When two parties agree to arbitrate, the obvious hope of the prevailing party is that the losing party will voluntarily comply with the arbitrator’s decision. This article is directed towards the situation in which the losing party refuses to so comply, and the prevailing party must petition the appropriate court system to “enforce” the arbitrator’s award.

Until confirmation, modification, or correction by a court of competent jurisdiction, an arbitration award is unenforceable under the law. The process for enforcing an arbitration award in Louisiana depends on whether the Federal Arbitration Act (“FAA”) or the Louisiana Binding Arbitration Law (“BAL”) applies.[1]

CONFIRMING ARBITRATION AWARDS

Whichever law applies, a party wishing to confirm an arbitration award must file a proceeding requesting confirmation of the award in a court of competent jurisdiction within one year of the award’s issuance.[2] While this one-year period is mandatory under the BAL, the federal courts of appeals are split on whether the same period is mandatory under the FAA. However, the U.S. Court of Appeals for the Fifth Circuit, which is the appellate court of federal jurisdiction over Louisiana, has implied that the one year limitations period is mandatory.[3]

In federal court, the FAA requires a party to begin the process of confirming an arbitration award by filing (and serving) either a petition or motion to confirm in the appropriate federal district court.[4]  Unlike the BAL, however, the FAA does not create independent subject matter jurisdiction, so the applicant must show that the federal district court has original subject matter jurisdiction over the dispute.[5]  The federal court has personal jurisdiction over the necessary parties once a party serves notice of the confirmation application on all parties.[6]

In both federal and state court, the confirmation of an arbitration award is a summary proceeding.[7]  The appropriate court will confirm the arbitration award (by granting the applicant’s motion) if no party challenges the enforcement of the award, and the court finds no grounds for vacating, modifying, or correcting the award.[8]  The court enters judgment on the award, which has the same force and effect as an ordinary judgment.[9]

VACATING, MODIFYING, OR CORRECTING AN ARBITRATION AWARD

Both the FAA and the BAL permit a party to challenge or request vacation, modification, or correction of an arbitration award.[10]  A notice of a motion to vacate, modify, or correct an arbitration award must be served upon the adverse party within three months after the award is issued.[11]  The grounds upon which an arbitration award can be changed or overturned are narrow and well-defined. Practically, this makes it very rare and difficult to alter an arbitration award.

Because arbitration is favored, both federal and state courts presume that an arbitration award is valid. Under the FAA and BAL, a court has authority to vacate an award only upon the following grounds:

  1. where the award was procured by corruption, fraud, or undue means;
  2. where there was evident partiality or corruption in the arbitrators, or either of them;
  3. where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
  4. where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.[12]

The FAA and BAL also limit a court’s authority to modify or correct an arbitration award. An award can be modified or corrected only:

  1. Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.
  2. Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.
  3. Where the award is imperfect in matter of form not affecting the merits of the controversy.[13]

If one of these two grounds apply, the courts will modify or correct arbitration awards “so as to effect the intent thereof and promote justice between the parties.”[14]

AWARDS AND ORDERS SUBJECT TO APPEAL

Both the FAA and the BAL permit the appeal of certain arbitration orders, including any order confirming, modifying, correcting, or vacating an award.[15]  Under the BAL, a party appeals from an arbitration order or judgment entered on an award in the same manner as a party appeals from an ordinary order or judgment.[16]  The federal courts and Louisiana appellate courts review a trial court’s confirmation of an arbitration award de novo.[17]

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[1] Chapter 1 of the FAA governs domestic arbitrations and applies to maritime disputes and contracts “involving commerce.” 9 U.S.C. §§ 1-16. The BAL governs arbitration in Louisiana, unless preempted by the FAA. La. R.S. §§ 9:4201-9:4271.

[2] 9 U.S.C. § 9; La. R.S. 9:4209.

[3] Bernstein Seawell & Kove v. Bosarge, 813 F.2d 726, 731 (5th Cir. 1987) (noting the complaint to enforce the arbitration award was filed within one year “As required by 9 U.S.C. § 9”).

[4] If the arbitration agreement does not specify the particular court, the party applying for confirmation of the award may file in any court in the district where the award was issued. 9 U.S.C. § 9.

[5] Vaden v. Discover Bank, 556 U.S. 49 (2009).

[6] 9 U.S.C. § 9.

[7] Id.; La. R.S. § 9:4209; see also Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 22-23 (1983).

[8] 9 U.S.C. §§ 10-11; La. R.S. §§ 9:4205 and 9:4209.

[9] 9 U.S.C. § 13; La. R.S. § 9:4214.

[10] 9 U.S.C. § 11; La. R.S. § 9:4211.

[11] 9 U.S.C. § 12; La. R.S. § 9:4213.

[12] 9 U.S.C. § 10; La. R.S. § 9:4210.

[13] 9 U.S.C. § 11; La. R.S. § 9:4211.

