Why The Recent Indictments of Nutritional Supplement Executives Matter To All Manufacturers/Distributors

Our firm has substantial experience in representing nutritional supplement manufacturers.  For that reason, the news that the Justice Department and federal agencies (such as the FTC) is engaged in a nationwide sweep of such companies is newsworthy.  This sweep has consisted of both criminal and civil/regulatory actions that will take years to unravel.

Other manufacturers/distributors might wonder if this government action is relevant to them.  The short answer is “yes” for the following reasons:

  1. This type of sweep is not limited to nutritional supplement companies.  As reported previously in our blog, the Justice Department just recently targeted the food industry in the same manner.
  2. The Justice Department continues to indict individual executives.   In a memo published in September, the DOJ emphasized that it will continue to pursue corporate executives individually for both criminal and civil liability.
  3. The criminal indictments relate in part to the manufacturer’s supply chain.  Although the government claims that the subject of the indictments was engaged in a conspiracy with a Chinese supplier, all manufacturers/distributors are potentially responsible for the actions of their suppliers, particularly those that supply raw ingredients.


Manufacturing a Troubling Future Part Two:  Recent Decision

This is the second of two posts regarding the “troubling” state of multi-employer pension plans.  My October post provided an overview of the recently published Teamsters’ Central States Pension “Rescue Plan” and discussed some of its implications.  This post will review the recent  decision of the Ninth Circuit Court of Appeals in Resilient Floor Covering Pension Trust Fund Board v. Michael’s Floor Covering imposing withdrawal liability on a company which had never previously contributed or been obligated to contribute to the pension fund.

When an employer stops making contributions to a multi-employer pension plan, generally ERISA requires the employer to pay its “fair share” of any withdrawal liability.  Often, when the withdrawal liability “bill” exceeds a company’s ability to pay, those costs are absorbed by the plan and ultimately passed on to the remaining employers.

The Resilient Floor Covering case represents a new twist.  In 2009, Studer’s Floor Covering announced it was going out of business at the end of the year.  As business wound down, one of its sales employees formed his own business (Michael’s Floor Covering), negotiated with Studer’s landlord to lease the same building when Studer’s closed, and hired five former Studer’s employees.  Studer’s sold a majority of its equipment and inventory at a public auction, although Michael’s purchased some equipment and inventory, and Studer’s allowed its telephone number to be transferred to Michael’s.

When Studer’s failed to pay $2.2 million in withdrawal liability, the pension fund sued Michael’s under the theory that Michael’s was the legal “successor.”  Applying traditional labor law principles, the district court ruled that Michael’s was not a successor and had no obligation to pay Studer’s liability.  The Ninth Circuit reversed.

In a surprising decision, the Ninth Circuit held that withdrawal liability under ERISA could be imposed on an unrelated company.  The Court held that in determining whether to impose such liability, the “most important” criteria to examine was whether there was a “substantial continuity” between the two entities based on whether the new company served the “same body of customers.”  In short, the Court held that because Michael’s in fact ended up earning a substantial portion of its business from Studer’s former customers, this factor alone was sufficient to find that Michael’s was a “successor” for purposes of withdrawal liability.


The impact of the Ninth Circuit’s decision remains to be seen.  Arguably, by focusing on whether there is a “substantial continuity” between two manufacturers, a manufacturer seeking to avoid the assumption of another’s withdrawal liability can take steps to make sure there is no such continuity.  But the Court’s focus on whether the new manufacturer ended up serving the same “body of customers” injects substantial uncertainty into this analysis.  In essence, a manufacturer may not be able to plan what its customer base will end up being.  The manufacturer planning to open an entire new market may fall short and the result could be nothing more than the “same old” customer base of the prior company.  That fact alone may serve to impose liability.

Furthermore, there is no telling whether pension funds will seek to impose the new standard retroactively on manufacturers.  One could see a scenario in which funds reassess collection efforts in light of Resilient Floor — seeking to collect what might not have been previously collectible.

