The Legal Intelligencer
(by Alana Fortna)
The Clean Water Act regulates the discharge of pollutants into “waters of the United States” pursuant to National Pollutant Discharge Elimination System (NPDES) permits issued by the U.S. Environmental Protection Agency (EPA) or an authorized state agency. This is not a new concept. However, what has come to be known as “the groundwater conduit theory” is disrupting the long-standing understanding of what is and what isn’t covered by the Clean Water Act. This new theory also creates questions for companies and attorneys dealing with Superfund sites and waste management units regulated under RCRA. This article discusses the circuit split on this theory and what I view as potential implications for Superfund sites and waste management units depending on how the U.S. Supreme Court rules.
Several federal cases have addressed the issue of the indirect discharge of pollutants into jurisdictional waters via groundwater transport, and the Supreme Court may weigh in on this question soon. 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, 33 U.S.C. Section 1342. A “point source” is defined as “any discernible, confined and discrete conveyance, including but not limited to any pipe, ditch, channel, tunnel, conduit, well, discrete fissure, container, rolling stock, concentrated animal feeding operation, or vessel or other floating craft, from which pollutants are or may be discharged.” Based on this definition, discharges into and through groundwater have not been considered point source discharges because they are not the typical “end of the pipe” discharges. Recent case law out of the U.S. Courts of Appeal for the Fourth, Ninth and Sixth Circuit has resulted in a circuit split on coverage under the Clean Water Act.
In Upstate Forever v. Kinder Morgan Energy Partners, 887 F.3d 637 (4th Cir. 2018), the Fourth Circuit evaluated Clean Water Act coverage for a discharge from a ruptured pipeline in South Carolina. The court interpreted the Clean Water Act to prohibit indirect discharges from point sources to navigable waters as long as the discharge is “sufficiently connected to navigable waters.” To be sufficiently connected, there must be a “direct hydrological connection” between the point source and the navigable waters. In Hawaii Wildlife Fund v. County of Maui, 886 F.3d 737 (9th Cir. 2018), the Ninth Circuit addressed discharges to wastewater treatment plant wells that eventually reached the Pacific Ocean. The Ninth Circuit similarly found Clean Water Act liability based on indirect discharges but further 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.” The Sixth Circuit diverged from both the Fourth and Ninth circuits by holding that both courts expanded Clean Water Act coverage beyond what was envisioned. The Sixth Circuit reviewed two cases involving discharges from coal ash ponds and held that a discharge for purposes of the Clean Water Act occurs only where the pollutant is added to jurisdictional waters “by virtue of a point-source conveyance,” see Kentucky Waterways Alliance v. Kentucky Utilities, 905 F.3d 925 (6th Cir. 2018) and Tennessee Clean Water Network v. Tennessee Valley Authority, 905 F.3d 436 (6th Cir. 2018). The decisions of the Fourth and Ninth circuits have been appealed to the Supreme Court. The Supreme Court has 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.” The Supreme Court has not yet ruled on the petition from the Fourth Circuit case, which asks the court to consider whether the Clean Water Act “also applies to discharges into soil or groundwater whenever there is a ‘direct hydrological connection’ between the groundwater and nearby navigable waters.”
If the Supreme Court agrees to hear both appeals from the Fourth and Ninth circuits, the decisions could have an impact on companies and attorneys involved in Superfund site cleanups and waste management units at operating facilities. With regard to Superfund sites, a decision that affirms the Fourth and Ninth circuits could create future liability at a site where a company has already invested significant time and expense in a remedial investigation and design work. If a company 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. The issue becomes more complicated when it is a large Superfund site with multiple source properties contributing the same contaminants of concern. Who shoulders the liability under the Clean Water Act? How do the companies establish that they are not the source of the discharge from the groundwater to the surface water? Is there a plausible way to apportion the liability when you have a commingled plume? These are questions that are not easily answered and could be very costly to answer. Moreover, remediation activities at Superfund sites take time and are subject to an established procedure under the regulatory scheme. Depending on how the Supreme Court rules, this procedure could be disrupted by citizen suit challenges. Environmental groups who disagree with the agency’s approach to the remediation or who think the remediation work is taking too long could attempt to influence the remedial action through a Clean Water Act citizen suit.
Similarly, the requirements for design, operation and closure of hazardous waste management units at operating facilities are regulated under RCRA. Specific regulations have been developed for various types of hazardous waste management units under Subtitle C of RCRA in 40 CFR parts 264, 265 and 266. The regulatory requirements are intended to protect human health and the environment from the risks posed by hazardous waste. Closure decisions that are made pursuant to solid waste regulations under RCRA (or state law by delegation) can be challenged by citizen groups under the Clean Water Act. This is problematic because there is more certainty under RCRA versus the Clean Water Act. In this regard, the Clean Water Act prohibits unpermitted discharges regardless of the level of pollutants or any evaluation risk. For a RCRA citizen suit, the plaintiff has the heavy burden of establishing an “imminent and substantial endangerment.” Because RCRA is based on level of risk, it does not necessarily follow that the only remedy will be source removal. Rather, there are likely multiple remedial alternatives that can abate a RCRA violation or be approved as a final remedy at a Superfund site. If the Supreme court establishes liability under the Clean Water Act for scenarios involving hazardous waste management units, then companies closing such a unit could face citizen suits where the environmental group argues that the only appropriate remedy is elimination of the discharge (i.e., removal of the source).
In short, how this case law develops is relevant not only from a NPDES permitting standpoint, but also from a remediation and waste management standpoint. Depending on how the groundwater conduit theory progresses, it could lead to substantial uncertainty for companies dealing with remediation at Superfund sites or closure of a hazardous waste management unit. Babst Calland Clements & Zomnir will continue to monitor this case law for purposes of evaluating its potential impact on these regulatory schemes.
Alana Fortna is a shareholder in the environmental and litigation groups of Babst Calland Clements & Zomnir. She represents clients in large-scale cost recovery actions under CERCLA and state law statutes, actions seeking injunctive relief under RCRA, and citizens’ suits brought under various federal statutes and regulatory programs including the Clean Water Act and the Clean Air Act. Contact her at afortna@babstcalland.com.
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Law360
(by Cara Salvatore)
Babst Calland has hired a former National Highway Traffic Safety Administration lawyer who played a lead role in the agency’s work on the Takata air bag probe and other high-profile matters, the firm said Wednesday, the third former NHTSA staffer to join the firm’s transportation practice in recent years.
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The PIOGA Press
(by Kevin Garber and Jean Mosites)
The Pennsylvania Environmental Quality Board (EQB) will consider a petition for a cap-and-trade regulation at its April 16 meeting. The Clean Air Council, Widener Commonwealth Law School Environmental Law and Sustain-ability Center, and others submitted the petition on February 28, asking EQB to promulgate a regulation that would create a multi-sector cap-and-trade system to reduce greenhouse gas (GHG) emissions to achieve carbon neutrality in Pennsylvania by 2052.
The petitioners initially submitted the petition to EQB on November 27, 2018. Under EQB’s Petition Policy (25 Pa. Code Chapter 23), the Department of Environmental Protection is to notify EQB and the petitioner within 30 days of DEP’s receipt of the petition whether the petition meets the policy’s eligibility criteria. DEP advised the petitioners on December 26 that the petition met the criteria and would be submitted to EQB for consideration at the first meeting of 2019.
However, DEP did not notify EQB members until, apparently, early February. Upon learning of the petition, Representative Daryl Metcalfe, chairman of the House Environmental Resources and Energy Committee, requested DEP on February 19 to have the petitioners resubmit their petition. The petitioners resubmitted the petition on February 28 with minor changes and additional signatories. DEP notified petitioners and the EQB on March 1 that DEP would review the petition to ensure it still meets the eligibility criteria. DEP has now done that and EQB scheduled the matter for consideration at its April 16 meeting.
The petition
The petition includes a fully drafted regulation that establishes a cap on covered GHG emissions, based on a 2016 base year, and reduces GHG emissions to carbon neutrality by 2052. The regulation borrows heavily from California’s cap-and-trade regulation, which is a multi-sector program that includes Ontario and Quebec. The California regulation, however, does not require a reduction of all GHG emissions to zero.
The Pennsylvania emissions cap would decline by 3 percent each year. Capping GHG emissions means that the covered entities meeting certain thresholds—including the oil and gas, coal, cement, glass, and steel industries and any facility producing or importing electricity— all must obtain allowances, by auction or allocation, for each metric ton of reportable GHG emissions per year attributable to their operations in Pennsylvania. According to EPA’s Envirofacts database, nearly 400 facilities in Pennsylvania report GHG emissions to EPA under a mandatory reporting rule. The proposed cap and trade program would require these and others not currently required to report GHG emissions to participate in the Pennsylvania program.
The petition states that if the regulation becomes effective for 2020, the initial cap would be equal to 97 percent of 2016 emissions. Limited by the ever-declining cap and availability of allowances, each covered entity must reduce its GHG emissions over time to achieve carbon neutrality by 2052. Allowances would cost a minimum of $10 each in 2020, with the price increasing by 10 percent plus the rate of inflation each year. Any person may buy from the available allowances regardless of whether that person emits GHG or not. If a covered entity cannot obtain sufficient allowances by auction or allocation, it may participate in the trading system and purchase needed allowances if they are available. Allowances may be freely traded or banked for future use.
