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.

Today, our blog takes a detour from advising on the CPSC and FTC to update you on a lesser-known law that can have major compliance consequences for appliance manufacturers and importers: the Energy Policy and Conservation Act, or “EPCA.”

Background

EPCA was born out of legislation in the late 1970s, which authorized the setting of non-binding “energy efficiency improvement targets” for 13 categories of appliances. Congress beefed up the statute in the 1980s to impose mandatory energy efficiency standards for a suite of covered products, and empowered the Secretary of Energy to promulgate new standards for additional products in his or her discretion. Pursuant to that authority, the Secretary of Energy has promulgated efficiency standards for a multitude of additional products over the course of the last three decades.

Today, the Department of Energy (“DOE”) has set mandatory energy and water efficiency standards for over 60 “covered products,” including everything from battery chargers to refrigerators, and microwave ovens to air conditioners.

Each efficiency standard has two components: a conservation standard and an associated testing procedure, which the manufacturer must apply to demonstrate compliance with that conservation standard. DOE is required to reassess each standard and each test procedure at least every six years, but critically, DOE only has the authority to strengthen, not weaken, energy efficiency standards – even in response to technological advancement that may nevertheless result in overall greater energy savings – meaning that manufacturers subject to onerous standards may only get relief from Congress (except in very limited circumstances). Participating in the DOE proceedings in which the agency reassesses a given product’s conservation standards and testing procedures is a critical means for companies and other stakeholders to ensure that standards are revised in an equitable and sensible manner.

Enforcement

Understanding whether your products are covered by EPCA and if you’ve complied with its substantive and procedural requirements is essential for any manufacturer or importer because the penalty for a failure to comply with EPCA can be substantial. Companies should also be aware that EPCA defines “manufacturers” more expansively than many other regulatory regimes, to include importers of EPCA products that are manufactured internationally. Importers may be responsible for EPCA compliance obligations and subject to enforcement actions for noncompliance as if they were the literal manufacturer.

Each non-compliant unit is subject to a maximum civil penalty of (currently) $449, with a five year “look-back” period. For manufacturers or importers with large inventories, the penalties can quickly add up to millions of dollars. It is important, therefore, for companies to not only maintain adequate EPCA compliance programs, but to also respond swiftly in the event they find themselves in DOE’s crosshairs. If DOE determines your products are non-compliant, it will typically demand that you:

  • Immediately halt sales of noncompliant products,
  • Ensure that replacement products are compliant,
  • Notify customers who may have purchased noncompliant products, and
  • Pay some (but not usually all) civil penalties.

In negotiating with DOE, it is important to abide by the following principles, which have served our clients well. First, do not immediately go to war with DOE. DOE understands its leverage (large civil penalties, reputational damage, and collateral litigation) and is not afraid to use it. Second, engage early and often with the Department. For example, request any testing performed by DOE and all other pertinent materials in the Department’s possession. Similarly, it is important for you to quickly compile all EPCA-related testing and other materials in your own possession. Understanding the scope of possible liability is necessary to understand your negotiating position. Third, consult with your SEC attorneys if you are a public company. If the possible civil penalty is sufficiently large, you may be required to publicly disclose the proposed or final penalty. Finally, read, understand, and apply DOE’s Civil Penalties Guidelines to your situation. The Guidelines are current, plain English, and valuable in understanding the mitigating factors that could help adjust the maximum penalty downwards. DOE has often been willing to settle civil cases at a significant discount to the maximum penalty permitted under law, but only if the settling party has checked the appropriate boxes described by the Guidelines and worked collaboratively with DOE to address its concerns.

The Future of EPCA

As EPCA ages and products evolve, stakeholders are reconsidering EPCA’s basic structure. In the past year and a half, DOE has issued three requests for information – typically a precursor to initiating a rulemaking or even proposed legislation – asking industry, non-profits and other interested parties to weigh in on EPCA’s future. It has sought comment on (i) whether EPCA should adopt market-oriented mechanisms for achieving reductions in energy consumption; (ii) how the Department should reform its process for developing appliance standards; and (iii) how to address the growing market for appliances enabled with smart technology, a topic not yet addressed in either EPCA or its existing regulations.

The agency’s pace is only quickening. In January it announced its intention to roll back proposed standards for certain lightbulbs which were expected to take effect in 2020. And only days ago, DOE published a proposal in the Federal Register that would re-write the agency’s Process Rule, which is the standard by which the agency seeks input regarding potential revisions to its energy efficiency standards. Comments on DOE’s wide-ranging proposal are due by April 15, 2019.

Understanding the existing regulatory regime and how proposed changes will impact your products is an essential but often overlooked component of a smart compliance program. For those of you who were previously less familiar with EPCA, hopefully this blog post is a first step toward ensuring that your products follow EPCA’s compliance requirements, and in warding off unwanted attention from DOE.

