Steven Meier, chair of Seyfarth’s Corporate department and co-chair of the firm’s Tax practice, will serve as a speaker for the fourth installment of EisnerAmper’s Navigating Tax Opportunities in 1031 Exchanges Webinar Series, “A Panel Discussion with Delaware Statutory Trust Operators & Advisors,” on March 13.

The webinar will provide practical tips on DSTs from operators, brokers, attorneys, and tax advisors. Attendees will learn the typical structure and economics of DSTs, pitfalls to avoid while operating a DST, and considerations for Private Placement Memorandum (PPM) and Trust Agreement drafting.

By Alex Meier

Seyfarth Synopsis: The National Labor Relations Board (“NLRB”) sent shockwaves through the employment landscape when General Counsel Jennifer Abruzzo took the position that the “proffer, maintenance, and enforcement” of restrictive covenants could violate Section 7 and Section 8(a)(1) of the National Labor Relations Act (“NLRA”).

As we previously blogged, the NLRB seemingly took the position that non-competes typically violate Section 8(a)(1) of the Act, which makes it an unfair labor practice for an employer to interfere with an employee’s Section 7 rights. We also noted that this theory could wreak havoc on routine employee departure litigation by creating a turf war between the court system and the NLRB.

But a recent memorandum provided by the Division of Advice to a regional office suggests that the NLRB’s antagonism towards non-competes may be more limited in practice. The memorandum addressed a fact pattern common to readers. An employee had an agreement with a company that placed restrictions on the employee’s ability to solicit or accept business from the company’s customers, to disclose confidential information, and to have competitive employment during the term of employment.

The employee then left the company, joined a direct competitor of the company, and began soliciting their former customers. In response, the company filed a lawsuit against the now-former employee, alleging breach of contract, breach of fiduciary duty, and misappropriation of trade secrets. The employee countered by filing a charge with the NLRB attacking the validity of the covenants.

The Region then sought guidance from the Division of Advice on how to handle this challenge. The resulting memorandum is extremely helpful in defining the amorphous policy initial announced by General Counsel Abruzzo. Let’s go through the analysis for each provision.

Non-Compete/Non-Solicit Restriction

The employee’s agreement included a combination non-solicit/non-acceptance of business covenant. The covenant read as follows:

Employee agrees not to directly or indirectly compete with the Company during the period of employment and for a period of one year thereafter and notwithstanding the cause or reason for termination. The term “not compete” shall mean that the Employee shall not, on Employee’s behalf or on behalf of any other party, solicit or seek the business of any customer, client or account of the Company existing during the term of employment and wherein said solicitation involves a product and/or service substantially similar to or competitive with any present or future product and/or service of the Company.

The Division determined that this covenant did not violate the NLRA, because the covenant “does not prevent an employee from accessing other employment opportunities. An employee is free to take a job with a competitor of the Employer’s; the employee is only restricted from soliciting the Employer’s existing customers in order to provide similar services for a period of one year.” The Division reasoned that the employee had not presented evidence that this industry involved a limited pool of customers such that this provision “effectively forecloses other employment opportunities,” so the Division concluded this provision did not violate the NLRA.

Here, the Division found this provision did not “prevent an employee from accessing other employment opportunities” because it was limited to a subset of customers. That, in the Division’s eyes, meant that the provision could not “reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities” fitting their skillset and experience—language that matches GC Memo 23-08. But in GC Memo 23-08, the General Counsel framed the test as presumptively invalid unless the provision is “narrowly tailored to special circumstances justifying the infringement on employee rights.” Even then, the General Counsel opined that it would be “unlikely” that the employer could provide a sufficient justification for low-wage and middle-wage workers.

By contrast, here, the Division seems to focus on whether the restriction prevents access to other suitable employment opportunities. This appears to be a more permissive formulation that would allow for a restrictive covenant that still enabled “access” to suitable job opportunities.

Takeaway: Employers should formulate restrictive covenants in a manner that does not wholly prevent access to employment opportunities for employees arguably covered by the NLRA. Employers should be particularly wary about “any capacity” agreements, which may be more difficult to justify to both the NLRB and to state courts.

Confidentiality Restriction

The Division next turned to the confidentiality restriction in the agreement, which read as follows:

Employee agrees that during the term of his employment with Employer and thereafter she will not disclose or use any information related to the Employer’s business and the business of the Employer’s present or prospective customers, including, but not limited to, any promotional concepts, marketing plans, strategies, drawings, customer lists or other information not otherwise made available to the general public. Employee acknowledges that the list of the Employer’s present and prospective customers as it may exist from time to time, along with the Employer’s promotional concepts, marketing plans, strategies and drawings and are valuable, special and unique proprietary properties of the Employer and constitute a trade secret.

The Division also found that this provision did not violate the NLRA. The Division determined that the provision covered only information that was “clearly proprietary and trade secrets.” Unlike other provisions or rules that the NLRB had invalidated, this provision did not reference employee information or information regarding the terms and conditions of employment.