CERCLA Update: Court Reverses Divisibility Ruling

Earlier this year, we reported on a case that seemed to breathe new life into the divisibility defense under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).  Under CERCLA, a party that causes or contributes to contamination, or even just owns contaminated property, can be held liable for the entire cleanup.  In May 2015, a federal court in Wisconsin became one of the very few courts to hold that a party’s harm could be divisible under CERCLA – such that the party would only be liable for its fair share of the harm.  But on October 19, 2015, the court took it all back.

In its May ruling, the court relied on expert estimates regarding certain parties’ contributions of contaminants to the Lower Fox River to determine a percentage share of the harm and, ultimately, the costs.  In the wake of the court’s May 2015 ruling, a number of parties asked the court to reconsider its findings.  The judge reevaluated the expert estimates and determined they were not as reliable as he had originally thought.

One of the court’s main criticisms of the expert estimates is that they contradict facts already found by the court.  This appears to be a common theme in unsuccessful divisibility cases – a recent CERCLA case in Rhode Island had the same criticism of a party’s attempt to prove divisibility.  It seems that when there is an imperfect factual record and significant disagreement on the underlying facts of a particular case, divisibility can be very difficult, if not impossible, to prove.

Despite these rulings, divisibility remains an important tool for potentially responsible parties in any CERCLA case.  The hammer of CERCLA is hard, and parties need any opportunity to reduce costs by attempting to tie liability to the actual harm created.  It may be hard to prove, but it is an important and viable defense for any potentially responsible party under CERCLA.

Three Issues That Manufacturers/Distributors Should Consider When Drafting Terms and Conditions (T&Cs)

Over the last few years, our team has worked with several manufacturers and distributors on their terms and conditions of sale and/or purchase.  We have even developed a questionaire that we typically use when we speak to a client for the first time.

Readers of this blog may recall posts regarding indemnification clauses, anti-assignment clauses, non-compete provisions and the like.  Yet, I thought it would be useful to provide three general over-arching business observations that often guide our analysis:

  1. Your Terms Should Be Written For Your Problematic Customers: There are clearly situations in which a contract should be written in a manner in which each side should get something in the deal.  Most times, I recommend that a company’s terms and conditions are not one of those situations.  Manufacturers and distributors should adopt terms that protect the company at all costs.  Now, we all recognize that customer relations is what drives sales.  But, remember that even if your terms are written in a way that protects your company, your team could always agree to waive a requirement in order to keep a customer/vendor/supplier happy.  It is much harder, however, to deal with a problematic customer if your terms are written in a way that gives the other side a lever that it should not have.
  2. Terms and Conditions Should Be Tailored To Your Business:  This piece of advice seems simple enough.  But, I have seen many situations where a company’s terms and conditions are pulled from the Internet or from another company.  For instance, the terms regarding the sales process may have procedures that do not reflect the actual process followed by the manufacturer and distributor.  Sometimes the process has changed over time or never existed.  For this reason, I encourage a periodic review of your terms and conditions to make sure it reflects the current state of affairs and also takes into account issues raised by problem customers (see #1).  Often, I have seen companies do this as part of their review of pricing for the next year.
  3. Beware of Competing Terms and Conditions:  Almost invariably, the other contracting party will have its own terms and conditions that are different than yours.  It is easy for a lawyer to tell a company that they need to confront all of those issues at the time of the sale, but even good legal advice needs to be balanced with the needs of the business.  For that reason, I often encourage manufacturers and distributors to identify the handful of provisions that are a must (i.e., that they cannot live without) and focus on those when reviewing the other party’s terms and conditions.  It is better to have the discussion upfront while everyone is motivated to make the deal than after the container goes missing, the product fails inspection, or the money is not paid.


A Troubling Future Part One:  Teamsters’ Pension Rescue Plan


Two significant developments in the multi-employer pension world emerged in September, developments which could give manufacturers concern.  While this is not the time to panic (we have plenty of time to panic), readers should take notice.

