggests that health-care providers utilizing these wearables must be able to explain why these devices required one patient to be seen but not another patient. Further, these devices could be considered subject to U.S. Food and Drug Administration (FDA) enforcement. Thus, enabling the user to independently validate the recommendations made by these devices is an important factor in considering whether FDA oversight is required as well.

(3) Ensure that decisions are fair: Companies should make sure that their algorithms do not result in discrimination against protected classes. For example, the FTC enforces civil-rights laws like the Equal Credit Opportunity Act (ECOA), which prohibits credit discrimination on the basis of race, sex, or income. Thus, if a company makes a credit decision based on consumers’ zip codes, resulting in a “disparate impact” on particular groups, the FTC may challenge that practice under the ECOA. Further, when evaluating an algorithm for illegal discrimination, the FTC will analyze the AI tool’s inputs (e.g., whether the model includes ethnically-based factors) and outputs (e.g., whether the model resulted in discrimination on a prohibited basis). Consequently, companies should rigorously test their algorithms, both before using them and periodically afterwards, to ensure that their AI tools do not discriminate against people.

(4) Ensure that the data and models being used are robust and empirically sound:As previewed above, companies that compile and sell consumer information that is used for credit, employment, or insurance may be subject to the FCRA. Compliance under FCRA means that companies have an obligation to implement reasonable procedures to ensure the accuracy of consumer reports and provide consumers with access to their own information.

In the health-care context, there could be significant liability risk if algorithms, using inaccurate data, lead to improper health-care decision-making. For example, Stanford Health researchers who are focused on AI-assisted in-home elder care are designing AI technology that could potentially be used in the homes of patients to monitor COVID-19 symptoms. Researchers are investigating the use of devices that can collect data (e.g., a patient’s body temperature or mobility) that can be analyzed to monitor up to seventeen activities of clinical relevance, including eating, sleeping, fluid intake, and immobility. Clinicians can then review this information in order to make decisions to help patients. While this research is promising, companies and clinicians that eventually create and use this technology must make sure that the technology’s models are sound and patients’ data are accurate to ensure that the best health-care decisions are made.

To ensure accuracy and soundness, the FTC advises that AI models must be validated and revalidated – using accepted and appropriate statistical principles and methodology – to confirm that they work as intended.

(5) Be accountable for compliance, ethics, fairness, and nondiscrimination: Companies should also hold themselves accountable to be compliant, ethical, fair, and nondiscriminatory when analyzing large amounts of data. To do this, algorithm operators should ask four questions:

  • How representative is our data set?
  • Does our data model account for biases?
  • How accurate are our predictions based on big data?
  • Does our reliance on big data raise ethical or fairness concerns?

Further, companies that develop AI to sell to other businesses should ensure that appropriate controls are put in place in order to prevent the misuse and abuse of sensitive data. Finally, companies should consider using third-party experts as objective observers to ensure that their AI tools do not unintentionally discriminate against classes of people.

Conclusion

This FTC guidance is significant because it is broad and will impact a number of legal areas (e.g., consumer protection and privacy) as AI continues to be used in so many different kinds of products – from credit-reporting services to online-retail sites to health-care products. And as mentioned above, since more sophisticated algorithms are being used in Health AI to address COVID-19, the FTC’s guidance will take on even greater importance. Thus, companies should take heed of these principles and pay attention to how the agency applies them in the years ahead.

Many states have laws forbidding price gouging during an emergency. These laws, which vary significantly by state, seek to avoid predatory pricing behavior that takes advantage of a disaster situation like a hurricane or pandemic.

The economics behind price gouging involves a surge in demand resulting in a temporary monopoly power for the party who has access to that good. Anti-price gouging laws are often triggered by a declaration of emergency and are part of a state’s consumer protection laws. These laws usually allow for recovery of all of the remedies available under a state’s consumer protection law, unless alternate remedies are specified. And while some states do not have specific price gouging laws, it is important to note that state Attorneys General have announced they will use their states’ consumer protection laws, which broadly prohibit unfair or deceptive practices, to combat price gouging during the COVID-19 crisis. While most companies would not actively engage in price gouging, the surge in demand for particular goods during an emergency often results in shortages, increasing supply costs along the supply and distribution chains. In the face of that, companies then must assess pricing in a way that allows them to cover their costs without violating anti-price gouging laws. At the end of this client alert, we provide a checklist to help companies think through pricing products that might be covered under state price gouging laws or subject to state Attorneys General scrutiny.

Lessons Learned

Attorneys General and private counsel have been on the watch for price gouging since the beginning of the COVID-19 crisis. Because of this, several large companies have become subject to Attorney General investigations, and others have been named defendants in class action lawsuits brought by unhappy consumers. For example, a recent California class action lawsuit accuses eBay and individual sellers of price gouging goods such as N95 masks by selling them at a high markup. In Texas, retailers have been sued for raising egg prices. Companies should treat these high-profile matters as lessons learned and become aware of the intricacies of price gouging laws to avoid liability as they are considering price increases. This awareness will be crucial in the current context, as food staples, PPE, cleaner supplies and other shortages continue, and basic economics (rising costs) will result in further necessary price increases.