[14] Id.; Gilbert v. Robert Angel Builder, Inc., 45,184 (La. App. 2 Cir. 4/14/10); 24 So. 3d 1109, 1113.

[15] La. R.S. § 9:4215; 9 U.S.C. § 16.

[16] La. R.S. § 9:4215.

[17] NCO Portfolio Mgmt., Inc. v. Walker, 08-1011 (La. App. 3 Cir. 2/4/09); 3 So. 3d 628, 632; Sarofim v. Trust Company of the West, 440 F.3d 213 (5th Cir. 2006)

Arbitration clauses are extremely common in construction contracts and subcontracts. In the event of a dispute, these clauses typically reflect the parties’ mutual agreement that any disputes arising from the project shall be arbitrated. Arbitration is similar to traditional litigation in many respects, but takes place out of court and is designed to be more efficient and cheaper. Both federal and Louisiana law strongly favor arbitration, and save a few exceptions, written pre-dispute arbitration agreements “shall be valid, irrevocable, and enforceable.”[1]

Whether a party is required to arbitrate rather than litigate first depends on two issues: 1) whether the agreement to arbitrate is valid, and 2) whether the agreement—by its terms—applies to the type of controversy at issue between the parties.[2]  Additionally, a party’s actions within a court proceeding can be deemed a “waiver” of the right to compel the same dispute into arbitration. In the typical dispute, the analysis will be straightforward, and the clause will be enforced, forcing the parties to resolve their dispute through binding arbitration rather than using the court system.

This article focuses on the admittedly rare situations in which a court may have proper grounds not to enforce an arbitration provision contained in the parties’ contract.

1.                  Contract Not Fully Executed by Both Parties

The threshold question in deciding whether parties must arbitrate is whether the parties actually agreed to arbitrate. In the typical scenario, both parties will have signed the contract containing the arbitration clause, and there will be no question that they agreed to arbitrate. Even if one of the parties does not know the contract contains the arbitration clause or does not understand its consequences, the party will still be required to arbitrate disputes. Louisiana courts have held that a signing party cannot avoid a contract’s terms by claiming that he did not read the contract, that he did not understand contract, or that the other party did not explain contract to him.[3]

Even when both parties to a contract do not sign, the parties may still be bound in certain scenarios. Louisiana law is clear that a party who prepares a contract and presents it to another for signature, but never personally signs, cannot later attempt to claim that he or she is not bound by the contract or its provisions.[4]  Thus, although many may think that they can escape the obligations of a contract that they did not sign, parties will often not be able to rely on such a technicality.

There is, however, an exception to this rule. A contract signed by only one party is not enforceable if the negotiations between the parties indicate that they have no intention of being bound until all of the terms of the agreement are incorporated into a written contract to be signed by both parties.[5]  A typical example is a situation where the parties orally negotiate the basic terms of an agreement but state that they want to have their managers or lawyers draft a formal, written document that both parties will sign. If there is never a written contract signed by both parties, there is never a contract or obligation to perform. It is important to note that a lack of contract does not necessarily mean that one party cannot be liable to the other. If one party begins performance or takes other action based on oral negotiations or promises, the other party may still be liable under theories of detrimental reliance or unjust enrichment.

Specifically as to arbitration agreements, despite a statute requiring them to be in writing, Louisiana law does not require the agreements to be signed to be enforceable.[6]  However, when an arbitration agreement—or contract containing an arbitration clause—lacks one or more parties’ signatures, the courts look to the conduct of the non-signing parties for evidence of intent to agree.[7]  Though no Louisiana court has yet addressed the issue, one could find that preparing and presenting a contract containing an arbitration provision is sufficient to show that party’s intent to agree to arbitrate. Otherwise the court will look to whether the non-signing party performed his obligations under the contract or otherwise acted as if the contract were enforceable. To avoid any uncertainty under this flexible inquiry, the party desiring the arbitration agreement should be sure to have both parties sign the contract for definitive proof of an agreement.

2.                  Unenforceable “Contracts of Adhesion”

Once a court determines that there was a mutual agreement to arbitrate, the clause will be enforced save some grounds for revocation of the contract such as fraud or error.[8]  Another relatively common ground upon which courts invalidate otherwise valid arbitration clauses is by finding that the agreement is a “contract of adhesion.” In general, a contract of adhesion is a printed contract—often in small font—prepared by one party with superior bargaining power presented to the other party in a “take-it-or-leave-it” manner. The nature of the contract is such that it raises questions as to whether the weaker party actually consented to its terms.