Development number one was the filing on September 25 of the Teamsters’ Central States Pension “Rescue Plan” to cut the benefits of tens of thousands of active employees and retirees.  Development number two was the September 11 decision of the Ninth Circuit Court of Appeals in Resilient Floor Covering Pension Trust Fund Board v. Michael’s Floor Covering imposing withdrawal liability on a company which had never previously contributed or been obligated to contribute to the pension fund.  Separately, each is troubling.  Combined, they might cause nightmares.

In this posting, we will examine the continued saga of the Central States Pension Fund.  In a future posting, we will examine the Resilient Floor Covering decision.

Frequent visitors to this blog will recall postings about the recently adopted Multi-Employer Pension Reform Act of 2014 (MEPRA), which gave multi-employer pension plans unprecedented legal authority to cut vested retiree benefits.  Almost immediately after MEPRA’s adoption, the Teamsters’ Central States Pension Plan announced its intention to seek to implement benefit cuts.

On schedule, during September, the Central States Pension Plan published and filed its proposal to cut benefits for active employees and retirees.  Key aspects of the Rescue Plan include:

  • Almost 100,000 retirees (labeled “orphan retirees,” those whose former employers discontinued operations without paying owed withdrawal liability) will have benefits cut to the lowest levels – 110% of the minimum pension benefit guaranteed by the Pension Benefit Guaranty Corporation. Some report that these cuts could amount to a 50% cut in pension payments.
  • Active employees will witness benefit accruals reduced by 25 percent (from 1% per year to .75% per year).
  • Between 2021 and 2021, the minimum retirement age for participants will increase from age 62 to age 65.
  • Some 48,000 participants will not see any benefit reduction because, in its agreement with the Teamsters Union, UPS agreed to make up any difference in pension payments as a result of authorized benefit cuts.
  • As required by the MEPRA, retirees receiving a disability pension or those age 80 and older will not suffer any pension reductions, but other retirees will see their pensions reduced based on a sliding scale of age and years of service.
  • Finally, any retiree experiencing a reduction in benefits will be able to return to work as a result of the relaxation of reemployment rules.

The Central States Pension Plan has set up its own website (Central States Pension Plan Rescue Plan Website) and the details of the Plan can be found here as well (Central States Pension Plan Rescue Plan).


As the first plan to seek relief under the new law, the Central States Rescue Plan will likely become a “model” for troubled multi-employer pension plans going forward.  Obviously, imposing pension reductions on active employees and retirees will result in significant hardship to some.  But the prospect that pension plans in future years may seek relief similar to Central States’ Rescue Plan means that manufacturers and others may be faced with new bargaining demands in anticipation of future developments.  For example:

  • Using the UPS model, unions may begin demanding that employers agree to make supplemental payments to retirees whose future pension benefits are reduced as a result of fund insolvency or the imposition of a Central States-like “rescue” plan.
  • Unions may seek to increase benefit contributions to offset reductions in accrual rates or otherwise seek to supplement pension benefits.
  • To the extent retirees suffering from benefit reductions may desire to return to the workforce, manufacturers may have to confront complicated “re-employment” issues – employee retraining, “probationary” periods, bumping rights, and benefit bridging to name just a few.

Only time will tell how unions and manufacturers will address these issues.  Stay tuned.

Can Air Emissions Lead to CERCLA Liability?

The Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9601 et seq. (“CERCLA”) imposes fairly broad liability on potentially responsible parties (“PRPs”) to pay for the investigation and remediation of a release of a hazardous substance.  Typically, we think of a “release” as spilling or dumping on land, or discharging to water.  A new line of cases, however, may result in CERCLA liability for PRPs emitting airborne pollutants that ultimately settle onto the land or water.

The Ninth Circuit is currently considering whether a lead smelting facility that released contaminants to the air that ultimately settled onto the land and water can be liable under CERCLA as someone who arranged for the disposal of a hazardous substance.  In the case, Pakootas v. Teck Cominco Metals, Ltd., plaintiffs alleged that a Teck Cominco Metals Ltd. (“Teck”), which operates a lead smelter in Canada, was emitting contaminants that were ultimately deposited at the Upper Columbia River site.  This action, plaintiffs argued, made Teck liable as an arranger under CERCLA.  The district court agreed with the plaintiffs, holding that Teck’s air emissions could result in CERCLA liability, but asked the Ninth Circuit to weigh in on the issue, which the court reported to be a matter of first impression.