The proposed regulation would allow manufacturers of certain products (but not fossil fuel suppliers or electricity generation) facing international and/or interstate competition to apply for some allowances to be distributed to them without cost. This mechanism is intended to prevent “leakage,” which refers to the relocation of production or emissions of GHGs to another jurisdiction in which GHG emissions are not commoditized. The number of free allowances directly awarded to such entities would be based initially on the company’s 2018 GHG emissions and be reduced by 5 percent each year after.
The petitioners cite the Pennsylvania Air Pollution Control Act and the Environmental Rights Amendment (ERA)―Article I, Section 27 of the Pennsylvania Constitution―as legal authority for their petition. Citing the Pennsylvania Supreme Court’s 2017 decision in PEDF v. Commonwealth, 161 A.3d 911, the petitioners assert the ERA requires the Commonwealth to control GHG emissions. They contend the ERA affords a right to a “natural climate unaffected by climate disruption,” because “a stable climate” should be understood to be a public natural resource, although this right is not expressly included in the Pennsylvania Constitution. The only express Pennsylvania legislation related to climate change and greenhouse gases is the Pennsylvania Climate Change Act (Act 70 of 2008), which provides for a report on potential climate change impacts, duties of the DEP, establishment of a Climate Change Advisory Committee, and a voluntary registry of greenhouse gas emissions. Neither the Air Pollution Control Act nor the Climate Change Act provides express authority to regulate GHG emissions or establish a cap-and-trade system. The petition bypasses legislative consideration of this issue by asking EQB as an administrative body to promulgate a climate change regulation.
Next steps
The notice of the agenda for the April 16 EQB meeting states DEP recommends that EQB accept the petition for further study. The petitioners may make a short oral presentation in favor of the petition at the meeting. Under its Petition Policy, EQB may deny it the petition if has previously considered the same issue for which there is no new or different information, if the request concerns a matter in litigation, or if the requested action is inappropriate for EQB rulemaking due to policy or regulatory considerations. In 2013, DEP recommended that EQB reject a petition by Ashley Funk et al. for a similar regulation to reduce fossil fuel CO2 emissions, citing lack of statutory authority and conflict with federal law. EQB voted 17-3 to accept DEP’s recommendation to deny the petition. The Commonwealth Court subsequently decided in 2016 that the Funk petitioners did not have a clear right to promulgation of the requested regulation and dismissed their petition for mandamus, which the Supreme Court affirmed. Funk v. Wolf, 144 A.3d 228.
Despite the petition policy setting certain timelines, EQB is not required to make any decision regarding the petition at the April 16 meeting.
On April 1, the Pennsylvania Chamber of Business and Industry and 14 industry trade groups including PIOGA asked EQB members not to take any action on the petition until they have fully considered its legal and practical implications. Key among those implications are the comprehensive reshaping of Pennsylvania’s entire economy and effects of higher energy prices on low-income rate payers, on municipalities, and on public, private and higher education. Other legal and practical considerations include whether the revenue collected by the auction of carbon allowances constitutes a tax, which constitutionally must be enacted by the General Assembly, and whether the impact to the power generation sector threatens reliability and the PJM Interconnection system. The Chamber and trade associations also recommend that each DEP advisory committee, including the Oil and Gas Technical Advisory Board and the Pennsylvania Grade Crude Development Advisory Council, be given the opportunity to consider the petition, providing necessary evaluation of its impacts by those industry members that would be affected.
If and when EQB accepts a petition for consideration, DEP must prepare a report and recommendation within 60 days (or longer if the report cannot be completed within 60 days) on whether EQB should promulgate a cap and trade regulation. If EQB decides to proceed with regulatory amendments, DEP will prepare a proposed rulemaking for EQB consideration within 6 months after mailing its report to the petitioners.
This petition and its proposed regulation present a dramatic departure from any current regulation in Pennsylvania and are intended to affect every aspect of the economy of this Commonwealth. Whether or not such a program in Pennsylvania would have any effect on the global climate is a question no one can answer. Every business large and small, those with and without GHG emissions, should engage in the conversation and stay tuned for further developments of the GHG rulemaking petition as 2019 unfolds.
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The Legal Intelligencer
(by Lindsay Howard and Matthew Wood)
In a press conference on Feb. 14, 2019, the U.S. Environmental Protection Agency (EPA) announced its multifaceted “action plan” outlining steps the agency is taking to protect public health and the environment from per- and polyfluoroalkyl substances (PFAS). PFAS are a group of synthetic chemicals that have been in use since around the 1940s and have numerous commercial and consumer applications. They have been used in nonstick coatings for cookware and food containers, waterproofing for fabrics and textiles, the manufacture of plastics and resins, and the formulation of firefighting foams. Their widespread use and the discovery of PFAS chemicals in various environmental media across the United States has raised interest and concerns about their potential effects on human health and the environment.
PFAS in the Environment
PFAS chemicals have been found in, among other things, groundwater (which may be used for drinking water), surface water and sediments, as well as in wildlife and human blood. Human exposure may occur through ingestion of contaminated drinking water and consumption of animals and plants in which PFAS have bioaccumulated (or that have been exposed to PFAS in the course of preparing or cooking food for consumption). Studies have shown that exposure to PFAS chemicals may have negative health consequences, which has driven the EPA and other stakeholders to better understand the chemicals, the extent of their presence in the environment, their potential health effects and the best methods for containment and cleanup.
EPA’s Action Plan
To develop its action plan, the EPA requested comments, visited with leadership and citizens of PFAS-affected communities, and hosted a PFAS National Leadership Summit in Washington, D.C. in May 2018. The input from these events informed the action plan’s four primary approaches to addressing PFAS: identifying and understanding PFAS; addressing current contamination; preventing future contamination; and effective communication with the public. In connection with these approaches, the EPA developed priority, short-term (< 2 years), and long-term (> 2 years) actions.
One of the EPA’s priority actions is to propose a drinking water regulatory determination for PFOA and PFOS—two of the more common PFAS chemicals. This regulatory determination is the first step in determining whether to establish maximum contaminant levels (MCLs) for these chemicals under the Safe Water Drinking Act (SWDA). Although EPA Administrator Andrew Wheeler anticipates completion of this first step in 2019, promulgation of MCLs will require additional regulatory steps, and is not guaranteed. In addition to its currently available enforcement mechanisms, the EPA is also in the process of defining PFOA and PFOS as “hazardous substances” under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) in order to increase the agency’s investigation, cleanup and cost recovery authority with respect to the chemicals.
Many of the EPA’s priority, short-, and long-term actions focus on collecting and disseminating information and data toward specific goals. For example, the EPA would like to better understand toxicity and health impacts of PFAS chemicals on humans, develop new analytical methods for detecting PFAS chemicals in drinking water and other environmental media (e.g., soil, sediment and air), identify additional sources of PFAS in the environment, and improve current and advance new investigative and remedial guidance. The EPA has committed to communicate its findings on these issues to the public.
State Responses
Even if the EPA accomplishes its goals in accordance with the general schedule set forth in the action plan, many of the agency’s actions will take years to implement. Moreover, despite the EPA’s recent actions, many states have long believed that the EPA has been moving too slowly to address their concerns about PFAS chemicals and have already implemented their own PFAS-related agendas. For example, earlier this month, the New Jersey Department of Environmental Protection (NJDEP) established interim specific groundwater quality standards (ISGWQS) for PFOA and PFOS at 10 parts per trillion (ppt), which is substantially lower than the EPA’s current Health Advisory Limit (HAL) of 70 ppt combined. Other states are similarly taking aggressive regulatory action to address PFAS in the environment.
Pennsylvania PFAS Action Team
Pennsylvania has also moved to address PFAS contamination at the state level. In September 2018, Gov. Tom Wolf issued an executive order establishing a PFAS action team made up of leaders from multiple commonwealth agencies. Among other things, Wolf tasked the action team with identifying impacted sites and protecting drinking water, developing response protocols, gathering and sharing information and exploring funding for remediation efforts. As of this writing, almost 20 sites across the commonwealth are being investigated for PFAS contamination. In a contemporaneous letter to Wheeler, Wolf also urged the EPA to expeditiously set protective MCLs for PFOA and PFOS and “expand its analytical and regulatory focus beyond drinking water to encompass PFAS reductions across all media.”
PADEP subsequently held a public meeting in November 2018, to educate residents about PFAS, featuring presentations by PFAS experts and opportunities for public comment (a follow-up meeting is planned, but as yet unscheduled). In an apparent response to the EPA’s action plan—which some critics claimed indicated the EPA’s lack of commitment to establishing MCLs for PFOA and PFOS—PADEP appears to be gathering resources to begin the process of establishing its own MCL, a first for the commonwealth.
Impacts to Site Remediation Programs
Cleaning up historic contamination at old industrial properties can be an expensive and time-consuming process. With the increased attention now being given to new and emerging contaminants like PFAS, the site remediation process will no doubt become even more complicated. For example, for sites that are currently being evaluated for cleanup, the lead agency may add PFAS to the list of chemicals that need to be investigated, even if the investigation is already well on its way. Moreover, for sites that have previously been investigated and cleaned up, the lead agency could compel further investigation of PFAS chemicals. Another concern is that agencies may compel action before adequate tools to evaluate, treat, and clean up PFAS are developed. Alternatively, agencies may delay providing parties with regulatory closure at remediation sites as they attempt to come up to speed on the science and incorporate it into their regulatory schemes. All of these scenarios could be costly and time consuming for parties involved in investigations and cleanups.