In these cases, the courts look beyond a party’s signature to determine if he or she truly consented to the arbitration clause. If an arbitration clause is adhesionary, the court will not enforce it and will allow the weaker party to proceed with a lawsuit despite their apparent agreement to arbitrate. In that sense, contracts of adhesion serve as an exception to the rule described above that a party is bound to contracts he or she signs regardless of knowledge or understanding of their terms. In the construction industry, these issues most often arise in the manufactured homes context where one party is a large corporation and the other is an individual buyer with little to no construction or business knowledge.[9]

Contracts of adhesion are typically standard form contracts; however, not all standard contracts are adhesionary and not all adhesionary contracts are in a standard form.[10]  The Louisiana Supreme Court has recently listed the factors to review in determining whether an agreement is an unenforceable contract of adhesion as follows: (1) whether the physical characteristics of the arbitration clause are deceiving (i.e., the font and size of the print), (2) whether the arbitration clause is distinguished from the rest of the agreement (i.e., whether the clause was concealed), (3) whether the clause requires both parties to pursue arbitration rather than a suit in court, and (4) whether one party has superior bargaining strength.[11]

The Louisiana Supreme Court has recently found an arbitration provision in a general waiver of liability signed by a patron of a trampoline park to be adhesionary. The arbitration provision of the waiver was the same size print and font as the rest of the electronic document. However, the two sentences regarding arbitration were “camouflaged” within a paragraph containing nine other sentences that did not pertain to arbitration. In addition, the waiver’s “I agree” language indicated to the Court that the agreement to arbitrate did not apply equally to the trampoline park, and the clause contained a liquidated damages provision which also only applied to the patron. Although the paragraph containing the provision had a box next to it that the patron affirmatively checked, the Court found that the patron’s electronic signature did not represent actual consent to arbitrate due to the adhesionary nature of the contract. Thus, the Court invalidated the provision.[12]

It should be noted that it would be almost impossible for one business to assert this defense against another because they would almost certainly have similar bargaining strength. Additionally, the party who does not want to sign a contract with an arbitration provision could easily walk away from the deal and work with someone else instead.

3.                  Waiver of Right to Arbitration

The rights provided by an otherwise valid arbitration clause can also be unintentionally “waived” by one of the parties. Louisiana courts have limited the waiver of arbitration to two situations where a party insisting on arbitration either (1) resorted to judicial remedies, or (2) allowed a significant period of time to elapse before demanding arbitration.[13]

Courts in Louisiana have found waiver of arbitration only in extreme cases.[14]  Waiver of arbitration is not a favored finding and there is a presumption against it.[15]  A party asserting waiver bears a heavy burden of proof to show that the opponent has waived a right to arbitrate, and there is a strong policy in Louisiana favoring arbitration when it has been agreed to by the parties.[16]  To find a waiver, Louisiana courts require a showing that the party demanding arbitration has meaningfully participated in court litigation proceeding so as to indicate its intention to litigate the dispute within that forum. Courts have been hesitant to draw a line in the sand as to how much litigation activity rises to the level of waiver, but one court has observed that the mere answering of a lawsuit does not equate to waiver.[17]

Although findings of waiver here are rare, the cautious litigant should assert its rights to arbitrate clearly and early in any separate court litigation. Courts do seem willing to review the entire record, rather than to fault a party for a single step taken in court. Still, a party’s argument for arbitration weakens to the extent the party continues to litigate the arbitrable dispute within court proceedings.

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As noted, this entire article is geared towards the rare scenarios in which a court will not enforce an arbitration provision. Although the issues described above do arise from time to time, typically, if the clause applies to the particular dispute, a court will force the parties to arbitrate rather than litigate.

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[1] 28 U.S.C. § 2 (2016); La. R.S. 9:4201 (2016).

[2] Dicorte v. Landrieu, 908 So. 2d 799, 801 (La. Ct. App. 4 Cir. 2008).

[3] Aguillard v. Auction Mgmt. Corp., 908 So. 2d 1, 17 (La. 2005).

[4] Rainey v. Entergy Gulf States, Inc., 35 So. 3d 215, 227 (La. 2010).

[5] Id. (citing Big ‘A’ Sand & Gravel Co. v. Bay Sand & Gravel Co., 282 So. 2d 837 (La. Ct. App. 1 Cir. 1963)).

[6] Hurley v. Fox, 520 So. 2d 467, 469 (La. Ct. App. 4 Cir. 1988) (“La. R.S. 9:4201 provides that if the agreement to arbitrate is in writing, it shall be valid, irrevocable and enforceable. The law does not provide that the agreement must be signed. We conclude, therefore, that if the agreement between the parties is written, the provisions of the statute are satisfied even though the writing is not signed by the parties.”).

[7] In re Succession of Taravella, 734 So. 2d 149, 151 (La. Ct. App. 5th Cir. 1999).

[8] Duhon v. Activelaf, LLC, 2016-0818 (La. 10/19/16), 2016 WL 6123820.

[9] See e.g., Easterling v. Royal Manufactured Housing, LLC, 963 So. 2d 399 (La. Ct. App. 3 Cir. 2007); Dufrene v. HBOS Mfg., LP, 872 So. 2d 1206 (La. Ct. App. 4 Cir. 2004).

[10] Duhon, 2016 WL 6123820.

[11] Id.

