On August 8, 2020, President Donald Trump issued an executive order directing the Centers for Disease Control (“CDC”) to “consider whether any measures temporarily halting residential evictions of any tenants for failure to pay rent are reasonably necessary to prevent the further spread of COVID-19 …”.  On September 1, 2020, the CDC, using its quarantine authority, has opined that evictions would lead to homelessness and spread of COVID-19 because evictions would lead to individuals going to homeless shelters or living with extended family.  In the opinion of the CDC, those close living quarters would lead to more spread of COVID-19.   Based upon the CDC’s advice, President Trump is expected to issue an executive order issuing a nationwide moratorium to prohibit evictions of qualified tenants.

The Executive Order would set forth four criteria that a tenant must meet in order to be eligible for the moratorium relief. A tenant must:

  • Have an income of $198,000 or less for couples filing jointly, or $99,000 for single filers;
  • Demonstrate they have sought government assistance to make their rental payments (the one-time stimulus payment issued early this year satisfies this criteria);
  • Affirmatively declare they are unable to pay rent because of COVID-19 hardships; and
  • Affirm that they are likely to become homeless if they are evicted.

This moratorium would provide tenants with temporary relief through December 31, 2020.  However, the moratorium does not forgive the obligation to pay the rent.  If the tenant was laid off in March, it could owe nine months of accrued rent by the time the moratorium ends.

Absent a Federal financial aid package, many tenants will not be able to pay the accrued rent.  An impecunious tenant makes the odds of recovering that accrued rent from the tenant pretty low.   The tenant could be evicted upon the expiration of the moratorium, but are there going to be any tenants in the market to occupy that unit?  Lease amendments could be a solution – if properly drafted, a lease amendment could address payment of the accrued rent over time with acceleration of the accrued rent in the event that the tenant receives any financial aid or rental assistance, and other terms to address this unprecedented pandemic and economic uncertainty.  The collaboration of the landlord and tenant could benefit both parties by giving the tenant an opportunity to get back on his/her feet, and giving the landlord better odds of collecting the accrued rent and keeping its apartment units occupied.

Just a quick reminder that in 2007, the Louisiana State Police (“LSP”) adopted regulations requiring special reporting requirements for persons “engaged in the transportation of hazardous materials by railcars, vessels, or barges, or the temporary storage of hazardous materials in any storage vessel not permanently attached to the ground” if that activity is within “a parish affected, or projected to be affected, by a Category 3 or higher hurricane for which a mandatory evacuation order has been issued.”  LAC 33:V.11103.  Hazardous materials are those materials listed in 40 C.F.R. Part 355, Appendix A.  Temporary storage is defined as storage in a portable container, and excludes any storage in pipelines or any other storage vessel permanently attached to the ground.

At the present time (August 25, 2020 at 11:00 AM), Hurricane Laura is a Category 1 storm; however, it is projected by the National Hurricane Center that Hurricane Laura will become a Category 3 storm with maximum sustained winds of 110 to 130 mph.  Landfall is currently projected to occur between Morgan City, Louisiana and San Luis Pass, Texas, as early as the evening of August 26, 2020.  It is projected that the hurricane will affect much of western and central Louisiana parishes.  Hurricane Laura closely follows on the heels of Tropical Storm Marco, which caused  significant rainfall in south Louisiana on Monday, August 24, 2020.  The Governor of Louisiana has issued an executive order that puts the entire State of Louisiana under a declaration of emergency.  On August 23, 2020 three parishes, Jefferson, Lafourche and Plaquemines, issued mandatory evacuation orders for portions of their parishes due to imminent combined impacts from Marco and Laura.  On Monday August 24, Cameron Parish issued a mandatory evacuation order and Calcasieu Parish issued a voluntary evacuation order that may be upgraded to mandatory. We are not aware of any mandatory evacuation orders for any other Louisiana parishes at this time.  The following is a link to all parish emergency response offices which will provide contact information to inquire about any orders issued: http://gohsep.la.gov/about/parishpa.

If a mandatory evacuation order is issued for any Louisiana parishes due to a Class 3 or higher category hurricane, the rules (LAC 33:V.11105) require the following:

  • Notification shall be given to the DPS, via electronic submittal, to the 24-hour Louisiana Emergency Hazardous Materials Hotline email address at emergency@la.gov within 12 hours of a mandatory evacuation order issued by the proper parish authorities (if the storm is not projected Category 3 yet, the LSP indicate that the report should be made “as soon as practical” after the National Hurricane Center upgrades to Category 3).
  • For persons engaged in the transportation activities noted above, the report must include the following information:
    • the exact nature of, and the type, location, and relative fullness of the container (i.e., full, half-full, or empty) of all hazardous materials that are located within a parish subject to the evacuation order;
    • the primary and secondary contact person’s phone, e-mail, and fax number; and
    • whether the facility will be sufficiently manned such that post-event assessments will be performed by company personnel (as soon as safely practicable) and that any releases and/or hazardous situations will be reported in accordance with existing Louisiana Department of Environmental Quality (LDEQ) and State Police reporting requirements.

State Police FAQs concerning this rule are posted at the following link: http://www.lsp.org/pdf/ReportingRequirementsFAQ.pdf.

For those materials that are stored, it shall be necessary to only report those hazardous materials that were not reported in the annual SARA inventory report (40 CFR Parts 312/313) and those that are in excess of what is typically stored at the facility.

In addition to the notification to the LSP, “within a reasonable period of time” persons subject to the rule “shall perform a post-event assessment of those hazardous materials that were actually present in the affected area and to what degree, if any, those materials were compromised by said event and their current condition.”  Such information must be available for review by both the LSP and the LDEQ shall have access to this information.

Louisiana law (the Private Works Act – La. R.S. 9:4801, et seq.) does not require project owners to obtain lien waivers or to obtain a clear lien certificate from the clerk of court, but many construction contracts require lien waivers and a clear lien certificate before the contractor will be entitled to final payment.  The basic use of both lien waivers and the clear lien certificate is to as nearly as possible eliminate the risk that a lien could be filed (for which the owner would have personal liability) before the owner pays out retainage to the contractor.  So long as there is a risk of a lien filing, generally the owner wants to have retainage available to satisfy that lien.

Lien waivers and the clear lien certificate approach the issue from different directions.

Lien waivers are an agreement/admission by the party granting the waiver that they have been paid in full and that they will not/cannot file a lien.  It would be possible for a party that has given a lien waiver to still file a lien, but a properly crafted lien waiver should pave the way for the lien to be quickly disposed of by a court as unfounded (based on the admissions in the lien waiver that the party that gave the waiver has already been paid in full).  Some states, such as Texas, restrict lien waivers to certain government-approved forms.  Louisiana law, on the other hand, leaves the form and content of a lien waiver up to the parties.

