Category: Labor & Employment

Relying on Noncompete Clauses May Not Be the Best Defense of Proprietary Data When Employees Depart

Much of the value of many companies often is wrapped up with and measured by their intellectual property (IP) portfolios. Some forms of IP, such as patents, are known by the public. Others derive their value from being hidden from the public. Many companies, for example, have gigabytes of data or “know-how” that may be worth millions, but only to the extent that they remain secret. This article discusses some ways to keep business information confidential when an employee who has had access to that information leaves the company.

Many companies traditionally turned to employment agreements, specifically noncompete clauses, to protect proprietary competitive information. The legality of noncompetes is in question following the Federal Trade Commission’s (FTC’s) ban on them, which is being challenged in court by the U.S. Chamber of Commerce, causing confusion and concerns about protecting information via noncompete agreements. As covered in Wilson Elser’s prior articles* on this subject, the timeline of the FTC rule in question was as follows:

  • The FTC promulgated new rules to take effect in September 2024 banning all noncompete agreements.
  • The U.S. Supreme Court overturned the 40-year-old method of reviewing agency rules (Chevron Deference), throwing all agency rules, including the FTC’s rule on noncompetes, into question.
  • The District Court for the Northern District of Texas preliminarily enjoined the FTC from enforcing its new rule banning noncompetes.

After this flurry of activity, noncompetes are, for now, not banned. But do they offer an effective solution for businesses seeking to protect their proprietary information?

Noncompete Clauses Are Not Always Effective
Vortexa, Inc. v. Cacioppo, a June 2024 case from the District Court for the Southern District of New York, illustrates the limitations of noncompete clauses in employment agreements. That case presents the familiar fact pattern of an employee leaving and going to work for a competitor. With some evidence of the employee’s access to proprietary competitive information in hand (but no evidence of actual misappropriation), the former employer sought a preliminary injunction to prevent the employee from working for the competitor for one year, the term stated in the noncompete clause in the employee’s contract with the former employer. The contract also included common non-disclosure and confidentiality clauses.

Absent evidence of actual misappropriation, the plaintiff employer relied on the “Inevitable Disclosure” doctrine, which assumes that a departing employee will inevitably disclose confidential information when they go work for a competitor. The court refused to apply this doctrine, explaining that inevitable disclosure may substitute for actual evidence of misappropriation only when the information is a trade secret. Here, none of the information about which the former employer was concerned was a trade secret.

The proprietary information that the former employee had was pricing data, marketing strategies and “intricacies of the business.” These types of information do not, in and of themselves, constitute trade secrets. In addition, the information was not afforded trade secret treatment because (1) some of it was ascertainable by the competitor without reference to the first employer’s information; (2) the companies sell different products; (3) some of the information was developed without the expenditure of a good deal of money and effort; (4) some of the information was provided to clients without a non-disclosure agreement; (5) some of the information was shared on company-wide collaboration channels; and (6) “google drive log records show that [the former employee] opened and viewed these documents, which underlines the lack of security protecting this purportedly confidential information.”

Most of these reasons for the information not being accorded trade secret status cannot be changed by any action of the employer. For example, if information can be generated by means independent of the first employer, that information cannot be protected by trade secret law and nothing the first employer can do will change that after the fact. However, any business seeking to protect its valuable competitive information can change the way that it secures, protects and manages access to its competitive information, and this may be enough to ensure that its information is protected by trade secret law.

What Businesses Should Do to Protect Their Proprietary Competitive Information
Generally, proprietary competitive information can be protected as a trade secret by operation of law or via contract. In many cases, the “boots and suspenders” approach is best – the information should be protected both by contract and by meeting the requirements for protection under trade secret law. As described, a contract alone is sometimes ineffective, so information that derives its value from not being generally known to the public should also be treated in such a manner that the courts would see it as being a trade secret.

Specifically, for something to qualify for trade secret protection under federal and state statues and common law, it must be securely kept and carefully protected from disclosure. Some easy ways to protect information are to (1) restrict access to folders on a company’s internal computer systems, (2) physically lock rooms that contain hard copies and (3) have computers lock automatically when not accessed for set time periods. Protecting information via noncompete, confidentiality and non-disclosure contractual obligations is another way to ensure that information remains secret, such that it is protected under trade secret law. Internal policies on how information may be shared with third parties, such as clients, also are helpful evidence of trade secret treatment. In addition, the business may consider maintaining records on the time, effort and monetary expenditures required to develop proprietary information, which should allow the business to demonstrate that making such information freely available to a competitor is fundamentally unfair.

In some cases, information protected as a trade secret may be the most valuable IP that a company owns. But the value can easily be lost if the company does not properly secure the information. Different scenarios call for different methods of security, and a good rule of thumb to protect information from disclosure by a departing employee is to protect this information both by contract and as a trade secret.

The first step for any business is to think through their overall data protection strategy and consult with experienced intellectual property counsel to put appropriate protections in place.

© 2024 Wilson Elser
For more news on Proprietary Business Data, visit the NLR Intellectual Property section.

Pennsylvania Federal Court Declines to Preliminarily Enjoin FTC Rule Banning Non-Competes

Earlier today (July 23, 2024), Judge Hodge in the U.S. District Court for the Eastern District of Pennsylvania denied a tree care company’s motion to stay the effective date and preliminarily enjoin the Federal Trade Commission’s (“FTC”) proposed final rule (“Final Rule”) banning nearly all non-competes. ATS Tree Services, LLC v. Federal Trade Commission, No. 2:24-cv-01743-KBH (E.D. Pa.). The decision comes in the wake of the U.S. District Court for the Northern District of Texas’ July 3, 2024 ruling to the contrary in Ryan LLC v. Federal Trade Commission, No. 3:24-cv-00986-E, which stayed the Final Rule’s effective date as to the plaintiffs in that case, but had no nationwide effect.

The Pennsylvania Court’s Decision

The Pennsylvania court denied Plaintiff ATS Tree Services, LLC’s (“ATS”) request for a preliminary injunction based on its conclusion that the company failed to establish that it (i) would suffer irreparable harm if injunctive relief was not issued; and had a reasonable likelihood of succeeding on the merits of its claims.

ATS argued it would be harmed by incurring “nonrecoverable efforts to comply” with the Rule, and by losing “the contractual benefits from its existing non-compete agreements.” ATS described its nonrecoverable compliance costs as: costs associated with notifying its twelve employees of the change in accordance with the Rule’s notice provision; the costs and efforts to “review and modify [its] business strategy”; and the unquantifiable costs and efforts of altering its specialized training program. But court found these either insufficient or too speculative to support injunctive relief. ATS further argued it would face the risk that its employees would leave and transfer confidential information to direct competitors. The court found these risks too speculative.

ATS also unsuccessfully argued that it would succeed on the merits because, it asserted, the FTC lacks substantive rulemaking authority under its enabling statute, the FTC exceeded its authority, and Congress unconstitutionally delegated legislative power to the FTC. The court rejected each argument. The court further found that the “major questions doctrine” did not apply, because the Final Rule falls within the FTC’s core mandate, and the FTC has previously used its Section 6(g) rulemaking power in similar ways to the Final Rule.

Looking Forward

The Pennsylvania court’s decision did not analyze the Ryan decision, which reached contrary conclusions. It is likely that the dispute will ascend to the Third and Fifth Circuits, respectively. Notably, the Ryan court has indicated that it intends to issue a final judgment on the merits by August 30, 2024, which is likely to be appealed, and the Final Rule is scheduled to become effective by September 4, 2024.

