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.
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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.
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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.
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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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PITTSBURGH, January 2, 2019 – Babst Calland recently named Meredith L. Calfe, Kate H. Cooper, Alana E. Fortna and Rachel E. James shareholders in the Firm.
Meredith Calfe, a member of the Firm’s Energy and Natural Resources Group, concentrates her practice on counseling oil and gas clients on mineral-related transaction matters, including title examination, due diligence and curative work.
Ms. Calfe is a 2009 graduate of the University of Pittsburgh School of Law.
Kate Cooper, a member of the Firm’s Corporate and Commercial Group, counsels for-profit and non-profit entities in connection with mergers, acquisitions and divestitures, and a broad range of general corporate matters, including business planning and structuring, commercial contracts, securities law matters and governance issues.
Ms. Cooper is a 2010 graduate, cum laude, of Boston College Law School.
Alana Fortna is a member of the Firm’s Litigation, Environmental, Employment and Labor, and Emerging Technologies groups. Ms. Fortna represents clients in complex commercial litigation with a focus primarily on environmental litigation, including 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. She also leverages her litigation experience to help companies and other entities with emerging technologies strike a balance between innovation and risk management.
Ms. Fortna is a 2010 graduate, magna cum laude, of Duquesne University School of Law.
Rachel James, a member of the Firm’s Energy and Natural Resources Group, represents energy clients on oil, gas and mineral-related transaction matters, including title examination, due diligence activities, curative work and the acquisition and disposition of oil and gas fee and leasehold assets.
Ms. James is a 2009 graduate of the University of Pittsburgh School of Law.
The Legal Intelligencer
(by Blaine A. Lucas and Alyssa E. Golfieri)
Pennsylvania municipalities are “creatures of the state” and thus may only exercise those powers expressly and implicitly delegated to them by the General Assembly. One area in which municipalities have been delegated authority is the regulation of land uses. The Pennsylvania Municipalities Planning Code, 53 P.S. Section 10101 et seq., establishes the framework for zoning and subdivision and land development regulation in Pennsylvania. However, a municipality’s powers are not without limitation. The General Assembly, by statute, has constrained the manner and degree to which municipalities can regulate certain types of land use. The Pennsylvania Right-to-Farm Act, 3 P.S. Section 951 et seq., (RTFA) and the Pennsylvania Agricultural, Communities and Rural Environment Act, 3 Pa.C.S. Section 311 et seq., (ACRE) are two such examples.
The RTFA was enacted in 1982 for the purpose of limiting the circumstances under which “normal agricultural operations” may be the subject matter of nuisance suits and zoning regulations. Specifically, the RTFA mandates that every municipality regulating a public nuisance exempt from its scope “normal agricultural operations” as long as the operations do not have a “direct adverse effect on the public health and safety.” It also requires municipalities to permit the direct sale of agricultural commodities on property owned and operated by a landowner who produces 50 percent or more of the commodities sold, regardless of applicable zoning regulations.
In 2005, the General Assembly recognized that owners and operators of normal agricultural operations needed a cost and time efficient way to challenge local regulatory actions running afoul of the RTFA and, in response, enacted ACRE. ACRE provides a means for those engaged in these activities to challenge and seek the invalidation of unauthorized ordinances or enforcement actions related to those ordinances. If an owner or operator believes a local municipality’s ordinance(s) or enforcement action(s) are inhibiting his operations in violation of state law, he may request that the attorney general initiate a review of the same. Upon receipt of such a request, the attorney general has 120 days to review the challenged ordinance or enforcement action and determine, in his or her sole discretion, whether to bring a legal action against the municipality in Commonwealth Court. Any person aggrieved by an unauthorized local ordinance also can bring an action in Commonwealth Court.
While the above-referenced restrictions on a municipality’s authority to regulate agricultural operations appear relatively elementary and straightforward, the devil is in the details. ACRE incorporates by reference the RTFA’s definition of “normal agricultural operation,” interpretation and application of which recently has become the cause of much debate. The Pennsylvania Commonwealth Court, Pennsylvania attorney general, and several municipalities across the commonwealth have interpreted the definition narrowly to include only those activities associated with the production and preparation of crops and livestock for market. Conversely, owners and operators of agricultural operations contend that the definition should be interpreted more broadly to include, among other things, agritainment, agribusiness, and agritourism—all terms used interchangeably to describe farm-themed entertainment, such as hayrides, cornfield maze contests, wine tastings, harvest festivals, farm-to-table dinners, weddings and farm stays (i.e., short-term rentals). Such activities are touted as boosting an operation’s income, but are geared solely toward consumer experiences and do not contribute to nor are they necessary for an operation’s preparation and production of crops and livestock for market.
The RTFA defines “normal agricultural operation” as: The activities, practices, equipment and procedures that farmers adopt, use or engage in the production and preparation for market of poultry, livestock and their products and in the production, harvesting and preparation for market or use of agricultural, agronomic, horticultural, silvicultural and aquacultural crops and commodities and is:
- Not less than 10 contiguous acres in area; or
- Less than 10 contiguous acres in area but has an anticipated yearly gross income of at least $10,000.
The term includes new activities, practices, equipment and procedures consistent with technological development within the agricultural industry. Use of equipment shall include machinery designed and used for agricultural operations, including, but not limited to, crop dryers, feed grinders, saw mills, hammer mills, refrigeration equipment, bins and related equipment used to store or prepare crops for marketing and those items of agricultural equipment and machinery defined by [the Farm Safety and Occupational Health Act].