Lien waivers are common, and most every construction contract has some requirement that the contractor collect lien waivers from most (if not all) of their subcontractors, equipment lessors, material suppliers and other potential lien claimants with each pay application and in conjunction with final payment.  Whether it is reasonable to relax that requirement will depend on: (i) how comfortable the owner is that anyone that has not given a lien waiver might file a (significant) lien; and (ii) the outcome of the clear lien certificate (discussed below).

A clear lien certificate is simply a statement by the clerk of court enumerating all liens (otherwise known as “Statements of Claim or Privilege”), mortgages, and other filings impacting the property at issue as of the date of issuance.  If that statement is issued after the lien filing period has closed for the project (typically 60 days of the filing of a Notice of Termination for that Work), the owner can be reasonably comfortable that any lien that might be filed in the future would be untimely, and subject to cancellation.  This certificate from the clerk is understood to be “clear” if it confirms the absence of any uncancelled liens.

Legally, it makes no difference whom the clerk issues the certificate to.  The important thing is to know what liens (if any) were preserved by a timely filing of a statement of claim or privilege, and when the lien filing period has closed.  If the owner is comfortable that the lien filing period has closed and that a potential lien claimant has not preserved its lien rights by filing a statement of claim or privilege timely, getting a lien waiver for that person probably does not serve much purpose.

For more information on the Kean Miller Construction Law Team, click here.

An active legislative area is carbon capture and storage (“CCS”), which could be an option for incentivizing Louisiana’s struggling energy economy.  On August 19, 2020, Governor Edwards issued two executive orders directed towards the ambitious commitment (or pledge) to cut greenhouse gas emissions 25-28% by 2025 and to planning measures in order that Louisiana would be “net zero” by 2025. One of the Governor’s executive orders creates a “Climate Initiatives Task Force,” comprised of 23 mostly yet-to-be-named members from nine state agencies, the Public Service Commission, the Louisiana Mid-Continent Oil and Gas Association; the Louisiana Chemical Association, an electric utility, a federal scientific agency, an environmental group, a community development group, a member of a tribal organization, a local government representative, a person with climate change policy experience, and an at large member.

Meeting these goals represents a huge practical and political challenge.  For industrial facilities, in addition to process improvements, energy efficiency projects, and pollution controls, meeting this challenge can include  the removal of carbon dioxide (CO2) from emission sources for permanent underground storage.  Geological storage (sequestration) will require Louisiana industry to develop and implement carbon capture and other related infrastructure projects.  These initiatives, along with the oil and gas industry’s recent embrace and commitment to implement climate solutions, opens the door for Louisiana to become an economic hub for CCS in the United States.

In Louisiana, we are fortunate that the highly concentrated industrial corridors from which CO2 can be captured are in relatively close proximity to the depleted and ideal geological formations which are capable of sequestration. These factors, as well as Louisiana having available pipeline infrastructure, knowledgeable experts, and an experienced workforce, make Louisiana particularly well suited to development of CCS.

In this regard, recent Act No. 61 of the 2020 Louisiana Legislature (Senate Bill 353, by Sen. Sharon Hewitt), updates the  Louisiana Geologic Sequestration of Carbon Dioxide Act and provides greater clarity with respect to “geologic storage facilities of hydrocarbon-bearing formations.”  It also extends the time for repayment of the fee for the carbon dioxide geologic storage trust fund from 10 years to 12 years, and creates a site-specific trust account (rather than the fee going to the State), together with other beneficial updates to the law.

On the federal level, very recently, the U.S. Treasury Department and IRS issued long-awaited proposed regulations with respect to the Section 45Q tax credits concerning the sequestration of CO2 for enhanced oil recovery.  85 Fed.Reg. 34050 (June 2, 2020). These proposed rules would  provide greater certainty concerning the qualifications, implementation, use, and transfer of these tax credits.  The public comment period on the proposed rules ended August 3, 2020, and a final rule is anticipated before the end of the year.

When considering Louisiana’s infrastructure, its laws and regulations already in place for CCS, the potential finalization of Section 45Q credits, regulators who are eager to work with companies to kickstart this new industry, and the Governor’s new Climate Initiates Task Force, it appears that Louisiana is well-positioned to become a global leader in carbon capture and storage.

On July 13, 2020, the EPA released its final rule updating and clarifying the substantive and procedural requirements for water quality certification under Clean Water Act (“CWA”) § 401.  This new rule represents the first revision to the applicable regulations since the CWA was enacted in 1971.  The new rule replaces the entirety of the 1971 certification regulations and is “intended to make the Agency’s regulations consistent with the current text of CWA § 401, increase efficiencies, and clarify aspects of CWA § 401 that have been unclear or subject to differing legal interpretations in the past.”  85 Fed. Reg. 42236.  The new rule, 40 C.F.R. §121.1 et seq., goes into effect on September 11, 2020.  The CWA § 401 process is important to the issuance of federal permits for many types of infrastructure projects (pipelines, roads, and the like) as well as to most CWA § 404 permits for the discharge of dredged or fill material.

Under the new rule, a 401 certification is required whenever there is the potential for any federally licensed or permitted activity to result in a discharge from a point source into waters of the United States.  40 C.F.R.  §121.2.    The scope of certification is limited to assuring that a discharge from a federally licensed or permitted activity complies with state ambient water quality standards and any applicable effluent limitations.  40 C.F.R. §121.3   This is a departure from past precedent where a state could use the certification process to comment on, and perhaps condition, the entire project proposal rather than just the permitted discharge. Consequently, impacts such as greenhouse gas emission impacts of the project or other indirect impacts that it might pose with regard to water quality will not be allowed as a basis for denial of or conditions to the certification.  In the past several years, some state agencies denied certification for pipeline projects based on the assertion that greenhouse gas emissions from the project would result in climate change impacts that would indirectly adversely affect coastal waters.

The new rule is indeed more consistent with underlying Clean Water Act authority and generally streamlines the process for the permit applicant.  Given the consistency of the new federal rule with Louisiana’s existing certification program, the new rule is unlikely to significantly affect applicants’ dealings with the Louisiana Department of Environmental Quality (“LDEQ”) in seeking certifications.

Required request for pre-filing meeting

The new rule requires that the project proponent request a pre-filing meeting with the certifying authority no later than 30 days prior to submitting its application for certification. The certifying authority is not required to grant or respond to the request.  40 C.F.R. §121.4.  There is no restriction on how far in advance of the filing a pre-filing meeting may be requested.  Currently, LDEQ rules do not require a pre-filing meeting request, but applicants should ensure that they meet this requirement until LDEQ rules are updated.

Contents of certification request

While the contents of a certification request were not specifically provided in prior federal regulations, the new rule specifies the minimum required contents:

  1. Identify the project proponent(s) and a point of contact;
  2. Identify the proposed project;
  3. Identify the applicable federal license or permit;
  4. Identify the location and nature of any potential discharge that may result from the proposed project and the location of receiving waters;
  5. Include a description of any methods and means proposed to monitor the discharge and the equipment or measures planned to treat, control, or manage the discharge;
  6. Include a list of all other federal, interstate, tribal, state, territorial, or local agency authorizations required for the proposed project, including all approvals of denials already received; and
  7. Include documentation that a pre-filing meeting request was submitted to the certifying authority at least 30 days prior to submitting the certification request.

