Mary Siceloff, Author at Weintraub Tobin

Business Owners – Planning Can Help Prevent Employer Liability During Civil Unrest

Published: June 4, 2020

by Shauna N. Correia
The Labor & Employment Law Blog

My colleague Brendan Begley blogged last week about the risks employers face due to the threat of COVID-19 in the workplace. As he noted, employees have the right to expect employers to follow city, county, and state orders and take reasonable precautions to minimize the risk to a known “direct threat” to health and safety.

Now, in the wake of the horrific death of George Floyd 10 days ago, the citizens of our nation have risen up to demand racial equality and an end to systemic injustice. Our nation’s pent up frustrations have boiled over, and, unfortunately, some of that frustration is being expressed violently.

In the last few days, I’ve been hearing from business owners who were focused on steps to reopen after COVID-19, but are now worried about preventing potential destruction of property, theft, and violence. While owners work to protect their businesses, they must also not forget to take reasonable steps to protect their employees from harm.

Strategies for Granting Rent Relief in the Age of COVID-19

Published: June 4, 2020

by Mark E. Ellinghouse

Over the past several months, the COVID-19 health crisis has affected everyday life by a magnitude that is hard to fathom. Routine tasks, such as going to the grocery store or walking the dog, suddenly necessitate precautions like face masks, social distancing, and excessive amounts of sanitizer. Unemployment is near record levels, businesses have shuttered, and most of us are confined to our homes to avoid further spreading the COVID-19 disease.

Yet while most of us have adjusted to the “new normal” and cities and counties begin to reopen, it’s hard not to think we’ve hit just the tip of the iceberg in terms of how this crisis will affect our lives for many years to come. Federal, state and local jurisdictions have adopted aggressive measures to mitigate the potentially disastrous effects, including direct stimulus checks and forgivable loan programs, but these programs will expire soon. When these funds are no longer available and the new post-COVID-19 reality sets in, all of us will need to reassess both our personal and professional circumstances.

Landlords and tenants are no exception. While the Paycheck Protection Program and other federal funding options helped many tenants survive the initial few months of the crisis, these tenants will continue to struggle to pay rent long after their funding has been used. Landlords are left in a difficult situation – evict the tenant (assuming no moratoria apply) and spend months searching for a new tenant, or provide relief to the tenant in an effort to maintain occupancy until the economy recovers.

There are many approaches for providing rent relief, each of which has both advantages and disadvantages for landlords seeking to preserve their rental stream and minimize their losses. These options, of course, are subject to any other landlord commitments such as loan covenants, reporting obligations, and other financial requirements. Below are some of these options:

Rent Abatement
For many landlords, abatement of rent for one or more months represents the quickest and most straightforward option to provide relief for a struggling tenant. Doing so offers a tenant the prospect of removing what is often a primary expense and, for tenants that can continue to operate, hopefully building up sufficient revenues to resume paying rent the following months. Moreover, tenants often perceive rent abatements positively, potentially strengthening the landlord-tenant relationship going forward. Landlords must weigh these benefits against waiving rent that is otherwise properly due and payable under the lease without any prospect of repayment.

Rent Deferral
Often the most practical option, deferring rent allows a landlord to offer immediate relief to a tenant without actually sacrificing the payment of rent. Whether with interest or not, deferred rent can be spread over a period of several months or the remainder of the term in regular monthly, quarterly or annual payments. While many enactments permitting repayment preclude late fees or interest, nothing prevents a landlord and tenant from agreeing to include such additional amounts to offset the benefit of deferred rent. Unlike rent abatement, this option ensures payment of all rent, with landlords simply bearing the cost of the time value of money.

Monetary Concessions
In lieu of abating or deferring rent, a landlord can abate or defer other costs for which a tenant is otherwise responsible under the lease, such as operating expenses, insurance, taxes and the like. For landlords with loan obligations or other reporting requirements which mandate certain rent thresholds, offering other monetary concessions provides tenant relief without jeopardizing important landlord commitments. These concessions represent hard costs incurred by a landlord, however, so their forgiveness is not often a much better alternative absent a specific reason for preferring payment of rent.