On January 31, 2019, e.l.f. Cosmetics, Inc. (“ELF”) agreed to pay $996,080 to settle its potential civil liability for 156 apparent violations of the North Korea Sanctions Regulations (NKSR). Elf is a cosmetics company headquartered in Oakland, California.

(Stephan)

ELF appeared to have violated § 510.201(c)1 of the NKSR by importing 156 shipments of false eyelash kits from two suppliers located in the People’s Republic of China (PRC) that contained materials sourced by these suppliers from the Democratic People’s Republic of Korea (DPRK). The total value of the imported shipments equaled $4,427,019.26. The statutory maximum civil monetary penalty amount for the apparent violations was $40,833,633, and the base civil monetary penalty amount for the apparent violations was $2,213,510.

OFAC determined that throughout the time period in which the apparent violations occurred, ELF’s OFAC compliance program was either non-existent or inadequate. The company’s production review efforts focused on quality assurance issues pertaining to the production process, raw materials, and end products of the goods it purchased and/or imported. Until January 2017, ELF’s compliance program and its supplier audits failed to discover that approximately 80 percent of the false eyelash kits supplied by two of ELF’s China-based suppliers contained materials from the DPRK.

OFAC considered the following facts and circumstances pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. Part 501, Appendix A, in reaching the settlement amount. It found the following to be aggravating factors:

  • The apparent violations may have resulted in U.S.-origin funds coming under the control of the DPRK government, in direct conflict with the program objectives of the NKSR;
  • ELF is a large and commercially sophisticated company that engages in a substantial volume of international trade; and
  • ELF’s OFAC compliance program was either non-existent or inadequate throughout the time period in question.

OFAC found the following to be mitigating factors in this case:

  • ELF’s personnel do not appear to have had actual knowledge of the conduct that led to the apparent violations in this investigation;
  • ELF has not received a Penalty Notice or Finding of Violation from OFAC in the five years preceding the earliest date of the transactions giving rise to the apparent violations;
  • The apparent violations do not appear to constitute a significant part of ELF’s business activities; and
  • ELF cooperated with OFAC by immediately disclosing the apparent violations, signing a tolling agreement, and submitting a complete and satisfactory response to OFAC’s request for additional information.

ELF then terminated the conduct which led to the apparent violations and has undertaken the following steps to minimize the risk of recurrence of similar conduct in the future:

  • Implemented supply chain audits that verify the country of origin of goods and services used in ELF’s products;
  • Adopted new procedures to require suppliers to sign certificates of compliance stating that they will comply with all U.S. export controls and trade sanctions;
  • Conducted an enhanced supplier audit that included verification of payment information related to production materials and the review of supplier bank statements;
  • Engaged outside counsel to provide additional training for key employees in the United States and in China regarding U.S. sanctions regulations and other relevant U.S. laws and regulations; and
  • Held mandatory training on U.S. sanctions regulations for employees and suppliers in China and implemented additional mandatory trainings for new employees, as well as, regular refresher training for current employees and suppliers based in China.

The notice from OFAC regarding this enforcement action highlights the risks for companies that do not conduct full-spectrum supply chain due diligence when sourcing products from overseas, particularly in a region in which the DPRK, as well as other comprehensively sanctioned countries or regions, is known to export goods.

OFAC indicated that it encourages companies to develop, implement, and maintain a risk-based approach to sanctions compliance and to implement processes and procedures to identify and mitigate areas of risks. It also explained that such steps could include, but are not limited to, implementing supply chain audits with country-of-origin verification; conducting mandatory OFAC sanctions training for suppliers; and routinely and frequently performing audits of suppliers.

For more information and in response to any questions regarding OFAC regulations and supply chain compliance please feel free to contact us.

© Getty Images

The U.S. Department of Justice and Consumer Product Safety Commission recently announced that they had entered into consent decrees with three New York-based toy companies and five individuals for importing and selling products that violate the Federal Hazardous Substances Act and the Consumer Product Safety Act. The consent decrees enter permanent injunctions against the companies from importing and selling toys until certain remedial actions are implemented and monitored by the CPSC. The decrees can be read here and here.

The DOJ and CPSC alleged that the individuals and companies – Everbright Trading Inc., Lily Popular Varieties & Gifts Inc., and Great Great Corporation – imported and sold numerous children’s toys and products that contained high levels lead content, lead paint, and phthalates; contained small parts; and violated the mandatory toy safety standard (ASTM F-963), bicycle helmet safety standard, and labeling of art material (LHAMA) requirements.

Continue Reading Government Blocks Companies from Importing and Selling Children’s Products after Alleged Non-Compliance with Product Safety Laws

From economic sanctions to import tariffs, the incoming Trump administration has suggested it will seek to implement almost immediately significant changes in international trade policy and enforcement. In addition to these potentially seismic shifts, technological and social developments reshaping international trade rules and global supply chains are gathering speed, from the expanding adoption of blockchain technology to increasing corporate social responsibility requirements. On Wednesday, January 18, 2017, our Crowell & Moring team discussed predictions for the coming year. We stepped into the eye of this perfect storm to identify the international trade risks and opportunities likely to arise for your businesses in the course of 2017.