The certification request shall also contain a statement certifying the completeness and accuracy of the information provided and a statement requesting that the certifying authority take action within the applicable reasonable period of time.   40 C.F.R. §121.5.

In Louisiana, LDEQ is the certifying authority. Current LDEQ certification application requirements do not conflict with these requirements.   LAC 33.IX.1507.F.

Certifying authority must act within “reasonable period of time,” not to exceed one year

The new rule clarifies that the permitting federal agency establishes the “reasonable period of time” within which the certifying authority must respond to the certification request.  Indeed, the federal agency is required to notify the certifying authority of the applicable reasonable period of time within 15 days of receiving the certification request from the project proponent.  The permitting federal agency, not the certifying authority, may extend the reasonable period of time but “in no case shall the responsible period of time exceed one year from receipt.”  40 C.F.R. §121.6.   While the certifying agency can request additional time beyond the initial “reasonable period of time” deadline, in no case can the reasonable period of time extend beyond the initial one-year period.  This rule is consistent with the D.C. Circuit’s recent decision in Hoopa Valley Tribe v. FERC, 913 F.3d 1099 (D.C. Cir.  2019), which indicated that states cannot delay a project’s certification by either resetting the start date for review by considering  applications to be incomplete or by requiring applications to be withdrawn and resubmitted.

Existing LDEQ regulations require applications for certification to be granted or denied within 60 days after LDEQ deems the certification application complete, unless certain enumerated conditions exist.   LAC 33.IX.1507.F.  While it is unlikely that the federal agency would shorten this time period, such is possible.  Further, the new federal rule may supersede some of LDEQ’s grounds for extension of the 60 day deadline in § 1507.F.  Further, it is not clear whether LDEQ may require amendment to its rules to address modifications to the initial certification.  The Preamble to the new EPA rule indicates that modifications will be addressed on a case-by-case basis.

Waiver of certification requirement

Within the reasonable period of time, the certifying authority may take any of the following actions within the scope of the certification:  grant, grant with conditions, or deny.   In the event the certifying authority fails or refuses to act within the reasonable period of time, the permitting federal agency shall provide written notice that a waiver of the certification requirement has occurred.  Upon written notice of waiver, the federal agency may issue the license or permit.   40 C.F.R. §121.9.

Enforcement of certification requirements

The new rule also makes clear that all certification conditions shall be incorporated into the federal license or permit and that the permitting federal agency shall be responsible for enforcing certification conditions, not the state certifying agency.  40 CFR §§ 121.10 and121.11.  Prior to the initial operation of a certified project, however, the certifying authority shall be afforded the right to inspect the facility or activity in order to determine whether the discharge will violate the certification.  If the certifying authority determines that the discharge will violate the certification, the certifying authority shall notify the project proponent and the permitting federal agency in writing and recommend remedial measures.   40 C.F.R. §121.11.

Clear mechanism in event EPA determines discharge may impact water quality in neighboring state

A permitting federal agency shall notify EPA within 5 days of receipt of a license or permit application and the related certification.  If EPA determines that a discharge may affect water quality in a neighboring jurisdiction, EPA shall notify that jurisdiction within 30 days and the permitting federal agency may not issue a license or permit until the conclusion of the specific processes set forth in 40 C.F.R. §121.12.   For example, if EPA determines that the discharge from the certified project may affect water quality in the neighboring jurisdiction, written notice is required from EPA advising the neighboring jurisdiction that it has 60 days to notify EPA and the permitting federal agency whether it has determined that the discharge will violate any of its water quality requirements, to object to the license or permit and to request a public hearing from the permitting federal agency.  If a hearing is requested, a hearing shall be held after 30 days’ notice.

Future rulemaking and anticipated impact on LDEQ certification process     

Pursuant to executive order, each federal CWA § 401 implementing agency shall initiate a rulemaking to ensure that its regulations are consistent with EPA’s final § 401 regulations. 85 Fed. Reg. 42214.  States will likely want to evaluate their own existing certification requirements as well.   While LDEQ is expected to review the new federal rule and consider any necessary adjustments to its existing certification program, LDEQ’s rules are already generally consistent with this new federal rule.  See, LAC.33.IX.1501, et seq.  LDEQ will likely need to revise its regulations to require an applicant request a pre-filing meeting with LDEQ no later than 30 days prior to submitting a certification application.  Further, LDEQ will need to incorporate provisions to meet the federal “reasonable period of time” deadlines as such may preclude some of the deadline extensions currently available to LDEQ under LAC 33:IX.1507.F. We will continue to monitor any litigation challenging the federal rule and any future proposed changes to LDEQ’s existing certification rules.

To review the New Rule and its preamble, see 2020-12081.

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  On April 24, 2020, the President signed the Paycheck Protection Program and Health Care Enhancement Act which provided additional funding. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”).

On May 22, 2020, the SBA and Department of Treasury jointly posted an interim final rule on loan forgiveness (the “First Loan Forgiveness Rule”).  The SBA also posted an interim final rule on May 22, 2020, regarding SBA loan review procedures and related borrower and lender responsibilities (the “First Loan Review Rule”). On June 11, 2020, the SBA posted an interim final rule revising the first PPP interim final rule to incorporate Flexibility Act amendments, including those relating to loan forgiveness.

The SBA and Department of the Treasury published the Business Loan Program Temporary Changes; Paycheck Protection Program-Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rule on June 26, 2020, which supplemented and modified the First Loan Forgiveness Rule and the First Loan Review Rule (the “June 26 Interim Rule”).

The SBA also published the PPP Loan Forgiveness Application Form 3508, and the PPP Loan Forgiveness Application Form 3508EZ, along with instructions for both forms.  The forms and instructions provide good guidance for borrowers.

The purpose of this article is to provide a summary of the most notable provisions of the Flexibility Act and the guidance offered in the First Loan Forgiveness Rule as modified by the June 26 Interim Rule primarily with respect to the topic of loan forgiveness.

For your convenience, attached are links to earlier blog articles written about the CARES Act.  CARES Act Offers Much Needed Hope to Small-Businesses, 2020 Update to CARES Act and Paycheck Protection Program – April 6 and 2020 Update to CARES Act and Paycheck Protection Program – April 7.  This article does not attempt to explain the entire program.  It assumes that the reader is familiar with the provisions of the original CARES Act.