Assessing State Anti-Price Gouging Laws

Companies should recognize, first and foremost, that each state’s price-gouging laws are different, and even small differences in these laws can greatly impact the risk of a contemplated price increase. Accordingly, each state’s law must be carefully and independently considered.

The factors to consider include:

1. Is your product covered?

The first factor to consider is what products are covered by each state’s price gouging law. If the product (or supply line for your product) is not covered by the law, the risk from a price increase will be low. While state anti-price gouging laws cover a wide variety of products, some laws only apply to a specific list of covered products. For example, Pennsylvania’s law broadly covers consumer goods, while Idaho’s only covers fuel, food, pharmaceuticals, and water. Other states indicate that their primary focus is on goods that will be in growing demand due to an emergency, and some, such as Vermont, are very limited as they only apply to fuel or petroleum. The state law’s definitions should be carefully analyzed in those states that enumerate only specific products that are covered. For example, “consumer food” items might include food for animals, as it does in Tennessee, and emergency supplies might include a flashlight or candle. On the other hand, “consumer goods” might actually be limited to emergency goods. In South Carolina, the law broadly covers “commodities,” but the definition indicates a focus only on emergency goods. The generality or narrowness of these definitions may be surprising, so they should always be taken into careful account.

In addition to enumerating products covered, price gouging laws may not apply at the supply level. Some laws only apply at the retail level, while others specify that they apply to any party within the chain of distribution. Others are silent. For example, New York’s law applies to all parties within the supply chain, while Connecticut’s and Washington D.C.’s are limited to retail. Companies should therefore carefully check both the supply level and goods covered under the law.

2. Is your product covered by an exception? 

Second, companies should carefully check for applicable exceptions. Almost every price gouging law has some type of language allowing the pass through of increased supply costs. However, these laws sometimes contain vague language about the level of pass through costs allowed, particularly for maintaining profit margin. A few states, such as Utah and Washington, allow a price that represents the increased cost plus “customary markup,” capped at a percentage, usually 10%. Others, such as Wisconsin, do not allow for any increase above the increased cost, so no markup. However, terms such as “customary markup” are often undefined. Other states, such as North Carolina, only indicate that the pass through of increased costs is a factor to consider, rather than an automatic defense to a price gouging claim. It will be important for any company to consider permissive language related to supply cost increases, particularly if it seeks to maintain its profit margin rather than pass through costs dollar by dollar.

3. What is the price increase limitation? 

Third, companies should assess what percentage of price increase is permitted. Many price gouging laws specify particular percentages above which companies cannot increase prices for covered goods. For example, Kansas allows for an increase of up to 25%, while Arkansas, California, and New Jersey only allow up to 10%. Some states, such as Connecticut, do not allow any price increase. Other laws, like those in Texas, broadly prohibit “unconscionable” or “excessive” price increases, and sometimes with these terms undefined. Some states, like Missouri, define these terms, but in separate portions of the statute, so finding and analyzing the definitions section should be of primary importance.

Companies should also ensure the law allows them to make a profit, and if so, how much of one. Some laws, such as Iowa’s, state that the supplier may continue to make a reasonable profit, and some cap the profit at a certain percentage, such as Maryland’s law, which allows an increase in value of profit by up to 10%. Other states, such as Oklahoma, specifically provide that no profit may be accounted for when making price increases. Language about allowances for customary markup will also be crucial in assessing whether the company may profit.

4. What price is the starting point?

Lastly, companies should assess what pricing consideration can be taken into account. For example, certain states’ price gouging laws provide exceptions for promotional pricing, for goods that were sold at a discount at the beginning of the emergency, or for seasonal fluctuations in price. Kentucky and Virginia, among others, allow an exception for a good sold at a reduced price, and South Carolina accounts for seasonal fluctuations. Other states, such as North Carolina and Pennsylvania, consider the increase in costs such as attendant business risk and taxes. Recent price gouging provisions, such as California’s Executive Order, also contemplate the possibility of negotiating a price with government entities.

Each of these steps will involve a deep dive into each state’s particular price gouging law and a careful consideration of the text of the law. The analysis may also require researching any announcements or actions the state’s Attorney General has made or brought in order to clarify the law’s scope and focus. However, carefully considering these questions will allow companies to correctly assess risks in their pricing plans and avoid future liability.

Pricing Checklist

1. Is the product covered by the price gouging law?

  • Is the product enumerated? Does the law only contemplate emergency goods or any consumer goods? Is it primarily in place for Personal Protective Equipment (PPE)?
  • Are there definitions for general words such as “consumer goods,” “emergency equipment,” or “consumer food items”? The narrowness or generality of these definitions may be surprising.
  • Consider whether the law only applies at retail only versus retail plus any party in the supply line.

