Babst Calland today published its 12th annual energy industry report: The 2022 Babst Calland Report – Legal & Regulatory Perspectives for the U.S. Energy Industry. Each of our nation’s energy sectors is impacted by local, state and federal policies, many of which are addressed in this inclusive report on legal and regulatory developments for the energy industry in the United States.
The Babst Calland Report represents the timely and insightful perspectives of the firm’s energy attorneys on some of the most critical issues facing the industry, including climate change, cybersecurity, ESG and environmental justice, hydrogen and carbon capture sequestration, pipelines, and renewables.
Joseph K. Reinhart, shareholder and co-chair of Babst Calland’s Energy and Natural Resources Group, said, “The U.S. energy industry, and the U.S. economy as a whole, is reacting to shifting market forces and potential significant new changes in laws and regulations. Importantly, Russia’s invasion of Ukraine earlier this year and the resulting worldwide shortage of oil and gas has spotlighted the world’s continued reliance on fossil fuels and reinforced the value of America’s relative energy independence even as the nation and the world continue to seek alternative energy sources.”
Report Features Video Commentary from U.S. Senator Joe Manchin
This edition of The Babst Calland Report also features commentary from Senator Joe Manchin (D-WV), Chairman of the U.S. Senate Energy and Natural Resources Committee, who spoke with Babst Calland energy clients at a special briefing on May 26, 2022 called “A Perspective on U.S. Energy Policy with Senator Joe Manchin.”
To request a copy of The 2022 Babst Calland Report, click here.
The Babst Calland Report is provided for informational purposes for our clients and friends and is not intended to constitute legal advice.
The Wildcatter
(By Nikolas Tysiak)
PENNSYLVANIA
Commonwealth v. International Development Corporation, 2022 WL 628284 (Commw. Ct. Pa. 2022). This is a deed interpretation case with some Title Wash sprinkles mixed. In 1894, two individuals (Proctor and Hill) conveyed approximately 2,000 acres in Bradford County to Union Tanning Company, excepting and reserving all the coal, oil and gas. This was unseated lands, and the minerals remained assessed with the surface. After several intervening conveyances, the surface estate became vested in Central Pennsylvania Lumber Company (CPLC). CPLC’s surface assessment went delinquent and was sold to Calvin McCauley in 1908. The deed to McCauley effectively “washed” the title to the reserved minerals, which also effectively became vested in McCauley. McCauley subsequently transferred the newly-reunified estates under the 2000 acres back to CPLC in 1910. In 1920, CPLC conveyed the land to the Commonwealth, utilizing the following language:
[t]his conveyance is made subject to all the minerals, coal, oil, gas or petroleum found now or hereafter on, or under the surface on any or all of the lands described in each of the above mentioned parts or divisions [of the 1920 deed]; together with the right and privilege of ingress, egress and regress upon said lands for the purpose of prospecting for, or developing, working or removing the same, as fully as said minerals and mineral rights were excepted and reserved in deed dated October 27, 1894, from … Proctor [and Hill] to … Union …
International Development Corporation became the current successor to CPLC as to the minerals following the above 1920 deed, and the Commonwealth of Pennsylvania continues to own the surface estate to this deed. The case hinges on the interpretation of the above language – is it a reservation benefiting CPLC, or just a limitation on the warranty? The Commonwealth Court determined that, reading the 1920 deed as a whole and in context, the intent of CPLC was clearly to retain for itself the same mineral rights that had originally been reserved by Proctor and Hill in 1894. The Court pointed out that, normally, making a conveyance “subject to” a prior reservation or right does not create a new right. However, in the 1920 deed, CPLC utilized additional language modifying the “subject to” clause that created new rights for itself. As such, the Court effectively vested title to the oil and gas at issue with International Development Corporation, and not the Commonwealth.
WEST VIRGINIA
Antero Resources Corporation v. Irby, 2022 WL 1055446 (S. Ct. W. Va. April 8, 2022). Antero contested the methodology employed by the West Virginia State Tax Commissioner’s valuation of three wells located in Doddridge and Ritchie Counties, on appeal from the West Virginia Business Court. A larger valuation dispute had previously been adjudicated and remanded to that court, to which the parties were able to reach agreement, but the current dispute revolves around wells specifically producing both oil and gas. Essentially, West Virginia regulations allow certain deductions from the assessed value of wells.