Litigation
Aside from regulatory concerns, many companies may face threats of lawsuits by parties allegedly injured by PFAS. In one recent complaint filed in February 2019, (Ridgewood Water v. The 3M Company, BER-L-001447-19, N.J. Super. Ct. Law Div.), Ridgewood Water (a public drinking water provider), alleged that 3M and multiple other defendants (including 50 Doe defendants) involved in the manufacture and use of PFAS chemicals contaminated Ridgewood’s wells. The plaintiff alleged the contamination forced it to take some wells out of service and incur costs to develop treatment plans for others. Ridgewood brought causes of action for strict products liability for defective design; 2strict products liability for failure to warn; negligence; and trespass; and is seeking investigation and cleanup costs, compensatory damages for past and future injuries, punitive damages, and attorney fees and costs. We expect to see similar complaints filed in the future.
Conclusion
The regulatory developments concerning PFAS chemicals discussed here are already having significant impacts on stakeholders. Despite the recent release of the EPA’s action plan, it remains to be seen whether and how quickly the agency takes action toward further regulating PFAS chemicals. In the meantime, it is clear that Pennsylvania and other states will proceed with their own action plans, leaving the regulated community with a patchwork of potentially inconsistent and confusing requirements and standards across the country.
Babst Calland Clements & Zomnir will continue to track the EPA’s and the states’ dynamic plans to identify, regulate and respond to PFAS in our communities.
Lindsay P. Howard is a shareholder in the environmental services group of Babst Calland Clements & Zomnir. His practice focuses on issues related to complex site remediation, solid and hazardous waste, natural resource damages, and occupational safety and health for a broad array of clients. Contact him at 412-394-5444 or lhoward@babstcalland.com.
Matthew C. Wood is an associate in the firm’s environmental group. His practice encompasses a variety of environmentally related legal matters arising under major federal and state environmental and regulatory programs, with a focus on issues involving government inquiries, environmental investigations, remediation and related activities. Contact him at 412-394-6589 or mwood@babstcalland.com.
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Smart Business
(by Jayne Gest with Christian Farmakis)
It’s not always easy for business owners to find financing. Most business owners will, at some point, turn to conventional bank lending to help finance their business or fund growth, like acquisitions. There are, however, many different types of financing products available in the commercial lending market. But whatever type of financing you settle on, it’s critical to know exactly what you’re risking.
“Business owners often focus more on ‘getting the loan’ than on the specific terms and covenants of the loan, which in many instances can hinder the ongoing operations of the business,” says Christian A. Farmakis, shareholder and chairman of the board at Babst Calland.
Smart Business spoke with Farmakis about the lending environment and legal risks to keep an eye on.
What are loan options for small and mid-sized business owners?
Since the Great Recession, traditional bank lending has competed with other forms of lending. For instance, business owners are increasingly turning to private equity funding and family office lending rather than traditional, asset-based lending. These options may require sacrificing significant ownership and control over the business.
Other loan types include U.S. Small Business Administration loans backed by the federal government but underwritten by banks, small business loans for real estate financing and equipment loans.
Credit unions and regional and community banks sometimes offer different and more flexible terms and do smaller loans because they service the loan in their portfolio, where a larger bank might have stricter underwriting requirements.
What legal issues could crop up in the term sheet and loan documents?
Loans can include affirmative and negative covenants, but it’s usually the negative ones that trip people up.
Most loans require you to give a personal guarantee, provide certain information on a yearly basis, keep you from spending above a particular threshold on capital expenditures without prior approval, or stop you from taking out more debt. Most financial covenants require compliance with certain ratios, such as a debt to equity ratio; if you exceed those, the lender can theoretically default the loan. A larger loan also may require annual audits or reviewed statements, which can be disruptive and costly if the company is not already having those statements done by a CPA.
Another item to consider is pre-payment penalties, which can be significant but might decline over the first few years of the loan. It’s also not uncommon for a burdensome pre-payment penalty to stall, end or defer the business owner from doing a deal until the penalty is gone.
Therefore, it’s critical to know how the loan terms might restrict your operations and burden you with requirements. Take time to truly understand what events could trigger fees or penalties.
How much room is there to negotiate these terms?
Your negotiating room depends on the financial strength of your business, your growth model and if the bank sees opportunities to cross sell other fee-based services. Healthier, stronger businesses may be able to get items minimized or eliminated, such as fees. In addition, sometimes loans require borrowers to use services like payroll, lockbox or credit card processing. You may be able to disassociate the loan from these services.
You also want to get several quotes because banks have different underwriting requirements. For instance, one lender may require less collateral than others. And while a lot of this relates to the strength of the borrower, it also connects to the bank’s focus. If a lender isn’t interested in lending to a certain industry, it might not give the best terms.
Generally, a first-time, smaller borrower’s loan terms will be standard. You can take it or leave it, so you’re left negotiating interest rate and whether there’s a pre-payment penalty. But bigger borrowers with a solid balance sheet and strong business can prioritize the most costly or burdensome items and see if better terms are possible.
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Institute for Energy Law Oil & Gas E-Report
(by Adam Speer)
Anyone dealing with land and title issues in West Virginia quickly learns the importance of real property assessments. The relative ease in which an interest in land, including mineral rights, can be lost in a tax sale means that landmen and title practitioners who fail to examine a property’s tax assessment history do so at their peril. Those histories are found in the volumes of “landbooks” maintained by each county assessor’s office. A relatively common and beguiling problem arises when the title examiner discovers that a property has been double assessed. Such duplicate assessments are rarely obvious, as assessed interests are often described by brief and vague notations and sometimes assessed in the name of a long-gone predecessor in title.
Recently, in Haynes v. Antero Resources Corporation, Hill v. Lone Pine Operating Company and L&D Investments Inc. v. Mike Ross, Inc., the Supreme Court of Appeals of West Virginia considered the validity of several tax deeds that stemmed from the duplicate assessment of certain oil and gas interests created by the Harrison County Assessor’s Office. In each of the cases, the court reaffirmed its long-standing precedent that holds that in the case of two assessments of the same land under the same claim of title, the state can only require one payment of taxes under either assessment. The cases highlight the potential consequences of duplicate tax assessments of severed mineral interests in West Virginia and the need to have interests properly assessed. The Haynes, Lone Pine and L&D Investment decisions should be maintained in any title practitioner’s toolkit for analyzing interests conveyed by a tax sale and determining the likelihood of a successful challenge to set aside a tax deed.
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The Legal Intelligencer
(by John McCreary)
The February 2017, issue of Pennsylvania Law Weekly published this author’s comments on the employment law issues created by the then-recently enacted Medical Marijuana Act (MMA). I identified some of the practical and legal problems presented by the continued illegality of marijuana under federal law, the conflict between statutory employment protections for medical marijuana patients and common employer policies prohibiting illegal drug use. I predicted that the “imprecision of the MMA’s statutory language” would “inject needless uncertainty into the employer-employee relationship” that “likely would not be resolved absent litigation.” Although to date there have been no cases reported under Pennsylvania’s MMA, several courts in other jurisdictions have considered employment issues arising under similar medical marijuana statutes. The uncertainty is lessening; the smoke is beginning to clear.
The 2017 article conjectured that the federal Drug Free Workplace Act (DFWA), which requires recipients of federal funds to maintain a drug-free workplace as described, see 41 U.S.C. Section 8102, might serve as a defense to a claim brought by a medical marijuana patient. Noffsinger v. SSC Niantic, 338 F.Supp.3d 78 (D.Ct. 2018), a case arising under Connecticut’s Palliative Use of Marijuana Act (PUMA), Conn. Gen. Stat. Sec. 21a-408 et seq.says otherwise. There, medical marijuana patient Noffsinger accepted a position as activities manager at the defendant’s health and rehabilitation facility. The plaintiff informed her prospective employer about her medical marijuana prescription. PUMA Section 21a-408p(b)(3) provides that “no employer may refuse to hire a person or may discharge, penalize or threaten an employee solely on the basis of such person’s or employee’s status as a qualifying patient” under PUMA. When Noffsinger’s pre-employment drug screen returned positive for marijuana the job offer was rescinded. A representative of the defendant articulated company policy: “medical marijuana is not an approved prescription, … we use federal law, which indicates that marijuana is still illegal.” The court rejected the defendant’s reliance on the DFWA as a defense to Noffisinger’s claim, stating that: “The DFWA does not require drug testing. Nor does the DFWA prohibit federal contractors from employing someone who uses illegal drugs outside the workplace, much less an employee who uses medical marijuana outside of the workplace in accordance with a program approved by state law. That defendant has chosen to utilize a zero tolerance drug testing policy in order to maintain a drug free work environment does not mean that the policy was actually ‘required by federal law in order to obtain federal funding.’”
Thus, the judge revealed the DFWA to be merely aspirational and not a source of positive duty or affirmative defense.
Much like Connecticut’s PUMA, Pennsylvania’s MMA prohibits discrimination against employees and applicants “solely on the basis of such employee’s status as an individual who is certified to use medical marijuana.” In the 2017 piece, I parsed this language and wrote:
“Although subparagraph (b)(1) protects employees from employment actions based “solely” on their “status as an individual who is certified to use medical marijuana,” it says nothing about employment actions based on actual use pursuant to such certification. It would have been a simple matter for the legislature to have protected use pursuant to certification—“No employer may discharge, etc., an employee solely on the basis of such employee’s use of medical marijuana in accordance with a valid certification …,” but it did not do so. The failure to provide protection for actual use of prescribed marijuana suggests that no such protection was intended by the legislature, but that is not the only possible reading of the act.