[12] Id.

[13] Lincoln Builders, Inc. v. Raintree Inv. Corp. Thirteen, 37,965 (La. Ct. App. 2 Cir. 1/28/04), 866 So. 2d 326, 331 (citing cases).

[14] Matthews-McCracken Rutland Corp. v. City of Plaquemine, 414 So.2d 756 (La. 1982).

[15] Lorusso v. Landrieu Enterprises, Inc., 02-2346 (La. App. 4 Cir. 5/21/03), 848 So.2d 656.

[16] Electrical & Instrumentation Unlimited, Inc. v. McDermott International, Inc., 627 So.2d 702 (La. Ct. App. 4 Cir.1993).

[17] Matthews-McCracken, 414 So.2d 756 (La. 1982).

By the Kean Miller Construction Team

Conventional wisdom holds that arbitration is a more preferable mechanism for dispute resolution than full-blown litigation in the court system. Knowing nothing else about the particulars of a particular dispute, if arbitration is available as an alternative to state or federal litigation, we generally advise our clients to arbitrate.

However, that does not mean that arbitration is preferable to traditional litigation in all respects, or that arbitration is always well-suited to resolve a particular dispute. We often are asked by clients to evaluate the benefits of arbitration versus litigation. The purpose of this brief article is to set forth the general framework within which we address that question.

Pros of Arbitration

The primary benefits of arbitration are well-documented:

  • Lower Cost: On average, seeing a case through arbitration costs less to the client than does seeing a case through litigation. The lower costs relate closely to more-streamlined discovery and the shorter length of the entire procedure.
  • Controlled & Compacted Schedule: Arbitration offers a high degree of predictability in the scheduling of deadlines, hearings, and awards. Most arbitrations resolve within one year of initiation.
  • Knowledgeable Arbitrator: Arbitration parties typically select an arbitrator from a pool of subject-matter experts. The American Arbitration Association maintains a listing of local arbitrators with specialty designations in a variety of fields (e.g., commercial construction). An arbitrator with industry experience requires less education on technical aspects of the case.
  • Privacy: Arbitration proceedings are not on the public record. This is a benefit where the subject matter of the arbitration is commercially sensitive. Parties can agree prior to the arbitration to effectively “seal” any evidence and perhaps even the outcome of the arbitration.
  • Finality: Arbitration parties have no rights to appeal the substance of the arbitrator’s decision. This means that arbitration awards are generally final, therefore a party can plan accordingly once the arbitrator issues its decision.

Cons & Quirks of Arbitration

However, the negatives of arbitration are less discussed:

  • Multi-Party Difficulties: To enter into arbitration, parties either voluntarily agree to so enter, or are compelled by a court to submit to arbitration based upon a prior and valid agreement to arbitrate. This makes complex multi-party disputes tough to arbitrate. For example, CGL insurers on construction projects usually cannot be compelled to participate as a party in a construction defect arbitration between a claimant and the respondent insured. The more parties a case involves, the less likely that arbitration will be a feasible option.
  • Higher Filing Fees: Clients are often surprised at the up-front filing fees required by arbitration service providers such as the American Arbitration Association (“AAA”). Those fees depend upon the claim amount. For example, an AAA claim of $150,000 requires payment of $3,000 in purely administrative fees. The amount of the fees increase along with the claim amount, and for larger claims, can approach $15,000. Also, these fees are in addition to arbitrator compensation, which must be covered by the parties and usually resembles typical hourly attorney billing.
  • Summary Judgment Unlikely: In traditional litigation, the summary judgment procedure is an effective tool to resolve certain claims before trial. For example, if the parties agreed on the relevant facts but disagreed on the interpretation of their contract, such an issue would be ideal for early resolution in court via summary judgment. However, arbitrators rarely grant summary judgment motions, so this tool is not effectively available in arbitration. Several experienced arbitrators have commented to us that, due to the finality of arbitration and lack of an appeal procedure, they are extremely hesitant to dispose of any part of a case prior to the hearing itself.
  • Adverse Ruling Is Final: The finality of arbitration certainly works against a party facing an adverse decision by the arbitrator. State and federal courts offer substantive appeal procedures which involve close scrutiny over the lower court’s decision; no such mechanism is available in arbitration. In almost all cases, the loser is stuck with the arbitrator’s initial decision.
  • Limited Subpoena Power: Parties often require testimony or information from a party who is not named in the proceeding. The subpoena process is available in arbitration, but can be limited in scope and time-consuming to properly enforce.

*         *         *

It is true that arbitration is generally more preferable to court litigation as a dispute resolution mechanism. However, in cases in which a party has a choice over whether to arbitrate or litigate a particular dispute, the party should pay careful attention to the nature of the dispute in light of the pros, cons and quirks of the arbitration proceeding.