© 2024 Proskauer Rose LLP.
For more news on the Eastern District of Pennsylvania’s decision in ATS Tree Services, LLC v. Federal Trade Commission, visit the NLR Antitrust Trade Regulation section.

Michigan Supreme Court Expands Employer Exposure to Public Policy Retaliation Claims

In Michigan, various state employment laws prohibit employers from retaliating against employees. But can an employee pursue a public policy retaliation claim against the employer in addition to a statutory retaliation claim?

On July 22, 2024, the Michigan Supreme Court ruled that anti-retaliation provisions in two important workplace safety laws—the federal Occupational Safety and Health Act (“OSHA”) and Michigan’s Occupational Safety and Health Act (“MIOSHA”)—do not preclude a plaintiff from also asserting a violation of public policy in court. Stegall v. Resource Technology Corp (Case No. 165450, decided July 22, 2024).

Cleveland Stegall, an IT specialist working at FCA through the staffing agency Resource Technology, complained internally about asbestos insulation issues at the assembly plant and threatened to file complaints with the government. He was subsequently terminated. Stegall sued both entities for wrongful discharge under OSHA and MIOSHA’s anti-retaliation provisions, as well as termination in violation of public policy.

At-will employees generally may be terminated for any reason (or no reason at all). But one exception to this rule is that certain terminations violate public policy and therefore create an actionable legal claim. This includes firings for “failure or refusal to violate a law” or exercising a right conferred by the Michigan Legislature.

Both the trial court and the Court of Appeals dismissed Stegall’s public policy claim because they concluded that the OSHA and MIOSHA laws already forbid retaliation. The Michigan Supreme Court reversed. It reasoned that the remedies under OSHA and MIOSHA are insufficient, pointing to the truncated 30-day period to file a complaint with the relevant government agency, the discretion granted to the respective investigating agency, and the employee’s lack of control over what occurs after a complaint has been filed. See 29 U.S.C. §660(c)(2) and MCL 408.1065(2).

What does this case mean for employers? The Michigan Supreme Court’s decision provides another avenue for employees to pursue retaliation claims, particularly where the employee raises workplace safety concerns. It is unclear, however, whether courts will extend this ruling and allow employees to pursue public policy wrongful discharge claims if the employee is also seeking relief under another anti-retaliation statute.

© 2024 Miller, Canfield, Paddock and Stone PLC
For more news on Employer Anti-Retaliation Lawsuits, visit the NLR Labor & Employment section.

Full Steam Ahead: NLRB Top Lawyer Signals Continued Focus On Injunction Actions

Last month, the U.S. Supreme Court issued a decision in Starbucks v. McKinney clarifying the standards courts must use when evaluating requests by the National Labor Relations Board (NLRB) for injunctive relief under Section 10(j) of the National Labor Relations Act (NLRA). Many view this as, at least in some jurisdictions, heightening the standard the agency must meet in these cases.

NLRB General Counsel Jennifer Abruzzo issued a memo on July 16 noting this ruling will not affect how her office views Section 10(j) cases. According to the press release, “General Counsel Jennifer Abruzzo reaffirmed her commitment to seeking Section 10(j) injunctions after the Supreme Court’s recent decision in Starbucks Corp. v. McKinney, which set a uniform four-part test applicable to all Section 10(j) injunction petitions.”

The statement then goes on to note, “General Counsel Abruzzo explained that, while the Supreme Court’s decision in Starbucks Corp. provides a uniform standard to be applied in all Section 10(j) injunctions nationwide, adoption of this standard will not have a significant impact on the Agency’s Section 10(j) program as the Agency has ample experience litigating injunctions under that standard and has a high rate of success in obtaining injunctions under the four-part test — a success rate equivalent to or higher than the success rate in circuit courts that applied the two-part test.”

Employers should take note, as the NLRB does indeed have a high success rate when seeking these injunctions against employers. For example, in fiscal year 2020, the agency prevailed in every 10(j) case it brought. These actions can be costly from a time and resources perspective for companies, as they are then forced to defend against alleged labor violations before both the NLRB and in federal court simultaneously.

Accordingly, while the recent Supreme Court ruling did offer a uniform standard and clarity around the legal framework for 10(j) cases, it appears this won’t cause a dip in the amount of such matters the NLRB brings.

© 2024 BARNES & THORNBURG LLP
For more news on NLRB Injunction Actions, visit the NLR Labor & Employment  section.

The End of Chevron Deference and the Anticipated Impact on Withdrawal Liability

The U.S. Supreme Court recently overturned the decades-old Chevron doctrine of judicial deference to a federal agency’s interpretation of an ambiguous statute. (See “Go Fish! U.S. Supreme Court Overturns ‘Chevron Deference’ to Federal Agencies: What It Means for Employers”) Following the decision in Loper Bright Enterprises v. Raimondo, courts must exercise independent judgment in reviewing the agency’s interpretation of the statute. Courts may apply the standard set forth in Skidmore v. Swift & Co., 323 U. S. 134 (1944), in which a court can uphold a regulation if it finds the agency’s interpretation of the statute persuasive.

The Loper Bright decision could prove to have an immediate impact on the actions of the Pension Benefit Guaranty Corporation (PBGC). The PBGC is a federal agency with regulatory authority over the withdrawal liability provisions in Title IV of ERISA. Two recent actions taken by the PBGC that are under current scrutiny figure to be challenged under Loper Bright: the Special Financial Assistance (SFA) plan asset phase-in and withdrawal liability interest rate assumption regulations.

Conditions for MEPPs Receiving Special Financial Assistance (SFA)

The American Rescue Plan Act of 2021 (ARPA) provided for SFA for troubled multiemployer pension plans (MEPPs). The SFA program will provide between $74 and $91 billion in assistance to eligible MEPPs. Pursuant to ARPA, Congress delegated authority to the PBGC to issue “reasonable conditions” for SFA applications and for withdrawal liability calculated by SFA recipients. On July 8, 2022, the PBGC published a final rule detailing the eligibility criteria, application process, and restrictions and conditions associated with a MEPPs’ use of SFA funds.

As previously discussed in “More Bad News for Employers in the PBGC Final Rule,” the final rule expresses PBGC’s opinion that “payment of an SFA was not intended to reduce withdrawal liability or to make it easier for employers to withdraw.” Consistent with these concerns, the PBGC’s final rule mandated that recipient MEPPs “phase-in” the SFA as a plan asset over a 10-year period. This interpretation will significantly (and arguably artificially) increase the amount of many employers’ withdrawal liability. It is anticipated that the final rule will be challenged in the near future.

Withdrawal Liability Interest Rate Assumption

The interest rate assumptions used by an MEPP to calculate withdrawal liability can have a massive impact on the amount of an employer’s liability. In 1980, when amending Title IV of ERISA by enacting the Multiemployer Pension Plan Amendments Act (MPPAA), Congress delegated authority to the PBGC to issue regulations relating to these critical interest rates assumptions. To date, PBGC has not done so.

Specifically, in response to several recent court rulings (See “Withdrawal Liability Interest Rate Must Reflect Projected Investment Return, D.C. Circuit Holds”), the PBGC issued a proposed regulation to allegedly “make clear that use of 4044 rates [the settlement interest rate], either as a standalone assumption or combined with funding interest assumptions represents a valid approach to selecting an interest rate assumption to determine withdrawal liability in all circumstances.” Even more problematic, the proposed rule states that a “plan’s actuary would be permitted to determine withdrawal liability under the proposed rule without regard to section 4213(a)(1) [including foregoing the reasonableness and actuarial best estimate requirements].” The proposed rule directly contradicts recent judicial interpretations of the referenced statute that was enacted as part of MPPAA over 44 years ago.