Blend and Extend
Landlords and tenants wanting to provide rent abatement without sacrificing the total amount due under a lease can instead elect to extend the term of a lease in exchange for a rent credit. This option, often referred to as “blend and extend,” provides a longer rental stream for the landlord in exchange for immediate rent relief for the tenant. For many landlords, the prospect of a longer tenant commitment may afford additional value justifying the credit to the tenant. Landlords must also consider that this option sacrifices potential rent during this extended period from the existing tenant or a third-party tenant.

Additional Security
A common approach to rent relief immediately following the start of the COVID-19 crisis involved application of a tenant’s security deposit to rent immediately due and requiring replenishment at a later date. While this alternative maintained cash flow for a landlord, it often merely delayed a tenant’s eventual difficulty in paying rent. Rather than seek security through a deposit, sophisticated landlords prefer to seek actual collateral, personal guarantees or letters of credit from their tenants in exchange for immediate rent relief. This right strengthens a landlord’s position if the tenant ultimately fails and breaches its lease. Of course, relying on additional security suggests an eventual tenant default and lease enforcement, a prospect landlords generally like to avoid.

Non-monetary Concessions
When financial concessions are impractical, landlords may prefer to seek other benefits with respect to their leases which confer value for the landlord. This may include removal of early termination rights, rights of first refusal, options to extend or other rights originally granted to a tenant to complete a lease transaction. While these rights may not immediately offset the loss of rent, the concessions otherwise received may ultimately offer greater benefit for the landlord.

In evaluating the above strategies, landlords would be wise to require a tenant requesting relief to adequately demonstrate financial hardship. Many opportunistic tenants have seized upon the current situation to seek rent relief despite consistent or improved revenues. A shrewd landlord can often stymie these tactics by demanding the tenant provide ample financial records and information, including prior year financial statements, tax returns, sales reports, and bank statements, showing that the tenant cannot satisfy its leasehold obligations. If a tenant has received financial assistance from a federal loan relief program, the landlord should require those funds be paid toward rent to the extent permissible.

Regardless of which approach(es) a landlord may pursue, landlords must be careful to condition such relief on a tenant’s full performance of all remaining obligations under its lease. A landlord offering relief is not in a better position after doing so if, a few short months later, the tenant defaults, leaving the landlord without a tenant and with less rental income to collect via enforcement. It is critical for landlords to preserve all of their rights and claims under a lease while acting in good faith to assist their tenants during this difficult time.

Like their tenants, landlords must adjust to the new reality presented by the current COVID-19 health crisis. With a practical, reasoned approach, however, landlords can minimize the unwanted effects attendant with a pandemic and assist their tenants survive without unnecessarily forgiving a substantial portion of their rental income. If you would like assistance preparing lease amendments addressing these issues, the attorneys at Weintraub Tobin are here to help.

Southern District of New York Court Orders “All Remote” Bench Trial

Published: June 4, 2020

by Eric Caligiuri
The IP Law Blog

In Ferring Pharmaceuticals Inc. et al v. Serenity Pharmaceuticals, LLC et al, 1-17-cv-09922 (SDNY 2020-05-27, Order), Chief Judge C.J. McMahon of the Southern District of New York ordered an upcoming bench trial set to begin on July 6, 2020 in a patent infringement case to be “all remote,” at least in the sense that at a minimum all the witnesses will testify remotely.

Judge McMahon stated that the decision to go “all remote” was “a no-brainer.” The Judge reasoned that under the protocols the Southern District of New York was adopting, individuals who have traveled abroad in the preceding two weeks would not be permitted to enter the courthouse. And, it was noted that in this case there would be at least five or six witnesses — about half of the fact witnesses, and all but one non-expert — who would be traveling in from Europe. Putting to one side the issue of whether they could get into the United States at all — which just introduces additional uncertainty in a situation where no more is needed — Judge McMahon noted that they would have to arrive in New York by June 22 just so they could quarantine for two weeks before they would be allowed into the courthouse.

Thus, Judge McMahon determined that “given all the constraints, the witnesses should testify from where they reside. I will have read their directs and the expert reports. I can watch their crosses. Every witness for both sides gets the same benefit and suffers from the same perceived handicaps. It is the fairest way to proceed.”

As for the attorneys, Judge McMahon stated that is was up to them whether they would prefer to cross examine remotely or from the courtroom. However, Judge McMahon made clear that both sides needed to come to an agreement because the Court “will not have just one side’s lawyers in the courtroom.” Judge McMahon did state that she also might consider having lead trial counsel come to court after all the witness testimony to have “a real bench trial closing argument,” but strongly discouraged bringing a lot of people to court for such a closing argument.