Highlights

  • Borrowers must use a 24-week covered period for loan forgiveness purposes, unless they received loan proceeds before June 5, in which case they may elect to use the 8-week covered period.
  • Of the amount of the loan to be forgiven, at least 60% must be for the payment of payroll costs.
  • Borrowers with a weekly or bi-weekly payroll cycle may choose an alternative payroll covered period for payroll cost purposes. The alternative payroll covered period commences on the first day of the first payroll cycle that commences during the covered period.
  • In all likelihood, a borrower (particularly one with a bi-weekly cycle) will have greater payroll costs, for loan forgiveness purposes, if it uses the covered period rather than the alternative payroll covered period.
  • For loan forgiveness purposes, the cap on payroll costs for owner-employees is different than the cap for other employees.
  • Borrowers may include the amount of eligible expenses that were paid during the covered period (even amounts that were incurred prior to the covered period).
  • Borrowers may also include the amount of eligible expenses that were incurred during the covered period but were paid after the covered period but prior to the next billing cycle.
  • With respect to the potential for the loan forgiveness amount to be reduced as a result of reductions in headcount or reductions in salary that occurred between February 15, 2020, and April 26, 2020 (but not reductions that occurred after April 26, 2020), the CARES Act provided for relief from reduction if such reductions were restored prior to June 30, 2020. The period for restoration has been extended until December 31, 2020.
  • The Flexibility Act added additional relief provisions to avoid reductions in the loan forgiveness amount as a result of reductions in headcount or reductions in salaries. These additional relief provisions relate to former employees rejecting offers of employment, the inability to fill positions with new employees, and the inability to restore business operations to February 15 levels as a result of governmental actions (such as shut down orders).
  • The Flexibility Act provides a minimum maturity of five years for all PPP loans made on or after June 5, 2020. For loans made before June 5, 2020, the maturity is two years; however, borrowers and lenders may mutually agree to extend the maturity of such loans to five years.

Loan Forgiveness Process

Borrower must complete and submit the Loan Forgiveness Application SBA form 3508, SBA Form 3508EZ (if eligible) or lender equivalent within 10 months after the last day of the covered period.  The lender must make a decision about loan forgiveness within 60 days from receipt of a complete application to issue a decision to the SBA.  This article is not focused on the process.

Covered Period

The CARES Act defined the covered period in two different sections.  In Section 1102 it was defined as the period from February 15, 2020 until June 30, 2020.  The Flexibility Act replaced June 30, 2020 with December 31, 2020, such that the covered period for the purposes of Section 1102 is defined as the period from February 15, 2020 until December 31, 2020.

Eligible Costs

Subject to certain limitations, borrowers are eligible for forgiveness in an amount equal to the sum of the following costs incurred or paid (as described below) during the 8-week or 24-week covered period (as defined in Section 1106):

  • Payroll costs including salary, wages and tips, up to $100,000 of annualized pay per employee (for 24 weeks, a maximum of $46,154 per individual, or for 8 weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums). Payroll costs may include compensation to owner-employees and self-employed individuals.  However, the cap for such owners is the lesser of 8/52 of 2019 compensation or $15,385 per individual.  If a 24-week covered period is used, the cap for such owners is only increased to $20,883.
    • C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf;
    • S-Corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation;
    • Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit;
    • General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235;
    • For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.
  • interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal);
  • payments on business rent obligations on the real or personal property under a lease agreement in force before February 15, 2020; and
  • business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Payroll Costs (75% reduced to 60%)

Earlier guidance indicated that of the amount to be forgiven, at least 75% had to be based on the expenditure of payroll costs during the covered period.  The Flexibility Act reduced that percentage to 60%.  This does not mean that 60% of the loan amount must be spent on payroll costs. It just means that of the amount to be forgiven, at least 60% must have been spent on payroll costs.  You can determine the maximum potential amount of the loan subject to forgiveness by dividing the payroll costs paid or incurred (discussed below) during the covered period by 60%.

For example, if a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount).

Loan Forgiveness Covered Period (24-weeks, 8-weeks or in between)

For loan forgiveness purposes, the covered period was defined as the 8-week period commencing on the date on which the loan was funded.  For example, if the loan was funded on Monday, May 4, 2020, then the 8-week covered period would end on Sunday, June 28, 2020 (56 days).  The Flexibility Act amended the definition of “covered period” for these purposes to be the 24-week period beginning on the date the PPP loan is disbursed; provided, however, if the PPP loan was made before June 5, 2020, the borrower may elect to keep the 8-week covered period.

The 24-week covered period would give the borrower a much greater period of time within which to spend the loan proceeds.  However, if the borrower were to significantly reduce its workforce or reduce salaries (for those earning less than $100,000 per year) after the conclusion of the 8-week covered period but during the 24-week covered period, it might be better for the borrower to use the 8-week covered period.

The June 26 Interim Rule provides that the borrower may apply for forgiveness before the end of the 8-week or 24-week covered period (e.g., after 12 weeks).  If the borrower could not appropriately spend all the PPP loan proceeds within 8 weeks but could within 12 weeks, seeking loan forgiveness at this point rather than waiting until the end of the 24-weeks might be a better option.  The SBA has not clearly described this process.  The June 26 Interim Rule provides that if the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25%, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.  The example given assumes that an employee was earning a salary of $1000 per week pre-disaster (January 1 – March 31) but is reduced to $700 per week during the covered period. This reduction, $300, exceeds 25% of $1000. The amount by which it exceeds 25% is $50 per week.  If the 8-week covered period is used, then the reduction would be $400 even if loan forgiveness is sought after 6 weeks.  If the 24-week covered period is used, then the reduction would be $1,200 even if loan forgiveness is sought after 12 weeks.  What is not clear is what happens if the borrower reduces salary even greater after it seeks loan forgiveness.  There is also no clear guidance on how the reduction in headcount is measured under these circumstances.  This area needs further guidance.

Alternative Payroll Covered Period; Incurred or Paid

Recognizing the inconvenience of measuring payroll costs if the covered period started on a day other than the first day of a payroll cycle, a borrower with a bi-weekly (or more frequent) payroll cycle may elect to use an alternative payroll covered period (for payroll cost purposes only) that begins on the first day of the first payroll cycle that begins in the covered period and continues for either 8-weeks or 24-weeks, as applicable.

If a borrower using an 8-week covered period has a bi-weekly payroll cycle, and received PPP loan proceeds on June 1, then the covered period would commence on June 1 and end on July 26. If the first day of the borrower’s first payroll cycle that starts in the covered period is June 7, then the borrower could elect the alternative payroll covered period for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days), on August 1. Payroll costs paid during this alternative payroll covered period are eligible for forgiveness.  In addition, payroll costs incurred during this alternative payroll covered period are eligible for forgiveness if they are paid on or before the first regular payroll date occurring after August 1.  For the measurement of non-payroll costs, the covered period, not the alternative payroll covered period, still applies.

In general, payroll costs paid or incurred during the covered period are eligible for forgiveness.  Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction.  Payroll costs incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness. Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on the day the employee worked). For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work).