Disability access lawsuits have become a cottage industry and they have found their way into Louisiana, Texas and Arkansas.  Most are brought by the serial litigants working with same law firm.  These plaintiffs visit a business for the primary purpose of discovering an Americans with Disabilities Act (ADA) accessibility violation and then file a federal court lawsuit without giving the property owner, tenant or business advance notice of their complaint or an opportunity to fix the problems.

Now we are seeing a growing trend of “drive by” or “Google” disability access lawsuits.  The tag “drive-by” lawsuit came about due to accusations in many of these cases that either the plaintiff, or their lawyer, simply drove by the business, observed an alleged violation, and then filed suit.  The tag “Google lawsuit” arose from the belief of several business owners who have been sued that the ADA violations (such as the failure to have a lift seat at a hotel swimming pool) were discovered using Google earth.  In “drive-by” or “Google” lawsuits, the plaintiff almost always seeks attorneys’ fees, expert witness fees, and other litigation costs, as well as other concessions from the business they have sued.  Under federal law, business owners often have to pay both sets of attorneys’ fees, and if they do not settle, or make the corrections to their property demanded in the suit, it may end up costing them many thousands of dollars more, leading to accusations that these suits are simply money-making ventures for the plaintiff bar.

The ADA was passed by Congress in 1990.  Every private business in the United States open to the public must comply with the ADA.  This includes restaurants, bars, convenience stores, hospitals, hotels, shopping centers, and other retail locations.  The accessibility requirements of the ADA are very specific, and extensive.  There are thousands of requirements to be found in the 275-page ADA manual, which has specific requirements for things such as the slope and length of wheelchair ramps, the location and signage for handicap parking spots, and the height and location of door handles, sinks, toilets, and grab rails.

ADA access litigation is not limited to parking lots, sidewalks, restrooms and other alleged physical barriers in a “brick and mortar” establishment.  A growing number of lawsuits are being filed claiming that the business’ Web site does not provide adequate accessibility to the visually or hearing impaired.  Since 2010, the United States Department of Justice (DOJ) has delayed issuing specific regulatory guidance directly addressing the accessibility standards for commercial Web sites.  That does not mean that businesses do not have to try to comply with the general requirements of the ADA, nor does it prevent DOJ enforcement or suits by private plaintiffs.

Numerous ADA access lawsuits have been filed in federal court in Shreveport.  One of the recently filed claims is a class-action filed by a registered sex offender against a local municipality, claiming that the office where he is required to register as a sex offender is now violating the ADA by not providing him with a sign language interpreter.

So what should a business owner do to avoid this expensive headache?  A good starting point is to make your business an unattractive target.  Visit your location to see if there are any obvious ADA violations that would catch the attention of a “drive-by” plaintiff.  For example, look for un-ramped entrance steps, poorly maintained routes from handicap parking spaces to the entrance, handicap parking spaces with no access aisle, and observe the slope of your handicap parking spaces.  If you can see a slope, it is probably non-compliant.  And if you can see the slope, you can bet the plaintiff driving by will too.

Effective January 17, 2017, the Occupational Safety and Health Administration (OSHA) issued new instructions concerning its National Emphasis Program (NEP) as it relates to chemical process subject to Process Safety Management (PSM). See Directive Number CPL-03-00-021. PSM requirements are codified at 29 CFR 1910.119.   Prior NEPs were implemented for Petroleum Refining in 2007 and 2009 and ended in 2011. With the new instructions, refining is back on the list. NEP Inspections are divided up into Programmed and Unprogrammed Inspections, each of which has its own trigger or criteria.

Unprogrammed Inspections: These inspections are initiated as the result of a complaint, referral, accidents, or catastrophes.

Initiating Event NEP Application Limits/Expansion
Complaint/referral related to PSM Standard

Follow CEMP NEP

Inspection of contractor and host

 If initiated by contractor, normally limited to complaint/referral items/subject and contractor questions
Complaint/referral not related to PSM Standard Normally limited to specific (non-PSM) issue OSHA may decide to expand to include CEMP NEP if the facility has not been inspected under PSM NEP.
Accident/Catastrophe that involves PSM Standard Follow CEMP NEP Includes an incident investigation
Accidents/Catastrophe that does not involve PSM Standard Normally limited to specific (non-PSM) issue OSHA may decide to expand to include CEMP NEP if the facility has not been inspected under PSM NEP.

Programmed Inspections: The process is initiated by creation of a list of targeted facilities based on a number of factors: facilities subject to EPA’s Risk Management Program (RMP), previously OSHA cited facilities, facilities with SIC codes identified as explosive/pyrotechnincs, and other sources of available information. Approved facilities participating in OSHA Voluntary Protection Program (VPP) or Consultation Safety and Health Achievement Recognition Program (SHARP) and facilities that have had a NEP inspection in the last three years are removed from the list. Please note that VPP status does not prevent the possibility of an unprogrammed inspection. The final list is randomized and OSHA established the following annual inspection objectives.