Takeaway: Companies often include a long list of information that qualifies as proprietary or confidential. Companies should review their agreements to assess whether “confidential information” is defined in a manner that could encompass salary information or the employee’s working conditions.

Return of Property Restriction

The agreement also included a fairly standard return-of-property provision. The provision required:

Upon termination of employment, Employee agrees to surrender and return to Employer all company property, including but not limited to, drawings, marketing plans, customer lists, company manuals, data, correspondence, keys, files and records. Employee agrees that she will not duplicate or otherwise copy any such property. Thereafter, any mail received by Employee relating to the Employer’s business will be immediately forwarded to the Employer.

The Division concluded this provision did not violate the NLRA without much analysis, reasoning only that requiring the return of company property did not implicate information known to employees that may be used in Section 7 activity.

Takeaway: Return of property provisions apparently present little risk to companies.

Best Interests Restriction

The agreement also included a provision preventing the employee from engaging in competitive activity or activity “adverse” to the employer during employment. The provision’s exact language was as follows:

Except as hereinafter provided, the Employee shall at all times during the continuance of this AGREEMENT devote her full time to the conduct of the business of the Employer and shall not directly or indirectly, during the term of this AGREEMENT engage in any activity competitive with or adverse to the Corporation’s business or welfare whether alone, or as a partner, officer, director, Employee, advisor, agent or investor of any other individual corporation, partnership, joint venture, association, entity or person.

The Division found this provision violated the NLRA in two separate respects. First, by preventing the employee from engaging in activity that was “adverse” to the company, the Division believed that the employee could believe they were restricted from engaging in union organizing or other protected activities. Second, by preventing outside employment, the provision could be read to prohibit employment as a “union salt”—meaning a paid union organizer who accepts employment with a company for the purpose of organizing the workplace.

Takeaway: Companies could still maintain a viable “best interests” provision by having tighter language in the restriction that focuses on employment with companies that sell competing products or services. And, perhaps most notably, the Division implicitly found that one invalid provision in a contract does not invalidate the entire contract. That suggests a contract with a provision that allegedly violates the NLRA is not void but, instead, the unenforceable provision is severed from the rest of the agreement. 

The Lawsuit as Potential Retaliation

Finally, the Division determined that the lawsuit filed by the former employer was not preempted because neither of the contractual provisions in the lawsuit ran afoul of the NLRA.

Takeaway: This, in my view, remains one of the greatest areas of uncertainty. Say that the Division found one of the contractual provisions asserted by the employer to be potentially invalid under the NLRA. What then? Would the Board seek an injunction to enjoin the state law proceeding, and would that injunction cover the entire suit or only the claims that were arguably preempted?

Another Settlement Shows the Board Will Take a Harder Line in Settlements

In another blog post, we highlighted what we believed to be one of the first Region complaints challenging a restrictive covenant agreement. On January 29, 2024, the Region reached a settlement with the respondent company. Notably, as part of the settlement agreement, the company agreed to post the following:

The complaint included allegations that, if true, constituted clear violations of the NLRA as interpreted by this Board. Perhaps for that reason, the employer agreed to not prohibit employees from soliciting clients even though a similar—if not more onerous restriction by prohibiting the acceptance of business—was found to not violate the NLRA by the Division in the advice memorandum discussed above.

In sum, the Board still appears to be figuring out the contours of its position on restrictive covenants, but its earliest efforts seem to be focused on provisions where it can draw a direct parallel between already prohibited conduct and the restriction, as well as cases with more clear-cut alleged violations to bolster its efforts to elbow its way into restrictive covenants.

By Kristina Launey and Ashley Jenkins

Seyfarth Synopsis: Ninth Circuit paves the way for nationwide class action concerning the accessibility of healthcare check-in kiosks for individuals who are blind.

On February 8, 2024, the U.S. Court of Appeals for the Ninth Circuit approved a federal trial court’s certification of two classes of plaintiffs to proceed against LabCorp regarding the alleged inaccessibility of self-service check-in kiosks at LabCorp’s facilities. In the lawsuit, filed in the Central District of California in January of 2020, the named plaintiff who is blind claimed that he was denied effective communication and equal access to LabCorp’s services because the kiosks cannot be used without sight. The plaintiff claimed that unlike sighted customers, he had to wait for a staff member to notice him and assist him with check-in, forcing him to wait longer to get into the patient queue, and was not able to access other kiosk features like the ability to privately alter account information.

On the appeal of the class certification grant, LabCorp argued that the named plaintiff and other class members did not have standing to pursue their claims because they were not injured by the kiosks’ inaccessibility.  The Court disagreed, holding that the named plaintiff could not use the inaccessible kiosk and had to wait for an employee to notice him and check him in.  Based on these facts, the Court concluded that the named plaintiff “was denied effective communication and, by extension, the full and equal enjoyment of LabCorp’s services.” 