Further, the PBGC’s proposed rule ignored the critical issue of whether the selection of an interest rate that ignores the statutory reasonableness and best estimate requirements satisfies other provisions of ERISA, such as Section 4221(a)(3)(B)(i). In this regard, and consistent with Loper Bright, several Circuit Courts of Appeal have already exercised their independent judgment to interpret the statutory “best estimate of anticipated experience under the plan” language as referring to the “unique characteristics of the plan” such as the plan’s investment asset mix and the expected rate of return on such assets. These recent Circuit Court decisions therefore directly contradict the PBGC’s proposed regulations. Any final regulation promulgated by PBGC that follows the proposed regulations would inevitably be challenged and resolved under the less-deferential standard established under Loper Bright.

Final Thoughts

The exact impact of Loper Bright on agency actions in general and the PBGC actions discussed above remains to be seen. Since Skidmore is still good law, a court that is sympathetic to an agency’s position could still opt to defer to that interpretation. Courts will no doubt be busy with a plethora of suits challenging administrative actions. The two current hot-button topics discussed above seem destined to be challenged and resolved by judges in a post-Chevron world. The resolution of these issues will have massive implications for employers with significant potential withdrawal liability exposure.

Jackson Lewis P.C. © 2024
For more news on the impact of Loper Bright on the Pension Benefit Guaranty Corporation (PBGC), visit the NLR Labor Employment section.

Federal Agencies Have Placed a Heightened Priority on Whistleblowers and Speedy Cooperation

As new areas of the law emerge, driven in part by technology and the free flow of information, federal agencies are becoming more aggressive with a tried and true carrot-and-stick approach to law and regulatory enforcement.

In a recent PLI panel on government enforcement priorities in May 2024, Brent Wible, Chief Counselor, Office of the Assistant Attorney General, Department of Justice (DOJ or Department); Daniel Gitner, Chief of the Criminal Division, US Attorney’s Office for the Southern District of New York (SDNY or the Office); and Antonia Apps, Director of the New York Regional Office of the Securities and Exchange Commission (SEC or Commission) shared their thoughts, priorities and practices in 2024 enforcement and beyond.

All of the government lawyers stressed that the DOJ and enforcement agencies are open and are actively encouraging whistleblowers with new incentives and programs. To that end, Mr. Gitner from the SDNY stated very directly that corporations need to understand that there is a “need for speed” in corporate self-disclosures. Otherwise, whistleblowers will be closing the door to the benefits of corporate self-disclosures. Put differently, enforcement agencies do not want a corporation to complete lengthy internal investigations before reporting.

A uniform theme and stance taken by all is that whistleblowers are valuable, and bounties will be paid in cash or in deferred prosecution agreements or possibly both. Whistleblowers must be protected. Internal and external whistleblowers should be encouraged.
This article focuses on three whistleblower initiatives—(i) the SEC’s Whistleblower Program, (ii) the SDNY Whistleblower Pilot Program and (iii) DOJ’s Pilot Whistleblower Program for voluntary self-disclosure—and how those programs may impact a corporation’s response to whistleblowers, internal investigations, and disclosures.

SEC 21F WHISTLEBLOWER PROGRAM

Since its inception more than a decade ago, the SEC’s Whistleblower Program is widely viewed as successfully incentivizing whistleblower reports of violations of the securities laws. In its 2023 fiscal year, the SEC received more than 18,000 tips from whistleblowers and issued the most awards to whistleblowers ever in one year, totaling nearly US$600 million. That year, the Commission also issued its largest ever award of US$279 million to a single whistleblower.1

What is the SEC’s Whistleblower Program?

Section 21F of the Securities Exchange Act of 1934, codified as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires the SEC to pay awards to whistleblowers who provide information to the SEC about violations of federal securities laws.2 Accordingly, the SEC has issued a series of rulemakings implementing Section 21F to create its whistleblower program. To qualify as a whistleblower, an individual must voluntarily provide the SEC with original information in writing about a possible violation of federal securities law that has occurred, is ongoing, or is about to occur.3 To qualify for an award, this information must lead to a successful enforcement action with monetary sanctions totaling more than US$1 million.4

“Original” information means that it cannot be found in publicly available sources and is not already known by the Commission, but is instead the product of the whistleblower’s independent knowledge or analysis.5 A submission is “voluntary” if the whistleblower provides it to the SEC before receiving a regulatory request or demand for information relating to the same subject matter. Therefore, a submission of information that is made in response to a request, inquiry, or demand by the SEC, the Public Company Accounting Oversight Board, a self-regulatory organization (such as the Financial Industry Regulatory Authority), or a separate federal or state governmental body does not qualify as a voluntary submission.6 Additionally, a submission that is required under a legal or contractual duty to the Commission is not considered voluntary and is thus ineligible for an award.7

The SEC’s whistleblower rules also include anti-retaliation protections intended to ensure that the incentives provided to whistleblowers for reporting are not outweighed by a fear of reprisal from their employer. Under Rule 21F-17, companies are prohibited from interfering with or impeding a whistleblower’s communications to the SEC about a possible violation of the securities laws, including through enforcement or threatened enforcement of a confidentiality agreement that may be read to prevent whistleblower communications with the SEC.8

The SEC is taking violations of Rule 21F-17 seriously and has increased enforcement activity in this area over the last two years. The Commission brought a number of actions, with significant civil penalties, focused on corporate agreements containing confidentiality language that, according to the SEC, does not provide an express exception for whistleblower communications. The enforcement actions extend to different types of companies, including publicly traded companies, privately held companies, broker-dealers and investment advisers, and to a variety of forms of agreements with employees and customers alike.9

For example, a gaming company paid US$35 million to settle claims that it had violated the whistleblower protection rule by requiring former employees to execute separation agreements that obligated them to notify the company of any request for information received from the Commission, in addition to compliance failures regarding workplace complaints.10 In January 2024, the SEC settled the largest ever standalone Rule 21F-17 case, imposing US$18 million in civil penalties against a dually registered investment adviser and broker dealer for allegedly requiring clients to sign a confidential release agreement—without expressly allowing for direct communications to regulators regarding potential securities law violations—in order to receive certain credit or settlement payments.11 In another case involving US$10 million in civil penalties, the Commission charged a registered investment adviser with a standalone violation of Rule 21F-17 based on employment agreements that contained a confidentiality clause prohibiting external disclosure of confidential company information, without a carve-out for voluntary communications with the SEC concerning possible violations of the securities laws.12 As recently stated by the co-chief of the SEC Enforcement Division’s Asset Management Unit, “Investors, whether retail or otherwise, must be free to report complaints to the SEC without any interference. Those drafting or using confidentiality agreements need to ensure that they do not include provisions that impede potential whistleblowers.”13

SDNY WHISTLEBLOWER PILOT PROGRAM

In February 2024, the SDNY launched a whistleblower pilot program. The purpose of the program is to encourage early and voluntary self-disclosure of criminal conduct by individual participants.14 The program is applicable to disclosures of conduct committed by public or private companies, exchanges, financial institutions, investment advisers, or investment funds involving fraud or corporate control failure or affecting market integrity, or criminal conduct involving state or local bribery or fraud relating to federal, state, or local funds.15 In exchange for a qualifying self-disclosure, the Office will enter into a non-prosecution agreement with the whistleblower.16

Given that a non-prosecution agreement is promised, the SDNY has identified factors to determine whether a whistleblower qualifies for a discretionary non prosecution agreement. The most salient include: whether and to what extent the misconduct is unknown to either SDNY or the DOJ; whether the information is disclosed voluntarily to SDNY and not in response to an inquiry or obligation to report misconduct; whether the whistleblower provides substantial assistance in the investigation and prosecution of culpable individuals, and in the investigation and prosecution of the disclosed conduct; whether the whistleblower truthfully and completely discloses all criminal conduct they participated in and are aware of; whether the whistleblower is a chief executive officer or chief financial officer of a public or private company, who is not eligible for the pilot program; and the adequacy of noncriminal sanctions, such as remedies imposed by civil regulators.