Judge McMahon then outlined some of the other procedures for trial, such as using a dedicated computer on which she can watch the testimony that will have no connection to the court’s secure intranet, shipping of sealed exhibit binders to witnesses, possibly having an attorney present with witnesses during their testimony, and not breaking exhibit seals or showing exhibits to witnesses prematurely.

In sum, this case is an example of a Court working as hard as it can to continue moving cases and trials forward in these difficult times as best as possible while still striving to ensure fairness in the process.

Inoculating Against the Coming Spread of Employee Lawsuits Related to COVID-19

Published: May 28, 2020

by Brendan J. Begley
The Labor & Employment Law Blog

As workplaces begin reopening in the coming weeks, attorneys are predicting a rash of lawsuits by employees against their employers related to the COVID-19 pandemic. It seems clear that workers-compensation preemption may immunize employers from most civil actions alleging that employees became infected with the virus on the job. However, other types of employee lawsuits may reach fever pitch.

There does not appear to be any vaccination to alleviate many of the anticipated claims. Still, just as good hygiene practices may help flatten the curve of the actual coronavirus, good employment practices can help reduce the incidence of such lawsuits in your workplace. Here are four types of employment claims that are likely to spread like a contagion as employees are expected to (or actually do) return to their jobs, along with some inoculations that employers should consider:

Disability Claims

According to at least one media outlet, the head of the U.S. Equal Employment Opportunity Commission’s New York office reported this week that charges accusing employers of failing to accommodate workers’ disabilities are outpacing any other allegation tied to COVID-19 in the Empire State. Employers should anticipate similar developments here in the Golden State.

Indeed, California’s Fair Employment and Housing Act (“FEHA”) and its federal counterpart, the Americans with Disabilities Act (“ADA”), both prohibit disability discrimination and require employers to provide reasonable accommodations to disabled employees. An ounce of prevention – by engaging in the interactive process (from a safe distance) with infected or otherwise disabled employees to identify reasonable accommodations – often is more economical than the pound of cure that would come from prevailing in a failure-to-accommodate lawsuit.

In this regard, employers should remember that each request for an accommodation must be analyzed independently, and that a leave of absence may constitute a reasonable accommodation. Thus, if employees request a leave of absence, either to get over their own COVID-19 infection or to reduce the risk of being exposed to the coronavirus due to some preexisting disability that puts them at greater risk, serious thought must be given to fashioning a workable accommodation.

Some employers may find respite in the notion that a coronavirus infection might not constitute an actual disability under the ADA or the FEHA, as the illness typically impairs its victims moderately or for only a short duration of time. But this brand of comfort is often an ineffective placebo and not a recommended treatment to prevent the spread of disability lawsuits. That is because the effects of a COVID-19 infection may be more long-lasting or create a more severe impairment for some individuals. Thus, it would be a mistake for an employer to assume that such an infection can never amount to a protected disability.

At the same time, both the FEHA and the ADA prohibit employers from discriminating on the basis of a perceived disability. Thus, it is foreseeable that some employers might decide to treat certain workers differently than others because they believe certain workers have some other actual or perceived medical condition (e.g., a persistent cough, or diabetes, or an immunodeficiency, or Chronic Obstructive Pulmonary Disease). Employers may worry that letting such vulnerable employees return to the job or interact with coworkers might make them more susceptible to getting or spreading COVID-19. While treating such employees differently in this manner may seem (or even might actually be) an act of caring and concern that would rival Florence Nightingale, such actions can lead to costly challenges in court (especially if they are applied in a clumsy fashion).

Disability harassment is another type of claim that employers may anticipate. One way this type of claim may arise is when coworkers, managers or supervisors develop a notion that a particular employee was (or is) infected with coronavirus and spread (or is spreading) the sickness to the workplace. If such coworkers, managers or supervisors are allowed to harass, insult or ostracize an employee on that basis, the employer may find itself in need of some urgent care from lawyers.

Tameny Claims

The so-called Tameny claim is named after the California Supreme Court’s decision 40 years ago in Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167. Under the high court’s ruling in that case, a worker may pursue a lawsuit when he or she alleges that the employer terminated his or her employment in violation of some public policy.