The Court also rejected LabCorp’s argument that the commonality requirement for class certification was not met because the standing of each class member to pursue the Unruh Act damages claim requires an “individualized inquiry” into whether each class member has demonstrated “difficulty, discomfort, or embarrassment.”  The Court disagreed with this argument, finding that this standard only applies to the standing inquiry for construction-related Unruh Act claims, not for effective communication claims.  The Court accordingly found the class commonality requirement satisfied because “all class members maintain that their injury resulted from the inaccessibility of a LabCorp kiosk.”  The Court found the other Unruh Act damages class requirements of predominance, typicality, manageability, and superiority also satisfied.

As for the ADA injunctive relief class, the Court rejected LabCorp’s argument that no single injunction could provide relief to all class members because not all blind people prefer the same accommodations.  The Court found that the class members were injured by the “complete inaccessibility of LabCorp kiosks for blind individuals”, not by LabCorp’s failure to meet their preferences.  The Court adopted the district court’s reasoning that the entire class’s injuries could be addressed by making the kiosks accessible, even if some class members may prefer not to use the kiosks.

The two classes certified are: (1) a California class seeking damages under California’s Unruh Civil Rights Act, and (2) a nationwide class seeking injunctive relief under the Americans with Disabilities Act (ADA), the Rehabilitation Act, and Affordable Care Act. The case will now proceed back in the district court on the merits of the claims.

Given the recent proliferation of self-service equipment in public accommodations, this case serves as an important reminder that before entering into contracts for such equipment, businesses must consider whether the equipment is accessible to users with disabilities and, if not, whether there will be employees in the area to provide prompt assistance.  And while some courts have held that prompt employee assistance can be provided at inaccessible self-service equipment to comply with the ADA, providing accessible self-service equipment mitigates risk of litigation.

Edited by Minh Vu

Seyfarth Synopsis: About the Program – Much has happened in the 10 years since our national Wage and Hour Litigation Practice Group wrote ALM’s authoritative Wage & Hour Collective and Class Litigation treatise. We are excited to continue our informative webinar series to discuss—in bite-sized increments—the past decade’s most important changes to the federal and state employee pay litigation landscape.

The standards for determining independent contractor classification and joint employer status are in a constant state of flux, both at the federal and state levels. With the proliferation of “gig” work and staffing arrangements, businesses are faced with heightened uncertainty as to what, if any, actions they can take without creating liability under federal and state wage laws. And the Department of Labor’s inconsistent efforts at rulemaking on these topics have only further increased that uncertainty. 

Join our panel as they explore the rules governing worker classifications under the FLSA and state laws, and also highlight the related question of a business’s potential liability for wage-hour law violations as a joint employer.

* * * *

Our Wage & Hour Collective and Class Litigation treatise, published by ALM Law Journal Press, is widely recognized as an authoritative resource on the subject and is commonly used by lawyers, judges, and academicians in researching the many complex and evolving procedural and substantive defense issues that may ultimately determine case outcomes. 

Get your copy here.

Speakers

Andrew M. McKinley, Partner, Seyfarth Shaw LLP
Pamela L. Vartabedian, Partner, Seyfarth Shaw LLP
Eric M. Lloyd, Partner, Seyfarth Shaw LLP
Kelly J. Koelker, Senior Counsel, Seyfarth Shaw LLP

There is no cost to attend, however registration is required.

REGISTER HERE

Wednesday, March 6, 2024
3:00 p.m. to 3:45 p.m. Eastern
2:00 p.m. to 2:45 p.m. Central
1:00 p.m. to 1:45 p.m. Mountain
12:00 .m. to 12:45 p.m. Pacific


Learn more about our Wage Hour Class & Collective Actions practice.


If you have any questions, please contact Donna Miskiewicz at dmiskiewicz@seyfarth.com and reference this event.This program is accredited for CLE in CA, IL, and NY. Credit will be applied as requested but cannot be guaranteed for TX, NJ, GA, NC and WA. The following jurisdictions may accept reciprocal credit with our accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, AR, CT, HI and ME. The following jurisdictions do not require CLE, but attendees will receive general certificates of attendance: DC, MA, MD, MI, SD. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used for self-application. Please note that attendance must be submitted within 10 business days of the program taking place. CLE decisions are made by each local board and can take up to 12 weeks to process. If you have questions about jurisdictions, please email CLE@seyfarth.com.

Please note that programming under 50 minutes of CLE content is not eligible for credit in NJ, and programming under 60 minutes of CLE content is not eligible for credit in GA. Programs that are not open to the public are not eligible for credit in NC

By Benjamin J. Conley and Sam M. Schwartz-Fenwick

Seyfarth Synopsis: As foreshadowed in our earlier post, the first complaint was filed in what is expected to be a wave of litigation alleging breach of fiduciary duty in selecting and monitoring welfare plan vendors.  While the facts of this particular case may make it somewhat distinguishable from the circumstances involved in most employer-sponsored plans, it does provide early insight into how future litigation may proceed.  