Category Facility Type Inspection Target
1 Facilities likely to have ammonia refrigeration 25% of Programmed
2 Petroleum refineries 30 per year
3 Chemical Manufacturing 45% of Programmed
4 Other PSM Covered Facilities 30% of programmed

Otherwise, the new NEP instructions explain the process and expectations of a NEP inspection and should be considered carefully in the event of an inspection. The NEP provides a good overview of the areas to be investigated and the limitations that an employer should expect. Careful notice should be taken of the process and these expected limitations as the NEP instructions also include off-ramps to expand the investigation under certain circumstance.

On March 14, 2016, Environmental Protection Agency (“EPA”) proposed changes to the Risk Management Plan Program (“RMP”) Rule. On January 13, 2017, the EPA published a new final rule.  This is fourth in a planned series that will address five major changes: root cause analysis for near misses, third-party audits, inherently safer technology, emergency response, and availability of information. This week we will examine a requirement added to the Process Hazard Analysis (PHA) element: Safer Technology and Alternatives Analysis (STAA).

This requirement is mandatory to industries in three North American Industry Classification System (NAICS) codes: 322 (Pulp and Paper), 324 (Petroleum Refining), and 325 (Petrochemical). The added requirements are few: perform an analysis and determine the practicality for any identified inherently safer technologies or designs. The analysis must be structured to consider risk reduction according to the following hierarchy, all of which are newly defined terms: inherently safer technology or design, passive measures, active measures, and procedural measures.  Much of the rest is left up to the owner/operator, including whether to implement the findings.

The EPA replaced the word “feasible” with the word “practical” in the final rule but kept the same definition in an effort not to confuse or conflict with the concept of feasibility in OSHA rules. Whereas the dictionary definitions indicate that the meaning of the words is very similar, practical always seems like something smart to do; feasible just meant it was possible.

As said above, the additions to the rule relating to STAA are few. Most of the important “takeaways” can be found in the preamble:

  • Owners are in best position to define “economic and social value.”[1]
  • Cost and loss of profits can be considered.[2]
  • No timeframe for implementation.[3]
  • An evaluation of practicality includes the owners’ risk tolerance.[4]
  • Need only consider commercially viable chemical substitutions.[5]
  • More time allowed for complex practicality evaluation.[6]
  • Analysis can consider cost/benefit, customer needs, and business concerns.[7]
  • None or multiple safeguards may be appropriate.[8]
  • Facilities alone have the expertise to make decisions.[9]

In summary, the STAA requirements just require certain industries to perform a STAA and determine the practicality of possible changes. Although there is no requirement to automatically submit the analysis to an agency, once the documents exist, they of course could be demanded by an agency or another party in a law suit. Whereas this rule is expected to go in effect on March 14, 2017, this rule is subject to Congressional Review Act and could be undone by that process.

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[1] EPA does not believe that we should further define ‘‘economic or social factors’’ in the rule because further specificity of these terms would likely be too prescriptive and would not encompass all the possible conditions and outcomes that might be encountered when determining the practicability of an IST or ISD considered in the STAA. EPA expects that facility owners and operators will use their expertise and make reasonable judgments when considering the appropriate meaning of economic or social factors so that any decisions regarding possible implementation of IST is not driven towards changes that would cause unintended adverse consequences.  82 Fed. Reg at 4636.

[2] Cost is a consideration when determining whether a risk management measure can be successfully accomplished and because EPA is not requiring implementation of any IST, we see no reason to exclude this factor from a practicability determination.  82 Fed. Reg, at 4637.

[3] EPA also disagrees that incorporating consideration of a reasonable timeframe will allow facilities to avoid implementation. EPA is not requiring IST implementation and we acknowledge that there may exist practical limits on whether some projects or process designs can be done to enhance safety.  82 Fed. Reg. at 4637.

[4] Management response to hazard evaluation studies and recommended options involve risk management considerations that are developed based on a facility’s risk tolerance criteria.  82 Fed. Reg. at 4647.

[5] EPA expects that facilities will only evaluate chemical substitutes that have already been shown to be commercially viable and does not expect facility owners or operators to expend a major effort on hypothetical or untested chemical substitutes or uses.  82 Fed. Reg. at 4647.

[6] EPA allows that where a practicability evaluation is complex and resource intensive and may not be completed within the four-year compliance timeframe from the final rule or within the five years between PHA reviews, a facility should document during their PHA review that the IST is under consideration and that the practicability of implementing the technology is unknown and still undergoing evaluation.  82 Fed. Reg. at 4648.

[7] EPA disagrees that the practicability determination does not allow facilities to take into account costs and benefits and the effect on the full supply chain. The STAA requirements do not require any implementation of any particular IST. EPA expects that facility owners or operators will seriously consider the merits and consequences of ISTs for their facilities and use their expertise and judgment to ensure safety while not severely affecting the economic viability of their businesses. Facilities can consider the effects in their supply chain (downstream and upstream) when evaluating potential IST options.  82 Fed. Reg. at 4648.

