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Coronavirus may be basis to invoke force majeure provision of consent orders and consent decrees in Pennsylvania

The PIOGA Press

(by Kevin Garber, Sean McGovern and Jean Mosites)

On March 6, Governor Tom Wolf issued a Proclamation of Disaster Emergency throughout the Commonwealth under the Pennsylvania Emergency Management Services Code in response to the expanding COVID-19 coronavirus pandemic. On March 13, President Donald Trump declared a state of national emergency. Many other states and local governments are following suit. These government actions may be a basis to invoke the force majeure clause of consent orders and consent decrees between regulated parties and the Pennsylvania Department of Environmental Protection, other state and local environmental regulatory agencies or the U.S. Environmental Protection Agency.

The standard force majeure provision of most DEP consent orders and agreements allows deadlines in the order to be extended if circumstances beyond the reasonable control of the regulated party prevent compliance with the order. Similar provisions are often found in consent agreements with EPA and in consent decrees approved by federal and state courts.

These force majeure provisions typically require the affected party to notify the agency of the force majeure event when the party becomes aware or reasonably should have become aware of the event impeding performance. For example, the model DEP Consent Order and Agreement requires telephone notice within five working days and written notice, in some circumstances by notarized affidavit, within 10 working days describing the reasons for the delay, the expected duration of the delay, and the efforts being taken to mitigate the effects of the event and length of the delay. This model provision states that failure to comply with the timing and notice requirements invalidates a force majeure extension.

There are compelling reasons why the coronavirus pandemic, which is unlike any event experienced in this country, is beyond the contemplated scope of agency force majeure clauses such that strict adherence to the timing and notice provisions should be excused and extensions should be granted as necessary. If the pandemic is interfering or threatening to interfere with your ability to comply with requirements or deadlines in a consent order or consent agreement, because of a limited availability of employees, vendors, supplies or otherwise, consider potential options within the force majeure clause of the agreement. Also consider an application of force majeure principles to pandemicrelated difficulties complying with environmental permits.

Babst Calland’s environmental attorneys are available to help you with your situation and recommend the best course of action for proceeding in these uncertain times. For more information, please contact Kevin J. Garber at 412-394-5404 or kgarber@babstcalland.com, Sean M. McGovern at 412-394-5439 or smcgovern@babstcalland.com, or Jean M. Mosites at 412-394-6468 or jmosites@babstcalland.com.

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DEP will consider requests to temporarily suspend environmental requirements due to COVID-19

The PIOGA Press

(by Lisa Bruderly and Daniel Hido)

As businesses in Pennsylvania struggle to deal with significant disruptions and challenges to their operations caused by the COVID-19 pandemic, environmental agencies have recognized the challenges the pandemic presents to achieving compliance with environmental obligations. For example, on March 26 the U.S. Environmental Protection Agency issued a temporary policy for excusing COVID-19-related noncompliance (see accompanying article). Similarly, on March 31 the Pennsylvania Department of Environmental Protection issued an alert (www.dep.pa.gov/Pages/AlertDetails.aspx) announcing that it would consider requests to temporarily suspend certain regulatory, permit, and/or other legal requirements due to COVID-19. DEP also provided the form needed to make such a request.

This announcement reflects a thought change from DEP’s previous assertion that COVID-19’s impact on businesses in Pennsylvania would not excuse compliance with environmental laws, stating that “[a]ll permittees and operators are expected to meet all terms andconditions of their environmental permits, including conditions applicable to cessation of operations.”

What is required to request a temporary suspension?

Unlike EPA’s temporary policy, which does not require regulated entities to submit documentation regarding an inability to meet routine compliance obligations, DEP is requiring submittal of the request form. While DEP did not elaborate on how it will review requests for suspension, it will generally evaluate (1) the reasons for the request in light of the COVID-19 pandemic, and (2) the risk of harm to the environment or public health if the request is or is not granted.

Importantly, it will not be enough for entities to show that COVID-19 has restricted their ability to comply with regulatory, permit or other legal requirements; entities must demonstrate that strict compliance would prevent, hinder or delay necessary action in coping with the COVID-19 emergency. This standard reflects the language of Governor Tom Wolf’s March 6 Proclamation of Disaster Emergency and 35 Pa. C.S. § 7301, which DEP cited as authority for granting temporary suspensions.

The two-page request form asks 16 questions regarding topics including the following:

• Alternate compliance options that have been explored;
• Length of time the entity expects to be unable to comply and the necessary circumstances to return to compliance;
• Extent of risk of additional pollution and/or how such increased pollution will be avoided;
• Public health and safety benefits from granting the suspension; and
• Negative consequences to the entity’s operations and the Commonwealth’s response to the COVID-19 emergency if the suspension is not granted. Some of the more interesting, and potentially controversial, questions asked by DEP include the following:
• Do you believe cost gouging or supply hoarding is negatively affecting your ability to comply?
• Would you possess a unique advantage over your competitors, or others in the same industry, if a suspension is granted?

It is not clear whether DEP will be receptive to entities requesting suspensions from settlement agreement requirements using the request form, or whether the department will expect entities to rely primarily on the force majeure provisions typically provided in those agreements. However, the request form does allow entities to request suspension of regulatory, permit “or other requirement(s),” indicating that entities may be able to request suspension of settlement agreement requirements using this recentlyintroduced process.

When are suspensions expected to be granted?

DEP has not announced its expected time frame for responding to the likely large number of requests for suspension. The department also did not explain how it will evaluate and balance the factors outlined in the request form. April 2020 | The PIOGA Press 7  However, in multiple places the form emphasizes that the entity should provide detailed and specific responses. DEP stated that suspensions will initially not be granted beyond June 30, 2020.

We note that this procedure applies only to requests for suspension of state regulatory or permit requirements and requirements under federal programs delegated to Pennsylvania. Entities seeking relief from federal requirements, under only federal authority, are to contact EPA Region III and consult EPA’s March 26 policy.

Additional guidance on conducting Chapter 102 earth disturbance activities

At the same time as providing the temporary suspension request form, DEP also issued COVID-19-related guidance for permittees and operators conducting permitted earth disturbance activities under Chapter 102 of the Pennsylvania regulations.

Entities considered “life-sustaining businesses” under Governor Wolf’s March 19 order, which required all “non-life-sustaining businesses” to close their physical locations, may continue to conduct earth disturbance activities to the extent such activities are in support of the operation of the life-sustaining business.

However, “non-life-sustaining businesses” must cease earth disturbance activities. Upon doing so, the entity must implement temporary or permanent stabilization measures as required by the permit and applicable regulatory requirements. Once required stabilization measures are implemented, the entity is relieved from requirements to perform weekly routine inspections, but still must conduct other inspections required by the permit, such as Post-Storm Event and Corrective Action inspections. DEP stated that it considers such inspections to be critical operational functions and not in violation of the March 19 order.

Babst Calland’s environmental attorneys are available to help you develop requests for temporary suspensions and guide you through the process. For more information, please contact Lisa M. Bruderly at 412-394-6495 or lbruderly@babstcalland.com or Daniel P. Hido at 412-394-6580 or dhido@babstcalland.com.

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US Supreme Court Update: Cases to Watch for CERCLA Practitioners

The Legal Intelligencer 

(by Alana Fortna)

While there are several interesting environmental cases currently before the U.S. Supreme Court, two cases are particularly relevant for any legal practitioner handling Superfund cases, whether they involve site remediation issues or litigation over the cleanup costs. The two cases to watch are Atlantic Richfield v. Christian, Case No. 17-1498, and County of Maui v. Hawaii Wildlife Fund, Case No. 18-0260. Respectively, these two cases deal with the important legal questions of preemption and how groundwater discharges can be regulated and enforced. Both issues could have a significant impact on the scope of remediation and potential litigation at Superfund sites. CERCLA practitioners should watch for the opinions in these two cases.