My suggestion was, however, unfounded, at least in Connecticut under PUMA:
“The defendant next argues that PUMA prohibits discrimination only on the basis of one’s status as an approved medical marijuana patient but not on account of one’s use of medical marijuana in accordance with a PUMA program. For this argument, defendant relies on the language of the statute that forbids an employer from refusing to hire someone ‘solely on the basis of such person’s or employee’s status as a qualifying patient.’ But the language and purpose of the statute make clear that it protects employees from discrimination based on their use of medical marijuana pursuant to their qualifying status under PUMA. Under defendant’s restrictive interpretation of the statute, employers would be free to fire status-qualifying patients based on their actual use of medical marijuana—the very purpose for which a patient has sought and obtained a qualifying status. That makes no sense and would render the statute’s protection against PUMA-based discrimination a nullity, because there would be no reason for a patient to seek PUMA status if not to use medical marijuana as permitted under PUMA.”
Despite the learned judge’s characterization of the argument as making “no sense,” this author maintains that it is not nonsensical. Both the Pennsylvania and Connecticut statutes are ambiguous about whether employment protections extend to actual use, or only to status as a patient. The ambiguity may be attributable to the recognition by these legislatures that they were regulating in an area arguably preempted by federal law.
The 2017 comment noted that the conditions for which medical marijuana may be prescribed are explicitly designated as “serious health conditions” that would constitute “disabilities” under the Pennsylvania Human Relations Act. The Massachusetts Supreme Judicial Court held recently that employers in Massachusetts have a duty to reasonably accommodate the use of medical marijuana by their employees, as in Barbuto v. Advantage Sales & Marketing, 477 Mass. 456, 78 N.E.3d 37 (2017). Massachusetts’ medical marijuana law provides that “Any person meeting the requirements under this law shall not be penalized under Massachusetts law in any manner, or denied any right or privilege, for such actions.” Barbuto accepted an entry-level position with defendant Advantage Sales and Marketing (ASM), and informed ASM that she was certified to use medical marijuana for treatment of Crohn’s disease. Her pre-employment drug screen confirmed the presence of marijuana metabolites. Barbuto began work before being told by an ASM human resources representative that she was being terminated as a result of the positive drug test. According to Barbuto, she was told “that ASM did not care if Barbuto used marijuana to treat her medical condition because ‘we follow federal law, not state law.’”
Barbuto sued claiming, inter alia, disability discrimination under Massachusetts law. The trial court dismissed her claims, but the Supreme Judicial Court reversed. That court first noted that under Massachusetts law employers have a duty to accommodate the use of prescribed medication to treat and alleviate serious health conditions, and where the use of medication might interfere with job performance or violate policy, employers “would have a duty to engage in an interactive process with the employee to determine whether there were equally effective medical alternatives to the prescribed medication whose use would not be in violation of its policy.” The Massachusetts Court then held that:
“Where no equally effective alternative exists, the employer bears the burden of proving that the employee’s use of the medication would cause an undue hardship to the employer’s business in order to justify the employer’s refusal to make an exception to the drug policy reasonably to accommodate the medical needs of the handicapped employee.”
Rejecting ASM’s defense that it was per se unreasonable to accommodate the use of drug still illegal under federal law, the court ruled that under Massachusetts law, as a result of the act, the use and possession of medically prescribed marijuana by a qualifying patient is as lawful as the use and possession of any other prescribed medication. Where, in the opinion of the employee’s physician, medical marijuana is the most effective medication for the employee’s debilitating medical condition, and where any alternative medication whose use would be permitted by the employer’s drug policy would be less effective, an exception to an employer’s drug policy to permit its use is a facially reasonable accommodation. A qualified handicapped employee has a right under [Massachusetts law] not to be fired because of her handicap, and that right includes the right to require an employer to make a reasonable accommodation for her handicap to enable her to perform the essential functions of her job.
The court remanded the case for trial to permit ASM to prove that accommodating the plaintiff’s medical marijuana use would pose an undue hardship.
Pennsylvania antidiscrimination law requires a similar duty of reasonable accommodation for disabled employees, e.g., 16 Pa.Code Section 44.14(a) (“An employer shall make reasonable accommodations by modifying a job, including, but not limited to, modification of duties, scheduling, amount or nature of training, assistance provided, and the like, provided that the modification does not impose an undue hardship”). It is therefore quite likely, especially in light of the more robust employment protection provisions of the MMA, e.g., 35 Pa.C.S.A. Section 10231.2103(b), that the Pennsylvania Human Relations Commission and the courts will apply an analysis similar to that adopted in Massachusetts to claims challenging the refusal of employers to accommodate medical marijuana use by employees.
John A. McCreary Jr. is a shareholder in the employment and labor and public sector groups of the Pittsburgh law firm Babst Calland Clements & Zomnir. His practice spans the full range of issues encountered in the employment setting, including labor contract negotiation and administration, grievance arbitration, benefit plan issues, disputes over discriminatory hiring practices, wrongful termination claims, as well as litigation over pension and benefit entitlement. Contact him at jmccreary@babstcalland.com.
PA Law Weekly
(by Jean M. Mosites and Varun Shekhar)
On Feb. 28, Clean Air Council and Widener Commonwealth Law School Environmental Law and Sustainability Center, among others, resubmitted a petition to the Pennsylvania Environmental Quality Board, asking it to promulgate a regulation that would create a multi-sector cap-and-trade system in Pennsylvania to reduce greenhouse gas (GHG) emissions to achieve carbon neutrality by 2052.
The Petition
The petition includes a fully drafted regulation that establishes a cap on all reported GHG emissions, based on a 2016 base year. The cap would decline by 3 percent each year.
The petitioners acknowledge: “The proposed regulation will have an impact on all sectors of Pennsylvania’s economy, although the impact will vary among businesses and individuals, with some benefiting and some suffering adverse impacts.”
Capping GHG emissions means that the covered entities meeting certain thresholds—including producers of cement, glass, steel, lead and paper, any facility producing or importing electricity, and fossil fuel producers—all must obtain allowances, by auction or allocation, for each metric ton of reportable GHG emissions per year attributable to their operations in Pennsylvania. According to the EPA’s envirofacts database, close to 400 facilities in Pennsylvania report GHG emissions to the EPA.
The petition proposes that emissions from covered sources would be capped, with the cap declining each year by an amount equal to 3 percent of 2016 emissions. If the regulation becomes effective for 2020, the cap would be equal to 91 percent of 2016 emissions. Limited by the ever-declining cap and availability of allowances, each covered entity must reduce its GHG emissions over time to achieve carbon neutrality by 2052. Allowances under the proposed trading system would be priced at a minimum of $10 each in 2020, with the price increasing by 10 percent plus the rate of inflation each year. Any person may buy allowances regardless of whether that person emits GHG or not. If a covered entity cannot obtain sufficient allowances by auction or allocation, it may participate in the trading system and purchase needed allowances if they are available. Allowances may be freely traded or banked for future use.
The proposed regulation would allow manufacturers of certain products (but not fossil fuel suppliers or electricity generation) facing international and interstate competition to apply for some allowances to be distributed to them without cost. This mechanism is intended to prevent “leakage,” which refers to the relocation of production or emissions of GHGs to another jurisdiction in which GHG emissions are not commoditized. The number of free allowances directly awarded to such entities would be based initially on the company’s 2018 GHG emissions and be reduced by 5percent each year after.
The petition envisions potential future linkage with other trading systems. The Regional Greenhouse Gas Initiative currently has nine state participants, all from the northeast. RGGI, however, is limited to regulating GHGs emitted from electricity generation units, as is a similar system proposed in Virginia. The petition is based largely on the California cap-and-trade regulation, which is a multi-sector regulator of GHG emissions in a trading program that includes Ontario and Quebec. The California regulation, however, does not require a reduction of all GHG emissions to zero.
The Environmental Rights Amendment and the Petition
The petitioners cite the Pennsylvania Air Pollution Control Act and Article I, Section 27 of the Pennsylvania Constitution, commonly known as the Environmental Rights Amendment (ERA), as legal authority for their petition. The ERA states the “people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment.” The commonwealth must conserve and maintain public natural resources for the benefit of all the people. The Pennsylvania Supreme Court in PEDF v. Commonwealth, 161 A.3d 911, 933 (Pa. 2017), stated the commonwealth “must act affirmatively via legislative action to protect the environment.”
The petitioners assert the ERA requires the commonwealth to control GHG emissions. They contend that because “a stable climate” should be understood to be a public natural resource, the ERA affords a right to a “natural climate unaffected by climate disruption,” although this right is not expressly included in the Pennsylvania constitution. The petition bypasses legislative consideration of this issue by asking EQB as an administrative body to promulgate a climate change regulation.
Petitioners also contend the allowances to be sold by the Department of Environmental Protection “may be considered to be represent ecosystem services” to be sold, “similar to revenue from timber sales from sustainable management of state forest land.” Without selling these allowances, petitioners warn that the commonwealth “will be unable to address the structural budget deficit or restore the corpus of the trust” created by the ERA.
Climate Change Law
Currently in Pennsylvania, the only express legislative direction related to climate change and greenhouse gases is the Pennsylvania Climate Change Act, Act 70 of 2008. It provides for a report on potential climate change impacts, duties of the DEP, establishment of a Climate Change Advisory Committee, and a voluntary registry of greenhouse gas emissions. Neither the Air Pollution Control Act nor the Climate Change Act provides express authority to regulate GHG emissions or establish a cap and trade system.