The Commonwealth Court narrowly interpreted this definition in Tinicum Township v. Nowicki, 99 A.3d 586 (Pa. Commw. Ct. 2014). The court concluded that a mulching operation did not qualify as a normal agricultural operation and therefore was not afforded RTFA protection because the raw materials from the operation were not produced on the property and the resulting mulch was not used for the production of livestock, crops or agricultural commodities on the property. The court, emphasizing that the definition of normal agricultural operation under the RTFA “focuses on the use of farmland for the production of crops and livestock,” explained that:
“We believe that the definition of ‘normal agricultural operation’ necessarily requires some connection between the use at issue and the employment of the property in question for the production of an agricultural, agronomic, horticultural, silvicultural or aquacultural crop or commodity.”
In addition, in the attorney general’s 2012 through 2016 Annual ACRE Reports, the attorney general has declined to take legal action against municipalities that have attempted to apply zoning regulations to an operation’s on-site promotional, entertainment, and recreational events and agribusiness or agritainment activities. In doing so, the attorney general has determined, at least implicitly that such activities do not fall within the RTFA’s and ACRE’s definition of normal agricultural operation and therefore are subject in full to local zoning regulation.
Thus, under the current state of the law, agritainment, agritourism and agribusiness are not afforded RTFA’s and ACRE’s protections from municipal zoning regulation, and those wishing to engage in these activities must consult local ordinances to ascertain whether these uses are authorized in the applicable zoning district, and what the applicable approval criteria and standards are for these uses (e.g., hours of operation, minimum parking requirements, and maximum noise and light restrictions).
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The PIOGA Press
(by Meredith Odato Graham and Gary E. Steinbauer)
In 2016, the U.S. Environmental Protection Agency finalized a rule that established first-time federal standards for methane emissions from new, modified, and reconstructed sources in the oil and gas industry. The so-called new source performance standards (NSPS) at 40 C.F.R. 60, Subpart OOOOa (Subpart OOOOa), have since become the subject of considerable debate and litigation. Consistent with the Trump administration’s other deregulatory efforts, EPA published a proposal in the Federal Register in October that aims to reduce the Subpart OOOOa regulatory burden for industry.
EPA estimates that the proposed improvements to the rule could save industry tens of millions of dollars in compliance costs each year. EPA held a public hearing in November and is accepting stakeholder comments through December 17.
Significant changes to applicable requirements
The 52-page rulemaking notice describes several proposed amendments to Subpart OOOOa. EPA is addressing certain issues that were presented to the agency in formal petitions for reconsideration, as well as “other implementation issues and technical corrections” brought to the agency’s attention after Subpart OOOOa was promulgated. For example, it is proposing significant changes to the requirements for fugitive emissions components, including revised leak monitoring frequencies. Whereas the current regulation subjects well sites to semiannual leak monitoring, the revised Subpart OOOOa would require monitoring every other year for low production well sites and annually for all other well sites. The required frequency of compressor station monitoring would be reduced from quarterly to either semiannual or annual. (The proposal includes distinct monitoring requirements for well sites and compressor stations on the Alaska North Slope.) EPA also is proposing to reduce the schedule for repairing leaks from 30 to 60 days. Finally, EPA proposes to no longer require monitoring surveys at well sites once all major production and processing equipment is removed.
These are just a few of the many technical issues for which the agency is seeking public input. Operators should review the rulemaking notice and evaluate how the proposed changes could impact day-to-day operations.
Proposed rule attempts to address potentially overlapping federal and state requirements
While EPA may be inclined to relax regulatory obligations at the federal level, states could continue to impose more stringent requirements. For example, Pennsylvania’s Department of Environmental Protection finalized an air permitting package earlier this year that requires quarterly leak detection and repair (LDAR) monitoring for well sites subject to the new general permit known as GP-5A. As proposed, the revised Subpart OOOOa would require only annual or in some cases biennial monitoring at well sites. In general, where federal and state standards are in conflict, operators will need to comply with the most stringent requirement that applies.
EPA’s rulemaking proposal includes provisions that attempt to address potential overlap in federal and state requirements. The proposed rule would allow operators to meet certain existing state requirements as an alternative means of complying with Subpart OOOOa. Pennsylvania is one of six states where the proposed rule would allow operators to elect to comply with the state requirements in lieu of certain federal requirements.
Public comment period and hearing
EPA will accept public comments on the proposed revisions to Subpart OOOOa until December 17. The rulemaking notice indicates that the agency is seeking comment only on the specific issues identified in the notice. The agency is “not opening for reconsideration any other provisions of the NSPS at this time.” EPA’s related fact sheet indicates that it is still evaluating broad policy issues—such as the regulation of greenhouse gases—associated with Subpart OOOOa. According to the agency, such issues will be addressed separately at a later date.
On November 14, EPA held a public hearing at its Region 8 office in Denver, Colorado. The online docket for EPA’s proposed rule states that more than 48,000 comments have been received, although many of these comments appear to be form letters opposing the proposed rule. In addition, a group of shareholders for large publicly traded oil and gas companies reportedly sent a letter to these companies on December 5, urging the companies to oppose EPA’s proposed rule and supporting the regulation of methane emissions by EPA. As the public comment period ends, other parties will share their views on this important rulemaking.
Editor’s note: PIOGA’s Environmental Committee is actively engaged in the Subpart OOOOa issue and the association is part of an oil and gas industry coalition working to ensure commonsense methane regulations.
Babst Calland actively monitors federal and state air program developments affecting the oil and gas industry. If you have any questions about the proposed changes to Subpart OOOOa or air quality issues in general, contact Michael H. Winek at 412- 394-6538 or mwinek@babstcalland.com; Meredith Odato Graham; 412-773-8712 or mgraham@babstcalland.com; or Gary E. Steinbauer, 412- 394-6590 or gsteinbauer@babstcalland.com.
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