The Atlantic Richfield appeal came out of the Montana Supreme Court, and it asks the court whether the Comprehensive Environmental Response, Compensation and Recovery Act (CERCLA), 42 U.S.C. Section 9601 preempts state common law remedies. The case involves the Anaconda Smelter Site, a Superfund site covering 300 square miles of property impacted by historical smelter and ore processing operations. The U.S. Environmental Protection Agency (EPA) placed the site on the National Priorities List in 1983 and identified Atlantic Richfield Co. as a potentially responsible party (PRP). After years of remedial investigation under EPA oversight, the EPA approved a remedial action plan for the cleanup of the site. The respondents in the appeal are a group of landowners who sued Atlantic Richfield alleging common law tort claims seeking more traditional damages, such as monetary damages and diminution of property value.  However, the respondents also sought relief in the form of restoration, asking that Atlantic Richfield remediate or pay for remediation above and beyond the EPA-approved remedy. The respondents argued that Montana law supports their requested relief and requires Atlantic Richfield to restore the property to its pre-contamination state before the on-set of historical smelting operations. The critical question presented to the court is whether CERCLA preempts state common law claims for restoration that seek clean-up remedies that conflict with EPA-ordered remedies. The Montana Supreme Court held that landowners can pursue common law claims for restoration despite the conflict with EPA’s remedy.

Before the U.S. Supreme Court, Atlantic Richfield argued that the lawsuit and the restoration relief requested is barred by Section 113 of CERCLA, which deprives courts of the ability to hear challenges to the EPA’s remedial action plans. This is a critical component of CERCLA because it prevents parties from disrupting the remedial process and trying to impose a different remedy than what was approved by the agency with authority and experience. With respect to the preemption issue, Atlantic Richfield argued that in order to comply with the alleged state law duty to restore the property, it would have to defy the EPA order implementing the chosen remedial action. This creates a clear and stark conflict between state law and CERCLA. Numerous parties filed amicus curiae briefs in the appeal, including the Chamber of Commerce of the United States. The U.S. Supreme Court also invited the Solicitor General to file a brief expressing the views of the United States, and the Solicitor General also participated in oral argument before the court on Dec. 3, 2019.

The potential impacts of a decision affirming the Montana Supreme Court could be far-reaching. Such a decision could open the door to litigation by any displeased property owner in the vicinity of a Superfund site who believes that the EPA’s selected remedy is insufficient. Such litigation, if successful, would disrupt the regulatory framework of CERCLA, make remediations even more costly, and undercut the certainty and protections afforded to PRPs who work with EPA to clean up contaminated sites. Remedial investigations under CERCLA follow a certain process that evaluates the nature and extent of contamination and evaluates the feasibility of various alternatives for remedial action. CERCLA already includes public notice and comment requirements to allow the community to weigh in on the efforts at a given site. However, a ruling that affirms the Montana Supreme Court would allow private parties to try to dip their hands into the remediation process by filing a private action that was never contemplated by CERCLA or its regulatory framework.

The second case of interest is the County of Maui appeal out of the U.S. Court of Appeals for the Ninth Circuit, which involves how discharges to groundwater are regulated. While several federal cases have addressed the issue of the indirect discharge of pollutants into jurisdictional waters via groundwater transport, the U.S. Supreme Court granted certiorari in the County of Maui case. The case involves discharges to wastewater treatment plant wells that eventually reached the Pacific Ocean. The Ninth Circuit found Clean Water Act liability based on indirect discharges but limited coverage to instances where “the pollutants are fairly traceable from the point source to a navigable water such that the discharge is the functional equivalent of a discharge into the navigable water” and the pollutants that reach the surface water are more than “de minimis.” This is an important issue with far-reaching ramifications because it is generally understood that all groundwater that is not otherwise removed (i.e., pumped for drinking water supply) will eventually discharge to a surface water. The Clean Water Act prohibits discharges of pollutants from a “point source” without a NPDES permit.

The U.S. Supreme Court granted the petition from the Ninth Circuit case as to the following question: “Whether the Clean Water Act requires a permit when pollutants originate from a point source but are conveyed to navigable waters by a nonpoint source, such as groundwater.” Numerous amicus curiae briefs were filed from a variety of parties, including former U.S. EPA officials and administrators, several states, and other interested organizations, which shows the importance of the question involved. The county argued that the Clean Water Act very deliberately controls pollution from “point sources” differently from “non-point sources.” Only discharges from “point sources” are regulated by the Clean Water Act and require a permit. The county argued that this position is unambiguously supported by the text, structure, context, history and purpose of the Clean Water Act. Oral argument occurred on Nov. 6, 2019, and an opinion is expected sometime this year.

How does a case about regulation under the Clean Water Act potentially affect liability at contaminated Superfund sites being remediated under CERCLA or the Resource Conservation and Recovery Act (RCRA)? Similar to the Atlantic Richfield case, a decision from the U.S. Supreme Court affirming the Ninth Circuit could threaten to disrupt the regulatory process for remediating sites. Such a decision could open up PRPs to unanticipated liability under the Clean Water Act, which includes a citizen suit provision. Both CERCLA and RCRA cleanups are based on an evaluation of risk. For example, under CERCLA, a PRP in conjunction with EPA evaluates remedial action alternatives, which may not include absolute source control. Acceptable alternatives may allow for some form of natural attenuation or institutional controls related to groundwater contamination. Moreover, CERCLA and RCRA include a mechanism for a determination that removal of certain contamination in groundwater is technically infeasible. If a PRP has not achieved complete source control, then it could arguably face additional liability under the Clean Water Act for contamination that is migrating from the source area into groundwater and ultimately to a navigable water. This is not what was intended by the Clean Water Act. Therefore, the groundwater conduit theory could potentially disrupt the regulatory framework and semblance of predictability at Superfund sites while opening PRPs up to additional, unintended litigation.

For the full article, click here.

Reprinted with permission from the April 2, 2020 edition of The Legal Intelligencer © 2020 ALM Media Properties, LLC. All rights reserved.

End of the Trail: Supreme Court to Hear Atlantic Coast Pipeline Appeal

Institute for Energy Law Oil & Gas E-Report

(by Adam Speer)

On October 4, 2019, the Supreme Court of the United States granted certiorari to hear an appeal of the Fourth Circuit’s decision vacating the United States Forest Service’s special use permit authorizing the Atlantic Coast Pipeline (ACP) to cross beneath a segment of the Appalachian National Scenic Trail. In Cowpasture River Preservation Association v. Forest Service, 911 F. 3d 150 (4th Cir. 2018), a three-judge panel from the Fourth Circuit Court of Appeals ruled that the United States Forest Service lacked the statutory authority pursuant to the Mineral Leasing Act (MLA) to grant a pipeline right-of-way across the Appalachian Trail. The Fourth Circuit’s decision halted the construction of the ACP. If the decision stands, it could impede the completion of the ACP and affect other current and future pipeline projects along the east coast, like the Mountain Valley Pipeline, that would also cross the Trail.

For the full article, click here.

For the full report, click here.

2 Recent Court Opinions Clarify Mechanics’ Lien Claim Practices, Procedures

The Legal Intelligencer

(by Marc Felezzola and Benjamin Wright)

Two recent opinions from Pennsylvania’s Superior Court clarify aspects of the practice and procedure surrounding mechanics’ lien claims in the commonwealth—one case addressed whether a subcontractor may serve its formal notice of intent to lien upon an owner via FedEx and the other addressed when, if ever, grounds for statutory preliminary objections to a mechanics’ lien claim will be deemed waived.

• Superior Court permits service of subcontractor’s formal notice of intent to lien via FedEx.

In American Interior Construction & Blind v. Benjamin’s Desk, 206 A.3d 509 (Pa. Super. Ct. 2019), the Superior Court was asked to determine whether the procedural rules of the Mechanics’ Lien Law were to be interpreted strictly or whether substantial compliance would suffice.