[8] EPA recognizes that for any particular hazard point, any one of the four types of safeguards may not exist or may not be practicable for a variety of reasons. EPA also recognizes that facilities may wish to employ more than one safeguard.  82 Fed. Reg. at 4649.

[9] EPA agrees that the facility is in the best position to decide what safeguards or risk reduction measure can be employed to eliminate or reduce process hazards. Facilities must consider safeguards, in the following order of preference: IST, passive, active or procedural measures; however, the rule does not automatically require the facility to implement the measures preferentially in that order.  82 Fed. Reg. at 4649.

By the Kean Miller Health Law Team

On January 9, 2017, the U.S. Department of Health and Human Services Office for Civil Rights (OCR) announced its first HIPAA settlement arising from a failure to provide timely breach notification. Presence Health Network (Presence), one of the largest health care systems in Illinois, agreed to pay $475,000 as a result of Presence’s 2013 failure to provide timely notification in accordance with the HIPAA Breach Notification Rule. A copy of the Resolution Agreement between Presence and OCR is available here.

In 2013, Presence reported to OCR the loss of paper-based operating room schedules containing protected health information of 836 individuals. Under the Breach Notification Rule, HIPAA covered entities are required to provide written notification to individuals affected by a breach without unreasonable delay and in no case later than 60 calendar days following discovery of the breach. Additionally, for breaches affecting more than 500 individuals, contemporaneous notice must also be provided to OCR and notice must be provided to prominent media outlets serving the State or jurisdiction where more than 500 affected individuals reside. According to the Resolution Agreement between Presence and OCR, Presence failed to comply with all of the required notification deadlines. OCR’s investigation revealed that Presence notified the affected individuals 104 days following discovery, OCR 101 days after discovery, and the media 106 days after discovery. Moreover, during its investigation, OCR identified several other occasions where Presence was late notifying individuals of breaches affecting less than 500 individuals.

The settlement is an important reminder to covered entities of the need to timely and effectively investigate and report data breaches. As noted in the Resolution Agreement, each day that a notification is late is a separate violation of the Breach Notification Rule. Covered entities need to have effective policies and procedures in place to appropriately respond to and report data breaches. Additionally, covered entities must adequately train their workforce members on how to identify and internally report potential data breaches.

As a reminder, the deadline for reporting 2016 breaches involving less than 500 individuals is March 1, 2017.

On March 14, 2016, Environmental Protection Agency (“EPA”) proposed changes to the Risk Management Plan Program (“RMP”) Rule. On January 13, 2017, the EPA published a new final rule. This is third in a planned series that will address five major changes: root cause analysis for near misses, third-party audits, inherently safer technology, emergency response, and availability of information. Last week the blog concerned audit privilege; this week I focus on conditions that trigger a third party audit and new audit finding implementation requirements.

Condition requiring a third party audit: Unchanged from the proposal, third-party audits are required anytime the facility has an incident that meets the five-year accident history criteria as described in §68.42(a). The five-year report criteria remained unchanged: significant on site impacts or known off-site impacts. Usually these events are associated with significant incidents.

In the proposal, the EPA added a second criterion based on an agency finding of non-compliance. This condition was replaced in the final rule with a different criterion: an agency finding of a condition that could lead to an accidental release.[1] The agency could also demand the owner repeat third-party audits that fail to meet competency or independence criteria. See 40 CFR 68.79(f)(2). The deficient condition finding could be based on factors including mechanical integrity deficiencies, smaller incidents that could have been bigger incidents, or smaller incidents that occurred more than once.

Conditions at a stationary source that could lead to an accidental release may include, but are not be limited to, significant deficiencies with process equipment containing regulated substances, such as unaddressed deterioration, rust, corrosion, inadequate support, and/or other lack of maintenance that could lead to an accidental release. The presence of small ‘‘pinhole’’ releases, that do not meet the criteria in § 68.42(a) for RMP- regulated accidental releases, could also constitute conditions that could lead to a larger accidental release of a regulated substance. The occurrence of several prior accidental releases that did not meet the reporting criteria in § 68.42(a) at or from a facility could also constitute conditions which could lead to potentially more severe accidental releases. These releases may be a potential indicator that an owner or operator is not complying with RMP prevention program requirements and would benefit from a third-party audit to prevent future accidental releases.
82 Fed. Reg. 4594, 4616 (Jan. 13, 2017)

Of concern, a smaller incident that “could lead to a larger accidental release of a regulated substance” sounds eerily similar to a “near miss.” Whereas a “near miss” would result in an incident investigation, there is no discussion in the preamble that a “near miss,” should result in a third-party audit.