This is the second climate change-related petition submitted to the EQB in recent years. The first was initially submitted in 2012 by a group of individuals including several minors alleging the commonwealth violated the ERA by not developing a plan to regulate GHGs to address climate change. The DEP determined that the petition did not meet requirements for submission to the EQB, and the EQB denied it. The Commonwealth Court denied the petitioners’ petition for review for failure to exhaust administrative remedies, as in Funk v. Wolf, 71 A.3d 1097 (Pa. Commw. 2013). The petitioners then resubmitted a petition in 2013 and filed a mandamus petition with the Commonwealth Court, alleging that by failing to develop a comprehensive plan to regulate GHG “in light of the present and projected deleterious effects of global climate change,” the respondents (which included the DEP, DCNR, and PennDOT) have not met their obligations under the ERA. The court dismissed the petition, concluding the petitioners lacked a clear right to relief for purposes of a mandamus action, see Funk v. Wolf, 144 A.3d 228 (Pa. Commw. 2016), aff’d 158 A.3d 642 (Pa. 2017). On the question of the scope of the ERA for GHG regulation, the court stated “the ERA does not authorize respondents to disturb the legislative scheme” established by the Air Pollution Control Act. Id. at 250.
Status and Next Steps
The petition was originally submitted on Nov. 28, 2018, and resubmitted after House Environmental Resources and Energy Committee Chairman Daryl Metcalfe raised concerns that the DEP did not follow applicable notification requirements under EQB’s rulemaking petition policy, see 25 Pa. Code Chapter 23 (Environmental Quality Board Policy for Processing Petitions—Statement of Policy). Under that policy, the DEP initially reviews a rulemaking petition to determine whether the petition contains the background and related information required under 25 Pa. Code Section 23.1, EQB may lawfully take the requested action, and the proposal would not conflict with federal law. In December 2018, the DEP informed the petitioners that the petition satisfied these requirements. Following resubmission of the petition on Feb. 28, the DEP informed the petitioners on March 1, that the petition would be reviewed to ensure it still meets the eligibility criteria of EQB’s policy.
If the DEP determines it meets the criteria, the petition may be presented to the EQB at its April 16 meeting. The petitioners may make a short oral presentation on why the EQB should accept the petition and the DEP will make a recommendation on whether EQB should accept it. If EQB accepts the petition, the department must prepare a report and recommendation within 60 days (or longer if the report cannot be completed within 60 days) on whether EQB should approve the action requested in the petition. EQB may deny a petition if it has previously considered the same issue for which there is no new or different information, if the request concerns a matter in litigation, or if the requested action is inappropriate for EQB rulemaking due to policy or regulatory considerations. If regulatory amendments are recommended, the DEP will prepare a proposed rulemaking for EQB consideration within six months after mailing its report to the petitioners.
Among other things, the petition raises the legal issue whether the ERA confers extra-statutory authority on EQB and the DEP to act through administrative rulemaking in the absence of a clear statutory directive. Further developments on the petition for GHG rulemaking are expected later in 2019.
Jean M. Mosites is a shareholder in the environmental, energy and natural resources, and public sector groups of the Pittsburgh law firm Babst Calland Clements & Zomnir. Her practice includes client counseling on environmental compliance in the energy sector, resolving liabilities under federal and state remediation programs, as well as administrative appeals and environmental litigation in state and federal courts. Contact her at jmosites@babstcalland.com.
Varun Shekhar is an associate in the environmental group of the firm. His practice encompasses a variety of environmental programs, with emphasis on federal, state and local regulatory matters arising under the Clean Air Act (CAA). Contact him at vshekhar@babstcalland.com.
Smart Business
(by Jayne Gest with Christian Farmakis and Justine Kasznica)
Convertible debt is a common investment vehicle by which early-stage companies raise capital, where an investor grants to a company a short-term, often interest-bearing loan that converts into equity of the company at a future date. The convertible debt investors agree to push the question of what the company is worth — the valuation — down the road until the company’s next priced funding round. In return, the investors receive certain advantageous terms at the time that the debt converts to equity.
Smart Business spoke with Christian A. Farmakis, shareholder and chairman of the board, and Justine M. Kasznica, shareholder, at Babst Calland, about this investment vehicle.
What are the benefits for these investors?
As with any loan, the convertible debt note accrues interest until a defined maturity date. Unlike a standard promissory note, the convertible note often includes a conversion discount, valuation cap and other terms designed to mitigate the investor’s risk.
With the conversion discount, these investors receive a discount on the price per share at which their note converts to equity at a future priced round. Although discounts vary, it’s commonly set around 20 percent. Thus, if the price per share is set at $1, an investor’s convertible debt note would convert at a price of 80 cents per share.
With a valuation cap, (a) a maximum value of the company is established, solely for the purpose of calculating conversion of debt to equity; and (b) the investor’s price per share will be capped at the agreed upon number.
How can convertible debt negatively impact the startup?
Convertible notes are intended to be short-term investments. But when a company doesn’t get to its priced round quickly — or may require more notes to generate sufficient capital to keep the company in business — the founders can run into trouble.
By the time the company gets to a priced round, the accrual of interest, conversion discounts and valuation caps can result in a disproportionate percentage of the company being owned by the convertible debt investors, leaving the founders and employees as well as future investors with little future upside. Such a scenario can scare away new investors and render a company uninvestable.
How can founders get out of this scenario?
In many cases, this situation can be remedied through a renegotiation of the notes. For example, the valuation cap can be renegotiated or waived by the existing noteholders. Also, noteholders may agree to waive interest payments to reduce the impact of the conversion and the dilution effect on the founders. Still other times, noteholders may be interested in a buyout to get some or all of their money back.
A company’s negotiation and bargaining power is greatly enhanced if it can point to new investors who have conditioned their investment on a cap table adjustment. Noteholders can often be persuaded to give up or alter their contractual rights, if such a decision will help the company get the critical investment it needs to succeed.
What can be done to avoid this problem?
Although startups are often forced to accept bad financing deals just to get enough operating capital to survive, a few best practices can help mitigate some of these issues.
- Fully understand the impact convertible debt financing rounds will have on shareholder equity positions by working through a variety of conversion and post-financing scenarios with advisers.
- Where possible, try to treat multiple investments as if they were a single round, with a super-majority vote of the holders needed to amend the notes, making it easier to effectuate future note amendments.
- When possible, ask for protective provisions such as prepayment rights, voluntary conversion prior to the maturity date and time-based conversion discounts (where the discount is smaller if the company can get to a priced round sooner).
For the PDF, click here.
For the full article, click here.
The Legal Intelligencer
(by Krista-Ann M. Staley and Jenn L. Malik)
In 2016, Pennsylvania joined several other states in enacting legislation legalizing the use or possession of medical marijuana within its borders. Inherent in adopting this legislation is the regulation of the various retailers and manufacturers charged with supplying legal green to licensed users of medical marijuana. Now that the commonwealth has legislated the “how” of medical marijuana use, local governing bodies are taxed with legislating the “where.” The following addresses state and local regulation concerning the zoning of the medical marijuana industry.
State Regulation of Medical Marijuana Organizations
The Medical Marijuana Act (the act), 35 P.S. Section 10231.101 et seq., authorizes the Pennsylvania Department of Health (the department) to issue permits to “medical marijuana organizations” (MMOs), bifurcated by the act into two categories—namely dispensaries and grower/processors. As the terms suggest, dispensaries are authorized by the department to dispense medical marijuana and grower/processors are permitted by the department to grow and process medical marijuana. The act required the department to divide the commonwealth into regions and to regulate the number of permits issued per region. As a result, the department essentially regulates the amount of medical marijuana grown, manufactured and sold in each region. (The act required the department to establish at least three regions and the department actually established six regions). The department is initially only permitted to issue 25 permits to growers/processors and 50 permits to dispensaries statewide. In addition to the limited number of permits available, stringent state-mandated application requirements and hefty fees (i.e, an initial application fee of $10,000 for grower/processors and $5,000 for dispensaries; a first-year permitting fee of $200,000 for grower/processors and $30,000 for dispensaries; and additional renewal permitting fees) further limit MMO locations in the commonwealth.
Under the act, grower/processors may only conduct their operations within an indoor, enclosed, secure facility equipped with an electronic locking system and electronic surveillance. Dispensaries are also only permitted to operate in an indoor, enclosed, secure facility and may not operate at the same site of a grower/processor. The act requires each MMO to implement an electronic tracking system to monitor inventory and to surveil the premises.
The act requires that grower/processors meet the same municipal zoning and land use requirements as other manufacturing, processing, and production facilities that are located in the same zoning district. Dispensaries must meet the same municipal zoning and land use requirements as other commercial facilities that are located in the same zoning district. In addition, a dispensary is not permitted to be located within 1,000 feet of the property line of a public, private or parochial school or day care center.
Regulation of MMOs at the Local Level
After passage of the act, local governments across the commonwealth amended their zoning ordinances to mandate additional requirements governing MMO operations above and beyond those required at the state level. A survey of various local zoning ordinances regulating MMOs revealed the following typical regulations: conditional-use approvals required for operations occurring in certain zoning districts, minimum lot-size requirements for grower/processors, setback requirements from the nearest property line, additional setback requirements from schools, daycare facilities, and gambling facilities, buffer zones, fencing requirements, regulations concerning emissions from grower/processors, lighting restrictions, parking requirements, prohibitions against outdoor seating, singular entrances for dispensaries, permitted hours of operations, landscaping requirements, square footage limitations and prohibiting consumption of medical marijuana on the premises. Another common local regulation prohibits MMOs from operating in a trailer, cargo container, mobile or modular unit, mobile home, recreational vehicle or other motor vehicle—representing local governments’ recognition of the possible risks involved with a mobile MMO. Additionally, several ordinances prohibit drive-through and exterior sales of medical marijuana.