Mr. Gitner said the defense bar is coming around to a non-prosecution carrot for individuals involved in wrongdoing within the corporation. Mr. Gitner said that SDNY seeks early discussions, and the pilot program seems to be driving toward that goal.

DOJ PILOT PROGRAM ON VOLUNTARY SELF-DISCLOSURES FOR INDIVIDUALS

In March 2024, the DOJ announced an upcoming program to reward whistleblowers who report corporate crimes. The new program seeks to bolster existing whistleblower programs established by the SEC (discussed above), the Commodities Future Trading Commission (CFTC), the Internal Revenue Service, and the Financial Crimes Enforcement Network.17 Accordingly, the program will offer rewards to whistleblowers who provide information on misconduct that is not under the jurisdiction of those agencies. In particular, the Department is interested in criminal abuses of the US financial system, foreign corruption cases outside of the SEC’s jurisdiction, and domestic corruption cases. In order to qualify, an individual must provide original, nonpublic, and truthful information that assists the Department in uncovering “significant corporate or financial misconduct” and is previously unknown to the agency.18 Like the SEC and CFTC, the Department does not plan to provide awards for information that is submitted under a preexisting duty or in response to an inquiry.19 Access to the program is only available where existing programs or qui tam actions do not exist. Additionally, the whistleblower in this program cannot be involved in the criminal activity itself. After compensation to victims, the whistleblower will receive a portion of the resulting forfeiture as a reward.20

Interestingly, however, it appears the Department may be moving away from offering monetary awards to whistleblowers. In April 2024, the Department introduced a pilot program that tracks with the SDNY and offers mandatory non prosecution agreements to individuals who provide information on corporate misconduct.21 Under the program, an individual must voluntarily self-disclose original information to the Criminal Division about criminal misconduct that is not previously known to the Department. The information must be “truthful and complete,” meaning it must include all known information relating to the misconduct, including the individual’s own culpability. In particular, the Department seeks information on violations by financial institutions; violations related to market integrity committed by financial institutions, investment advisers, investment funds, or public or private companies; foreign corruption and bribery violations by public or private companies; violations relating to health care fraud or illegal health care kickbacks; fraud or deception against the United States in connection with federally funded contracting; and bribery or kickbacks to domestic public officials by public or private companies. The whistleblower also cannot be a chief executive officer, chief financial officer, or those equivalents of a public or private company; or an elected or appointed foreign government or domestic government official; nor can the whistleblower have a previous felony conviction or a conviction of any kind involving fraud or dishonesty. Irrespective of this program, the Department still has the discretion of offering a non-prosecutorial agreement to individuals who may not meet the above criteria in full, subject to Justice Manual and Criminal Division procedures.22

TAKEAWAYS

The takeaways here for corporate in-house legal departments are:

  • Federal agencies are incentivizing whistleblowers with cash and non-prosecution agreements. It is clear that wrongdoers and witnesses now more than ever have several whistleblower programs from which to choose. As a result, corporations must become more vigilant at detecting wrongdoing and effectively utilizing internal reporting systems. Careful consideration of an early self-disclosure to the appropriate agency may also be warranted. Internal investigations will take a heightened priority to aid the c-suite and board on disclosure decisions.
  • Not only is protecting whistleblowers a priority but encouraging whistleblowers through heightened compliance programs, updated hotlines or other internal reporting programs should be considered. You may also wish to consider offering financial incentives for timely reporting to the corporation’s internal reporting program. All of which will benefit the company in any government disclosure.
  • The enforcement risk for companies under the SEC’s whistleblower rules is real and potentially significant, including with respect to day-to-day business activities (such as entering into client or employee confidentiality agreements) that may not otherwise be recognized as creating regulatory exposure. Companies may wish to revisit their standard contracts and compliance materials to ensure that any confidentiality provisions align with Rule 21F-17.

We acknowledge the contributions to this publication from our summer associate Minu Nagashunmugam.

1 https://www.sec.gov/newsroom/enforcement-results-fy23.

2 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 2.

3 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 2.

4 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 3.

5https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 5.

6 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 5.

7 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 5.

8 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 28.

9 The SEC’s Office of the Whistleblower has stated that violations of Rule 21F-17 may be triggered by “internal policies, procedures, and guidance, such as codes of conduct, compliance manuals, training materials, and other such documents.” SEC, Whistleblower Protections (last updated July 1, 2024) https://www.sec.gov/enforcement-litigation/whistleblower-program/whistleblower-protections#anti-retaliation.

10 https://news.bloomberglaw.com/securities-law/sec-biggest-whistleblower-penalty-signals-broad-protection-focus?context=search&index=11

11 In re JP Morgan Sec. LLC, File No. 3-21829 (Jan. 16, 2024), https://www.sec.gov/files/litigation/admin/2024/34-99344.pdf.

12 In re D.E. Shaw & Co., L.P., File No. 3-21775 (Sept. 29, 2023), https://www.sec.gov/files/litigation/admin/2013/34-70396.pdf.

13 SEC Press Release (Jan. 16, 2024), https://www.sec.gov/newsroom/press-releases/2024-7.

14 https://www.justice.gov/d9/2024-05/sdny_wb_policy_effective_2-13-24.pdf

15 https://www.justice.gov/d9/2024-05/sdny_wb_policy_effective_2-13-24.pdf

16 https://www.justice.gov/d9/2024-05/sdny_wb_policy_effective_2-13-24.pdf

17 https://www.justice.gov/opa/speech/acting-assistant-attorney-general-nicole-m-argentieri-delivers-keynote-speech-american

18 https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-keynote-remarks-american-bar-associations

19 https://www.justice.gov/criminal/media/1347991/dl?inline

20https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-keynote-remarks-american-bar-associations

21https://www.justice.gov/criminal/media/1347991/dl?inline

22 https://www.justice.gov/criminal/media/1347991/dl?inline

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Copyright 2024 K & L Gates
For more on Whistleblowers, visit the NLR Criminal Law Business Crimes section

EB-5 Filing Strategies: Continued Immigrant Visa Availability Under the RIA’s Set-Aside Categories

The passage of the EB-5 Reform and Integrity Act (RIA) in 2022 resulted in the most significant changes to the EB-5 investor immigrant visa program since its establishment in 1990. Among the most notable changes implemented through the RIA was the creation of new “set aside” visa categories for EB-5 investors. These set-aside categories allocate a certain amount of the 10,000 EB-5 immigrant visas available each year to investments in certain areas or projects, which include:

  • 20% reserved for qualified immigrants who invest in a rural area;
  • 10% reserved for qualified immigrants who invest in a ‘targeted employment area’ (TEA), which meets the requirements that apply to areas of high unemployment (unemployment rate of at least 150% of the U.S. national average); and
  • 2% reserved for qualified immigrants who invest in infrastructure projects.[1]

Additionally, the RIA allows for the concurrent filing of the investor immigrant visa petition on Form I-526E and adjustment of status (AOS) filing on Form I-485 for those present in the U.S.[2] While certain types of EB-5 investments filed prior to the passage of the RIA remain subject to visa bulletin backlogs, which particularly impact petitioners and dependent family members born in countries with the highest demand for immigrant visas (e.g., mainland China and India), the Visa Bulletin has not yet announced a visa backlog for any of the set aside categories established by the RIA.