In American Interior, Benjamin’s Desk had retained Brass Castle Building (Brass) as the general contractor for the construction of office space improvements. Brass retained American Interior Construction & Blind  (AICB) as a subcontractor. AICB completed its work in December 2016 and AICB alleged that Brass failed to pay AICB in full.  AICB served a timely notice of its intent to file a mechanics’ lien against Benjamin’s Desk. However, AICB used FedEx to deliver its notice of intent. AICB then filed its complaint to enforce the lien claim.

Benjamin’s Desk filed preliminary objections in the nature of a demurrer alleging AICB failed to comply with the service-of-notice requirements under the Mechanics’ Lien Law. In response, AICB filed a response arguing that personal service of the formal notice by FedEx is personal service by an adult in the same manner as a writ of summons in assumpsit and therefore was expressly permitted by section 501(d) of the Pennsylvania’s Mechanics’ Lien Act of 1963 (Lien Law), 49 P.S. Section 1501(d).

Section 501(d) of the Mechanics’ Lien Law of 1963 provides that formal notice of intent to lien “may be served by first class, registered or certified mail on the owner or his agent or by an adult in the same manner as a writ of summons in assumpsit or if service cannot be so made then by posting … the improvement.”

The trial court sustained the preliminary objections and struck AICB’s complaint for lack of proper notice. AICB timely appealed. The primary issue before the Superior Court was whether a subcontractor may properly serve its formal notice of intent to lien via FedEx.

The Superior Court looked to Pennsylvania Rule of Civil Procedure 400.1, which governs the service of original process for actions commenced in Philadelphia. This rule states in relevant part, “In an action commenced in the first Judicial District, original process may be served … within the county by the sheriff or a competent adult.”  The Pennsylvania Supreme Court had previously interpreted Rule 400.1 as it related to the delivery of a praecipe to issue a writ of summons via certified mail. The Supreme Court had held that neither prior Pennsylvania cases nor the rules themselves contemplated punishing a plaintiff for technical missteps “where he has satisfied the purpose of the statute of limitations by supplying a defendant with actual notice.” See McCreesh v. City of Philadelphia, 888 A.2d 664 (Pa. 2005). Thus, pursuant to McCreesh as interpreted by the Superior court in American Interior, “technical noncompliance” with the Rules of Civil Procedure for original process may be excused “absent intent to stall the judicial machinery or actual prejudice.”

Applying that rule to the record before it, the Superior Court reversed and reinstated AICB’s complaint because “even if AICB failed to comply with the service requirements for original process, Benjamin’s Desk received actual notice and no party has alleged an intent to stall or actual prejudice.” The Superior Court’s reliance on McCreesh may implicitly suggest service of formal notice of intent to lien via FedEx is neither acceptable service by mail under Section 501(d) of the Lien Law nor acceptable service by competent adult under Rule 400.1(a)(1). However, the American Interior opinion makes clear that technical compliance with the lien law’s service-of-notice requirement will be excused and service of a formal notice of intent to lien will be upheld as long as the owner actually receives the notice, the manner was not intended to stall the judicial machinery, and the owner suffered no prejudice as a result of the technically improper service. Given this standard, service by FedEx was permissible in American Interior and likely will be in all other cases going forward.

• Superior Court declares that grounds for statutory preliminary objections to a mechanics’ lien claim are waived if not asserted in (or prior to the filing of) responsive pleading to the complaint to obtain judgment on the lien.

Section 505 of the Lien Law, 49 P.S. Section 1505, provides, “any party may preliminarily object to a mechanics’ lien claim upon a showing of an exemption or immunity of the property from lien, or for lack of conformity with this act … Failure to file an objection preliminarily shall not constitute a waiver of the right to raise the same as a defense in subsequent proceedings.” Thus, Section 505 seems to suggest that the statutory defenses to a lien claim (i.e., immunity of the property from lien or failure to perfect the lien in accordance with the requirements of the Lien Law) cannot be waived and may be asserted at any time to invalidate a mechanics’ lien.  However, in Terra Firma Builders v. King, 215 A.3d 1002 (Pa. Super. Ct. 2019), the Pennsylvania Superior Court expressly rejected this interpretation of Section 505.

In Terra Firma Builders, the mechanics’ lien claimant failed to properly perfect its lien because it did not file an affidavit of service for the lien as required by Section 502(a)(2) of the Lien Law, 49 P.S. Section 1502(a)(2). However, the property owners did not file statutory preliminary objections seeking to strike the lien as improperly perfected, nor did they file preliminary objections to the claimant’s complaint to obtain judgment on the lien pursuant to the Pennsylvania Rules of Civil Procedure challenging the propriety of service.

After the close of pleadings, the lien action was consolidated with the claimant’s civil action for breach of contract and the consolidated cases went to trial. Following trial, judgment was entered in favor of the owners and the parties filed post-trial motions. With those post-trial motions pending, the owners filed a motion to strike the lien for failure to comply with the lien law due to failure to file an affidavit of service.

The trial court interpreted the owners’ motion to strike as a preliminary objection under Section 505, read that statutory section to allow an owner to file statutory preliminary objections at any time, even after the enforcement action and trial is over, and struck the lien for failure to comply with the Lien Law’s procedural requirements.

On appeal, a divided panel of the Superior Court reversed, with Senior Judge Dan Pellegrini and Judge Deborah A. Kunselman holding that that the word “preliminary” as used in Section 505 of the Lien Law must have some meaning. Thus, according to the majority, Section 505 must be construed as requiring an owner to assert Section 505 defenses “in the enforcement proceeding in accordance with the manner provided for in the applicable rules of civil procedure.” The majority went on to conclude that because “the lack of service defense to the claim was not raised by preliminary objection or new matter as required under the Rules of Civil Procedure in the enforcement proceeding,” the “owners’ motion to strike was untimely and the issue was raised.”

In dissent, Judge Mary P. Murray argued that “Section 505 unambiguously places no limit on when a party may raise a defense to the enforcement of the lien” and allows an owner to move to strike a lien at any time, even after the conclusion of enforcement proceedings. On March 10, the Pennsylvania Supreme Court agreed to hear the owners’ appeal of the Superior Court’s decision. Thus, in the coming months, we should expect more clarity on the proper interpretation of Section 505.

For the full article, click here.

Reprinted with permission from the March 26, 2020 edition of The Legal Intelligencer© 2020 ALM Media Properties, LLC. All rights reserved.

Turning Down the Heat – What sort of legal and legislative action is necessary to help put Pennsylvania on the front lines of the battle against climate change

Pennsylvania’s Best Lawyers

(by Joseph Reinhart)

Much state environmental law is based on federal statutes. How can environmental-law attorneys help?

Environmental lawyers can be instrumental in sustaining rural communities and protecting natural resources by helping landowners and businesses understand the complex and interrelated laws and regulations governing so many aspects of economic development. Many municipalities in Pennsylvania have passed ordinances designed to protect residents in rural areas from environmental harm associated with natural-resource development. In some cases, these ordinances are issued with the intention of implementing Pennsylvania’s Environmental Rights Amendment. These ordinances may require approval prior to conducting activities as common as earth disturbance and road usage. Sorting out the laws and ordinances applicable to these activities, and determining which governmental authority has jurisdiction over them, are tasks well-suited to attorneys trained in environmental law.

Many states have developed their own climate-change plans. Do you think Pennsylvania will do that?

In 2018, Governor Tom Wolf issued an executive order establishing a Climate Action Plan for the commonwealth. The plan seeks to achieve, by 2025, a 26 percent reduction in greenhouse-gas emissions from 2005 levels. It includes a wide variety of proposed actions, including improvements in energy efficiency, increased use of electric vehicles, maintenance of nuclear generating capacity, and investment in solar development. The plan also contemplates development of a cap-and-trade program to limit carbon-dioxide emissions.