It would appear that a borrower using a weekly or bi-weekly payroll would only cover eight (weekly) or four (bi-weekly) payroll cycles if that borrower used the alternative payroll covered period.  It would appear that if that same borrower used the regular covered period, it might receive at least a portion of an additional payroll cycle.  If the borrower uses an 8-week covered period, the borrower receives its PPP loan proceeds on May 4 (8 weeks ends June 28), and the first payroll cycle to begin during the covered period is on May 7, then using the covered period (rather than the alternative payroll covered period) the borrower would be able to include the payments made on May 7, May 21, June 4, and June 18, because it made those payments during the covered period.  It would also be able to use a portion of the payment made on July 2 (approximately 10/14 of that payment).

Non-Payroll Costs – Incurred and/or Paid

There had been much discussion about a provision in the CARES Act that indicated that for eligible expenses to be included for loan forgiveness purposes they had to be both paid and incurred during the covered period.  A non-payroll cost is eligible for forgiveness if it was (i) paid during the covered period; or (ii) incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.  This would seem to allow the borrower to pay bills that were incurred prior to the commencement of the covered period. It would also allow the borrower to include a portion of the last billing cycle that extended beyond the end of the covered period.  For example, if an 8-week covered period began on May 4 and ended on June 28, then electricity bills paid between May 4 and June 28 could be included (e.g., the April bill). In addition, the electricity bill for the month of June that is paid in July could be partially included as long as it is paid before the next regular billing date.  The portion that would be included is 28/30 assuming the electricity bill is on a calendar monthly basis.

This provides greater flexibility and simplicity for borrowers.  The protection to the overall system is that only 40% of the amount of loan forgiveness can be based on non-payroll costs.

Advance payments of interest on mortgage obligations are not eligible for loan forgiveness. Likewise, principal on mortgage obligations are not eligible for forgiveness under any circumstances.

Reductions to Loan Forgiveness Amount

Section 1106 of the CARES Act requires certain reductions to a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or employee salaries and wages during the covered period.  Our earlier blog articles explain in much greater detail the methods by which the loan forgiveness amount is reduced as a result of these types of reductions.  In general terms, the loan forgiveness amount is multiplied by a fraction, the numerator of which is the average FTE employees per month during the covered period, the numerator of which is the average FTE employees per month during one of two reference periods, either February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020.  For example, if the pre-disaster headcount was 100 and the covered period headcount was 50, the loan forgiveness amount would be reduced by 50%.

The CARES Act and the Flexibility Act and subsequent SBA rules have provided some potential relief from such reductions.  I refer to the relief granted under the CARES Act as the “Restoration Relief.”

The Flexibility Act and subsequent SBA rules have provided additional relief based on various factors such as former employees rejecting offers of employment, the inability to hire replacements, and, perhaps most importantly, the fact that business did not return to pre-February 15 levels as result of governmental action.  I refer to these as “Flexibility Act Relief.”

Restoration Relief

The CARES Act provided that if certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the safe harbor period) but the borrower eliminates those reductions by June 30, 2020 (now December 31, 2020) or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages. Similarly, if a borrower eliminates any reductions in FTE employees occurring during the safe harbor period by June 30, 2020 (now December 31, 2020) or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees. A borrower that restores reductions made to employee salaries and wages or FTE employees but not later than December 31, 2020 will avoid a reduction in forgiveness amount.

It is important to note that this ability to restore reductions only applies to reductions that occurred between February 15, 2020 and April 26, 2020.  The CARES Act was very specific on this point.  The subsequent SBA rules do not appear to change this.  If the salary remained the same from February 15 through April 26 and then was reduced, or if the headcount remained the same through April 26 and then was reduced, the Restoration Relief provision will not be available.

Finally, a borrower’s loan forgiveness amount will not be reduced if an employee is fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction.

Flexibility Act Relief

  • Former Employees Rejecting Offers of Employment

If the borrower offered to rehire the same employee for the same salary and same number of hours, or restore the reduction in hours (for employees who were not laid off but whose hours were reduced), but the employee declined the offer, then the borrower’s loan forgiveness amount will not be reduced.  In this circumstance, the borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if (i) the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period; (ii) the offer was for the same salary or wages and same number of hours as earned by such employee; (iii) the offer was rejected by such employee; (iv) the borrower has maintained records documenting the offer and its rejection; and (v) the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.

  • Lack of Employee Availability

Borrowers are exempted from the loan forgiveness reduction arising from a proportional reduction in FTE employees during the covered period if the borrower is able to document in good faith the following: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020; and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.

  • Reduction in Business Activity

Borrowers are also exempted from the loan forgiveness reduction arising from a reduction in the number of FTE employees during the covered period if the borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirements related to COVID-19.  This would include a reduction in business activity stemming from state and local government shut down orders that are based in part on guidance from the three federal agencies.

The June 26 Interim Rule provides an example.  A borrower in the business of selling beauty products both online and at its physical store had its physical store shut down by the local government based in part on COVID-19 guidance from the three federal agencies.  In that case, the borrower would satisfy the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period if the borrower in good faith maintains records regarding the reduction in business activity and the local government shut down orders that reference a COVID requirement or guidance as described above.  This should be very helpful for bars, restaurants, gyms, and other businesses that were shut down for periods of time during the covered period.

  • Loan Forgiveness Application Instructions

The Form 3508 Loan Forgiveness Application Instructions describes the Flexibility Act Relief and the Restoration Relief with respect to a reduction in headcount as follows:

    • (Flexibility Act Relief) The Borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees described above if the Borrower, in good faith, is able to document that it was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
    • (Restoration Relief) The Borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees described above if both of the following conditions are met: (a) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (b) the Borrower then restored its FTE employee levels but not later than December 31, 2020, its FTE employee levels in the Borrower’s pay period that included February 15, 2020.
  • Reductions in Salary Resulting from Reductions in Hours

The CARES Act provided that if an employee’s salary or wages were reduced by more than 25%, the loan forgiveness amount would be reduced, dollar for dollar, by the amount of such reduction in excess of 25%.  This test only applied to employees who were not paid more than the annualized equivalent of $100,000 in any pay period in 2019.  Therefore, if salaries of more highly compensated employees are reduced by more than 25%, it would not result in a reduction in the loan forgiveness amount.

The salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.  The First Loan Forgiveness Rule provided an example. An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction so the borrower is not required to conduct a salary/wage reduction calculation for that employee.

Full-Time Equivalent Employee Definition and Calculation

The CARES Act did not define how to determine the number of full-time equivalent employees.  The First Loan Forgiveness Rule defines this term as an employee who works 40 hours or more, on average, each week.  Those employees are a 1.0 FTE employee.  The employees who work, on average, less than 40 hours per week are calculated on proportions of a single FTE employee and aggregated.  While the CARES Act referenced an average per month, the First Loan Forgiveness Rule and the Form 3508 Loan Forgiveness Application Instructions provide that the borrower must determine the average number of FTE employees during the covered period (or the alternative payroll covered period) and the applicable reference period (2/15/19 – 6/30/19 or 1/1/20 – 2/29/20) by dividing the average number of hours paid for each employee per week by 40, capping this quotient at 1.0.  In other words, if an employee is paid for 50 hours per week, that employee is still a 1.0.  For employees who are paid for less than 40 hours per week, on average, borrowers may choose to calculate the full-time equivalency in one of two ways. First, the borrower can use the same method used above for full-time employees. An employee that is paid for 30 hours per week would be a 0.75 FTE.  The second method is that borrowers may elect to use a 0.5 FTE for each part-time employee regardless of the number of hours paid each week for those employees.