With the establishment of the set-aside categories, the availability of EB-5 immigrant visas is now subject to multiple factors, in addition to country of birth, under the Department of State’s Visa Bulletin, which dictates an applicant’s ability to apply for an immigrant visa or concurrent AOS (if in the U.S.) based on per-country limitations released monthly by the Department of State (DOS).[3] As the visa bulletin is based on visas approved visa petitions and the petitioners’ countries of birth (as opposed to petitions filed with U.S. Citizenship and Immigration Services (USCIS) and currently in process), investors understandably are faced with a level of uncertainty when strategizing the timing of their investments and associated petition filings. This is due to the uncertain nature of the continued availability of immigrant visas, which can retrogress with little notice based on the DOS’ contemporaneous issuance of immigrant visas under the EB-5 program. This post will outline data and strategies available to investors to clarify questions related to potential changes to the visa bulletin that may impact EB-5 immigrant visa availability in the coming months. As the progression of the Visa Bulletin is subject to internal data shared between USCIS and the DOS, as well as the DOS’ internal visa issuance metrics, some level of obscurity and uncertainty should be accounted for when planning for immigrant visa petition filing, but the below is meant to help address and account for these inherent uncertainties.

Background on the Visa Bulletin

In connection with the U.S. government’s policy imperative to encourage a diverse pool of immigrants to the U.S., family- and employment-based immigrant visas are subject to a specific allocation of available visas every federal fiscal year. A total of approximately 140,000 immigrant visas are available every fiscal year for employment-based immigrant visas, including the EB-1, EB-2, EB-3, EB-4, and EB-5 immigrant visa categories. Of the total of 140,000 immigrant visas available annually, approximately 10,000 are allocated to the EB-5 investor visa program, which are also subject to the below per-country visa quotas.

To that end, no one country (based on the applicant’s country of birth) can be allocated more than approximately 7.1% of all available immigrant visas.[4] Importantly, the DOS recently revised its interpretation of the statutory language on the 7.1% per country limit to clarify that it applies in any preference only if a country’s use of visas exceeds 7.1% of all employment-based preferences together.[5] For example, the 7.1% per country limit for Vietnam will only start in the EB-5 category if Vietnam were to reach the 7.1% limit for the overall 140,000 employment-based visas available. In the past, investors born in Vietnam and Taiwan also have been high users of EB-5 visas; however, with this new interpretation by DOS, they will likely never be subject to a per-country limitation for EB-5 again given that these countries generally have never reached 7.1% of the overall 140,000 employment-based immigrant visas.

The above only tells part of the story on immigrant visa allocation. This is because in addition to the total of 140,000 employment-based immigrant visas allocated yearly to all countries, unused visa numbers from prior fiscal years (i.e. immigrant visas that are available to those born in under-subscribed countries, but not utilized) roll over for use by applicants of over-subscribed countries according to priority date and availability within the immigrant visa preference category.[6] Moreover, unused family-based immigrant visas may also be utilized to address excess demand in employment-based categories.[7] While the specific number of unused immigrant visas varies considerably year to year, there tends be some available unused family-based visa numbers from under-subscribed categories each federal fiscal year based on the most recent data made available by USCIS and DOS.[8] Additionally, unused EB-5 numbers from the unreserved ‘general pool’ of EB-5 immigrant visas available yearly (based on worldwide applicant demand), are reallocated to over-subscribed EB-5 categories, including the above-referenced EB-5 set-aside categories created post-RIA implementation.[9]

EB-5 Investor Immigrant Program Data

With the dynamic nature of the immigrant visa allocation process in mind, there is no simple, readily available formula that can help predict the numbers of EB-5 immigrant visas that may be available in a given fiscal year, nor one that can precisely predict how soon retrogression may impact the EB-5 program, particularly in connection with I-526E petitions filed by investors born in traditionally high-demand countries, like China and India. This process is made difficult because USCIS and the Immigrant Investor Program Office (IPO) have not released important statistics to the public that would allow investors to accurately predict how long of a backlog may form in the various set-aside categories. However, we do have some data.

To solve for the lack of government-released data, stakeholders have filed Freedom of Information Act (FOIA) requests that provide more nuanced data on the government’s current processing volumes. Notably, recent data disclosures made available through FOIA requests found a significant increase in demand for the rural set-aside category, but demand remains “below the needed level to absorb the near-term annual visa supply.” The data released also showed that demand for high unemployment TEA set-aside continued to increase through the end of 2023, which may result in a backlog for that specific set-aside category.[10] As expected, demand remains particularly high for immigrant applicants born in mainland China; the below chart published in connection with the data disclosed pursuant to FOIA provides further insight on the processing volumes:

TOTAL NUMBER OF I-526/I-526E FILED FROM APRIL 1, 2022,TO NOVEMBER 2023, BY TEA CATEGORY AND COUNTRY OF CHARGEABILITY (LATEST STATS AS PER AIIA FOIA DATA)[11]

China India Taiwan Rest of World Total Total %
Rural 767 174 18 134 1,093 32%
High unemployment 976 375 209 625 2,185 63%
Infrastructure 0%
Multiple TEA categories 7 3 5 16 0.5%
Not TEA 26 21 6 97 150 4%
Total 1,776 573 233 861 3,444 100%
Total % 52% 17% 7% 25% 100%

While the data above is subject to change and specifically reflects government filings through November 2023, and spanning multiple federal fiscal years (2022-23), it shows that about two times as many high unemployment set-aside I-526E Petitions were filed as compared to rural area set-aside I-526E Petitions. However, in June 2024, USCIS also released their January to March 2024 form data, which revealed that an additional 1,810 I-526E Petitions had been filed with USCIS over that three-month period, leaving 3,672 I-526E Petitions pending as of March 31, 2024.[12]

Importantly, the quarterly USCIS data shows a huge number of new I-526E Petitions were filed during Q2 2024. Half of all I-526E Petitions pending as of the date of this blog were filed just in Q2 of 2024. USCIS has not released any statistics to show the breakdown of I-526E Petitions filed in the high unemployment or rural area set aside categories. Anecdotal evidence from stakeholders and projects seems to show a strong uptick in the demand for rural area projects, and it is possible that many of these new I-526E Petitions were for rural area set-aside visa numbers. More data from USCIS will be required on this point to give investors a more accurate picture on visa wait times in both rural area and high unemployment set-aside projects.

Moreover, the USCIS Q2 2024 data shows that the agency only completed review of 356 I-526E Petitions this fiscal year. The statistics do not break down completions by approvals or denials. Given the small number of case completions during this fiscal year, no visa retrogression has been announced in the Visa Bulletin because an insufficient number of I-526E Petitions have been approved to necessitate announcement of retrogression for any country.