Background

In early February, pharmaceutical giant Johnson & Johnson (J&J) and its benefit plan committee were sued in a putative class action alleging the company breached its fiduciary duty in its selection of its pharmacy benefit manager (PBM), its reliance on a biased consultant in the selection process, and its failure to negotiate more participant-friendly contract terms in implementing the services.  To understand the basis for the lawsuit, it’s important to first recount the developments of the last few years:

  • Decades of Retirement Plan Litigation. Beginning in 2006, and continuing to present, 401(k) and 403(b) plans have been the subject of putative class action lawsuits alleging excessive fees. These lawsuits focus on fiduciary responsibilities with respect to vendor selection, fees and investment performance (several of these cases have  made it all the way to the US Supreme Court).
  • New Welfare Plan Transparency Law. In late 2020, Congress passed the Consolidated Appropriations Act (CAA), debuting a series of reporting and disclosure measures intended to bring greater transparency to the medical and prescription drug industry.  Specifically, the CAA required health plans to (a) post machine-readable files reporting the rates paid to network and non-network providers for a series of services, (b) create price estimator tools that allow participants to determine in advance how much a supply or service will cost, (c) document the processes used to create limits on access to mental health or substance use disorder services, and (d) solicit fee disclosures from brokers and consultants involved in the plan design upon entering into a contract (or renewing a contract).  The CAA also prohibited health plans from entering into contracts with network administrators that would restrict access to price or quality of care information. 
  • Shifting Focus to Welfare Plan Fee Litigation. Recently, a number of welfare plans brought suit against their third party administrators. These suits alleged that the TPAs refused to provide requested information relating to pricing, inflated costs and held conflicts of interest.  At the same time, Jerry Schlichter (an ERISA plaintiffs’ attorney in numerous 401(k) fee cases) gave several interviews indicating he intended to shift his focus to welfare plan fee litigation (and even went so far as to name upwards of ten companies that were in his sights).  Later in 2023, a number of companies began receiving ERISA document requests seeking six years’ worth of plan documents as well as a link to the plans’ price estimator tool. 
  • Lawsuit Filed Alleging Fiduciary Breach in Rx Fees. As noted above, earlier this month J&J, its fiduciary committee, and individual committee members were sued for purported breach of fiduciary duty with respect to their ERISA-governed prescription drug benefit program.  The lawsuit provides insight into potential theories as to how other plans may be targeted in this new wave of fiduciary litigation. 

What Are the Allegations?

First, it’s important to note that the lawsuit contains a number of unsubstantiated allegations.  The complaint attempts to make a splash by relying on shocking price disparities between the price pharmacies charge to uninsured/cash paying participants for a prescription drug versus what they charge to commercial group plans.  This overlooks the practical reality underlying the US healthcare system, which is that commercial plans are regularly charged a higher rate as a form of price subsidy for the uninsured.  (This was the entire premise of the Affordable Care Act, which attempted to “bend the cost curve” through reducing the rate of under-insured Americans.)

With that caveat noted, the complaint alleged that J&J breached its fiduciary duties through a series of actions resulting in the plan (and its participants) overpaying for prescription drugs.  The alleged breaches included:

  • Failure to Adequately Consider Non-Traditional PBMs. The complaint alleges J&J’s committee failed to conduct periodic requests for proposal (RFPs). Moreover, the complaint alleges that when they did so, they failed to consider so-called “non-traditional” PBMs that were compensated based on pass-through pricing rather than spread pricing and rebates (see below for a more thorough description of PBM pricing models). The complaint names several lesser-known PBMs that it suggests J&J should have considered. The complaint appears to allege that use of any compensation method other than pass-through pricing constitutes a de facto breach of fiduciary duty because it incentivizes the PBM to overcharge and pursue other tactics that are contrary to the interests of the plan and its participants.  Moreover, the complaint alleges the plan committed a breach of fiduciary duty in relying on its benefits broker/consultant in selecting and structuring the PBM agreement because the consultant was paid on commissions.  The complaint alleges that this incentivized the consultant to select a vendor (and pricing model) that maximized plan spend to increase the consultant’s compensation. 
  • Failure to Adequately Negotiate Favorable Contract Pricing Terms. The complaint alleges that J&J completely deferred to its PBM on development of the plan’s formulary (the list of covered versus excluded drugs).  The complaint suggests this allowed the PBM to favor more expensive drugs over generics, which increased the PBM’s compensation at the plan’s expense.  As noted above, the complaint criticized J&J for entering into a contract that compensated the PBM via rebates and spread pricing, which allegedly resulted in the plan paying significantly more for prescription drugs as compared to what the plan could have paid.  To this end, the complaint pointed to the cash/uninsured rate for these drugs and/or the government-developed “NADAC” rates for drugs (a tool reporting average drug procurement cost which many criticize as inadequate because it relies exclusively on self-reporting), which in many instances publicly reported lower drug costs.  
  • Failure to Carve Out Specialty Pharmacy From Contract. Finally, the complaint alleged that J&J relied on the PBM’s specialty pharmacy service rather than carving out specialty pharmacy to a separate third-party vendor.  According to the complaint, this resulted in the PBM designing the plan’s incentives to steer participants toward the PBM-owned specialty pharmacy rather than toward a lower-cost option. 