One Toke Over the Line
Zoning requires local governments to walk a narrow line—balancing the rights of a private property owner to use his or her own land lawfully while considering the general health, safety and welfare of the community. Naturally, the medical marijuana industry moving into the neighborhood will spark the attention of many constituents, given the industry’s very recent legality and the historical and cultural associations with marijuana. Some constituents may feel that an MMO in their area may attract crime and that the legalization of medical marijuana may be the catalyst to the legalization of recreational marijuana. With these considerations in mind, the following are some general considerations to take into account when considering zoning regulations applicable to MMOs.
An outright ban on MMOs is likely illegal. The Municipalities Planning Code (MPC), the local zoning enabling legislation, authorizes a challenge to the validity of a zoning ordinance when its provisions prohibit or unduly restrict a legitimate use, 53 P.S. Section 10916.1. Additionally, Pennsylvania courts have held that an ordinance that prohibits a lawful use throughout the municipality or is duly restrictive is unconstitutional, see Hock v. Board of Supervisors of Mount Pleasant Township, 622 A.2d 431, 433 (Pa. Cmwlth 1993). Consequently, banning MMOs is not permissible no matter the level of disapproval of the use in the community.
Additionally, even zoning regulations that fall short of an outright ban on MMOs should be executed with caution. The act itself explicitly provides that grower/processors meet the same municipal zoning and land use requirements as other manufacturing, processing and production facilities in the area. Likewise, dispensaries must meet the same municipal zoning and land use requirements as other commercial facilities within the area. While not yet addressed by the courts, there is an argument that the act would preempt any local ordinance from requiring grower/processors to comply with stricter requirements than other manufacturing/processing uses or dispensaries to comply with stricter requirements than other commercial uses. See generally, Mars Emergency Medical Services v. Township of Adams, 740 A.2d 193, 196 (Pa. 1999) (a municipal ordinance cannot be sustained to the extent that it is contradictory to, or inconsistent with, a state statute). Further, the act contains a provision stating that an MMO shall not be “subject to arrest, prosecution or penalty in any manner, or denied any right or privilege, including civil penalty or disciplinary action by a commonwealth licensing board or commission, solely for lawful use of medical marijuana or manufacture or sale or dispensing of medical marijuana.” While there have been no cases to date, it is possible that an overzealous zoning ordinance could amount to a violation of the act.
Another consideration to keep in mind is whether the act is pre-empted by federal law, i.e., the Controlled Substance Act (CSA), 21 U.S.C. Section 801, et seq., the Americans with Disabilities Act (ADA), 42 U.S.C. Section 12101 et seq., and the Food Drug and Cosmetic Act (FDCA), 21 U.S.C. Section 301, et seq.. Other jurisdictions that have considered the issue have found that their state medical marijuana statutes are not preempted by the CSA, ADA, or FDCA; however, Pennsylvania has not yet had occasion to decide this issue. See generally,Noffsinger v. SSC Niantic Operating ,273 F.Supp.3d 326 (D. Conn. 2017); Chance v. Kraft Heinz Foods, 2018 WL 6655670, No. K18C-01-056NEP (Del. Super. Ct. 2018); Callaghan v. Darlington Fabrics, 2017 WL 2321181, No. PC-2014-5680 (R.I. Super. 2017).
The most prudent course for local governing bodies would be to mirror the act whenever possible when enacting zoning ordinances affecting MMOs. Wherever possible, similar zoning rules and standards should be applied to grower/processors as other manufacturing, processing and production facilities in the municipality. Likewise, the same zoning rules should be applied to dispensaries as other commercial uses in the district. One-thousand foot setbacks from schools are specifically delineated in the act, consequently, attempts to increase those setbacks will likely be pre-empted.
For the full article, click here.
The PIOGA Press
(by Jean M. Mosites and Casey J. Snyder)
On January 8, Governor Tom Wolf issued the first executive order (EO) of 2019 entitled: Commonwealth Leadership in Addressing Climate Change and Promoting Energy Conservation and Sustainable Governance. The six-page EO is the current administration’s most recent action to address climate effects from greenhouse gas (GHG) emissions.
The EO consists of the following four components, with the majority of the order applying only to Pennsylvania executive agencies:
- Committing Pennsylvania to a GHG emissions goal
- Setting energy performance goals for Pennsylvania agencies
- Reestablishing the GreenGov council
- Detailing specific responsibilities for Pennsylvania agencies to achieve the energy performance and GHG goals
Statewide climate reduction goals
The EO includes an important, statewide goal within an order that otherwise applies only to state agencies. The EO commits Pennsylvania to a goal to achieve a 26 percent reduction of GHG from 2005 by 2025 and an 80 percent reduction by 2050. The directive places Pennsylvania in a league with 20 other states with specific GHG reduction targets. Pennsylvania’s goal is more stringent in the short term compared to states like Michigan and less stringent in the long term than goals set by California and New York. Of the states with GHG reduction targets, Pennsylvania is the leading net energy producer and the leading natural gas producer, according to the U. S. Energy Information Agency.
The EO comes during a time when the Trump administration has been critical of climate change initiatives. President Trump announced in 2017 that the U.S. would withdraw from the Paris Accord, and the EPA under his administration is considering rolling back regulation of methane emissions from onshore natural gas production. States are free to commit to their own climate plans, but the EO does not specify precisely how the Commonwealth will achieve the GHG reduction commitment.
Executive agencies’ energy performance
Under the EO, executive agencies must reduce energy consumption by 3 percent per year, and 21 percent by 2025 from 2017 levels. They must replace 25 percent of state cars with electric and hybrid vehicles. Agencies must also procure renewable energy to offset 40 percent of Pennsylvania’s energy use through direct purchase of Pennsylvania-sourced renewable energy or Certified Tier I renewable energy credits (solar, wind, low-impact hydropower, geothermal, biologic methane, fuel cells, biomass energy or coal mine methane sources). In addition, new buildings and certain renovations must achieve a 10 percent reduction of energy consumption over the U.S Department of Energy’s ANSI/ASHRAE/IES Standard 90.1-2016.
It is unclear to what extent the renewable energy focus in general and the reduction in the use of oil and gas in agency vehicles and infrastructure in particular will have on the oil and gas industry.
GreenGov Council and specific state requirements
The EO reestablishes the GreenGov Council as the central coordinating body to implement the EO. The council will consist of the secretaries of the departments of General Services, Environmental Protection (DEP), and Conservation and Natural Resources (DCNR) as well as other individuals appointed by Governor Wolf. The EO requires the council to encourage sustainable practices in the government’s policy, planning, operation, procurement and regulatory functions. Addition ally, the Council will be involved in trainings and certification of conservation and efficiency policies, including maintaining a certification checklist of approved measures and strategies that state agencies could implement.
Specific requirements for state agencies include the development and incorporation of policies to meet energy performance and GHG goals. DEP must develop cost-effective conservation, sustainability and efficiency strategies to implement the order, as well as assist in developing long-range conservation plan goals for agency facilities. DCNR is to provide technical assistance on these plans and invest in green projects and buildings.
Tracking agency implementation of these energy saving policies and strategies could be instructive to predict potential regulatory actions on the private sector. The GreenGov Council is required to encourage sustainable practices in executive agency regulatory functions. While ambiguous as to what this will actually require, such energy-saving measures may reappear in policies or proposed regulations going forward.
A continuing trend
Executive orders remain effective until rescinded by a governor, so this EO does not automatically expire when Governor Wolf leaves office in 2023. It signals an ongoing trend under the Wolf administration to regulate GHG and promote climate change initiatives. The EO follows closely the most recent update of Pennsylvania’s Climate Action Plan (CAP), a report required under Pennsylvania’s Climate Change Act of 2008. Pennsylvania’s CAP was most recently updated in November 2018. Under the draft CAP update, one identified climate action strategy is for executive agencies to take a lead-by-example role in implementing energy-saving practices and policies promoting sustainability. Governor Wolf’s EO implements this CAP initiative, and is arguably symbolic of his commitment to continue addressing climate change, as it is the first EO of 2019.
Additional components of the CAP target the energy industry and include: (1) increasing clean electricity generation; (2) creating a diverse portfolio of clean, utilityscale electricity generation; (3) reducing upstream impacts of fossil fuel energy production; and (4) increasing production and use of alternative fuels. Governor Wolf already announced his Methane Reduction Strategy, targeting methane emissions from natural gas well sites, compressor stations and pipelines on January 19, 2016. In June 2018, DEP finalized a new general permit and revised an existing general permit regulating methane emissions for the first time from natural gas compression, transmission, and processing sites and unconventional wells. In addition to the revised general permits, the CAP states that DEP could expand verification processes of methane emissions reported to DEP and expand utilization of remote sensing technologies like vehicle and air-craft mounted detection equipment, as well as hand-held detection technology like FLIR cameras. DEP unveiled a draft rule to regulate methane from existing oil and gas wells in December 2018 (January 2019 PIOGA Press, page 8).
The EO’s effect on the oil and gas industry is unclear. With Pennsylvania agencies now under a mandate to reduce GHG emissions, regulators may continue to scrutinize how this and other industries could provide additional reductions to meet Pennsylvania’s new climate goals. The Wolf administration’s response to the recent cap and trade petition submitted to the Environmental Quality Board will reveal even more in the coming months about the state’s climate change initiatives.