In fact, at a recent conference, the DOS indicated that there is a record amount of EB-5 visas available for this year and predicted again for next year. Specifically, DOS is predicting that there are more than 14,000 unreserved EB-5 visas and more than 8,000 set-aside visas available in FY 2024, and that there will be more than 11,000 unreserved EB-5 visas and more than 6,800 set-aside visas available in FY 2025. Together, that is more than 14,800 set-aside visas over this fiscal year and next, split between rural and high unemployment according to their percentages. This would mean approximately 9,800 rural visas and 4,900 high unemployment EB-5 visas are available over this fiscal year and next, with additional high numbers remaining available in the unreserved EB-5 category. Even assuming that each petitioner also brought two dependent applicants with them to the U.S., the sheer number of EB-5 visas available in these categories over this year and next would provide many immigrant visa numbers for applicants and their dependents in both set-aside categories, and drastic retrogression wait times are not yet predicted.

Additionally, note that the data provided reflects raw numbers of petition filings and does not take into account potential roll overs of additional unused immigrant visas, as noted above. In addition, applicants born in under-subscribed countries, like Vietnam and Taiwan, with robust demand for EB-5 immigrant visas that may qualify for the set-aside category, still have the option to choose to process under the general pool of unreserved EB-5 visa numbers, thereby freeing up additional availability under the reserved high-unemployment and rural TEA set-aside categories for individuals born in mainland China. This selection is typically made at the time that the National Visa Center (NVC) processes the immigrant visa application for applicants based outside of the U.S.

Key Takeaways

  1. There are a record number of EB-5 visas available to applicants in both the high unemployment and rural area set-aside categories in FY 2024 and FY 2025. While stakeholders need more data from USCIS on the breakdowns of pending I-526E Petitions between the high unemployment and rural set-aside categories, there is a record number of visas available and extensive backlogs are not expected to occur like those experienced by pre-RIA I-526 Petitions.
  2. File the I-526E Petition and associated AOS applications concurrently if possible. Although visa numbers remain available in the set-aside categories even for traditionally high-demand countries, the dynamics associated with the DOS Visa bulletin may result in retrogression with little notice. Filing concurrently where eligible can provide multiple benefits in the event of retrogression, including:a. Locking in dependent child’s age under chart A or chart B of the DOS Visa Bulletin, which under the Child Status Protection Act (CSPA) allows for a tolling of age progression while the petition is in process and based on the unavailability of a visa number; and

    b. Obtaining short-term U.S. immigration benefits that allow for work (employment authorization document (EAD)) and travel (advance parole (AP)) while the USICS processes the AOS filing.

  3. Individuals born in under-subscribed countries with qualifying investments in rural or high-unemployment TEAs should consider opting for processing under the general unreserved pool where possible. This would allow for use of additional reserved immigrant visas in the set-aside categories by those born in countries with higher demand for EB-5 immigrant visas, such as China and, potentially, India.
  4. Monitor visa bulletin progression and available government data. It will remain important to continue monitoring Visa Bulletin releases and planning for potential retrogression. As noted above, while the set-aside categories created under the RIA remain broadly available for immigrant visas and concurrent AOS processing, conditions may change with little notice as the government processes its backlog of filed EB-5 petitions or if USCIS speeds up its processing of I-526E Petitions.

[1] INA § 203(b)(5)(B)(i)(I).

[2] See INA § 245(n); 203(b)(5).

[3] See U.S. Dept. of State Visa Bulletin.

[4] See INA § 203(b).

[5] See 88 Fed. Reg. 50, 18252 (March 28, 2023).

[6] See, e.g. “Practice Pointer: Strategic Planning in an Era of EB-5 Visa Waiting Lines,” AILA EB-5 Committee, AILA Doc. No. 18060537, June 5, 2018.

[7] See, e.g., “The CIS Ombudsman’s Webinar Series: USCIS’ Backlog Reduction Efforts,” June 22, 2022 (“DOS currently estimates that approximately 57,000 unused family sponsored visa numbers from FY 2022 have been added to the employment-based limit for FY 2023.”).

[8] See, e.g., “Employment-Based Adjustment of Status FAQs,” USCIS, May 20, 2024 (“DOS determined that the FY 2023 employment-based annual limit was 197,091, due to unused family-based visa numbers from FY 2022 being added to the employment-based limit for FY 2023. In addition, 6,396 EB-5 visas carried over from FY 2022 to FY 2023 in the reserved subcategories.”)

[9] See id.

[10] See “AIIA FOIA Series: Updated I-526E Inventory Statistics for 2023,” American Immigrant Investor Alliance, Feb. 29, 2024.

[11] Id.

[12] See USCIS Quarterly Statistics “All USCIS Application and Petition Form Types (Fiscal Year 2024, Quarter 2).

©2024 Greenberg Traurig, LLP. All rights reserved.

by: Jennifer Hermansky, Jack Jrada of Greenberg Traurig, LLP

For more on EB-5 Filing, visit the NLR Immigration section

Federal Court Enjoins Federal Trade Commission’s Rule Prohibiting Non-Competition Agreements (US)

In January 2023, the U.S. Federal Trade Commission (FTC) proposed a sweeping rule that, with limited exceptions (such as for highly compensated executives or in connection with the sale of a business), would prohibit employers from entering into post-employment non-competition arrangements with workers. (See our post here.) Under the proposed rule, an agreement between an employer and a worker – not just employees, but also independent contractors, interns, and even volunteers – that would prevent the worker from seeking or accepting employment, or from operating a business, after the conclusion of the worker’s working relationship with the employer would be unlawful. As proposed, the rule not only applied prospectively, but invalidated previously entered-into non-competition arrangements. After a notice-and-comment period, the FTC issued the “Final Rule” on April 23, 2024 and it is scheduled to go into effect September 4, 2024.

As expected, the FTC’s Final Rule immediately generated legal challenges. Among the arguments advanced by those opposing the Final Rule were that the FTC lacks legal authority to regulate unfair methods of competition, that the FTC’s actions violated the “major questions doctrine” because the FTC’s actions lacked authorization from Congress, and that the FTC’s actions constituted an unconstitutional delegation of legislative power.

On July 3, Judge Ada Brown of the United States District Court for the Northern District of Texas issued the first ruling in these pending challenges to the Final Rule (Ryan LLC v. Federal Trade Commission). In her 33-page decision, Judge Brown preliminarily enjoined the Final Rule from going into effect on September 4, 2024 but only with respect to the Plaintiffs in the action—consisting of one private business (Ryan, LLC), the U.S. Chamber of Commerce, the Longview, Texas Chamber of Commerce, and two trade organizations (Business Roundtable and the Texas Association of Business)—and signaled that the Final Rule is unlikely to pass final judicial review on the merits for a number of reasons.

First and foremost, Judge Brown found unconvincing the FTC’s explanation that it was authorized to publish the Final Rule under its broad powers to prevent unfair methods of competition. In its briefing, the FTC argued that it is an unfair method of competition for persons to enter or enforce non-compete agreements, and that the powers entrusted to the FTC empower the agency to make substantive rules precluding unfair competition. The court rejected this argument. Although Judge Brown acknowledged that the FTC has the authority to make certain “housekeeping” rules dealing with unfair or deceptive practices, the FTC Act does not “expressly grant the [FTC] authority to promulgate substantive rules regarding unfair methods of competition.” Because agencies only have “the powers that Congress grants through a textual commitment of authority” and Congress has not expressly delegated substantive rulemaking to the FTC to regulate unfair competition, the court found that the FTC exceeded its authority in enacting the Final Rule.