2. Are there exceptions, particularly for increased supply costs?

  • Many states provide exceptions for increased supply costs, as well as fluctuations that occur in the regular course of business.
  • What, if anything, does the law say about the type of increased costs that are exempted? What type of pass-through costs does it contemplate?

3. What is the amount of price increase allowed, and does it account for profit?

  • Some laws forbid any price increase, while others allow an increase of up to 25%.
  • Some laws specifically allow a company to make its usual profit, while others specify a ceiling for a percentage increase above cost plus normal markup, without defining what “normal markup” means.

4. Does the law provide exceptions for previous promotional pricing or other unique situations?

  • Several laws explicitly exempt products that were subject to a sale or other promotional pricing at the beginning of or prior to the emergency.

Want to learn more on this topic, and have the opportunity to ask questions? Please join our state AG practice on June 2, 2020 for our webinar, Pricing Items in an Anti-Price Gouging World.

   

COVID-19 has disrupted and will continue disrupting supply chains in many important ways, as suppliers, carriers and buyers navigate the global pandemic. But does the pandemic allow activation of force majeure clauses in your contracts? If a force majeure clause is activated, what are the rights and responsibilities of each party during the pandemic? When does performance restart and how? And, what if there is a dispute?

    The following five steps should serve as a starting point to evaluate the efficacy of invoking a force majeure clause or similar doctrine in the face of a global pandemic.

1. What types of events excuse non-performance?
Many contracts include force majeure clauses, but they are not all the same – not even close. Thus, the very first step in your analysis should be to read the contract. Some force majeure provisions exclude certain types of situations like unprofitability, while others may specifically include a pandemic or infectious disease as a force majeure event. Your contract may be drafted in a way that limits force majeure events and only excuses non-performance in limited instances. Your contract may also instruct how to proceed in cases of supply or labor shortages. How your contract is worded, and the law that governs it, matter a great deal.

Some contracts do not include force majeure language. If this is the case, you will need to consider which state law governs the relationship. Many jurisdictions recognize the doctrines of impossibility or impracticability and frustration of purpose. The UCC codifies similar defenses. While there may not be a significant amount of case law interpreting these doctrines in your jurisdiction, you likely will find analogous fact patterns to inform the analysis.

2. What is the cause of the disruption?
You need to ask yourself if the pandemic itself has created the disruption, or if the cause of the disruption is an intervening factor, such as a third party’s response to the pandemic. Potential reasons for a disruption may include the following:

  • An aspect of the COVID-19 disease itself
  • Government action or prohibition in response to COVID-19 (e.g., many states have limited business operations to those deemed essential)
  • Shortage of supply and/or raw materials required to perform under the agreement
  • Shortage of labor, due to illness or quarantine or some other COVID-19-related cause
  • Significant decline in demand or material drop in potential profitability of the business metrics supporting the agreement due to COVID-19 or related events
  • Curtailment of transportation modalities or facilities

Performance may or may not be excused in each situation. You should also determine whether the contract allows for alternative means of performance, which may not be excused by the claimed disruption. Some supply contracts specify a particular upstream source, which if disrupted by a cause linked to the pandemic may excuse the supplier’s performance to the buyer. Others may not limit the supplier to use a sole source, requiring the supplier to go elsewhere to perform the contract, even if at much greater cost.

3. What steps should or must you take to protect yourself?
Does the contract require notice to assert force majeure? What about timing? If you assert force majeure, are you permitted to suspend performance or terminate the contract? Are there allocation requirements for limited supply?

You should consider how any written communication or other documentation reflecting the problem may later be characterized, given the actual words of the force majeure clause and the governing law. You should think strategically about your business’s operational needs and legal risks that the business faces. Consider how the arguments you are making in this dispute could impact other disputes, including those in which you may be disputing an assertion of force majeure. Be sure to keep copies of any documentation you are relying upon, including correspondence and emails between the parties.

4. What if your counterparty stops performing?
Can you stop performance? A counterparty’s declaration of force majeure may or may not be, in and of itself, sufficient to excuse your non-performance. Whether or not performance under the contract is entirely excused will depend on a careful reading of the force majeure clause and the contract as a whole. Can you seek supplies elsewhere, i.e., cover who bears the additional risk and cost of alternative supply? Again, the answers to these questions depend on what the contract says and which jurisdiction’s law governs.

5. What if there is a dispute?
Some contracts specify a dispute resolution procedure that must be followed before going to court. Some contracts require mediation. Think about what an acceptable resolution of a dispute looks like for your business. Carefully consider other issues in the supply relationship that are unrelated to the pandemic. This may be the time to take those up with your counterparty as well.

If you cannot resolve the dispute, then what? Some contracts call for binding arbitration in a particular forum instead of litigation in court. Other contracts allow you to sue, but only in certain courts. Either way, what damages or other remedies are available? Even if you hope to resolve the dispute amicably, developing a strategy that analyzes how your dispute may play out can give you leverage.