Maturity

Flexibility Act provides a minimum maturity of five years for all PPP loans made on or after June 5, 2020.  For loans made before June 5, 2020, maturity is two years; however, borrowers and lenders may mutually agree to extend the maturity of such loans to five years.  For these purposes, the loan is deemed to have been made when the SBA assigns a loan number for the PPP loan.

EIDL Grants

Pursuant to Section 1110(e)(6) of the CARES Act, if a borrower receives an advance under the EIDL program, and receives a PPP loan, the amount of the advance (they were awarded up to $10,000) is reduced from the loan forgiveness amount.

 

In the 2018 case, Murphy v. National Collegiate Athletic Association, the United States Supreme Court struck down the federal Professional and Amateur Sports Protection Act (PASPA). PAPSA went into effect in 1993 and prevented any state from legalizing sports gambling (unless the state was grandfathered in). As a result of the ruling in Murphy, the Supreme Court essentially granted individual states the right to legalize sports gambling.

As of July 2020, 21 states[1], including Mississippi, have passed legislation ushering in sports betting. In the first 12 months of legalized sports betting in the Magnolia State, Mississippi gamblers wagered over 300 million dollars gambled on sports and sent a total of 4 million dollars to the state. This from a state that has only 64% of Louisiana’s population[2] and had consumers spend $481,171,615.00 less than the State of Louisiana received in 2017.[3] Mississippi also only allows in-person gambling on sports, refusing to permit mobile sports betting at this time. Allowing mobile sports betting has shown to increase accessibility to consumers and provide for more revenue for the state when allowed.

Despite two of its neighbors permitting sports betting (Arkansas and Mississippi), Louisiana has yet to make that leap. The failure of 2019’s Senate Bill 153 was the latest in postponing sports betting in Louisiana. However, in 2020, sports gambling legislation was pushed once again with Louisiana lawmakers pre-filing legislation allowing for Louisiana voters to determine whether to allow sports betting in their individual parishes.

Last month, Senate Bill 130, proposed by Senator Cameron Henry, was signed by the Louisiana Governor becoming Act 215. This law enacts R.S. 18:1300.24 and 27:15.1 wherein a proposition election will be added to the November 3, 2020 ballot to determine whether to allow sports betting on a parish-by-parish vote. If a majority of the qualified electors in a parish voting on the proposition vote for it, then sports wagering activities and operations shall be permitted in such parish only after state law providing for licensing, regulation, and taxation of such activity and operations are enacted and become effective. The legislature will have to propose laws for licensing, regulation, and taxation in the 2021 session since the legislature only addresses fiscal matters in odd-numbered years. Therefore, it appears likely that Louisiana residents could potentially be placing sports bets in their home state as early as summer/fall 2021.

In 2018, Louisiana saw a similar proposition offered to its voters for a parish-by-parish vote to legalize daily fantasy sports, a game where consumers compete against other patrons by building a team within a given salary cap/budget. Forty-seven of the sixty-four Louisiana parishes voted to allow daily fantasy sports in 2018 which required infrastructure to be put in place (revenue allocation, tax mechanism, etc.) However, in 2019, the Louisiana legislature failed to approve any tax mechanism for daily fantasy sports preventing Louisiana residents from enjoying the changes for which they voted. Hopefully, the legislature will address a system for allocation and taxing in 2021 for daily fantasy sports and sports betting.

Keeping Louisiana residents’ money in-state will result in a boon for the in-state entertainment industry along with injecting cash into the state’s budget. Additionally, just as some Texas residents do for other gaming entertainment, Louisiana could see some Lone Star State visitors coming over to bet on sports as well (if western Louisiana parishes vote to allow for sports betting). Despite Texas lawmakers presenting sports betting bills in the past, nothing has been enacted and Louisiana is closer to allowing these activities. Likewise, if passed, online sports betting in Louisiana could induce residents of other nearby states that do not offer mobile betting to drive into Louisiana to place bets on one of a multitude of mobile sports betting platforms.

Despite PASPA being declared unconstitutional over two years ago, the sports betting industry still has room to grow. With new states coming on board with sports betting every year, the industry is certain to continue growing. Covid-19 has certainly changed the way Louisiana residents participate in entertainment during 2020. Although the future of Covid-19 is uncertain, having options for at-home and mobile sports betting entertainment may be just what the doctor ordered.

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[1] Arkansas, Colorado, Delaware, Illinois, Indiana, Iowa, Michigan, Mississippi, Montana, Nevada, New Hampshire, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee, Virginia, West Virginia, Washington

[2] Based on 2019 data

[3] www.americangaming.org for gaming consumer spend by state in 2017

The long-standing dispute amongst legislators regarding “Tort Reform” legislation and attempts to reduce insurance premiums took a step forward on the last day of Louisiana’s First Extraordinary Session of 2020, also known as sine dine.  House Bill 57, also entitled the “Civil Justice Reform Act of 2020”[1] authored by Speaker of the House, Clay Schexnayder (R-Gonzales), was approved by both the Senate and the House of Representatives on June 30th before being sent to Governor Edwards for signing.  Governor Edwards is anticipated to sign the bill, which represents a compromise between the original demands that both sides of the aisle have fought over during the past several legislative sessions.

The legislation, colloquially referred to as “tort reform”, has been a hot topic issue in the Louisiana legislature for the past few years.  In 2019, then-state representative Kirk Talbot (R-River Ridge) introduced HB 372 or the Omnibus Premium Reduction Act of 2019[2] which ultimately died in the Senate Judiciary committee.  In 2020’s Regular Session, now-Senator Kirk Talbot authored a very similar bill[3] that successfully made its way out of committee and was passed through both the House and the Senate before being vetoed by Governor Edwards.  Building off of the issues raised during the heated debates over the two previously failed bills, both sides compromised to reach an agreement that Governor Edwards will sign.

The proposed bills address the following common issues:

  1. Prescription Period – the time period after an incident in which a plaintiff must file a lawsuit or else have the claim barred (similar to statute of limitations in other jurisdictions);
  2. Collateral Source Rule – allows for a plaintiff to recover the full amount of what his/her healthcare provider charged for a particular service, regardless of the amount that was actually paid to healthcare providers on his/her behalf;
  3. Jury Threshold – the minimum amount of alleged damages demanded by a plaintiff that allows the case to be heard by a jury rather than by a judge;
  4. Direct Action Statute – law that allows a plaintiff to sue an insurer/insurance company directly;
  5. Seatbelt Gag Rule – a law that prevents a party from introducing evidence that the plaintiff was not wearing a seatbelt during an accident for purposes of proving comparative negligence and/or reducing damages.