Third party audit findings: The new rule vastly expanded the “implementation” requirements formally located at §68.79(d) with a new paragraph (f). Effectively the term “promptly determined” has been replaced with a 90 day maximum period. Further, in addition to a certification by the third party auditor, a separate certification is required by a senior corporate official that that a compliant audit was performed and that deficiencies have been, or are in the process of being corrected according to a schedule. Although similar to a Title V certification, the corporate official audit certification cannot be delegated to a responsible official. The audit report, responses to findings, certifications, and schedule must be submitted to the audit committee of the Board of Directors.

Next week we will examine inherently safer technology.

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[1] The agency preliminary determination must provide written notice describing the basis for the notice. The process includes an opportunity for the owner to provide additional information to the agency prior to a final determination. The final determination is appealable to the EPA Regional Administrator.

CMS issued an Alert on November 15, 2016, concerning 2017 Recovery Thresholds.  On December 12, 2016, it issued another Alert regarding 2017 Reporting Thresholds.  CMS also updated its NGHP User Guide on January 3, 2017.

The effect of the Alerts:

Reporting Threshold:  $750.00 for liability insurance (including self-insurance), no-fault insurance, and workers’ compensation payments.

  • Liability:  If the Total Payment Obligation to the Claimant (“TPOC”) date is 1/1/2017 (or after) and the payment exceeds $750.00, the payment must be Section 111 reported.
  • No-Fault:  If the TPOC date is 10/1/2016 (or after) and the payment exceeds $750.00, the payment must be Section 111 reported.
  • Workers’ Compensation:  If the TPOC date is 10/1/2016 (or after) and the payment exceeds $750.00, the payment must be Section 111 reported.

Recovery Threshold:  Effective January 1, 2017, the recovery threshold is $750.00 for physical trauma-based liability payments.  This means that CMS may assert a right to recovery/reimbursement if the payment exceeds $750.00.  However, there is no monetary threshold for recovery/ reimbursement in ingestion, implantation or exposure cases.  CMS reserves the right to assert a recovery claim regardless of the amount of the payment in ingestion, implantation and/or exposure cases. 

The recovery threshold on workers’ compensation and no-fault payments remains $750.00 as long as the workers’ compensation or no fault entity does not otherwise have ongoing responsibility for medicals.

On March 14, 2016, Environmental Protection Agency (“EPA”) proposed changes to the Risk Management Plan Program (“RMP”) Rule.  On January 13, 2017, the EPA published a new final rule.  This a second in a planned series that will address five major changes:  root cause analysis for near misses, third-party audits, inherently safer technology, emergency response, and availability of information.  The third party audit provisions are so significant that I must split it up into two topics, starting with privilege.

The proposed rule contained several provisions that reminded me of the poster hung for all to see in George Orwell’s 1984:  Big Brother Is Watching You.  Promulgation of the proposal would have resulted in submission of potentially flawed draft reports prepared by individuals with no prior knowledge of the facility that would end up in the regulating agency’s hands no later than the facilities; draft reports had to be retained.  For some reason, the EPA believed it was necessary to receive raw, unfiltered, and potentially incorrect conclusions.  Fortunately, all of this was dropped.  Interestingly, and to the alarm of many, the EPA also proposed to add:

The audit report and related records shall not be privileged as attorney-client communications or attorney work products, even if written for or reviewed by legal staff.  81 FR, 13638, 13707 (Mar 14, 2016)

In the final rule, the EPA deleted this provision limiting attorney-client privilege.  Ultimately, the EPA dropped this provision as they:

recognizes that the ultimate decision maker on questions of evidentiary privileges are the courts. Therefore, this rule does not contain a specific regulatory provision prohibiting assertion of these privileges.  81 Fed. Reg. at 4614.

I expect that the EPA did not remove the provision because they found public comments persuasive.  Ultimately they probably received good counsel that inclusion of the provision would have help naysayers strike down the rule. The EPA added, in no uncertain terms how they feel above screening internal deliberations based on privilege:

With regard to information that arguably should be protected under evidentiary privileges, EPA’s view is that the third-party audit reports and related records under this rule, like other documents prepared pursuant to part 68 requirements, such as process safety information, PHAs, operating procedures and others, are not documents produced in anticipation of litigation. With respect to the attorney-client communication privilege specifically, the third-party auditor is arms-length and independent of the stationary source being audited. The auditor lacks an attorney-client relationship with counsel for the audited entity. Therefore, in EPA’s view, neither the audit report nor the records related to the audit report provided by the third-party auditor are attorney-client privileged (including documents originally prepared with assistance or under the direction of the audited source’s attorney).  Id.

Given our litigious society, I would always consider conducting an incident investigation under attorney-client privilege.  I see no reason not to conduct future audits under privilege, but there is no certainty that a court would uphold the privilege (is there ever?).  The EPA reminds us in footnote #32 that they have authority to demand records under Section 114 of the CAA.  If maintaining control of a draft report is important to you (which it should), make sure you have and follow a retention policy that requires destruction of all draft reports.  Make sure to keep the support for the final report.  Contracts with third parties should include the return of all information, materials and drafts.

Next week:  the rest on third-party audits!