The complaint then attempts to establish that any fiduciary would be well aware that the only prudent option was pass-through pricing and an employer-designed formulary.  For support, plaintiffs cite various articles and employer statements over the last decade.


Explaining PBM Pricing Models

PBMs are traditionally compensated through one or several of the following methods:

  • Spread Pricing. Under a spread pricing model, the PBM is compensated based on the “spread” between what the PBM paid to acquire the drug, and what the PBM charges the employer health plan for the drug.  For example, if the PBM obtains a drug from the drug manufacturer for $10, and the PBM charges the plan $15 for the drug, the PBM would retain the difference ($5) as compensation.
  • Rebates.  PBMs often negotiate rebates from drug manufacturers based on their bulk purchasing power (i.e., the volume of drugs the PBM purchases for its entire customer base).  PBMs may then retain some or all of this rebate as compensation rather than refunding the rebate to its customer plans on a pro rata basis. 
  • Pass-Through Pricing.  PBMs that offer pass-through pricing charge their customer plans the drug’s acquisition cost.  Because the PBM does not receive compensation through spread pricing or rebates, the PBM in this context is often compensated in a different manner (e.g., through a per-employee, per-month rate.)

How Were the Plaintiffs Harmed?

ERISA generally allows for equitable relief where a plaintiff can establish a breach of fiduciary duty that harmed participants. A fiduciary is evaluated based on whether its process and decision were reasonable (fiduciaries are not mandated to follow a set process as many different approaches could be reasonable). Here, the complaint alleges participants were harmed in several ways:

  • Overpayment of Cost-Sharing. Because the J&J plan required participants to satisfy a deductible prior to receiving plan benefits, the complaint asserts that participants overpaid due to the plan’s failure to negotiate lower drug rates. Moreover, even after participants satisfied their deductible, they were required to pay copays or coinsurance for drugs until they satisfied the plan’s out-of-pocket maximum.  While copays are generally fixed amounts that do not fluctuate based on the drug cost, the complaint alleges that certain design features incentivized lower copays when participants used PBM-owned or affiliated pharmacies.  And while using such a pharmacy may have saved the participant money at the point of purchase, the complaint alleges it ultimately cost the plan more because the drug was available at a cheaper rate at an unaffiliated pharmacy.  Finally, where the plan assessed a coinsurance (i.e., where a participant paid a percent of the total cost), a higher drug procurement cost would have resulted in a greater participant out-of-pocket expense. 
  • Inflated Overall Plan Cost. The complaint further alleges that increased spend, even if derived from the employer’s portion of cost-sharing, has a detrimental impact on participants.  Specifically, the complaint alleges that employers continue to pass more and more of the overall health plan spend on to participants. So, the greater the overall plan cost, the greater the participant premium/contribution rate.  To be clear, setting participant premiums is a settlor/design decision, not a fiduciary decision.  As such, it will be challenging to state a viable claim based on this theory. 
  • Depressed Wages. The complaint asserts that when health benefits cost more, employers pay employees less.  In other words, the complaint alleges that the plan fiduciary’s purported failure to rein in prescription drug spending resulted in the company paying its employees less.  While the complaint cites to a study supporting this proposition, we are aware of no precedent supporting this theory of harm. 

Why Might This Case Be Unique?

As noted at the outset, we suspect the decision to file the seminal welfare fee case against J&J was calculated because J&J’s welfare plan is funded by a trust.  Most health plans are not.  This is significant because in order to establish a breach of fiduciary duty, plaintiffs must establish that the plan’s fiduciary exhibited imprudent stewardship of “plan assets”.  Plan assets include participant contributions, but they generally would not include company contributions unless those contributions are held in trust.  (All monies residing in an ERISA trust are considered plan assets.)  So while most companies would be able to effectively parry much of the complaint’s allegations by alleging any overpayment only runs to the detriment of the company, J&J may be required to defend the entirety of the plan’s spend. 

What Should Plan Fiduciaries Do Now?

In the wake of this lawsuit, and given all the indicia that this is simply the first in a coming torrent of similar suits, it merits considering what actions (if any) employer plan fiduciaries should take.  In short, employers should continue to engage in prudent fiduciary decision-making processes in their selection of PBMs and consultants and their contracting with other vendors.  Contrary to the allegations in the complaint, ERISA does not dictate a one-size-fits-all approach.  In our discussions with various industry experts, it has become apparent that designing a plan exactly in accordance with the specifications outlined in the complaint could very reasonably be expected to result in increased plan costs and participant expenses.  So, designing a plan to satisfy all the allegations in the complaint cannot be taken as a road map to insulate from litigation.