Will the passage of certain laws be necessary?

Wolf’s executive order requiring the development of a cap-and-trade program has been met by stiff resistance from parties concerned about the costs and potential adverse economic consequences associated with a carbon tax. In December 2019, members of the Pennsylvania House and Senate referred bipartisan companion bills, known as the Pennsylvania Carbon Dioxide Cap and Trade Authorization Act, to their respective environmental and energy committees. The proposed legislation provides that there is currently no statutory or constitutional authority allowing a state agency to impose a tax on carbon emissions, and requires the General Assembly, in consultation with the DEP and other agencies, to determine whether and how to do so. Regardless of the outcome, any laws dealing with a cap-and-trade program in Pennsylvania are likely to receive considerable attention and require input from environmental lawyers representing all interested parties.

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DEP unveils initial draft of carbon dioxide trading rule to Air Quality Technical Advisory Committee

The PIOGA Press

(by Kevin Garber and Jean Mosites)

On February 13, the Department of Environmental Protection presented its preliminary draft proposed rulemaking to establish a carbon dioxide budget trading program to the Air Quality Technical Advisory Committee (AQTAC). The proposed trading program would apply to fossil fuel fired electricity generators of greater than 25 MW in Pennsylvania. The draft proposal reflects a first look at DEP’s vision for a cap-and-trade program as directed by Governor Tom Wolf’s October 3, 2019, Executive Order 2019-07.

The draft proposed rule, although still in development, parallels the model rule prescribed by the Regional Greenhouse Gas Initiative (RGGI). RGGI is a coalition of 10 states in the Northeast and Mid-Atlantic that participate in a regional CO2 cap-andtrade program for fossil fuel-fired electricity generating units that have a nameplate capacity of over 25 MWe.

Under the program, each member state has a budget of CO2 allowances, which it then allocates through setaside programs, offsets or periodic auctions. The number of allowances in each state’s CO2 budget that are allocated through auction varies widely among members. Each affected source (CO2 budget source) is required to hold sufficient CO2 allowances based on its CO2 emissions as determined from continuous monitoring. Each allowance is equal to one ton of CO2 emissions.

States’ CO2 budgets, and in turn available allowances, periodically reduce over time. This requires each CO2 budget source to either reduce CO2 emissions as measured by continuous monitoring, or obtain extra CO2 allowances to cover its emissions in excess of its allowance account. Under RGGI, auctions to obtain allowances generally occur quarterly, and may be open to qualified participants other than CO2 budget sources. The draft proposed rule explicitly mentions financial institutions and environmental groups as potential auction participants. The proposal specifies an annual rather than quarterly auction process.

Unlike the majority of RGGI state members, Pennsylvania DEP has indicated it does not intend to seek legislative authority to implement a CO2 trading program, but rather believes it has sufficient authority under the Pennsylvania Air Pollution Control Act. This position has been controversial, as some stakeholders contend that approval by the Pennsylvania General Assembly is necessary for such a trading program, including one that would involve other states. In November 2019, bills were introduced into the House (HB 2025) and Senate (SB 950) that would require General Assembly approval for any Pennsylvania carbon cap-and-trade program. This legal dispute is likely to give rise to significant ongoing challenges to the trading program rule.

DEP’s draft proposed rule contains a number of differences from the RGGI model rule, most notably including:

• The proposed rule states that it is designed to reduce CO2 emissions “in a manner that is protective of public health, welfare and the environment and is economically efficient,” while the RGGI model rule mentions only economic efficiency in its statement of purpose. Numerous concerns were raised at the AQTAC meeting regarding the overall cost-effectiveness of the trading program, an analysis of which will be required under Pennsylvania’s Regulatory Review Act, Commonwealth Attorneys Act and the Climate Change Act. DEP indicated it is still assessing costs and benefits of the trading program. The overall economic impact of the regulation will be a critical issue to a variety of stakeholders as the rulemaking progresses.

• The draft proposed rule does not require the establishment of multi-state allowance auctions, as performed within RGGI. Rather, the draft proposal gives DEP discretion to hold auctions only within Pennsylvania if it determines, among other things, that its participation in a multi-state auction process would not provide more benefits than costs to Pennsylvania versus a statewide auction. There is no established timeframe in the draft proposed rule for Pennsylvania DEP to determine which approach it will take.

DEP is operating on an accelerated timeframe to initiate and ultimately finalize the CO2 budget trading program rulemaking. It intends to present a proposed version of the regulation to AQTAC in April, at which point the committee will vote on whether to advance the proposal to the Environmental Quality Board (EQB). DEP anticipates submitting the proposal to the EQB by July as required by Executive Order 2019-07. Assuming the EQB votes to adopt the regulation as a proposed rulemaking, public comments will be solicited in fall of 2020, and the final rulemaking could be promulgated by fall 2021. DEP expects the regulation to be effective in the first quarter of 2022.

Owners and operators of fossil fuel-fired electricity generating units greater than 25MW will be directly affected by the CO2 budget trading program rulemaking if the rule is adopted in its currently proposed form. In addition, the energy industry, manufacturers and consumers in general are likely to be affected by the rulemaking based on the potentially far-reaching impacts to the nature of energy generation within Pennsylvania and regionally.

Babst Calland’s climate change attorneys are closely following this rulemaking. If you have questions about the proposed CO2 budget trading program, please contact Kevin Garber at 412-394-5404 or kgarber@babstcalland.com or Jean Mosites at 412-394-6468 or jmosites@babstcalland.com.

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Julie R. Domike – Environmental Attorney

Emerging Technologies Profile 

Is there one thing you recall that influenced your career path? Yes, I started thinking about hands-free vehicles when I was just a kid. On a vacation back to the U.S., as my father accelerated the family station wagon onto the highway, I imagined something like a subway’s third-rail. Vehicles would connect to it and travel forward in a safe and graceful caravan. Drivers would be able to use their time how they pleased—maybe playing a game of cards with their daughters. When it was time to return to active driving, the vehicle would disconnect, and the driver would resume the controls.  Even back then, the idea made so much sense to me.

What may surprise people about your background? As an attorney at the EPA, I was involved in rulemaking and enforcement for the first part of my career. In private practice, I represent companies that have been the focus of EPA’s regulations. Some of my friends tell me that my best skill is as an intermediary who can play on both sides of the regulatory fence.

What brought you to the nation’s capital? As the daughter of an American working abroad, I was raised all over Latin America.  While growing up in countries still squarely under the thumb of charismatic caudillos, the idea of a country governed by law instead of one man’s whims seemed like a paradise. I’ve always been impressed by the predictability that stare decisis and precedent lend to our system. My law degree is from Georgetown, and from there I joined the EPA where the focus was on implementing the 1990 amendments to the Clean Air Act.

How do you ease your daily commute into/out of the District? Currently, while en route, I’m listening to the audiobook Go, Went, Gone by German novelist Jenny Erpenbeck.  It’s a story about a widowed, retired professor in Berlin who experiences a transformation after he witnesses African refugees during a hunger strike and subsequently becomes involved in their immigrant community first as an academic pursuit and then as a friend.

Do you think AI will ever advance far enough to take over your complex job anytime soon? AI is already making our legal work more efficient. But, not yet to the point where it can replicate the high value logic and judgment that we aspire to every day. Nevertheless, when the time comes for technology to replace legal counsel, I’ve got a plan for what to do next.

So, what does that future plan include? If and when that happens, my plan is to travel extensively across Latin America where I grew up to see how it’s changed.  When that’s done, it’ll be off to Australia for a couple of months.

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The value of M&A and why you can’t afford to ignore it

Smart Business 

(by Jayne Gest with Chris Farmakis)

Vivak Gupta has hands-on experience with M&A — including his share of battle scars — after 36 years in the IT industry. Most recently, he was the president and CEO behind Mastech Digital’s $55 million deal for InfoTrellis in 2017.