It is difficult to tally how many Tameny claims are spreading in California, as the administrative agencies that handle claims of disability discrimination (or other types of discrimination, harassment or retaliation) typically are not responsible for investigating a Tameny claim. So we may not know for many months how many Tameny claims have been filed in court; nonetheless, there is good reason to think the number will be high.

Keep in mind that California has a public policy that requires employers to “furnish employment and a place of employment that is safe and healthful for the employees therein.” (Cal. Labor Code, § 6400.) Also bear in mind that California has a public policy that prohibits employers from “preventing an employee from disclosing information to a government or law enforcement agency,” or to a manager or supervisor, “who has authority to investigate, discover, or correct the violation or noncompliance.” (Cal. Labor Code, § 1102.5.)

With those public policies in mind, there are two general ways to become exposed to a Tameny affliction. One arises when an employee is fired for refusing to execute some task on the job that actually would be unlawful. The second arises when the employee is fired for complaining about what he or she reasonably perceives to be unlawful activity in the workplace (even if the activity in question turns out to be legal).

Regarding the first variety, it is easy to foresee the following scenario developing: An employer directs an employee to return to work and the employee refuses and is fired. If the employer instructed the employee to return before the government lifted restrictions for that specific workplace, terminating the employee for refusing to return may violate a public policy. Likewise, if the employer waits until the restrictions lift but then fails to enforce regulations requiring social distancing or sanitary practices or the donning of personal protective equipment (“PPE”), firing an employee for refusing to work under such conditions may also be in violation of public policy.

Turning to the second type of Tameny ailments, it is equally easy to anticipate these scenarios occurring: An employer directs an employee to return to work either before the restrictions are lifted or after the restrictions are lifted but without implementing or enforcing policies for social distancing, sanitation, or PPE. The employee complies, returns to the job, and performs his or her work, but not quietly or without protest. Instead, the employee complains about the workplace conditions, either to a governmental agency or a supervisor, and is subsequently fired. Terminating an employee for complaining about such workplace conditions may be in violation of public policy.

One aspect of many Tameny claims that make them look less severe than other types of claims is that they often do not result in the employer having to pay the employee’s attorney fees. However, given the other undesirable symptoms and bad side-effects that such lawsuits can trigger (e.g., lost productivity due to litigation, or the risk of emotional-distress and even punitive damages), that is a bit like telling a sick patient suffering from simultaneous chills and sweats that a fever of 103.8 degrees is not as bad as one that is 104 degrees.

Leave Claims

There are a number of federal and state laws that require various employers to provide a certain amount of protected leave to covered employees; for example, the federal Families First Coronavirus Response Act (“FFCRA”), the federal Family and Medical Leave Act (“FMLA”) and the California Family Rights Act (“CFRA”).

The FFCRA was passed just this year to provide workers with protected leave if they have been impacted in various ways by the coronavirus and related shelter-in-place orders. It has already resulted in what some might call an epidemic of lawsuits where employees have claimed that their employer interfered with their protected leave, denied them benefits, or fired them in retaliation for requesting leave.

Meanwhile, the FMLA and the CFRA are not geared specifically for coronavirus-related leaves, like the FFCRA is, but those laws may still protect such leaves of absence. Making things more complicated, there may be overlap between these leave entitlements and some employers may be subject to all of these laws, while others are subject to some or none of them.

It is very probable that employers will be faced with many more leave requests, either to care for someone who has been infected with COVID-19 or to stay at home with a child whose school or daycare facility remains closed while some restrictions are lifted. Of course, employees also may request leave to deal with other health conditions that deteriorated while they were unable to get routine medical treatment while sheltered in place. Each leave request should be given serious consideration.

Discrimination Claims

Whereas some employers may be struggling with too many employees in need of leave, others may be grappling with having to lay off employees due to downturns in business as a result of the shelter-in-place restrictions. In either scenario, care must be given to how such decisions are made and serious thought must be devoted to the potential results.

Such decisions may trigger claims under the FEHA or its federal counterparts, Title VII of the Civil Rights Act or the Age Discrimination in Employment Act. Those laws bar making employment decisions on the basis of certain protected categories; for instance, age, race, national-origin, gender or religion.

When deciding which employees are going to be given leaves of absence, or laid off, or assigned to certain duties, consistent procedures and rationales must be followed. Even then, under what is called the disparate-impact type of claim, a neutral policy or practice can lead to discrimination liability if it has a statistically disproportionate impact on a certain class of workers.