Teck continues to argue that the aerial emissions cannot be a disposal under CERCLA.  In support of its position, it relies on another case decided by the Ninth Circuit – Center for Community Action and Environmental Justice v. BNSF Railway, 764 F.3d 1019 (9th Cir. 2014).  In that case, the Ninth Circuit held that emission of particulates in diesel exhaust does not constitute “disposal” under the Resource Conservation and Recovery Act, 42 U.S.C. §6901 et seq. (“RCRA”).  RCRA disposal, the Ninth Circuit stated, does not include “emitting,” and so contaminants in exhaust could not lead to RCRA liability.  Not all courts agree, however – an Ohio court recently held that aerial emissions can lead to RCRA liability, and how those pollutants end up on the land or water may be a “distinction without a difference.”

The cases are a warning to anyone who emits airborne pollutants – even if those emissions are permitted – that liability can follow you downwind.

The underlying case is Pakootas v. Teck Cominco Metals, Ltd., 2014 U.S. Dist. LEXIS 178964 (E.D. Wash., Dec. 31, 2014).

The RCRA cases are:

Community Action and Environmental Justice v. BNSF Railway, 764 F.3d 1019 (9th Cir. 2014).

The Little Hocking Water Association v. E.I. du Pont De Nemours Co., Case No. 2:09-CV-1081 (S.D. Ohio, Mar. 10, 2015).

The Hidden Assassin: How This Contractual Provision Can Derail A Manufacturer’s Acquisition Plans

An”anti-assignment” clause can be the death knell of any deal involving the sale or purchase of a manufacturing company.  You might ask:  what is an anti-assignment clause?  Here is the typical language that is often buried at the end of many types of contracts, including those with your suppliers and customers:

Seller shall not assign any of its rights or interest in this Agreement without [Business Partner’s] prior written consent.

It appears simple enough.  But, we have seen contracts that not only prevent the assignment of contracts to third parties, but also expressly prohibit consolidation, mergers or change of ownership without prior written consent.

Such provisions raise a host of questions such as: “Can a party withhold consent unreasonably?”  The answer to that is it depends on the language of the contact.  Some anti-assignment clauses expressly state that consent cannot be withheld unreasonably while others are silent on the issue.  [Note:  If you find yourself in the latter situation, we have developed arguments to help].

The other issue that arises is what type of conduct is unreasonable?  Not surprisingly, your customers and suppliers may grant their consent only after obtaining economic concessions and/or re-negotiating the contract.  Some courts have held that such conduct is inappropriate while others have allowed consent to be withheld if the business partner can show that it will be economically harmed or injured by the assignment.

How does this issue derail a deal?  Simple – the party looking to buy or sell or change ownership seeks consent and cannot get it.  If the contract at issue is a key driver for the deal, the whole acquisition can go up in smoke.  For that reason, check your contracts and scrutinize anti-assignment clauses at the time of negotiation.


The Background Check Conundrum: “Manufacturing” a Problem (Pun Intended)

I am a longtime advocate of pre-employment criminal background checks.  So I have watched with resigned acceptance as the EEOC, over 100 states and cities across the United States, and other public advocates have fought to limit the use of an applicant’s criminal history in all but limited circumstances.  New York City’s recently enacted “ban the box” ordinance, which took effect September 2, remains one of the most recent legislative responses, but most certainly will not be the last.  Driving home the point, on September 8, the EEOC announced a settlement of its long running criminal background screening litigation against BMW in which BMW agreed to pay $1.6 million and offer employment opportunities to approximately 100 former applicants.