No two acquisitions are the same, but he says he tries not to make the same mistakes twice.

“It’s a pretty complex process, and there is no shortcut but to actually learn from experience,” Gupta says. “It’s baptism by fire — you have to burn your fingers and then you really get to know what works and what doesn’t work.”

But even when Gupta isn’t actively looking to buy or sell a business, he keeps an eye on the dealmaking market — who is buying and selling companies and raising capital — because it’s a good indicator of what’s happening in the industry.

“Why is my competitor acquiring a company in, just as an example, the cloud space?” he says. “How is it connecting with their current strategy? Then, you watch how they complete the acquisition and how the market rewards them or penalizes them for that acquisition.”

Gupta isn’t alone in his feelings about the value of M&A. Many executives, investors and advisers see how mergers, acquisitions and dealmaking play a critical role in business today — both directly and indirectly. And those who ignore it run the risk of falling behind as their competitors scoop up a new technology, diversify into new geographies, raise growth capital and implement long-term exit plans that help them operate better.

You owe it to yourself to build your M&A knowledge and network, but don’t take our word for it. Here’s what some of Pittsburgh’s dealmakers had to say.

Take the initiative

M&A is done by different companies for different reasons, Gupta says, adding that you can get ideas from watching others, including honing your own strategy, because it’s important to agonize, from the beginning, about why you’re doing deals.

Many times, organizations are approached by someone looking to sell, such as founders looking to exit.

“That’s not a bad thing, but that’s more reactive,” he says.

It’s better to start at the drawing board and figure out your purpose for buying a company, Gupta says. Is it to bulk up or add new capabilities? Are you trying to diversify? Are you trying to realign the organization?

Gupta stays in touch with what’s going on in his industry by subscribing to numerous M&A reports and scrutinizing them to try to determine what his competitors’ objectives are and if they’re working out — and sometimes gets good ideas from his research.

Watching the dealmaking market isn’t just a way to gather ideas. It’s also a way to be ready for changing market conditions.

Chris Farmakis, shareholder and chairman of the board at Babst Calland, sees a lot of private equity capital in the marketplace chasing down middle-market deals. These firms are good at spotting regional or family-owned businesses, investing in one and then doing roll-up acquisitions to consolidate the industry.

“Business owners need to pay attention to this activity because what could happen is, you might be in an industry that consolidates and you’re the last standalone business,” he says. “You wait too long — you have no one to sell to or, at best, your purchase price is lower.”

Even if you’ve been successfully operating your business for 30 years, consolidation can add pricing or competitive pressures because your competitors now have scale.

“Business owners focus more on customer relationships and operations, as opposed to changing market conditions outside of their industry,” Farmakis says. “Sometimes, it’s important for them to lift their heads up and take a broader look at the market.”

Farmakis recommends utilizing trade associations as a resource, but doing so requires a different kind of networking than what business owners would normally be doing — which is mining customers, looking at new operations and other things that relate to operations.

For example, business owners can get a sense of market-based pricing for their industry, and people share things like, “The multiples are landing here,” or “This is what I heard they sold their company for.”

“Trade associations and industry associations can be a very good heartbeat or pulse as to what’s going on in the industry, and it’s a way to get direct and indirect information about people who have sold,” Farmakis says. “You can get a sense of, if you’re buying, what companies might cost and how they’re funded.”

Know your value

President and CEO Michael Wagner started Target Freight Management more than a decade ago. He did his first two deals in 2019 when he bought out his business partner and acquired his first company. However, he paid attention to M&A prior to that, as it helped him understand the market and how his company’s value was changing.

Wagner knew what multiples logistics businesses were selling for — and he even had larger corporations pitching to him and asking him to sell.

“I wasn’t looking to exit, but there were big numbers thrown around in my business in the last three or four years,” he says. “I think it’s slowed down a little bit, but it’s just good to understand and know what’s going on in your business from that standpoint.”

Wagner also already had a foundation of knowledge when his partner wanted to sell. Wagner, who has never worked in another industry, wasn’t ready to retire at age 40, and he didn’t want to work for somebody else or wait until a noncompete ran out.

“It was important for me to understand the value of the business, and what it was going to cost me to buy him out,” he says.

John Roppo believes that knowing your value is just the start. Preparing for a sale takes time — especially if you want to get the best price you can. The long-time CFO started his own firm, Roppotunity LLC, to help companies prep for sale, among other things.

“You can’t bring somebody in three to six months out and say, get the company ready for sale,” he says. “You can do it, but you’re not going to get the best value, or you’re going to have a higher risk of the deal falling apart.”

Dawn Fuchs Coleman and her family’s business, Weavertown Environment Group, is a good example of why it’s important to be prepared. They had been approached numerous times by venture capital groups and angel investors but were never really interested.

When Univar, however, came to the environmental services company in 2015, she decided to listen to its offer, and nine months later, the sale went through.

Her reasons were many, but the timing was right. Fuchs Coleman wasn’t sure if the next generation, which was still young, was interested in running the company. She also knew the company couldn’t continue to self-finance, so a large strategic buyer was appealing.

“I had an uncle that had a very successful family business in the second mortgage lending space,” she says. “He had an offer to sell his business. He turned it down, and years later, I think he always regretted it. So, I had that in the back of my mind, too.

“You can’t be naïve, and you can’t be ignorant. You’ve got to be willing to hear it. If it feels right, listen; don’t just stop and say, ‘I’m not interested.’ You have to be open-minded.”

Use all available growth tools

Sreekar Gadde, executive director at BlueTree Capital Group, has noticed that staying updated on the M&A market allows business leaders to better plan for the future.

“This allows leaders to make informed decisions about their business — basically making sure that they are moving with the market and not stagnating,” he says. “In addition, this allows leaders to keep an eye open for M&A opportunities.”

They may discover a strategically advantageous chance to merge or acquire companies at a low value that will improve the business’s future opportunities, Gadde says.

BlueTree Capital Group also tends to view all major decisions in the context of M&A, he says. What is the ROI? Can the venture capital firm see a way to get a 3x to 5x on the capital or resources spent?

“In view of that, most, if not all, parts of a growth strategy need to be considered within the context of the M&A market,” Gadde says.

Business owners may want to use a similar lens on their decisions, especially if there’s a possibility that they want their company to be acquired in the future.

“Business owners need to constantly be informed about the M&A ecosystem — both the current status and where the ecosystem is headed,” he says. “This informs every decision they make, from product roadmap, to hiring, to financing and, eventually, when to start the acquisition process and how to position their company to get the most favorable terms.”

The most effective business leaders use all available tactical and strategic tools to grow shareholder value, says Louis Testoni, a retired market managing partner with PricewaterhouseCoopers who serves on a number of corporate boards.

Buying companies or divesting assets is one of those tools.

“Divestitures can be a valuable tool to monetize underperforming assets and/or assets no longer aligned with the core business strategy,” he says.

They can also unlock intrinsic value sitting on the balance sheet to reinvest in alternative ways, or reduce debt or increase working capital to support other parts of the business’s growth strategy.

For the full article, click here.

Court Provides Clarity on the Applicable Scope of Review in Land Use Appeals

The Legal Intelligencer

(by Alyssa Golfieri)

Zoning hearing boards have exclusive jurisdiction to hear and render final adjudications on nine discrete matters, ranging from substantive challenges to the validity of land use ordinances, to appeals from determinations of a zoning officer, to applications for variances and special exceptions from the terms of zoning and floodplain ordinances. See Section 909.1(a) of the MPC, 53 P.S. Section 10909.1(a). If a party to a land use matter is unhappy with a zoning hearing board’s final adjudication, he has 30 days to appeal the decision to the trial court. See Section 1002-A of the MPC, 53 P.S. Section 11002-A.