Inoculate Against Such Claims

There is no vaccine that will prevent or get rid of all such claims, but the harmful effects of such lawsuits can be ameliorated by following certain precautions.

First, be sensitive to actual or perceived disabilities, do not make medical assumptions, work hard to identify and implement reasonable accommodations for disabled employees, and be vigilant in guarding against harassment of employees on the basis of some perceived or actual medical condition.

Second, take every request for a disability accommodation or leave of absence seriously and analyze each one independently on its own merits.

Third, do not violate or direct your employees to violate governmental shelter-in-place, social-distancing, sanitary or PPE restrictions or regulations.

Fourth, whenever making a termination decision, be sure it is for reasons that have absolutely nothing to do with the employee’s refusal to violate some public policy or the employee’s complaints about reasonably perceived violations of some public policy.

Fifth, make certain that personnel decisions have nothing to with protected classifications (e.g., age, race, gender, religion) and carefully analyze how decisions may impact protected classes of employees.

Just as there presently is no medicine that is sure to eradicate the current pandemic, there is no one-size-fits-all regimen that will completely wipeout such employment claims. Even these steps cannot completely immunize employers against all these types of lawsuits, yet failing to adopt such protective measures probably will increase the risk of exposure to these afflictions.

Finally, it seems obvious that getting prompt medical attention may stem the more serious effects of a disease; by the same token, obtaining early legal advice may decrease the incidence or cost of these exorbitant types of lawsuits.

Inside Out: The Ninth Circuit Holds The Moodsters are No Batman

Published: May 28, 2020

by James Kachmar
The IP Law Blog

(This article was republished with permission by ABA Business Law Today on 6/2/2020, available here.)

Certain literary or graphic characters may, in some cases, enjoy copyright protection. Think James Bond – or Batman and even his Batmobile. Recently, the Ninth Circuit was called upon to determine whether the Moodsters, “anthropomorphized characters representing human emotions,” are subject to the same copyright protection as Batman. Sadly, the Ninth Circuit concluded they do not.

The Moodsters were created by an expert on children’s emotional intelligence and development, Denise Daniels. She created the Moodsters to “help children cope with strong emotions like loss and trauma.” In 2005, Ms. Daniels and her team released an initial product called The Moodsters Bible. The Moodsters Bible told the story of five characters who were “color-coded anthropomorphic emotions” that represented a different emotion: pink–love, yellow-happiness, blue-sadness, red-anger and green-fear. Two years later, Ms. Daniels and her team released a 30-minute television pilot featuring the Moodsters called, “The Amoodsment Mixup.” In 2015, Ms. Daniels and her team had developed a line of toys and books featuring the Moodsters that were sold at Target and other retailers.

No, Machines Cannot Be Inventors!

Published: May 22, 2020

by Audrey A. Millemann
The IP Law Blog

Eventually, it was bound to happen. A patent application was filed by a machine. Well, not exactly. A human being filed a patent application naming a machine as the inventor.

The machine was an artificial intelligence machine described as a “creativity machine.” Its name was listed as “DABUS Invention Generated by Artificial Intelligence.” The invention was called “Devices and Methods for Attracting Enhanced Attention.”

The human’s name was Stephen L. Thaler. Mr. Thaler filed U.S. patent application no. 16/524,350 in the PTO on July 29, 2019. He also filed a statement acknowledging that because existing law does not allow a machine to own property, he was the assignee of DABUS’s invention. He said that he was the legal representative of DABUS, and was the applicant for the patent application. Mr. Thaler did not file the required oath or declaration, which is the inventor’s statement, signed under oath, that they believe they are the original inventor of the invention.

After the application was filed, the PTO sent the applicant a notice requiring that the missing oath or declaration be submitted. The applicant responded with a petition seeking to vacate the notice, which was denied. The applicant filed a petition requesting reconsideration.

In his petition, the applicant argued that inventorship should not be limited to natural persons. He said that DABUS was “programmed as a series of neural networks that have been trained with general informant in the field of endeavor to independently create the invention.” He further explained that DABUS was not created to solve a specific problem and was not trained on data relevant to the invention, but was able to “recognize” that the invention was novel.