Please click here to access an on-demand recording of the webinar (note: you must complete the registration form for access).

Key Topics:

  • Sanctions in a Trump Administration: Iran, Cuba, Russia, and beyond
  • AML – “de-risking” and the new normal
  • ECR here to stay? Rollbacks? What’s next?
  • Supply chain risk management: CSR, blockchain, conflict minerals: new actors, and public disclosure – 2017 Issue
  • New tax on imports? Impact of possible border adjustment tax on your business; increased enforcement; ACE update
  • A new sheriff in town? Expedited case decisions, retaliatory tariffs, and China, China, China.

Presenters included members of our international trade team and Crowell & Moring International based in Washington, D.C. and Brussels.

 

FLC Pic

On February 12, 2016, the Federal Bar Association will host a day-long Fashion Law Conference at Parsons School of Design (Starr Foundation Hall in the New School’s stunning new University Center) on the last day of New York Fashion Week!

Speakers include in-house counsel from The Estee Lauder Companies, Inc., Tiffany & Co., New York & Company, and Global Brands Group.

Topics include cover anti-counterfeiting, FTC and trademark considerations, ethical sourcing and labor issues, the regulatory framework of labeling and disclosure, mergers/acquisitions and antitrust considerations, and the current legal issues in e-commerce and mobile apps.

We are privileged to have the Honorable Claire R. Kelly from the U.S. Court of International Trade provide opening remarks, and Professor Susan Scafidi, Academic Director of the Fashion Law Institute—and one of the foremost leaders in the field of fashion law—as our luncheon keynote speaker.

Please join Crowell & Moring’s, Cheryl Falvey, Chahira Solh, Frances Hadfield and a host of other speakers and experts for our cutting-edge fashion law panels (and of course plenty of networking opportunities). We look forward to seeing you there!

Photo credit: Federal Bar Association

On January 6th, the Mexican Government published a new list of apparel and textile goods with “estimated prices.” These prices are the minimum reference price that goods ranging from raw materials to finished products may be imported into Mexico and is categorized by Harmonized Tariff Schedule classification number. Shipments entered below these prices will be considered “undervalued” and would likely be subject to an investigation and potential penalties. If the parties to the transaction are related entities, this may also trigger larger questions as to the intercompany pricing (i.e., transfer pricing policy) behind the transactions as well. The measure entered into force on January 18, 2016. The announcement is attached here (in Spanish). Continue Reading Mexico Publishes List of Minimum Reference Price for Textile and Apparel Imports

Crowell & Moring is partnering with the United States Fashion Industry Association (USFIA) for an October 20 webinar covering the emerging legal landscape for the fashion industry in the digital media age. The webinar will run from 2:00 to 3:00 pm ET and will explore how to:

  • Best protect your intellectual property rights as fashion goes high tech.
  • Avoid advertising and regulatory pitfalls.
  • Minimize “at the border” customs delays or litigation.
  • Safeguard your interests in an age of heightened data capture.

The panelists from Crowell & Moring will include:

  • Cheryl A. Falvey, partner in the Washington, D.C., office and co-chair of the firm’s Advertising & Product Risk Management Group. Cheri is the former general counsel of the Consumer Product Safety Commission (CPSC).
  • Lora A. Moffatt, partner in the New York office and a member of the firm’s Intellectual Property Group, focusing on brand protection.
  • Frances P. Hadfield, counsel in the New York office and a member of the firm’s International Trade Group, focusing on customs litigation and regulatory compliance.

Registration is free for USFIA members or affiliates and $95 for non-members. Please click here for more information and to register at usfashionindustry.com.

Last week, the Department of Justice filed an action against Michaels Stores on behalf of the Consumer Product Safety Commission (“CPSC”).  According to the complaint, between 2006 and 2010 Michaels sold glass vases which were prone to shattering in consumers’ hands and caused multiple injuries.

The complaint alleges that (1) despite receiving injury reports from consumers beginning in 2007, Michaels failed notify the CPSC of the hazard until 2010; and (2) Michaels sought to mislead the CPSC by implying that another company imported the vases, when in fact Michaels was the “importer of record.”  (Under the Consumer Product Safety Act an importer has the same reporting obligations as a manufacturer.)  The CPSC is seeking civil penalties and a permanent injunction to allow for compliance oversight of the retailer.

Click here to read the full article on this case and lessons it can provide for retailers.

Click here to view a three-part video series by Crowell & Moring partner Cheryl Falvey that reviews compliance programs and risk mitigation strategies for consumer products companies.