Instead, plans should engage in a prudent process for designing their prescription drug and medical benefits.  While plan fiduciaries should consider different vendors and design options, ERISA does not require that plan fiduciaries select the lowest cost vendors.  There are myriad reasons why a plan would reasonably choose not to engage a “non-traditional” PBM, even if that PBM purports to offer lower drug pricing.  For instance, such a decision could lead to sacrificed network access, drug selection, claims processing, or other factors that are at least, if not more, significant to plan participants than finding the lowest cost drug.  We will continue to monitor the J&J case and in the welfare fee litigation landscape more broadly and keep you apprised of developments. 

Kathryn Weaver, Hong Kong Partner in Seyfarth’s International Employment Law team, will lead a panel on “The challenges of getting DEIB policy and practice right, and the cost of getting it wrong.”

The panel will be held at the Legal 500 GC Summit Hong Kong 2024, on 7 March 2024. More details on the event can be found here. Seyfarth is proud to be one of the event sponsors.

By Lauren Gregory Leipold  and Owen Wolfe

Seyfarth Synopsis: You might recall that the judge in  Andersen v. Stability AI —the case in which a group of visual artists sued the makers of several different generative AI platforms for copyright infringement—tossed most of the plaintiffs’ claims last year. However, the court allowed the plaintiffs an opportunity to replead. Specifically, the judge said that for their vicarious copyright infringement claims to remain viable, the plaintiffs would have to at least allege that derivative works created using AI programs that generate images in response to user prompts are “substantially similar” to their original copyright-protected works.

The plaintiffs took the judge’s ruling to heart. They filed an amended complaint, adding new plaintiffs and using statements by the AI companies’ employees on social media to bolster their claims that the AI programs are copying their art. Most interesting to us, however, was the images the plaintiff artists inserted into their amended pleading providing a side-by-side comparison of their original visual works and what they allege is substantially similar AI-generated output. (Plaintiffs in other cases involving written works have been taking notes on the Stability AI decision and similar decisions too, which we’ll be writing about in the coming weeks).

The defendants in the Stability AI case have all moved to dismiss. Stability AI did not raise arguments about substantial similarity, but defendants Runway AI, Midjourney, and DeviantArt all did so. Those defendants highlighted some examples that they argued were not similar. They’ve also argued that recreating stylistic attributes of, or “concepts” and “ideas” similar to those found in, plaintiffs’ works, is not copyright infringement. They’ve also raised other arguments, including that the plaintiff “manipulated” the AI programs to get these results and that at least some of the artists’ images have not been registered for copyright protection. 

While we don’t yet know what the judge thinks about these image comparisons, we found some of them to be pretty striking. We want to know what you think, too.

Will the following comparisons be enough to allege plausible substantial similarity?

Here’s an example the plaintiffs submitted from the Stability AI program:

The AI-generated images certainly contain differences in details. But there are also many similarities. Interestingly, derivative works created by the platform Midjourney do not look as similar to us as the original:

Nor do the examples generated by Runway AI:

What do you think?

Here’s a second example from Stability AI:

Compare images generated by Midjourney:

And images generated by Runway AI:

Somewhat different based on the platform used, wouldn’t you say?

Here’s one last example of Stability AI content cited in the plaintiffs’ amended pleading:

Here are the Midjourney images:

And finally, here are the Runway AI images:

The judge may find that all (or none) of these images may be deemed “substantially similar” enough to survive a motion to dismiss. But it will be interesting to see how the parties argue a line should be drawn, and whether different platforms might be treated differently based on these anecdotal outputs gathered by the plaintiffs.

While we await an official ruling, we’d like to know what you think. Can you predict how the judge will rule here?

Please click here to access our poll comparing the above images. We’ll share the results on our blog next week.

By Dawn Lurie

On the morning of February 14, 2024, several clients reached out after encountering issues with the photo matching tool in E-Verify. They reported discrepancies where the photos transmitted by E-Verify did not align with the photos on the employees’ documents. It became increasingly clear that E-Verify was not rendering the correct photos from the government’s databases. Instead, random photos were appearing on the photo-match screen. We quickly investigated, reaching out to several electronic I-9 vendors, and clients, to assess the scope of the issue. After confirming that the issue was widespread, we informed U.S. Citizenship and Immigration Service (USCIS). Fortunately, the agency was able to quickly resolve the problem.

How to Handle Affected Photo Match Cases:

Cases with erroneous photos should be closed, and a new E-Verify submissions should be made to ensure the correct images are displayed in order to complete the photo match process.

Employers utilizing electronic I-9 systems are encouraged to closely collaborate with their vendors to understand the resubmission process and identify any necessary actions on their part. Moreover, employers should verify that cases did not mistakenly receive a Tentative Nonconfirmation (TNC) based on an erroneous photo match

What Is E-Verify?

E-Verify, established under the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (IIRIRA), is an online platform enabling employers to check the work eligibility of their employees electronically. It does not replace the Form I-9.