Against this “ban the box” tsunami, some employers also have been attacked for not being aggressive enough in rejecting applicants based on their criminal backgrounds.  Uber attracted a great deal of attention (and litigation) this summer with the revelation that many Uber drivers were hired notwithstanding significant past criminal convictions.  See, for example, New York Times and Time magazine.  Implicit in this criticism of Uber is the view that the mere fact of conviction for some crimes, no matter how long ago and regardless of the circumstances, made the applicant forever unfit from driving a car-for-hire.

The “Catch 22” has left some employers in doubt as to the course to take.

This practitioner believes the elements of a good background screening policy include the following:

  • An analysis of each position and its essential functions, including degree of unsupervised access to company property, customers, minors and those with special needs.
  • Uniform policies and practices to ensure compliance with federal, state and local laws and notice requirements (such as the Fair Credit Reporting Act).
  • An opportunity for an applicant to voluntarily disclose relevant past criminal convictions and to explain the circumstances and any mitigating factors (youth, rehabilitation, certificate of relief from disabilities, pardon, and so on).
  • An opportunity for an applicant to correct inaccurate criminal conviction reports or explain discrepancies between her or his disclosure and conviction records.

There are many publicly available “best practices” guidelines, two of which can be found here and here.

The debate surrounding the use of criminal convictions is not likely to end soon.  Manufacturers will be well served to review their policies and practices accordingly.

EPA To Propose Overhaul of RCRA Generator Regulations

EPA is poised to publish a proposed rule revising regulations applicable to hazardous waste generators under the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq. (RCRA).  The proposed rule, which has not yet been published in the Federal Register, represents a significant overhaul of the RCRA generator regulations.  EPA states that the purpose of the proposed rule is to make the regulations easier to understand, facilitate compliance, provide greater flexibility in the management of hazardous waste, and close important gaps in the regulations.

Currently under RCRA, there are three categories of generators based on the quantity of waste they generate: Large Quantity Generators (LQGs), Small Quantity Generators (SQGs) and Conditionally Exempt Small Quantity Generators (CESQGs).  The proposed rule would replace the term CESQG with Very Small Quantity Generators (VSQGs).  The generator quantities would not change, but the new term reflects the fact that all categories of generators are conditionally exempt from obtaining a RCRA disposal permit, provided they comply with certain parameters.

The proposed rule also provides some leniency for generators that produce larger quantities of hazardous waste as a result of an episodic event.  A generator would be allowed to maintain its existing generator category even if, as the result of an expected or unexpected episode, the generator generates enough waste to bump the facility into a more stringent category.  A generator would be able to take advantage of this episodic exception once in each calendar year.

The proposed rule would also allow VSQGs to send their waste to LQGs under the control of the same person, provided the facilities meet certain conditions.  The waste from the VSQGs would then be subject to the LQG rules, including notification, recordkeeping and reporting, and labeling, and all wastes at the LQG facility would be uniformly managed.  States would be free to have more stringent rules preventing these waste transfers, and in the event that waste is to be transported across state lines, the generators would need to ensure that both states allow for the transfer.

There are a number of other proposed changes and revisions to the regulations, including more specificity around hazardous waste determinations.  According to EPA, various studies have shown that generators are not properly classifying hazardous waste.  The proposed regulations would provide more detail about how to make these determinations, including a proposal to create an electronic system to help generators navigate through the process.

The proposed revisions are too numerous to recount in this post, but suffice to say, if they become final, they will represent a significant shift for all RCRA generators.  The proposed rule is expected to be published any day in the Federal Register.

Heralding Wholesale Changes for Manufacturers, Labor Board Revamps “Joint Employer” Test

Just in time for Labor Day, the National Labor Relations Board handed organized labor a great gift and potentially disrupted the business and labor relationships of thousands of American manufacturers.

On August 27, 2015, a divided Labor Board ruled 3-2 that Browning-Ferris Industries was the “joint employer” of workers supplied by a third-party.  Browning-Ferris Industries, 362 NLRB No. 186 (Aug. 27, 2015).  Rejecting over thirty (30) years of precedent holding that joint employer status would not be found unless the alleged joint employer actually exercised direct control over the employees’ terms and conditions of employment, the Board adopted a new test.  Going forward, the Board can find that two separate entities are joint employers of a group of employees if they “possess” the power to “share or codetermine” the “essential terms and conditions of employment.”  If you think there is a lot of writing behind those words, you would be correct.  The Board’s decision and dissent comprise over 50 pages of text, with 208 separate footnotes and a diagram.