In an unsurprising decision, the PTO denied the petition. The PTO relied on the patent statutes, which provide that “whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter… may obtain a patent….” (35 USC section 101) and define an inventor as “the individual… who invented or discovered the subject matter of the invention” (35 USC section 100(a)). The PTO found that these statutes indicate that inventors must be natural persons.

The PTO also cited a Federal Circuit case holding that the state cannot be an inventor. In University of Utah v. Max-Planck…., 734 F.3d 1315, 1323 (Fed. Cir. 2013), the court had held that conception of the invention determines inventorship, and that conception is the “formation in the mind of the inventor of a definite and permanent idea of the complete and operative invention.” In other cases, the Federal Circuit has held that corporations cannot be inventors. Based on these decisions, the PTO concluded that only natural persons could be inventors.

So, DABUS will have to wait. Some day, the law might just allow machines to be named as inventors.

The DFEH’s Free On-Line Sexual Harassment Prevention Training For Non-Supervisors is FINALLY Available

Published: May 20, 2020

by Lizbeth (Beth) V. West

On May 20, 2020, the California Department of Fair Employment and Housing (DFEH) announced that it has finally launched free anti-sexual harassment training for non-supervisory employees. The online training, which is available through DFEH’s website – https://www.dfeh.ca.gov/shpt/ – will meet an employer’s obligation to provide training to non-supervisory employees by January 1, 2021.

Section 12950.1 of the California Government Code requires employers with five or more employees to provide at least one-hour of classroom or other effective interactive training and education regarding sexual harassment prevention to all non-supervisory employees in California.

Webinar – Getting Back to Business: Building Your Net to Minimize Your Risk

When: Jun 3, 2020
Where: Zoom - Online

On June 3, 2020, Lizbeth (Beth) V. West was a panelist for the webinar Getting Back to Business: Building your Net to Minimize Risk, hosted by the Capital Region Family Business Center.

Summary:
A panel of business leaders shared their insights and experiences in bringing employees, vendors, and the public back to business. They detailed the steps to create a safe work environment, the psychological hurdles, the physical preparations, communication tools, and dealing with employees who don’t want to return. The panel also shared their first-hand “stories from the front lines” as businesses open up.

A recording of the webinar is available on the Capital Region Family Business Center website.

SBA Releases PPP Loan Forgiveness Application (UPDATED*)

Published: May 18, 2020

On Friday May 15, 2020, the Small Business Administration (“SBA”) released the application borrowers will use to request forgiveness of their Paycheck Protection Program (“PPP”) loans. On Friday May 22, 2020, the SBA and Treasury jointly issued an Interim Final Rule clarifying some portions of the forgiveness application. PPP borrowers have been awaiting additional guidance regarding the forgiveness portion of the program for well over a month. While the application and interim final provides some additional guidance, many questions remain.

BACKGROUND

As our readers already know, the PPP loan program was enacted pursuant to the CARES Act as a tool to help small businesses keep employees on their payroll. The draw of the program is the ability for borrowers to have the loans forgiven. In other words, the loans can be essentially converted into tax-free grants. One caveat is that borrowers are permitted to spend PPP loan proceeds on very limited types of expenditures. PPP loans must be spent only on payroll, rent, utilities and interest on certain pre-existing obligations during an eight-week period following loan origination.

SBA had previously required that borrowers certify that 75% of their PPP loans would be expended on payroll. Moreover, subject to one large exception, a portion of loan forgiveness will be lost for borrowers who reduce the number of full-time equivalents on their payroll OR reduce the average hourly wage or annual salary of an employee by more than 25%. The aforementioned exception to loan forgiveness applies where (i) reductions in full-time equivalents or average hourly wages and salaries took place between February 15 and April 26, 2020 and (ii) the number of full-time equivalents and compensation are restored by June 30, 2020 (the “June 30 Restoration Exception”)

THE APPLICATION

As noted above, many questions remain unanswered but the application does provide clarification of certain issues, including the following.

Eight Week Testing Period / Covered Period

In order to qualify for forgiveness, amounts must be spent during the eight-week period commencing upon the date the loan proceeds are disbursed to the borrower (the “Covered Period”). For administrative convenience, borrowers who pay employees at least as often as biweekly may elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following the loan disbursement date (the “Alternative Payroll Covered Period”). Note that this alternative eight-week period only applies to payroll costs and not to other qualifying expenditures.