Although the first reason was by itself sufficient to find that the Plaintiffs had established a likelihood of success on the merits, the court also found that the FTC’s rulemaking was arbitrary and capricious: “[The Final Rule] imposes a one-size-fits-all approach with no end date,” and thus lacks a rational connection between the agency’s goal of preventing unfair competition and the “categorical ban” it adopted without “targeting specific, harmful non-competes.” The court specifically noted the FTC’s failure to consider any alternatives to a blanket ban on non-competes, failure to consider the potential “pro-competitive justifications” of such covenants, and failure to differentiate the effect of non-competes among different types and classes of workers.

The court also had little trouble finding that the Final Rule would result in irreparable harm to the Plaintiffs, agreeing that its implementation would “announce open season” for poaching workers and increase the risk that departing workers would take valuable intellectual property and proprietary methods to competitors. The operational cost of complying with a likely invalid rule and the nonrecoverable financial costs associated with complying with the Final Rule before its effective date were sufficient to demonstrate a significant risk of irreparable harm. Thus, finding that the injury to the Plaintiffs and the public interest would be great if the court were not to enjoin the rule, the court granted the Plaintiffs preliminary injunctive relief and stayed the Final Rule’s effective date as to the Plaintiffs. The court would not, however, grant nationwide injunctive relief and limited its preliminary injunction and the stay of the Final Rule’s effective date to the Plaintiffs before the court. However, Judge Brown noted that she “intends to enter a merits disposition on th[e] action on or before August 30, 2024,” a decision likely to convert the preliminary injunction to permanent relief. Between this initial blow to the Final Rule and the pendency of other lawsuits in Texas and Pennsylvania attacking the Final Rule, the chances of the FTC’s non-compete ban going into effect appear to be in serious jeopardy. We’ll continue to monitor and update with further developments.

© Copyright 2024 Squire Patton Boggs (US) LLP
For more news on Legal Challenges to FTC Noncompete Rule, visit the NLR Antitrust Trade Regulation section.

New DOL Salary Threshold for Most White-Collar Exemptions Is Now in Effect

Update July 1, 2024: The U.S. Department of Labor’s new rule on the required salary threshold for employees to qualify as exempt from overtime is now in effect as of July 1, 2024. Although the federal district court for the Eastern District of Texas issued an injunction blocking enforcement of the new rule against the State of Texas as an employer on Friday, June 28, 2024, that injunction does not apply to other employers, including private businesses. Thus, the new salary thresholds for exempt status, as detailed below, are in effect nationwide. Other lawsuits challenging the regulation remain ongoing, and should continue to be monitored for any further developments.

The U.S. Department of Labor (DOL) has issued a final rule that significantly raises the required salary threshold for many salaried exempt employees starting July 1, 2024. Under this final rule, issued on April 23, 2024, the guaranteed salary that most employees must receive to qualify as exempt from the overtime rules will increase dramatically over the next nine months. Effective July 1, it will jump from $35,568 per year to $43,888 per year; and then just six short months later, on January 1, 2025, it will jump to $58,656 per year.

Under the Fair Labor Standards Act, employees who work in executive, administrative, professional, and certain computer positions must generally meet both the salary basis test and the job duty requirements to be classified as exempt from the overtime rules. In addition to being paid on a salary basis (which means there can be no deductions from salary, subject to certain limited exceptions), the threshold salary is currently $684 a week, amounting to $35,568 annually. The final rule raises the threshold for salaried employees significantly, according to the following schedule:

  • Effective July 1, 2024: $844 per week (equivalent to $43,888 per year)
  • Effective January 1, 2025: $1,128 per week (equivalent to $58,656 per year)
  • Effective July 1, 2027, and every three years thereafter: To be determined based on available earnings data

In addition, the new rule increases the total annual compensation threshold for highly compensated employees from $107,432 per year to $132,964 per year effective July 1, followed by yet another increase to $151,164 per year effective January 1, 2025. This will result in an increase of nearly $44,000 per year to the salary threshold necessary to qualify for the highly compensated employee exemption.

It is widely expected that various business and industry groups may file suit to attempt to block these changes from taking effect. Many employers may remember that a similar scenario occurred in 2016, when the DOL under the Obama Administration proposed a large increase in the salary threshold for these white collar exemptions, before that increase was blocked by court action. If the final rule issued by the DOL is not blocked through court action, it will mean significant changes for employers in compensation structure, as more employees nationwide will qualify for overtime pay unless their salaries are increased over the new threshold.

Employers should immediately review their workforces to determine what changes, if any, may be necessary if the final rule takes effect. Possible considerations include:

  • Raising the annual salary of employees who meet the duties test to at least $43,888 as of July 1, and $58,656 as of January 1, 2025, to retain their exempt status;
  • Converting employees to non-exempt status and paying the overtime premium of one-and-one half times the employees’ regular rate of pay for all overtime hours worked; or
  • Converting employees to non-exempt status and eliminating or reducing the amount of overtime hours worked by such employees.

Similar considerations should be undertaken with highly compensated employees. While it is wise to review pay practices proactively and identify potential changes that may become necessary, employers may wish to continue to monitor legal developments prior to actually implementing such changes. As employers will recall from 2016, significant changes can occur between the announcement of a final rule and the date on which it is scheduled to become effective.

Employers are encouraged to consult with legal counsel to discuss their options and strategies for implementing these changes, if necessary.

© 2024 Varnum LLP

Two Blockbuster U.S. Supreme Court Decisions May Spell End of NLRB’s Expansion of Reach of NLRA as Well as How Agency Prosecutes Cases

The U.S. Supreme Court issued two blockbuster decisions this week, both of which likely will curtail the ability of federal agencies, including the NLRB, to prosecute cases and expand the law.

In a 6-3 decision announced Thursday in Securities and Exchange Commission v. Jarkesy et al., U.S., No. 22-859 (Jun. 27, 2024), the Supreme Court ruled that when the SEC seeks civil penalties against a defendant, the defendant is entitled to a trial by jury. As reported here, this decision could affect a future ruling in Space Exploration Technologies Corp., v. NLRB, No. 24-40315 (5th Cir. 2024), a case challenging the authority of National Labor Relations Board (“NLRB”) Administrative Law Judges (“ALJs”) on the same grounds.

Perhaps more significant, a 6-2 decision announced Friday in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, et al., No. 22-451 (Jun. 28, 2024), eliminates the deference given to federal agencies to interpret laws by reversing the Chevron decision.

Jarkesy: Viability of Agency Administrative Law Judges Put Into Question

Jarkesy Background
In 2013, the Securities and Exchange Commission (“SEC”) initiated an enforcement action and sought civil penalties for alleged fraud against Defendants. Relying on relatively new authority conferred by the 2010 Dodd-Frank Act, the SEC opted to adjudicate the matter itself before an agency ALJ. In 2014, the SEC ALJ issued a decision levying civil penalties as well as other relief against the Defendants.

Defendants petitioned for judicial review at the Fifth Circuit, which held in 2022 that the agency’s decision to have an ALJ adjudicate the case violated the Defendants’ Seventh Amendment right to a jury trial. The Fifth Circuit also identified two further constitutional problems: (1) Congress violated the nondelegation doctrine by authorizing the SEC to choose whether to litigate this action in court or adjudicate the matter itself; and (2) the insulation of SEC ALJs from executive supervision, with two layers of for-cause removal protections, violated the separation of powers doctrine.