When rendering final adjudications, zoning hearing boards sit as fact finders. This means zoning hearing boards are the sole judge of the credibility of witnesses and the weight afforded evidence. See Tri-County Landfill v. Pine Township Zoning Hearing Board, 83 A.3d 488, 518 (Pa. Commw. Ct. 2014). As such, when a zoning hearing board’s decision is appealed to the trial court, the trial court should not, with one exception addressed below, engage in fact-finding or disturb the board’s credibility determinations. See Section 1005-A of the MPC, 53 P.S. Section 11005-A; see also Manayunk Neighborhood Council, 815 A.2d at 652 (Pa. Commw. Ct. 2002). Rather, the trial court must uphold a zoning hearing board’s determination so long as the board did not commit a manifest abuse of discretion—an abuse of discretion occurs only when a zoning hearing board’s findings are not supported by substantial evidence, which Pennsylvania courts have defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. See Berman v. Manchester Township Zoning Hearing Board, 540 A.2d 8, 9 (Pa. Commw. Ct. 1988); Hertzberg v. Zoning Board of Adjustment, 721 A.2d 43, 46 (Pa. 1988)—or an error of law.

The one exception to a trial court’s deferential standard of review is a circumstance where the trial court, upon motion by a party, concludes the zoning hearing board improperly excluded evidence.  In such circumstances, the trial court may open the hearing record and accept additional evidence pursuant to Section 1005-A of the MPC, 53 P.S. Section 11005-A. Section 1005-A provides, in relevant part:

“If, upon motion, it is shown that proper consideration of the land use appeal requires the presentation of additional evidence, a judge of the court may hold a hearing to receive additional evidence, may remand the case to the body, agency or officer whose decision or order has been brought up for review, or may refer the case to a referee to receive additional evidence … if additional evidence is taken … the court shall make its own findings of fact based on the record below as supplemented by the additional evidence …”

To avoid its findings being disturbed on appeal, a zoning hearing board typically accepts all evidence presented before it, even when the evidence is arguably irrelevant. Then, when rendering its decision, the zoning hearing board uses its sole discretion to give the evidence the weight it deserves. While this practice does not eliminate a party’s right to request relief from the trial court under Section 1005-A, it does significantly limit the trial court’s ability to conclude a zoning hearing board improperly excluded evidence.

Since relief under Section 1005-A is rare, when a trial court does agree to take additional evidence, the next question often becomes—what is the trial court’s scope of review? Does the last line of Section 1005-A—“if additional evidence is taken … the court shall make its own findings of fact based on the record below as supplemented by the additional evidence”—mean the trial court must consider the entire matter de novo? What if the zoning hearing board rendered a decision on five, 10 or even 15-plus issues, but the trial court only takes additional testimony on one limited point? Under that scenario, should the trial court apply a deferential scope of review to the issues for which no additional evidence was taken? Before the Commonwealth Court’s July 29, 2019, decision in Sowich v. Zoning Hearing Board of Brown Township, 214 A.3d 775 (Pa. Commw. Ct. 2019), some argued that any time a trial court accepted additional evidence the court’s deferential standard of review transitions to de novo for all matters. The Commonwealth Court’s decision in Sowich clarified this is not, however, the case.

In Sowich, a landowner appealed a notice of violation to the Brown Township Zoning Hearing Board (the ZHB), challenging the township’s zoning official’s determination that the depositing, storing, and removing of fill, the grinding of stone, and the storing of concrete barriers on his property was not a legally nonconforming use. The ZHB upheld the zoning official’s decision in-part and overturned the decision in-part, finding the use of the property as a fill operation was a legally nonconforming use, but the crushing of stone and the storing of five or more concrete barriers was not. The landowner and several objecting neighboring property owners appealed the ZHB’s decision to the trial court.

On appeal, the landowner filed a motion pursuant to Section 1005-A to supplement the record on one limited point—whether the grinding and crushing of stone was an inherent part of the depositing, storing, and removal of fill activities. The trial court granted the landowner’s motion and remanded the matter back to the ZHB to take additional evidence. As instructed, the ZHB held a remand hearing and then forwarded the hearing transcript and exhibits to the trial court “for further proceedings.”  The trial court then affirmed the ZHB’s decision. In doing so, the trial court applied a deferential scope of review to all matters, including the one for which additional evidence was accepted.

The landowner and objectors appealed to the Commonwealth Court, challenging, among other things, the scope of review applied by the trial court. The landowner contended that once the trial court accepted additional evidence, Section 1005-A required it to review the matter, in its entirety, de novo (i.e., the ZHB’s findings were no longer relevant or controlling). The Commonwealth Court disagreed.

Relying heavily on its previous decision in Cherry Valley Associates v. Stroud Township Board of Supervisors, 554 A.2d 149, 151 (Pa. Commw. Ct. 1989), the Commonwealth Court held, in relevant part, that a trial court’s decision to accept additional evidence, either itself or via remand to the zoning hearing board, does not automatically render the scope of review on all matters de novo. Rather, a trial court is required to make findings of fact on, and thus review de novo, only the limited point for which additional evidence was taken. Accordingly, a trial court should not disturb a zoning hearing board’s credibility determinations, the weight the board afforded the evidence or the board’s findings (so long as they were supported by substantial evidence) on matters for which no additional evidence is taken.

For the full article, click here.

Reprinted with permission from the February 13, 2020 edition of The Legal Intelligencer  © 2020 ALM Media Properties, LLC. All rights reserved. 

DOL Issues First Meaningful Revision to Joint Employer Rule in Decades

The Legal Intelligencer

(by Stephen Antonelli and Andrew DeGory)

On Jan. 16, the U.S. Department of Labor (DOL) released a final rule updating its interpretation of “joint employer” under the Fair Labor Standards Act (FLSA). The update represents the first “meaningful revision” of its interpretation, codified at 29 CFR Part 791, since the FLSA’s inception in 1958. The final rule takes effect on March 16 and carries meaningful significance for companies that rely on temporary staffing and subcontractors and franchise owners. It could also allow companies to exert more influence over temporary workers without being considered a “joint employer.” While not binding on the federal courts, the final rule will serve as the DOL’s official interpretation moving forward and guide its enforcement of this issue under the FLSA.

The FLSA has always recognized that an employee can have two or more employers who are jointly and severally liable for the wages of its workers. The act requires covered employers to pay their employees at least the federal minimum wage for every hour worked and overtime for every hour worked over 40 in a workweek. The FLSA defines the term “employer” to “include any person acting directly or indirectly in the interest of an employer in relation to an employee.”

Part 791 recognizes two scenarios where an employee may have joint employers. In the first scenario, and most commonly, an employee performs work for an employer while another person or entity “simultaneously benefits” from that work. Thus, the employee only works one “set” of hours in a given week. In the second scenario, “one employer employs an employee for one set of hours in a workweek, and another employer employs the same
employee for a separate set of hours in a workweek.”

The DOL’s final rule primarily addresses the first scenario and adopts a four-factor balancing test derived from the U.S. Court of Appeals for the Ninth Circuit’s 1983 holding, Bonnette v. California Health & Welfare Agency. To determine whether a party is potentially a joint employer, the test analyzes whether the person or entity:

The DOL touts the four-part test as providing “necessary uniformity, clarity, and certainty for businesses.” Of crucial importance, the employer must have an “actual exercise of control” over one of the test’s four factors to be considered a joint employer. No single factor is dispositive in determining joint employer status, and the appropriate weight to give each factor will vary depending on the circumstances. Additionally, the DOL stated that maintaining the employee’s employment records alone will not establish “joint employer” status. Finally, the DOL provided that additional factors may be considered if they indicate that a potential joint employer “exercises significant control over the terms and conditions of the employee’s work.”

The new rule will not impact the second scenario above, as the DOL’s interpretation will not change and the agency will continue to evaluate the “relationship” between the two employers. If the employers are in fact joint employers in this second scenario, they must “aggregate” the employees’ hours to ensure compliance with the act.