Babst Calland is actively monitoring these and other such initiatives within both state and federal administrations. If you have any questions about the topics discussed in this article or how they may affect your operations, contact Jean M. Mosites at 412-394-6468 or jmosites@babstcalland.com, or Casey J. Snyder at 412-394-5438 or csnyder@babstcalland.com.
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The Legal Intelligencer
(by Stephen Antonelli)
By the time you are reading this, the federal government will have re-opened, at least temporarily. On Friday, Jan. 25, the president and Congress agreed to end a 35-day partial shutdown of the U.S. government—the longest in history—by passing a continuing resolution that will fund the government through Feb. 15.
Throughout the shutdown, there were numerous news stories concerning the deadlines by which federal courts were expecting to run out of money. As a result, employment litigators and other federal court practitioners questioned whether the shutdown would interfere with their clients’ filing deadlines and how it might affect their practices, generally. Early on, courts were expected to run out of operating funds by Jan. 18. That deadline was later extended to Jan. 25 and then to Feb. 1. Luckily, courts were able to maintain mostly normal operations until the shutdown ended.
Likewise, the shutdown did not affect the National Labor Relations Board (NLRB) or the U.S. Department of Labor (DOL). The same cannot be said for the Equal Employment Opportunity Commission (EEOC), which closed on Dec. 22 and did not reopen until Jan. 28. For the 37 days in between those dates, the EEOC did not process new charges of discrimination and it did not investigate pending charges.
According to the EEOC’s website, during the shutdown, most services were unavailable. Its toll-free phone numbers were unstaffed, its digital portals were inaccessible, and intake interviews were cancelled (unless a charging party was in danger of missing a filing deadline). In other words, unless a deadline was nearing, if parties to a charge of discrimination had questions about the status of a charge, those questions were likely unanswered during the shutdown.
Through a notice posted on its website, the EEOC provided information for potential charging parties as well as to those who had already filed and/or responded to a charge. Once posted, the website was not updated until the shutdown had ended and appropriations were enacted. A summary of the information provided by the EEOC is below.
Information Provided for Potential Charging Parties
The EEOC reminded potential charging parties that, generally, they must file charges of discrimination within 300 days of the incident of alleged discrimination. This deadline is only 180 days in states such as North Carolina, Georgia, Alabama, Mississippi or Arkansas, where there is no state fair employment practice agency. The EEOC clearly noted that the shutdown did not serve to extend these filing deadlines. As a result, it advised charging parties who were within 30 days of an expiring statute of limitations (or those who were unsure of a filing deadline) to immediately begin the process of filing a charge by downloading and submitting a pre-charge inquiry. The EEOC accepted pre-charge inquiries throughout the shutdown, but only via hand delivery, mail or fax because its online portal was not available.
The EEOC also advised potential charging parties who were within 30 days of a filing deadline of how to file a timely charge. Charges must be dated and signed in writing (not typed). They must also include the following:
- The charging party’s name, address and phone number;
- The name, address and phone number of the respondent;
- The adverse action the charging party believes was discriminatory, when it occurred and the reason it was taken; and
- A request for the EEOC to take remedial action.
Information Provided for Parties to a Charge or Litigation
Despite the shutdown, employers were expected to comply with all deadlines for position statements and requests for information. Employers who typically seek extensions of these deadlines were not likely to have their requests granted during the shutdown as the EEOC did not have adequate staff to consider such requests.
The EEOC advised charging parties who have received notice of their right to sue, that the time limits for commencing litigation in federal court were not suspended as a result of the shutdown. As a result, it advised that charging parties who fail to file suit within the applicable time period set forth in the dismissal notice will lose the right to do so.
All mediations—whether for private or public sector matters—that were scheduled to occur during the shutdown, were cancelled until further notice. Now that the EEOC has resumed operations, mediators will contact the parties in each matter to reschedule the mediation.
During the shutdown, the EEOC continued to accept but did not process Freedom of Information Act (FOIA) requests. Now that the EEOC has resumed operations, it will begin to respond to messages left for the FOIA Requester Service Center and the FOIA Public Liaison in the order in which the messages were received. Depending on the volume of messages received, it may take the EEOC as long as 10 business days (until Feb. 8) to respond to your message.
Finally, all litigation involving the EEOC as a party was suspended unless a continuance had not been granted by the court.
In short, the EEOC resumed operations—at least temporarily—on Jan. 28. Its employees will have more than a month’s worth of “catch-up” work to do in addition to their normal responsibilities. Employees, employers and their respective counsel should expect significant delays as the EEOC processes and investigates a presumed backlog of charges of discrimination.
For the full article, click here.
Smart Business
(by Jayne Gest with Christian Farmakis and Sara Antol)
Consider this scenario: A startup in the artificial intelligence (AI) space develops a unique algorithm. A larger AI firm is interested in this algorithm but isn’t sure it’ll work. The larger company doesn’t want to buy the startup, but it wants a foot in the door on the new technology and is willing to invest. The startup needs funds but is concerned about the competitive issues created by giving the larger company a board seat and waiving the corporate opportunity doctrine.
“A smaller company is under pressure — in this scenario or others like it — to waive the corporate opportunity doctrine,” says Sara M. Antol, shareholder at Babst Calland. “Before you do that, stop and think about what this will mean. You need to determine whether there’s room to compromise with tailored language that serves the purposes of both the company and the investor.”
Smart Business spoke with Antol and Christian A. Farmakis, shareholder and chairman of the board at Babst Calland, about the corporate opportunity doctrine.
What is the corporate opportunity doctrine?
The corporate opportunity doctrine is part of the duty of loyalty imposed upon corporate fiduciaries. It’s not uncommon for a business owner or entity to invest in another company. If the investment is significant, the investor may demand a board seat to help influence the policies and operations of the company. If this person finds out about an opportunity as a board member, the corporate opportunity doctrine stops that director or officer from personally benefiting from an opportunity that would belong to the corporation, if it meets a four-pronged test:
- If the corporation is financially able to exploit the opportunity.
- If the opportunity is within the corporation’s line of business.
- If the corporation has an interest or expectation relating to the opportunity.
- If by taking the opportunity, the officer or director is placed in a position adverse or in conflict with the corporation.
How did it become commonplace for this doctrine to be waived?
As private investment increased, investors saw the potential conflict created by the duty of loyalty if they acted to maximize their interests while serving on a board. In 2000, Delaware amended its general corporation law to allow companies to expressly waive that duty in their certificate of incorporation. Since then, other states have adopted similar provisions, such as Pennsylvania’s limited liability company law in 2016.
Today, it’s common for companies to waive the corporate opportunity doctrine. Form investment documents, especially with private equity, often include this language.
Why would a company invest in a competitor and how does it create conflict?
A bigger company looking for the next big thing might invest in startups within its market space. Then, it can leverage the product or technology when the opportunity matures. Frequently, these startups are searching for capital and willing to agree to investment from a larger competitor.
The conflict arises when the larger company wants a waiver of the corporate opportunity doctrine in the investment documents. This allows the larger company to operate in its market space, which is shared by both companies, without restriction. The smaller company, though, may justifiably have concerns about future competition from the larger company.
How can companies find a compromise?
The waiver language can be tailored to address the areas and issues where the two companies might most likely compete. For example, if the larger company ends up competing with the smaller company under the waiver, the investor could lose some investor rights — investor rights that you wouldn’t want a competitor to have, like a board seat, monthly financial information or information about customer opportunities. Instead, perhaps the board seat converts to observer rights and the investor is limited to only receiving annual financial information.
There’s room to negotiate and countless scenarios could be proposed, so founders need to think carefully and assess the situation before agreeing to waive the corporate opportunity doctrine. At the very least they’ll have their eyes open to the risks and know what they’re giving up by agreeing to this waiver.
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The PIOGA Press
(by Lisa M. Bruderly and Gary E. Steinbauer)
On December 11, the U.S. Environmental Protection Agency and Army Corps of Engineers released a much-anticipated proposed rule that would redefine “waters of the United States” (WOTUS) under the Clean Water Act (CWA).1 As compared to the WOTUS definition in the Obama administration’s 2015 “Clean Water Rule” (CWR) (currently applicable in Pennsylvania), the proposed rule would significantly reduce the federal government’s jurisdiction over surface water, including wetlands, nationwide. Should the proposed rule be finalized as writ ten, the oil and gas sector could see significant changes in CWA permitting/compliance obligations associated with well sites and pipeline construction.
Revised definition limits federal government’s CWA jurisdiction
The proposed rule’s WOTUS definition is intended to provide predictability and consistency in identifying federally regulated surface waters. The agencies state the proposed WOTUS definition is “straightforward” and cost-effective while still being protective of the nation’s navigable waters and respectful of state and tribal authority over their land and water resources.