Expenses Paid or Incurred

One question that tormented borrowers was whether eligible costs had to be paid and incurred during the Covered Period or whether they could be incurred and/or paid during the period. With respect to payroll costs, the application provides:

Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).

Similarly, with respect to eligible non-payroll costs, the application provides:

An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.

However, the May 22 Interim Final Rule clarifies that pre-payments of interest are not eligible for forgiveness. Accordingly, it appears that any eligible payroll or non-payroll costs (other than prepayments of interest) paid during the Covered Period count towards loan forgiveness despite when the cost was incurred. Additionally, costs incurred during the Covered Period and paid in accordance with the usual schedule for payment can also be forgiven even if the payment date falls after the conclusion of the Covered Period.

Calculating Full-Time Equivalents

Recall that a reduction in full-time equivalents (“FTEs”) during the Covered Period will result in a proportionate reduction in loan forgiveness. The application permits borrowers to calculate the number of FTEs in one of two manners. The first way to calculate FTEs is to determine the average number of hours worked by each employee per week during the Covered Period and divide that number by 40. The resulting quotient is rounded to the nearest 1/10^th and capped at 1.0. Alternatively, borrowers can count all employees who average 40 or more hours per week as 1.0 and each employee working less than 40 hours as 0.5. Once the borrower has calculated each employee’s FTE status, the results are aggregated.

The average number of FTEs during the Covered Period is then compared against the number of FTEs during one of the following periods (at the Borrower’s election): (i) February 15, 2019 to June 30, 2019; (ii) January 1, 2020 to February 29, 2020; or (iii) in the case of seasonal employers, a consecutive twelve-week period between May 1, 2019 and September 15, 2019. The number of FTEs for the Covered Period and the number of FTEs during the reference period chosen by the borrower must be calculated using the same methodology.

Additionally, any FTE reductions resulting from one of the following reasons will not impact loan forgiveness: (i) employees who were terminated prior to April 26, 2020 and who rejected a good-faith, written offer of rehire during the Covered Period (the employee’s rejection of the offer to rehire must be reported to state unemployment insurance offices); and (ii) any employees who (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.

Calculating Salary and Wage Reductions

As noted above, borrowers who reduce their employees’ salaries by more than 25% will suffer a loss in the amount of loan forgiveness. This calculation is made on a per employee basis. Meaning, each employee’s compensation during the Covered Period is measured against that employee’s compensation from January 1, 2020 to March 31, 2020.

It is unclear how this rule would apply if the borrower terminated a number of employees and rehired lower wage workers.

June 30 Restoration Exception

Any reductions in FTEs or compensation that are restored on or before June 30, 2020 will not result in a reduction of loan forgiveness. The application does not specify how this rule operates. For example, for how long do employees need to be rehired? How does one test FTEs on June 30, 2020? Is it a one-day test or do we test based upon a payroll period ending or starting on June 30, 2020?

Owner Compensation

Pursuant to prior SBA guidance, compensation payable to owners is limited to 8/52 weeks of 2019 net profits. Additionally, healthcare expenses and retirement contributions attributable to self-employed individuals, general partners and other Schedule C filers are not eligible for forgiveness. It appears that health and retirement contributions made on behalf of shareholder-employees are eligible for forgiveness.

The application requires a certification that the amount for which forgiveness is requested “does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,384 per individual.” Accordingly, it appears that borrowers cannot receive full loan forgiveness if they use PPP funds to increase compensation to owner-employees, including corporate shareholder-employees.

Loan Forgiveness Process

In order to receive loan forgiveness, borrowers must submit the PPP loan forgiveness application linked in the introductory paragraph above to its lender. Within 60 days of receiving the application, the lender must issue a decision to SBA regarding loan forgiveness. Within 90 days of receiving the lender’s decision and subject to the SBA’s additional review of the original loan and/or forgiveness application, the SBA will remit payment of the appropriate forgiveness amount to the lender together with accrued interest on such amount. Accordingly, it can take up to 150 days to receive final notification of loan forgiveness.

CONCLUSION

While these new rules do provide some additional guidance, the answers to many important questions (particularly with regard to the June 30 Restoration Exception) still remain unclear.

Some practitioners expect that SBA will promulgate further guidance concerning PPP loan forgiveness. However, it is unlikely that such guidance will be issued soon enough to be helpful for borrowers who have already received loans. Additionally, there are many proposals being discussed in Congress to amend the Paycheck Protection Program. We will be sure to provide additional updates in the event additional guidance is issued or amendments are enacted.