During the commenting period for the proposed final rule, supporters and critics were divided along employer and employee lines, respectively. Commenters representing employers opined that the rule would bring clarity to the varying opinions in the federal courts. On the contrary, those representing the interests of employee groups asserted that the rule ignores existing Supreme Court and circuit court precedent and should not receive judicial deference moving forward. The DOL did acknowledge that the rule may reduce the number of joint employers and therefore employees “will have the legal right to collect” wages from fewer employers.

As part of its update, the DOL also provides illustrative examples of scenarios where a joint employer analysis would be necessary. As with the updated rule in general, employers “overwhelmingly supported” the inclusion of the examples, whereas employee supporters criticized them as “inadequate.” Regardless, the examples offer insight for how the DOL would enforce its interpretation in certain situations.

Going forward, employers should consider the following implications and
advantages of Part 791:

• Hiring and firing: In one of its illustrative examples, the DOL states that acompany’s single request of a staffing agency to fire a temporary employee does not constitute “indirect control” over hiring and firing. Based on this interpretation, a company relying on temporary workers to round out its workforce can feel more comfortable if faced with an independent contractor that it believes should be terminated. If, however, a company exerts control over multiple termination decisions, it is perhaps more likely to be determined to be a “joint employer.”

• Codes of Conduct: Under the new rule, the potential joint employer can require another employer to comply with a contractual code of conduct. The code can even include requirements to provide hourly wages higher than the federal minimum without exercising control over rate or method of payment. This offers companies a tool to influence their employers or suppliers without becoming a “joint employer.”

• Resources and benefits: The DOL stated that a potential joint employer may provide benefits, such as training, educational opportunities, and benefit plan options without impacting their status. Therefore, companies seeking to provide worthwhile resources and benefits to temporary employees should not hesitate to do so out of a fear of changing employer status.

• Avoiding excessive overtime: Subcontracted hourly workers—in particular those in the oil and gas industry—often log significant overtime at wages considerably higher than the federal minimum. Under these circumstances, the implications of “joint employer” status are magnified as the overtime calculation on a relatively high regular rate may result in large overtime penalties if a subcontractor were to make an error when calculating overtime payments. The new interpretation should lessen the financial burden for companies that rely heavily on a subcontracted workforce.

A Look at the Courts

Although the DOL hopes the new rule will decrease litigation in the field, it remains unclear how much deference federal courts will grant the rule. Part 791 simply serves as the DOL’s official “interpretation” and guideline for enforcement of joint employer status under the FLSA. Therefore, courts are not mandated to follow the rule and only time will tell whether it receives widespread judicial support.

For the full article, click here.

Reprinted with permission from the February 6, 2020 edition of The Legal Intelligencer © 2020 ALM Media Properties, LLC. All rights reserved. 

Artificial Intelligence Is Transforming the Legal Industry

The Legal Intelligencer

(by Christian Farmakis)

Artificial intelligence (AI) is adding efficiencies and transforming businesses everywhere, and legal practices are no exception.

General counsels who are hiring lawyers need to understand that this technology is available now, so they can make sure their lawyers are leveraging the latest technology tools. AI can increase speed, increase efficiency and lower costs for clients—if the law firm has the right tools, but more importantly knows how to use those tools.

The following are some of the common questions about advancement of AI technology in the legal space.

•  How is AI technology disrupting the legal industry?

AI is a term generally used to describe computers performing tasks normally viewed as requiring human intellect.

AI legal technology won’t replace lawyers, but these tools will drastically change the way lawyers provide services for their clients. While estimates vary, 23% to 35% of a lawyer’s job could be automated. As a result, lawyers will need to be more strategic and supervisorial, able to act as project managers and supervise the information being fed into systems, and knowledgeable about the assumptions underlying the machine learning algorithms.

So far, projects that classify data have been impacted the most, allowing projects such as e-discovery, due diligence, document management and research to be done faster and more efficiently.

Law firms can already pass these savings on to clients, but this is only the beginning of the transformation. Early law firm adopters are implementing artificial intelligence, machine learning and predictive analytics to legal contract review and document management, enhancing efficiency, intelligence and quality while reducing costs for clients.

For example, with the addition of artificial intelligence software, Babst, Calland, Clements and Zomnir can now deploy highly trained machine learning algorithms in its due diligence process resulting in faster, more intelligent contract or document review for clients. Whether the client has 100 or 100,000 documents for review, we can now rapidly review and identify key provisions within documents and agreements more quickly and accurately than ever before.

•  What will be the next wave of AI legal technology?

The next generation, which is starting to hit the market now, will be document automation and legal research and writing tools, as well as predictive technology tools. For example, a contract can be put through an algorithm in order to identify how risky it is. It could be used to determine how likely it is to go into litigation or if it complies with the company’s internal contract procedures and policies.

Another use is analytic tools that can measure efficiency and pricing of the legal services. E-billing and practice management tools could measure whether a service contract should cost $2,500, not the $7,500 that’s being charged. In other instances, AI could help firms do estimates for alternative fee arrangements.

•  Why is it so important for lawyers to use the right tool for the job?

AI technology is not going away. It’s here to stay, and it’s increasing exponentially. While the AI legal tech revolution is still in its infancy, the tipping point is around the corner. In 2016, the industry spent $8 billion on AI technology; that’s predicted to hit $46 billion by 2020.

However, many of these products are single-tasked products and not integrated tools that can perform multiple tasks. And many of the products’ pricing models do not yet meet the market needs.

While pricing adjustments are already starting to occur and integration should happen over the next five years, AI technology is nothing more than a tool. Just like other technology, purchasing the new tool is only a small part of what needs to happen to gain efficiency and lower prices. The organization has to be behind it, the employees need to know how to use it and the entire project must be managed properly.

For a variety of reasons, companies are demanding access to specialized services, greater efficiency and more insight from outside legal counsel, as well as more innovative resources to stay one step ahead in a time-sensitive, highly competitive marketplace. A state-of-the-art approach, along with a systematic process that applies artificial intelligence technology, provides clients with the latest, flexible solution customized to meet their specific legal and business needs.

Lawyers who have an open mind and an ability to use these new tools effectively are already passing cost efficiencies on to clients, and this should only increase in the future.

Babst Calland and its affiliated alternative legal service provider, Solvaire, is leveraging new AI technology and proven project management processes in its due diligence, discovery and document management projects resulting in faster, more intelligent contract or document review for clients.

Christian A. Farmakis is a shareholder, management committee member and chairman of the board of directors at Babst, Calland, Clements and Zomnir and president of its affiliated alternative legal service provider, Solvaire. If you have questions about the deployment of AI on large diligence, discovery or document management projects, contact Farmakis at 412-394-5642 or cfarmakis@babstcalland.com. 

For the full article, click here.

Reprinted with permission from the January 31, 2020 edition of The Legal Intelligencer  © 2020 ALM Media Properties, LLC. All rights reserved. 

Trucking regulators look to alleviate cost increases, while keeping safety first

Smart Business

(by Jayne Gest with Boyd Stephenson)

The trucking industry is still adjusting to the final transition to electronic logging devices (ELDs). Some relief may be on the horizon, however, as federal regulators consider whether to relax the hours of service requirements.

“Every solution has unintended consequences, and that is exactly what we are seeing now,” says Boyd A. Stephenson, associate at Babst Calland. “The supply chain is like a balloon, where everything is interconnected. You push on one part and another piece will pop out.”

Paper logbooks are left to the discretion of the driver, while ELDs record driving time automatically to ensure driving hours are strictly followed. The idea is to make the roads safer. Effective now, strict enforcement of the ELD mandate applies to all drivers, unless they operate under the short-haul rule exemption.

The trucking industry is dealing with rising transportation costs and an overall driver shortage in an economic expansion. Freight volumes also grew more slowly in 2019, with trade conflicts and tariff increases taking a toll on growth.