E-Verify requires employers to input details from an employee’s Form I-9, into the system. This data is then digitally matched against records held by the U.S. Department of Homeland Security (DHS) and the Social Security Administration (SSA), with responses typically provided in seconds to confirm whether the employee is authorized to work or if further steps are necessary to resolve the case.

The program is jointly managed by the SSA and USCIS. USCIS plays a pivotal role in ensuring adherence to U.S. immigration laws by offering support and training for the E-Verify program, assisting users, conducting outreach activities, and pioneering technological advancements for verifying employment eligibility. E-Verify is voluntary unless mandated by the E-Verify Federal Contractor Rule or individual state regulations.[1]

 What is the Photo-Matching Tool?

When using E-Verify, the system will guide users to perform a photo comparison process. This involves checking certain documents provided by the employee against a corresponding photo shown during the E-Verify case creation. This step is crucial for verifying that the document presented by the employee aligns with the data accessible to the DHS.

There are four specific List A documents that activate the photo matching feature: 1. the U.S. passport, 2. the passport card, 3. the Permanent Resident Card (also known as Form I-551), and 4. the Employment Authorization Document (Form I-766). Upon the presentation of any of these documents by an employee, employers are required to make copies of both sides of the document (for a U.S. passport, this means copying the Passport ID page and the Passport Barcode page) and keep these copies with the employee’s Form I-9. If the details on the employee’s Form I-9 match with DHS records, E-Verify will display a photo from the document that was presented.

Employers must compare the photo E-Verify displays against the actual document’s photo or a photocopy of it. Employers should not use the E-Verify photo to compare against the employee themselves. That comparison should have already been conducted during the Form I-9 verification process, before initiating the E-Verify case. The aim is to confirm the photos are “reasonably identical” with allowances for minor differences due to the document’s condition or variations in monitor quality.

It’s important to note that E-Verify photos include a watermark to deter misuse. A genuine document provided by the employee should not have this watermark. However, the absence of a watermark in the employee’s document photo does not discredit its authenticity.

The Seyfarth Immigration Compliance and Enforcement team regularly trains companies in E-Verify protocols, develops policies to ensure E-Verify compliance anti-discriminatory processes, and audits current systems in an effort to minimize liability and recommend improvements. We also focus on the interplay between electronic systems and E-Verify. With increasing information sharing between government agencies, it is more important than ever to ensure that those responsible for managing the E-Verify process understand the timelines involved, the process, and the need to treat all employees fairly. Please contact the author at Dlurie@seyfarth.com for more information.


[1] For more information on state E-Verify regulations, current Seyfarth clients may reach out to Dlurie@seyfarth.com for information related to our 50 State E-Verify Mandate survey.

By Amy Abeloff and Ken Wilton

Seyfarth Synopsis: Collaborations with athletes, actors, and singers have always been a great way for companies to grow their brand recognition and create profitable products. With the Super Bowl (and, of course, its famed commercials) last weekend, we saw new collaborations between celebrities and brands. Similar to celebrity-filled ads, collaborative relationships between influencers and companies on social media continue to be prevalent.  With California’s unique laws on classifying independent contractors, including how “work made for hire” language is interpreted in California, businesses should pay attention to best practices for a successful partnership.

Like Patrick + Brittany and Travis + Taylor: Partnerships Are Key

Nowadays, celebrities and social media influencers are more business savvy. In the past, famous people simply served as the face of a brand or endorsed a product in a short advertisement. However, celebrities and even their family members, as well as budding social media influencers are increasingly involved with brand collaborations. This includes providing input on package or product designs and colorways and overseeing the production process. Whether it is Kansas City Chiefs’ quarterback Patrick Mahomes creating a clothing line with Adidas, or a clothing collection curated by Patrick’s off-the-field partner, Brittany, with Vitality (the commercial even features Patrick and Brittany’s daughter, Sterling Skye, after whom the line was named), the possibilities are endless.  Even the mere appearance of a singer or athlete in commercials for businesses unrelated to sports or music can create brand associations, like Travis Kelce and Pfizer and Taylor Swift and Capital One. But what if the collaboration results in the creation of legally protectable intellectual property rights? Who owns the copyright? The answer to this question often turns on the celebrity’s or influencer’s legal relationship with the business.

Instant Replay—Is the Celebrity an Independent Contractor or Employee under California Law?

The difference between employees and independent contractors is critical in California. If a worker is an employee, the business must report the worker’s earnings to the Employment Development Department (EDD) and must pay employment taxes on those wages. Thus, companies have a clear interest in ensuring that the freelancers they occasionally contract with are deemed independent contractors, not employees.