The facts of the case are illustrative.  Leadpoint Business Services contracted with Browning-Ferris to supply labor to Browning-Ferris’s Newby Island recycling plant.  The contract appears to have been typical.  Leadpoint agreed to provide labor based on Browning-Ferris’s needs and schedule, and Browning-Ferris agreed to pay Leadpoint a per hour fee for each hour of work.  Leadpoint agreed to hire, train and be responsible for its workers, all of whom were required to meet minimum training standards and successfully complete pre-employment drug tests.  The agreement also provided, however, that Leadpoint could not assign employees to the Browning-Ferris facility for longer than six-months, could not assign former Browning-Ferris employees, and could not pay the employees more than the pay rate of current Browning-Ferris employees in the facility.  The evidence shows that on two occasions, Browning-Ferris managers notified Leadpoint of possible misconduct by its employees, misconduct which actually resulted in disciplinary action – once when two workers were observed passing a bottle of whiskey while working on the recycling equipment and once when a piece of equipment was found vandalized.

On these facts, the Labor Board held that Browning-Ferris was a joint employer of the Leadpoint employees.  While the Board could have held that Browning-Ferris was a joint employer under its long-established test, the Board went much further.  Announcing a new standard, the Board found that because Browning-Ferris possessed the power to determine or co-determine the “essential” employment terms, it was the employees’ co-employer.

The Board’s new standard was announced in the context of an initial representation election, but it carries profound implications for manufacturers.

First, many companies routinely enter into agreements with third-parties to provide labor or services – mailroom and delivery services, operating cafeterias and newsstands, cargo and short-haul freight delivery, and security to name just a few.  These typical service agreements contain many of the same terms the Board relied on in finding Browning-Ferris to be a joint employer.  Manufacturers usually determine when personnel can access their facility, require background checks and security clearances, mandate minimum qualifications, set standards for codes of conduct and work performance, and otherwise enact requirements to safeguard the premises and employees.  I personally cannot imagine a reputable employer failing to act after witnessing a contractor’s employees drinking on the job.  Thus, the Board’s decision opens the possibility that manufacturers will be found to be joint employers of the employees of routine third-party service providers.

Second, the Board expressly rejected any “bright-line” test and ignored a fundamental goal of labor relations – predictability.  Addressing this concern, the Board wrote:  “[W]e do not and cannot attempt today to articulate every fact and circumstance that could define the contours of a joint employer relationship.  . . . [T]hese issues are best examined and resolved in the context of specific factual circumstances.”  The absence of a predictable joint employer test could result in significant disruption down the road.  If a manufacturer can only determine whether it “jointly employed” the employees of a third-party service provider after protracted litigation, a manufacturer may have a difficult time deciding when to involve itself it the employment affairs of that third-party and when to stand back.

Finally, the lack of a predictable standard ignores the sometimes chaotic nature of labor relations.  The Browning-Ferris case arose in a representation election context .  But the joint employer standard often comes into play during contract negotiations, grievance-arbitration proceedings, and picketing and strike activity.  When an employee of a service provider files a demand for arbitration over an alleged wrongful discharge, will the manufacturer be obligated to participate in that arbitration even though it is not a party to the contract under a joint employer theory?  If a labor union strikes a service provider, is the manufacturer also a lawful primary target or does picketing at its gates become unlawful secondary activity?  If employees of a third-party service provider walk off the job to protest the actions of the manufacturer, are those employees even engaged in “protected” activity in the first place?

These are just some of the more disconcerting questions to come to mind.  Undoubtedly, as the “warp and woof” of the modern industrial workplace unfolds, we will have many chances to address these issues again.

In the meantime, manufacturers would be well served by reviewing there relationships with third-party service providers in light of the Browning-Ferris decision.