An American Transportation Research Institute survey found that the top industry concerns for 2019 were driver shortages, hours of service, driver compensation and detention or delays at customer facilities. These obstacles increase trucking costs, which get passed on to shippers that need their goods transported.

Smart Business spoke with Stephenson about hours of service rules and other industry changes that businesses should be aware of in 2020.

Why did the Federal Motor Carrier Safety Administration (FMCSA) feel a need to change the hours of service rules?

With ELDs in place, drivers cannot adjust their logs. Difficulties like wait time while cargo is loaded or unloaded, weather and traffic have highlighted the need to adjust the hours of service and let drivers spend more time on the road. Based on strong industry feedback, the FMCSA proposed more flexible hours of service in August, which it hopes will alleviate some industry challenges.

The agency proposes to:

• Extend the short-haul exemption, where drivers are not required to keep logbooks. As of now, to be considered short haul, a driver must drive only within a 100 air-mile radius, start and return to the same location with 12 hours of duty time, drive no more than 11 hours and have 10 consecutive hours off between shifts. The updated exemption would apply to those who drive 150 air miles and allow short-haul drivers to be on duty for 14 hours.

• Give more flexibility for driver breaks and sleeper berth requirements.

• Allow one off-duty break, lasting between 30 minutes and three hours, that would allow the driver to pause the clock on his or her 14-hour window.

The majority of truck traffic operates under the short-haul exemption, and more liberalized hours of service should have wide-ranging effects on the overall supply chain, such as flexibility and lower costs.

With the comment period over, the FMCSA hopes get a final rule out this year.

What is the Beyond Compliance program, and what does it mean for fleet operators?

Regulators also would like to implement the Beyond Compliance program, which would give incentives to fleet operators that adopt proven safety tools, technologies or practices, such as collision warning. With the comment period closing in February 2020, the final rules have yet to be determined. However, short-haul drivers that use ELDs and implement the Beyond Compliance program may have one incentive, as they will be more likely to be sent on their way if a roadside inspection site is busy. Compliance with this program factors into the carrier and driver history that is already considered.

Businesses with truck fleets should be proactive with safety technology, as these investments can pay off. Not only will adopting these technologies deprioritize a truck’s chance of getting inspected, but the resulting improved safety performance makes the truck safer, which also lowers the required inspection rate and factors into insurance costs.

For the full article, click here.

For the PDF, click here.

Legal Tech: Babst Calland & Solvaire: An AI Contract Review Use Case

Law Journal Newsletters

(by Christian A. Farmakis)

Babst Calland and our technology affiliate, Solvaire, have been performing complex due diligence, discovery, and document management projects for clients for more than 20 years. Our clients look to us for due diligence guidance in the areas of acquisitions and divestitures, as well as complex corporate, commercial and real estate transactions.

The firm has a long history of utilizing the latest technologies to enhance contract review. And, in the last few years, the firm has taken a deep look at AI-assisted review and its ability to enhance efficiency and reduce cost for clients. Saying that we have become “AI Believers” in the process is an understatement. After many AI tool evaluations, trials, and getting numerous AI projects under our belts, we have become our clients’ go-to resource in leveraging AI for their benefit.

Taking Off On an AI Journey

In today’s business climate, clients demand greater efficiency when it comes to contract review for many complex deals and transactions. We have found that the combination of deep legal expertise, coupled with embracing carefully researched and vetted technology, is the most effective means of delivering high quality and timely review in an increasingly competitive marketplace.

Over the last few years, our firm has embarked on an exhaustive search for tools that will help us deliver more value to our clients. We spent the first 36 months of our AI journey reviewing nine different well-known contract review tools. Within the last 12-18 months, we have incorporated specific tools into the firm’s due diligence and contract management processes. We are particularly excited about our selection of Diligen, which we find to be a high-performance contract review platform. In the end, we chose Diligen for its intuitive and flexible interface, robust performance, and its ability to handle large volumes of contracts.

Many of the other vendors we vetted did not consider the time constraints under which acquisitions have to take place. We found that Diligen was flexible, enabling us to implement the product quickly to meet even the most unreasonable diligence deadlines. Diligen is quickly becoming one of our core engines within our processes for driving even more effective and reliable client service delivery for contract review.

With our new intelligent tools and enhanced processes in place, we are now able to identify specific language — such as assignment, change of control, term, or termination provisions — in hundreds of thousands of contracts. This allows us to provide our clients with rapid and deep insight into their contracts, uncover potential risk, and provide informed legal advice on much shorter timelines.

Beyond ROI

While much of the return-on-investment for AI tools is measured in time and cost savings, there is also significant value in risk mitigation. AI-assisted review enables comprehensive client contract review rather than limiting the review to a smaller subset of documents due to time and budget constraints. Highly trained machine learning systems can act as an “early warning system” to ensure all contracts with potential issues are surfaced and tagged for careful human review much earlier in the project. In the M&A due diligence process, for example, being able to identify all the change of control provisions in a set of contracts early in the review (as opposed to finding them sequentially as the reviewers plow through a portfolio of documents), reduces the risk of uncovering serious red flags in contracts that otherwise may not be discovered until just before closing. It can mean having enough time earlier in a project to obtain a necessary consent, send out a notice, or otherwise comply with other deal-damaging obligations, rather than requiring a last-minute scramble that may ultimately allow issues to slip through the cracks. Being able to thoroughly review a new last-minute set of contracts provides additional peace of mind that all critical issues have been identified, even under tight timelines.

Here are some key takeaways we have after our first year of AI-powered review:

• AI due diligence triage: We are able to quickly sort documents by type and content to get a better overall sense of the scope of the review, what resources will be needed on our side, and which contracts to review first. We are then able to advise the client within the first 48-72 hours with an update on our anticipated review timelines.
• Relevancy means speed: Completing large scale contract review the old-fashioned way can be painstaking, particularly when utilizing attorneys who are inexperienced in a given subject matter. Legal teams that don’t leverage the right AI tools spend a high proportion of their time sifting through volumes of lower priority documents, looking for the most relevant language. Leveraging Diligen, for example, we were able to identify all of the assignment provisions in a set of 350,000 contracts as a starting point for our review. With the right tools and processes, we were able to produce detailed, high quality review on an aggressive timeline.
• Invisible AI: Well over a year into leveraging AI tools for our clients, we never hear “wow, we are so excited that you used AI”. Instead, we might get the occasional “I can’t believe how quickly you delivered that review, how did you do it?” For the most part, we have silently and effectively worked AI into our best practice service delivery.
• Processes and Methodologies Matter: Sound project management skills are still necessary to properly implement these types of projects. Effective setup, document intake and processing, project scheduling, employee management, and quality control are all heavily contributing factors to a successful project. Having these factors in addition to a robust AI tool are certainly the difference between an excellent and average (or below average) experience.
• (Self) Training makes perfect: Based on our evaluations and testing, only a small selection of tools on the market can be trained to recognize new types of clauses by the user. An even smaller number work well and quickly enough to be truly trustworthy and usable. This ability to train the tool to recognize new concepts extends our review capability by allowing the review team to quickly add to the library of pre-existing clause types that the tool can recognize when needed. This is especially critical when encountering varying subset types of documents within a portfolio.
• Thinking bigger with AI: Since deploying AI tools to help address our clients’ due diligence and review needs, we have been able to do thorough reviews far faster while offering pricing certainty. We can now take on bigger projects — and deliver them faster — thanks to our streamlined, best practices process.

After an extensive period of tracking the development of various contract review and other AI tools on the market we’ve selected best-in-class technology to work in tandem with our well-established processes for contract review. For law firms and legal teams, choosing the right tools — as well as having the right know-how to leverage them fully — is key to delivering high quality legal services effectively, affordably and on time.

Reprinted with permission from the January 2020 edition of Law Journal Newsletters.  © 2020 ALM Media Properties, LLC. All rights reserved.  

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