The following chart reflects the general highlights of the differences and similarities in the three bills – as originally introduced – referenced above:

 

  Omnibus Premium Reduction Act of 2019 Omnibus Premium Reduction Act of 2020 Civil Justice Reform Act of 2020[4]
Author Rep. Kirk Talbot Sen. Kirk Talbot Rep. Clay Schexnayder
Prescriptive Period Extended from one year to two years from date of delictual or tortious action. Extended from one year to two years from date of any injury or damage arising from the operation or control of any motor vehicle, aircraft, or watercraft.  Most other delictual actions remain subject to a one year prescriptive period. Not addressed in this bill.
Collateral Source Would repeal collateral source rule and plaintiff’s recovery for medical expenses is limited to amount actually paid to healthcare provider by insurer or Medicare – not the amount that was billed. Would repeal collateral source rule and plaintiff’s recovery for medical expenses is limited to amount actually paid to healthcare provider by insurer or Medicare – not the amount that was billed. Evidence showing that the plaintiff’s medical expenses have been or will be paid shall be admissible.
Jury Threshold Reduced from $50,000 to $5,000. Reduced from $50,000 to $5,000. Reduced from $50,000 to $10,000.
Direct Action Would repeal the direct action statute and plaintiff could no longer sue the insurer of the alleged tortfeasor directly. Would repeal the direct action statute and plaintiff would only be able to sue the insurer of the alleged tortfeasor directly in very limited instances.

Not addressed in original draft.

 
Seatbelt Gag Rule Was not addressed in this bill. Would repeal the seatbelt gag rule and allow the plaintiff’s failure to wear a seatbelt to be considered as evidence of comparative negligence and damages.  If plaintiff was not wearing a seatbelt at the time of the accident, their damages will be reduced by 25%.

Not addressed in this bill, but was addressed in SB 9.[5]

SB 9 will allow a defendant to introduce evidence of the plaintiff’s failure to wear a seatbelt as evidence of the plaintiff’s comparative negligence and to reduce or mitigate damages.
Amendments Made During Session and included in version sent to Governor. This bill never made it to the Governor’s desk.

– Jury Threshold was only reduced from $50,000 to $35,000 – rather than the $5,000 proposed in the initial bill.

– In addition to the amount of medical expenses paid by an insurer and Medicare, the bill presented to the governor included payments made by Medicaid and any cost sharing amount paid by plaintiff.

– Final bill allowed for plaintiff to sue the insurer directly in more instances than allowed in initial bill.

– The existence of insurance coverage cannot be communicated to the jury, absent limited scenarios.

– Plaintiff’s recovery for medical expenses is limited to amount actually paid to the healthcare provider by the insurer, Medicare or any applicable cost sharing amounts paid/owed by plaintiff – not the amount that was billed.  But, the court will award plaintiff 40% of the difference between the amount billed and the amount paid to the medical provider.
End Result Died in Senate Judiciary Committee Vetoed by Governor Edwards Expected to be signed into law by Governor Edwards.

 

Supporters of this legislation contend that it will reduce automobile insurance rates across the state, as Louisiana ranks near the top of the most expensive insurance rates in the country.  Supporters of this legislation argued that each of the changes detailed above will result in reduced insurance rates.  For example, by altering the collateral source rule supporters of the bill contend that the damages awarded to plaintiffs will be less, while the plaintiff is still made whole.  In turn, this would reduce the amount the insurers will have to pay on claims or to satisfy judgments, which would allow for a reduction in rates.  Although not addressed in HB 57, tort reform supporters promoted an increase in the prescriptive period from one year to two years in hopes that the extended time frame would allow for disputes to be resolved prior to parties needing to file a lawsuit.

The Civil Justice Reform Act of 2020, once signed by Governor Edwards, will not go into effect until January 1, 2021 and will not apply to any action arising or pending prior to January 1, 2021.  Time will tell whether Louisianians will experience reduced insurance rates as a result of this legislation.  However, as of July 6, 2020, Louisiana’s largest automobile insurer had already reduced rates by 9.6%.[6]

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[1] https://www.legis.la.gov/legis/ViewDocument.aspx?d=1185162

[2] https://www.legis.la.gov/legis/ViewDocument.aspx?d=1121375

[3] https://www.legis.la.gov/legis/ViewDocument.aspx?d=1164927

[4] https://www.legis.la.gov/legis/ViewDocument.aspx?d=1180636

[5] https://www.legis.la.gov/legis/ViewDocument.aspx?d=1183908

[6] https://www.nola.com/news/business/article_b206c09e-bf96-11ea-8a51-1b6e4653417f.html

In United States Patent & Trademark Office v. Booking.com B. V.,[1] SCOTUS held that a mark styled as “generic.com” is eligible for federal trademark registration if the applicant shows  “generic.com” is not a generic name to consumers. Although the Court did not expressly say so, this decision chips away at the rule that generic terms cannot become protectable marks.[2]

A travel-reservation agency known as “Booking.com” sought to register a trademark for its website of the same name with the United States Patent and Trademark Office (“PTO”). The PTO denied the registration concluding that the term “Booking.com” is a generic name, a name of a class of products or services instead of a specific brand. So, BOOKING.COM was ineligible for federal trademark registration.

According to the PTO, “booking” was a generic term for online hotel-reservations, and the combination of generic term with “.com” did not overcome this finding.[3] Booking.com sought judicial review, and the District Court determined that BOOKING.COM—unlike the term “booking” standing alone—is not generic. The Court of Appeals affirmed and the PTO sought review with SCOTUS.

The 8–1 majority opinion plays out a clash between two principles of trademark law: the ability to distinguish one’s goods from another’s based on consumer recognition and the need to leave generic terms in the public domain.[4]

The PTO relied on the principle articulated in Goodyear’s India Rubber Glove Mfg. Co. v. Goodyear Rubber Co., 128 U. S. 598 (1888), which stated that a generic term followed by word “company” is not trademark-eligible. But the majority opinion distinguished the prior ban on generic terms by noting that that the mark “generic.com” implies a specific website domain that is only occupied by one entity at a time. So, if the public perceives “generic.com” as a specific brand name—which, in the case of BOOKING.COM, consumer surveys indicate it does—the term acquires the descriptiveness needed for federal trademark registration.[5]

Although the majority noted that marks like BOOKINGS.COM would be “weak” marks that would necessarily be difficult to enforce in court, Justice Breyer, the lone dissenter, urged that the majority underestimated the anticompetitive effects of the holding. According to Justice Breyer, “[t]erms that merely convey the nature of the producer’s business should remain free for all to use.”[6]

With this decision, SCOTUS has decisively expanded the availability of federal registration for domain names containing generic terms. This relaxing of the sweeping anti-generic rule may indicate an uptick in trademark registrations for historically generic terms (as long as they include “.com”).