*This alert was initially published on May 18, 2020 following the release of the PPP loan forgiveness application and has been updated to include certain clarifications provided by the May 22, 2020 Interim Final Rule.

NOTE: This article has been updated from the original publication on May 18, 2020 to reflect new information provided by the SBA on May 22, 2020.

The Ninth Circuit Affirms Ruling that COMIC-CON isn’t Generic for Comic Conventions

Published: May 15, 2020

The IP Law Blog

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The battle started almost six years ago. A Utah-based company known as Dan Farr Productions (“DFP”) decided to use San Diego Comic Convention’s (“SDCC”) registered trademark COMIC-CON in conjunction with its own comic and popular arts convention, resulting in SDCC filing suit in the Southern District of California. SDCC alleged in its complaint that it has the exclusive right to utilize its COMIC-CON trademarks and has done so in connection with its comic convention since 1970.

After years of litigation, which was apparently filled with gamesmanship on the part of DFP and its counsel, SDCC prevailed on a motion for summary judgment. DFP met SDCC’s claim for infringement with an affirmative defense that SDCC’s marks were “generic ab initio.” In other words, DFP argued that COMIC-CON was generic before SDCC’s first use. The district court disagreed, finding that the evidence tendered by DFP was insufficient to support the argument that COMIC-CON was generic before SDCC’s first use. The Ninth Circuit reviewed this decision de novo and found that the district court properly granted summary judgment in favor of SDCC.

The Ninth Circuit also addressed the district’s court attorneys’ fees and costs award. DFP appealed the district court’s order granting SDCC over $3.7 million for attorney’s fees and costs, claiming that the district court erred because the case was not “exceptional” as required by SunEarth, Inc. v. Sun Earth Solar Power Co., 839 F.3d 1179 (9th Cir. 2016) (en banc) (per curiam). The Ninth Circuit reviewed the award, applying an abuse of discretion standard, and found that the district court did not abuse its discretion in awarding reasonable attorneys’ fees. The Ninth Circuit recognized that that district courts should analyze the “totality of the circumstances” to determine if a case is exceptional, using the preponderance of the evidence standard. SunEarth, 839 F.3d at 1181. The Ninth Circuit found that the district court properly applied the totality of the circumstances standard and focused primarily on the “unreasonable manner” in which DFP litigated the case. Specifically, the district court noted that DFP repeatedly failed to comply with court rules, re-litigated issues already decided, and engaged in gamesmanship. Given the district court’s findings and consideration of these factors, the Ninth Circuit held that the district court did not abuse its discretion deeming the case “exceptional” and granting attorneys’ fees under 15 U.S.C. § 1117(a).

As to the amount, DFP failed to challenge the hourly rates and reasonableness of timesheets for SDCC’s attorneys at the district-court level or on appeal. Instead, DFP argued that there must be a causal connection between the misconduct rendering the case exceptional and the particulars of the fee award. The Ninth Circuit found no authority supporting this argument, and stated that, regardless, the district court found that Defendants engaged in misconduct at every stage of the litigation, rendering an award of attorney’s fees related to the entire case proper.

The only portion of the district court’s fee and cost award that the Ninth Circuit took issue with was the award of $212,323.56 for expert witness fees. The Ninth Circuit found that although successful plaintiffs are entitled to “the costs of the action” under the Lanham Act, the Lanham Act does not provide the “explicit statutory authority” required to award litigation expenses beyond the six categories of costs set forth in the general costs statute. See 28 U.S.C. §§ 1821, 1920. Accordingly, because the general cost statute doesn’t reference expert witness fees, the district court erred in awarding such costs to SDCC under the Lanham Act. As such, the Ninth Circuit vacated that portion of the judgment.

Overall, the Ninth Circuit’s review was favorable to SDCC. The appellate court affirmed the summary judgment in favor of SDCC, finding DFP infringed SDCC’s COMIC-CON trademarks and that DFP’s “generic ab initio” argument lacked evidentiary support. And although the Ninth Circuit vacated the portion of the judgment awarding SDCC expert witness fees, it affirmed the remainder of the attorney’s fees award, leaving approximately $3.5 million of the award intact. SDCC certainly could have done worse.