Companies also benefit under federal copyright law if the Employment Development Department or influencer can be classified as an independent contractor.  The U.S. Copyright Act provides that certain specially ordered or commissioned works can be considered “works made for hire” and, when created by an independent contractor, the commissioning party is considered the author of the work (and thus the holder of the copyright).  As a result, companies often include “work made for hire” clauses in contracts with independent contractors to ensure that the company owns all copyrights in the contractor’s their work. Under U.S. copyright law, however, only certain types of works created by an independent contractor qualify as a work made for hire. You can find a complete list of the types of works that can be considered a work made for hire here. Even if the contracted work qualifies, companies should take a time out to consider California employment law, which complicates the issue.

California’s View Of “Works Made For Hire” Creates An End-Around Misclassification Rule

Normally, the determination of whether an independent contractor should be classified as an employee is governed by  AB 5, which codified the three-party “ABC” test for employment classification, as discussed in detail here.   But different rules apply when an independent contractor agreement includes “work made for hire” language.

According to California Labor Code section 3351.5(c) and California Unemployment Insurance Code section 621(d) and 686, an “employee” includes any person, including independent contractors, who enters into a written agreement to create a specially ordered or commissioned work of authorship stating “the work shall be considered a work made for hire.”

This essentially means that by including a simple “work made for hire” clause in a contract, an otherwise independent contractor is deemed an employee under California law. This apparently dispenses with the ABC classification test codified by AB 5. The independent contractor’s level of involvement in the project does not matter because the inclusion of the work made for hire clause itself determines the employment status.

Avoiding a Flag on the Play: What Companies Can Do To Adjust and Win the Game

The employment status of their celebrity and social media partners may be more starting to California companies than the 49ers’ fumbled punt in this year’s Super Bowl.  To avoid pitfalls, including penalties, companies with such partnerships and “work made for hire” contractual language, must properly classify these workers as employees. 

Alternatively, companies considering partnering with a celebrity or influencer may opt to work with an individual who has created a corporation, LLC, or other business entity (excluding sole proprietorships) and contract with the business entity as opposed to the individual. This is a common approach for celebrities who contract through an entity on a loan-out basis.  Entities are not considered employees in California and this strategy may allow a company to avoid the “work made for hire” employment risk. However, whether a loan-out company will survive an EDD audit is an unanswered question.

Some celebrities and most influencers are unrepresented by a formal legal entity. When facing this kind of situation, companies may opt to omit the “work made for hire” clause and instead acquire the requisite rights through another mechanism, such as an assignment or license. This will allow the company to appropriately utilize the work.

When dealing with an independent contractor in California, it is crucial to devise a game plan and consider the company’s end goal.  Businesses seeking to own intellectual property created by a celebrity or influencer or as a result of such a collaboration should consider an assignment of rights or a license from the content creator to avoid triggering the “work made for hire” clause.  This approach is not without its own risks; grants of rights in copyright can be terminated after a period of time which could result in the rights reverting back to the independent contractor.

Workplace Solutions

If you have questions or would like to strategize regarding compliance with this facet of California law, “works made for hire” generally, or other intellectual property and employment-related pitfalls that arise when working with celebrities, social media influencers, or independent contractors, don’t hesitate to reach out to your Seyfarth lawyer or the authors of this blog. Edited by Coby Turner and Cathy Feldman

Cost

There is no cost to attend, however, registration is required. 

REGISTER HERE

Thursday, February 29, 2024
3:00 p.m. to 4:00 p.m. Eastern
2:00 p.m. to 3:00 p.m. Central
1:00 p.m. to 2:00 p.m. Mountain
12:00 p.m. to 1:00 p.m. Pacific


About the Program

On January 10, 2024, the Department of Labor issued their Final Rule retreating from its prior standard for when workers qualify as independent contractors under the Fair Labor Standards Act (FLSA). This Final Rule introduces a new multi-factor test, while providing limited guidance on how the test should be applied in practice. 

Before the Rule comes into effect on March 11, join our experienced panelists for an in-depth examination of the Rule and its impact, best practices for compliance, and potential legislative changes and legal challenges.

Speakers

Camille Olson, Partner, Seyfarth Shaw LLP
Eric Lloyd, Partner, Seyfarth Shaw LLP
Andrew McKinley, Partner, Seyfarth Shaw LLP
Kyle Winnick, Associate, Seyfarth Shaw LLP


Learn more about our Wage and Hour practice.

This program is accredited for CLE in CA, IL, and NY. Credit will be applied as requested but cannot be guaranteed for TX, NJ, GA, NC and WA. The following jurisdictions may accept reciprocal credit with our accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, AR, CT, HI and ME. The following jurisdictions do not require CLE, but attendees will receive general certificates of attendance: DC, MA, MD, MI, SD. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used for self-application. Please note that attendance must be submitted within 10 business days of the program taking place. CLE decisions are made by each local board and can take up to 12 weeks to process. If you have questions about jurisdictions, please email CLE@seyfarth.com.

Please note that programming under 50 minutes of CLE content is not eligible for credit in NJ, and programming under 60 minutes of CLE content is not eligible for credit in GA. Programs that are not open to the public are not eligible for credit in NC.

If you have any questions, please contact Kate Stacey at kstacey@seyfarth.com and reference this event.