On March 8, 2023, the SEC appealed the Fifth Circuit’s decision to the Supreme Court. Oral argument was heard on November 29, 2023.

Jarkesy Supreme Court Decision
The Supreme Court held that the Seventh Amendment of the United States Constitution entitled Defendants to a jury trial where the SEC sought civil penalties for securities fraud. Writing for the majority, Chief Justice John Roberts reasoned that the SEC’s antifraud provisions “replicate common law fraud” claims, which must be heard by a jury. As a result, where a claim brought by an agency (1) resembles common law causes of action; and (2) seeks a remedy traditionally obtained in a court of law, a Seventh Amendment jury right attaches to the claim.

The Court recognized an exception to this general rule under a “public rights” doctrine, which permits non-Article III courts to adjudicate matters that “historically could have been determined exclusively by [the executive and legislative] branches.” However, causes of action that are “quintessentially suits at common law” and not “closely intertwined” with a public right—like the anti-fraud provisions at issue here—are unable to utilize this exception and must be heard in Article III courts.

Because the jury trial issue resolved the case, the Court declined to reach the nondelegation or removal issues. As a result, the Fifth Circuit’s decision in Jarkesy on these issues remains good law.

Sotomayor Dissent in Jarkesy
In dissent, Justice Sonia Sotomayor argued that Congress has latitude—via the Constitution as well as prior Supreme Court decisions—to assign the enforcement of civil penalties “outside the regular courts of law.” This would be the case “even if the Seventh Amendment would have required a jury where the adjudication of those rights is assigned to a federal court of law instead of an administrative agency.”

Justice Sotomayor also raised issue with the majority’s interpretation of a public rights doctrine. Notably, the dissent challenges the majority’s claim that most causes of actions that should be protected under the doctrine involve areas of the law where political branches “traditionally held exclusive power…and had exercised it.” To this end, Justice Sotomayor argues that the majority cannot distinguish between Congress’ enacting of statutes such as the National Labor Relations Act (“NLRA”) and its enacting of the Dodd-Frank Act. The dissent implies that neither labor relations nor securities were traditionally governed by political branches, thus (purportedly) refuting the majority’s reliance upon this principle.

NLRB Implications
Similar to the SEC, the NLRB utilizes ALJs to adjudicate violations of the NLRA. Contrary to the SEC, however, the NLRB ALJ scheme has been in place for decades. These judges hear and decide unfair labor practice cases in quasi-judicial hearings that affect the rights of parties to the cases. Moreover, unlike potential violations of the NLRA, the SEC is not always the exclusive forum for vindication of securities issues. The Department of Justice often prosecutes securities laws issues and private plaintiffs can bring lawsuits to vindicate civil claims. Contrast this with the NLRB, which is the exclusive forum for the vast majority of issues arising under the NLRA.

In the wake of the Fifth Circuit’s 2022 decision in Jarkesy, on January 4, 2024, Space Exploration Technologies Corp. (“SpaceX”) filed a complaint in the Southern District of Texas challenging the constitutionality of NLRB ALJs. SpaceX specifically argued that: (1) the NLRB’s structure is unconstitutional in that it limits the removal of NLRB ALJs and Board Members and permits Board Members to exercise executive, legislative, and judicial power in the same administrative proceeding; and (2) the Board’s expanded remedies constitute consequential damages, and therefore violate employers’ Seventh Amendment right to a trial-by-jury.

Because the Supreme Court in Jarkesy declined to reach the nondelegation or removal issues, the Fifth Circuit’s decision on these issues remains good law. This makes the current forum battle even more significant, as the Jarkesy Fifth Circuit opinion could provide dispositive precedent for SpaceX’s removal and nondelegation arguments. In addition, the Supreme Court’s ruling on the Seventh Amendment issue might support SpaceX’s argument that the Board’s expanded consequential damages remedies should be adjudicated in a trial by jury, depending on how the court interprets the current state of NLRB remedies.

As reported here, in Thryv, Inc., 372 NLRB No. 22 (2022), the NLRB expanded remedies under the NLRA to include “all direct or foreseeable pecuniary harms suffered as a result of the respondent’s unfair labor practice.” The Board has been committed to expanding remedies since 2021, when General Counsel Jennifer Abruzzo issued a memorandum on this subject. NLRB Regional Offices have also been aggressive in seeking these expanded remedies, which arguably are punitive rather than remedial in nature. In its Complaint, SpaceX used the Board’s position on remedies, coupled with the Jarkesy Fifth Circuit ruling, to argue that the Board has sanctioned compensatory relief that can only be issued through a trial by jury.

However, this position could be impacted by the Fifth Circuit’s ruling in Thryv, Inc. v. NLRB, No. 23-60132 (5th Cir. May 24, 2024). In this decision, the Court vacated the Board’s ruling in Thryv, Inc., 372 NLRB No. 22 (2022) on the merits, and thus did not reach the consequential damages issue. The Court did however label this remedy as “draconian” and “a novel, consequential-damages-like labor law remedy.” The Board therefore will require a new case to codify the issuing of consequential damages. It remains to be seen how this ruling would impact SpaceX’s Seventh Amendment argument concerning consequential damages, which could be a key element of its potential reliance on the Supreme Court’s ruling in Jarkesy.

Court Deference to Agency Positions Dead: Chevron Reversal
In a massive blow to agency power, the U.S. Supreme Court on Friday reversed Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), in a case involving a fishing industry rule. Under Chevron, on review of agency action, where the relevant statute was silent or ambiguous regarding a specific issue, courts were directed to defer to agencies and were not to “impose [their] own construction on the statute.” Thus, where an agency offered “a permissible construction of the statute,” courts were to defer to the agency even if the court would have reached a different conclusion. In the years since Chevron was issued, reviewing courts often remarked that they were bound to uphold an agency determination even if they disagreed with the interpretation. Justice Roberts, writing for the majority, held that Chevron could not be reconciled with the Administrative Procedures Act (“APA”), which commands “the reviewing court” to decide “all relevant questions of law” arising on review of agency action, which of course includes interpretation of the federal statute at issue. As a result, the majority determined that there should be no deference to agencies in answering legal questions, although deference is mandated for judicial review of agency policy-making and fact-finding. The majority concluded that, in deciding Chevron, the Supreme Court had required judges to “disregard their statutory duties,” which required this Court to “leave Chevron behind.”

Takeaways
These two Supreme Court decisions could substantially curtail the NLRB’s ability to bring and prosecute actions against parties (not just employers, but unions as well). While the Jarkesy Supreme Court decision is narrow, it could end the ability of the NLRB to bring certain claims in front of agency ALJs (all of whom are employed directly at the Board and who are not subject to removal). The pending SpaceX decision likely will further the development of the law, as it is a direct challenge to the NLRB adjudicatory scheme, and will also give a Circuit Court—and eventually maybe the Supreme Court—a chance to rule on additional constitutional challenges to federal agencies.

In addition, the reversal of Chevron likely will have a substantial effect on the review of NLRB cases. At time of unprecedented expansion of the reach of the NLRA—including finding non-compete agreements and confidentiality clauses unlawful—the end of Chevron deference allows a reviewing court the ability to disregard NLRB actions as not rooted in the NLRA or beyond the scope of the agency’s mandate. There is no doubt many challenges of NLRB actions will be brought as the probability of prevailing in a reviewing court has increased substantially with the end of deference.

As always, we will monitor decisions and agency actions to see how these important developments play out.

© 2024 Proskauer Rose LLP.