The author wishes to thank their law clerk, Joseph Balhoff, for their assistance in preparing this article. 

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[1] The opinion is available at: https://d2qwohl8lx5mh1.cloudfront.net/5OsQDpOQ2dJ63nh0n-PMog/content.

[2] See Abercrombie & Fitch Co. v. Hunting World, Inc., 537 F.2d 4, 9 (2d Cir. 1976).

[3] United States Patent & Trademark Office v. Booking.com B. V., No. 19-46, 2020 WL 3518365, at *2 (U.S. June 30, 2020).

[4] Id. at *9 (Breyer, J., dissenting).

[5] Id.

[6] Id. at *9 (citing Goodyear, 128 U.S. at 603).

The COVID-19 pandemic has forced a technological revolution, with many companies switching their workforce to remote solutions for the first time and now recalling those same workers back to offices as cities move to reopen. While working remotely has had significant benefits, it has also presented new and different risks to company data security. Now as some employees are returning to the office (though others remain at home), this transition also presents challenges.  Some of the most basic things to consider include:

  • Do your employees work from their own personal devices?
  • Are your employees or contractors using public Wi-Fi to connect to your business network?
  • Are your employees or contractors storing work data on their cell phones, iPads, USB sticks, and other personal devices?
  • Are your employees or contractors using their personal e-mail accounts to transfer business documents to themselves and others?
  • Does your business have corporate policies in place regarding telework?
  • Does your business provide adequate data security training to your employees?

Remote work presents significant opportunity for bad actors to attack unsecured systems. Employees working from home are more likely to make mistakes, click on email links that they should not, and be more relaxed about data-security and privacy issues. We have previously written about measures that companies can take to protect themselves from cyber-security threats while employees work from home,[1] but if the worst should happen, cyber insurance can ease the burden associated with a data breach.

1.What is cyber insurance?

Cyber insurance policies generally provide a mixture of first-party and third-party coverages.  First-party coverages protect an insured for loss to the insured’s own property; whereas, third-party coverages protect an insured for losses sustained as a result of demands and/or lawsuits made by third-parties.  One of the most important forms of cyber insurance coverage protects your business from liability for data breaches involving individual personal information. Individual personal information typically includes Social Security numbers, credit card numbers, passport numbers, driver’s license numbers, user names, passwords, health records, and other information protected from disclosure by state and/or federal law. The Ponemon Institute estimates that the average cost of a data breach in the United State is $242 per lost record.[2] These costs include direct costs like computer forensics, attorney fees, notification to affected persons, and credit monitoring services, as well as indirect costs from lost business, business interruption, and reputational damage.  Therefore, cyber insurance can be extremely valuable in the event of a data breach.

2.What is typically covered by cyber insurance?

It depends on the policy that you buy and the specific terms of that policy. Unlike automotive insurance, which is fairly standard and has form policies that have existed for many years, cyber insurance is currently far from uniform. There are many different forms of cyber insurance and coverage “enhancements” available in the insurance marketplace.  Therefore, there is no “one-size-fits-all approach” to buying cyber insurance and it is wise to consult an experienced broker or lawyer and purchase a policy that best suits your company’s risks. Depending on the policy you select, common coverages can include the following:

  • Data breach investigation costs, including computer forensics experts and attorney fees associated with investigating and repairing the damage from the breach.
  • Business losses caused by business downtime, business interruption, data loss recovery, and reputational damage.
  • Notification costs and costs of providing free credit monitoring to individuals who were affected by the data breach.
  • IT system failures and data destruction.
  • Money paid in response to extortion (i.e., a ransomware attack) and brokerage fees for the purchase and transfer of bitcoin.
  • Legal expenses for attorney guidance in responding to a breach, as well as litigation expenses associated with the release of confidential information or intellectual property, shareholder suits, suits by affected individuals, regulatory investigations, and other legal expenses.

3.I have Commercial General Liability (“CGL”) insurance policy already. Isn’t that enough?

 Trying to find coverage for the consequences of a cyber incident under a CGL policy is a huge gamble.  Many CGL policies expressly exclude cyber liabilities from coverage, and a number of courts have found that CGL policies do not cover cyber incidents. Therefore, you should not rely on your CGL policy for cyber coverage.  Instead, it is best to talk to your insurance broker or an experienced attorney who can review your policy and identify the scope of your coverage.

4.I’m not a Fortune 500 company. Do I really need this?

 Like most insurance, you’re buying peace of mind that you will hopefully never have to use. Unfortunately, the number of cyber incidents continues to rise each year and hackers are becoming more sophisticated. Hackers target big and small companies alike, with approximately 43% of cyber-attacks aimed at small businesses.[3] Smaller companies are often considered an “easy target” because they are less likely to have a sophisticated security infrastructure, are less likely to have data backups, and are more likely to pay ransomware demands.

5.I have a robust, state of the art IT security system. Shouldn’t that be enough?

Strong IT security systems can certainly help, but they are not invincible. Significant time, money, and effort are expended by hackers to crack these “ironclad” systems, and they have moments of success in those efforts. Much of data security is reactionary, meaning that systems are built up and made secure only after a hacker has found a vulnerability that can be exploited.

Further, while a healthy IT department and resources provide safeguards, they do not remove the risks associated with human error. More than half of all data incidents are caused by human mistakes, like clicking on links in phishing emails or providing confidential information in response to a phishing email request. There are also employees who intentionally send out confidential information to unauthorized persons because they are disgruntled or have been offered money to do so. A robust IT system also cannot guard against all physical breaches, such as theft and accidental loss of equipment. Therefore, your IT infrastructure likely will not protect you from all types of breaches.

6.Okay, fine, you convinced me. Anything else I should know?

 When a data incident is discovered or suspected, it is critical to act quickly and competently. Privacy attorneys can help guide the process, and retaining a privacy attorney increases your chances of cloaking the most sensitive areas of your investigation under a privilege. If you would prefer to work with your current law firm and have those attorney’s fees covered by insurance, a streamlined way to set up that arrangement is through an endorsement to choose your own counsel. Negotiation of that endorsement would happen before you buy the policy. Note that the insurance provider is unlikely to agree to the endorsement unless the preferred attorney is experienced in data privacy law and breach management.

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[1] Jessica Engler, “Cybersecurity Considerations for an Increasingly Remote Workforce”, Louisiana Law Blog, Kean Miller LLP (Apr. 6, 2020) (https://www.louisianalawblog.com/covid-19/cybersecurity-considerations-for-an-increasingly-remote-workforce/).

[2] “2019 Cost of a Data Breach Report”, IBM.com (https://www.ibm.com/security/data-breach)

[3] Scott Steinberg, “Cyberattacks now cost companies $200,000 on average, putting many out of business”, CNBC (Oct. 13, 2019) (https://www.cnbc.com/2019/10/13/cyberattacks-cost-small-companies-200k-putting-many-out-of-business.html).