The proposal focuses on surface waters that are “physically and meaningfully connected to traditional navigable waters,” and relies largely on the “relatively permanent water” jurisdictional test established in the late Justice Antonin Scalia’s plurality opinion in United States v. Rapanos, 547 U.S. 715 (2006). The proposed rule includes the following six categories of waters that are WOTUS and also includes 11 categories of waters or features that are not WOTUS:
WOTUS includes
- Traditional navigable waters, including territorial seas (TNWs)
- Tributaries that contribute perennial or intermittent flow to TNWs
- Ditches that (a) are TNWs, (b) are constructed in a tributary, (c) relocate or alter a tributary such that they are a tributary, or (d) are constructed in an adjacent wetland so long as they meet the definition of tributary
- Lakes and ponds that (a) are TNWs, (b) contribute perennial or intermittent flow to a TNW in a typical year directly or indirectly through a jurisdictional water, or (c) are flooded by jurisdictional waters in a typical year
- Impoundments of otherwise jurisdictional waters
- Wetlands adjacent to jurisdictional waters
WOTUS does NOT include
- Any feature not identified in the proposal as jurisdictional
- Groundwater
- Ephemeral features and diffuse stormwater run-off
- Ditches that are not defined as WOTUS
- Prior converted cropland
- Artificially irrigated areas that would revert to upland if irrigation stopped
- Artificial lakes/ponds constructed in upland that are not defined as WOTUS
- Water-filled depressions and pits created in upland incidental to mining or construction activity, and pits excavated in upland to obtain fill, sand or gravel
- Stormwater control features created in upland to convey, treat, infiltrate or store stormwater run-off
- Wastewater recycling structures constructed in upland
- Waste treatment systems
The proposed rule’s definition of WOTUS is significantly different from the definition of WOTUS under the CWR, and, as such, would significantly reduce the extent of federally regulated waters. This is especially true in states, such as Pennsylvania, where the CWR’s WOTUS definition currently applies. Some of the key differences include:
- References to “significant nexus” are eliminated. The proposed rule does not reference the “significant nexus” jurisdictional test, a hallmark of the CWR, that is based on former Justice Anthony Kennedy’s concurring opinion in Rapanos. Rather, the proposed rule focuses on “relatively permanent flowing and standing waterbodies” that are or have a surface connection to TNWs
- “Tributary” is narrowed. Only surface water channels with perennial or intermittent flow to a WOTUS in a “typical year” would be federally defined as tributaries. Ephemeral features are excluded from the definition. Unlike the CWR’s definition of tributary, the proposed rule does not define a tributary based on the presence of defined beds, banks and ordinary high water marks.
- “Adjacent wetlands” are narrowed. “Adjacent wetlands” would not be jurisdictional unless they either physically abut a WOTUS or have a direct hydrologic surface connection to another WOTUS other than a wetland. By contrast, the CWR’s definition of WOTUS extends jurisdiction to wetlands within a certain dis1. For additional background on the events leading up to the release of the proposed rule, please see the authors’ PIOGA Press articles from February and November 2018, and relevant Environmental Alerts on Babst Calland’s Perspectives webpage at www.babstcalland.com/ perspectives. Lisa M. Bruderly, Esq. Gary E. Steinbauer, Esq. Authors: 10 The PIOGA Press | January 2019 tance from an ordinary high water mark or within the 100-year floodplain of a WOTUS, even if they are physically separated from a WOTUS.
- Jurisdiction over ditches clarified. The proposed rule generally would not categorize ditches as WOTUS, unless they function as TNWs, are constructed in or satisfy the definition of a “tributary,” or are constructed in an “adjacent wetland.” Even though certain “ditches” under the proposed rule would not be considered jurisdictional, the agencies note that they could be subject to CWA permitting if they meet the definition of “point source.”
Potential advantages for oil and gas sector and public comment opportunities
The proposed rule’s definition of WOTUS, if finalized as written, would fundamentally alter and substantially narrow the scope of federal CWA authority. For the oil and gas industry, this proposed narrower definition would likely simplify the federal obligations associated with the construction and maintenance of well pads, pipelines and access roads, including the following:
- Section 404 permitting. Because, under the proposed rule, fewer waters would be considered to be WOTUS, the extent of impacts to federally jurisdictional waters from well pad, access road or pipeline construction would be expected to decrease, thereby lessening the likelihood of requiring more expensive, resourceintensive and time-consuming individual Section 404 permits.
- Spill reporting. Under the proposed rule, the likelihood of spilled materials entering a WOTUS and triggering federal spill reporting requirements would be lessened.
- Maintenance of ditches. Under the proposed rule, fewer drainage ditches would be considered to be WOTUS, therefore decreasing the need for Section 404 permits or authorizations to maintain these ditches. We note that, while the proposed rule may reduce certain federal obligations, it does not alter existing state permitting or reporting obligations (e.g., Chapter 102 and Chapter 105 permitting obligations, PPC planning requirements, state spill reporting obligations, etc.).
Oil and gas operators are encouraged to provide their comments on the proposed rule. A 60-day public comment period will open upon publication of the proposal in the Federal Register. The agencies are soliciting public comment on all aspects of the proposed rule, including whether:
- The “significant nexus” test must be a component of the proposed new definition of WOTUS.
- The definition of “tributary” should be limited to perennial waters and not those with intermittent flows.
- “Effluent-dependent streams” should be included in the definition of “tributary.”
- The jurisdictional cut-off for “adjacent wetlands” should be within the wetland or at the wetland’s outer limits.
- A ditch can be both a “point source” and a WOTUS.
- The agencies should work with states to develop, and make publicly available, state-of-the-art geospatial data tools to identify the locations of WOTUS.
Continuing jurisdictional uncertainty and inevitable litigation
While the proposed rule may ultimately be beneficial for the oil and gas sector, it does not bring any immediate changes to the regulatory landscape and is but the first step in what could be a long road to redefine WOTUS. Even if finalized, litigation challenging any final rule adopting all or part of the proposed rule is almost certain. As we have described in previous articles, the litigation challenging the 2015 CWR began almost immediately upon its finalization and still continues. In addition, challenges by states and environmental groups to the Trump administration’s efforts to delay implementation of the CWR have resulted in the current regulatory patchwork where the pre-CWR definition of WOTUS is in effect in 28 states and the arguably more expansive CWR definition of WOTUS is in effect in 22 states, including Pennsylvania.
While efforts to finalize this newly proposed rulemaking continue and the inevitable litigation runs its course, the regulated community must continue to contend with these state-dependent differences in the scope of the federal government’s authority under the CWA.
If you have any questions about the topics discussed in this article or how they may impact your operations and compliance obligations, contact Lisa M. Bruderly at 412-394-6495 or llbruderly@babstcalland.com, or Gary E. Steinbauer at 412-394-6590 or gsteinbauer@ babstcalland.com.
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Smart Business
(by Jayne Gest with Christian A. Farmakis)
In 2013, San Francisco seed accelerator Y Combinator created a Simple Agreement for Future Equity (SAFE), which can be used in lieu of a convertible note. SAFEs spread throughout the California investment community. Now they’re entering regions like Pittsburgh. Investors, however, haven’t always embraced SAFEs as a reasonable vehicle for seed investment. They may be hesitant or uncomfortable with them.
Christian A. Farmakis, shareholder and chairman of the board at Babst Calland, first encountered SAFEs a few years ago when making a personal investment.
“I didn’t know much about it at the time. I initially thought, ‘How is this different than a convertible note?’” he says. “I read it and thought: ‘If the investment goes well, I’m largely in the same position. If the investment doesn’t go well, I will never be repaid, but I never expected to be.’ So, I signed it.”
Smart Business spoke with Farmakis about what entrepreneurs and investors need to understand about SAFEs.
What are the similarities and differences between SAFEs and convertible notes?
A SAFE is essentially a warrant (a contractual right to purchase equity upon the occurrence of a future triggering event, like a later priced investment round), but with the purchase price paid upfront.
SAFEs are like convertible notes in many ways. They can (a) include a discount on the per share price — a 20 percent discount would provide the investor 125 shares rather than 100; (b) include a valuation cap, capping the investor dilution when the triggering event occurs; and (c) give pricing protection for early investors. Because both are early-stage investment vehicles, the price per equity unit is not determined because the company has no company valuation.
A convertible note is a debt instrument. A SAFE is a contract. As such, a convertible note typically earns interest while it remains outstanding; a SAFE doesn’t. Convertible notes usually result in more shares being issued upon conversion — the aggregate value is higher than the original amount due to accrued interest. From this perspective, SAFEs are advantageous to founders.
Notes frequently trigger on a priced round but are intended to be repaid with interest when they mature, say, five years later, if a priced round doesn’t happen. SAFEs do not have this feature. They have no maturity date. At first blush, this convertible note characteristic favors investors. However, consider if this is materially favorable — in most instances, a failed startup usually doesn’t have the funds to repay note holders after its creditors are paid.
How can founders and investors benefit?
Because the baseline forms are available from Y Combinator’s website, SAFEs are fairly standardized, and the expenses associated with getting early-stage investors to sign a SAFE are lower. The startup doesn’t carry SAFEs as debt on its financial statements. Also, if structured properly, founders aren’t diluted as quickly as they might be with conventional debt.
If things go well, SAFEs give investors benefits like the percentage discount, valuation cap and most favored nation on the pricing. If they go badly, SAFEs benefit the founders, but the additional rights an early-stage investor loses aren’t significant. Again, sophisticated investors who put money in early-stage companies generally don’t expect to get paid back if they fail.
What should entrepreneurs be aware of?
Entrepreneurs should carefully consider the pro-rata investment rights usually contained in SAFEs to avoid unintended dilution. They should work with counsel to create a pro-forma cap table before issuing SAFEs to understand the impact upfront.
How have SAFEs changed?
Y Combinator has developed a new form of SAFE for early fundraising that involves larger amounts of money. It measures SAFE ownership after the round of SAFE money is accounted for but before the new money in a priced round (usually Series A) converts and dilutes the SAFE. This form separates the pro-rata investment rights and tailors them to apply to the next round of financing.
What’s your advice for Pittsburgh investors?
There are similarities and differences between convertible notes and SAFEs. Ask questions to see which one makes sense for you as an investment vehicle.
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