Oil wells receive a deduction of $5,750.00, while gas wells receive deductions of $150,000.00 or more per year, with the deductible value increasing year over year. The Tax Commission applied the deductions to the Antero oil and gas wells based on the proportion of revenue generated by each individual resource on a per-well basis. For example, for a well that generated 75% of its revenue on gas and 25% of its revenue on oil, the Commission calculated the deduction as follows: 75% of $150,000.00 plus 25% of $5,750, for a total well deduction of$113,937.50. Antero argued that the assessments were not “singular” as required under existing caselaw regarding these producer’s well assessments because a monetary average effectively creates a sliding scale for valuation (an idea that had been previously rejected by the Supreme Court). The real value of the additional oil well deductions equates to millions of dollars in Doddridge and Ritchie Counties. The Supreme Court concluded that the valuation of the “mixed” oil and gas wells was reasonable and not in violation of fairness, upholding the Tax Commissioner’s valuations.
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Reprinted with permission from the MLBC June 2022 issue of The Wildcatter. All rights reserved.
Legal Intelligencer
Alyssa Golfieri is a shareholder in the firm’s public sector and energy and natural resources groups. Her practice focuses primarily on municipal and land use law, with an emphasis on zoning, subdivision, land development and municipal ordinance enforcement.
Practice Profile:
Golfieri is a shareholder in the firm’s public sector and energy and natural resources groups. Her practice focuses primarily on municipal and land use law, with an emphasis on zoning, subdivision, land development and municipal ordinance enforcement.
She represents the firm’s municipal clients on a wide array of local government issues, including the preparation of zoning and land development ordinances pursuant to the Pennsylvania Municipalities Planning Code, the processing of land development applications, responses to record requests submitted under the Pennsylvania Right-to-Know Law, navigation of public bidding matters, abatement of property maintenance issues, defense of notices of violations before zoning hearing boards and magisterial district judges, and compliance with both the Pennsylvania Sunshine Act and the Pennsylvania Public Official and Employee Ethics Act.
Leadership Activity:
Golfieri is an active leader within the firm, having served on the associates, summer associates, recruiting, technology and carpetmaster’s committees. She also serves as a mentor to future generations of attorneys outside the firm.
Pro Bono and Civic Work:
She frequently volunteers as an alumni judge for Duquesne University School of Law 1L appellate oral arguments, a juror for Allegheny County High School Mock Trial Competition, a panelist for Allegheny County Bar Association’s young lawyer’s division roundtable discussion titled “Preparing for the Bar Examination,” and a coordinator for Allegheny County Bar Association’s young lawyer division holiday toy drive.
Experience:
Current employer, May 2011-present, summer associate, 2011, associate, September 2012-December 2020, shareholder, Jan. 1, 2021-present.
Education:
The Pennsylvania State University, B.S. in crime, law and justice, 2009; Duquesne University School of Law, J.D., 2012.
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Reprinted with permission from the June 17, 2022 edition of The Legal Intelligencer© 2022 ALM Media Properties, LLC. All rights reserved.
Environmental Alert
(by Robert Stonestreet and Kip Power)
Two recent developments depict the frustration with regulatory roadblocks and concern with future costs that project developers often cite in working through Endangered Species Act (ESA) issues with the U.S. Fish & Wildlife Service (FWS). One illustrates the extraordinary delays that ESA permitting can create. The other is indicative of the ever-broadening scope of FWS authority.
On June 1, 2022, West Virginia-based Allegheny Wood Products, Inc. (AWP) filed a federal lawsuit against FWS and its Director, as well as the Secretary of the Interior, seeking a court order directing FWS to take action in an ESA permitting process that began 16 years ago and still remains pending. Allegheny Wood Products, Inc. v. U.S. Fish and Wildlife Service, Civil Action No. 2:22-cv-007 (N.D. W.Va.) (assigned to Judge Thomas Kleeh). According to the Complaint, AWP (one of the largest producers of Eastern U.S. hardwoods) began the process to obtain an Incidental Take Permit from the FWS in 2006 for a proposed project in Tucker County, West Virginia. Consistent with guidelines published by FWS, AWP started the process by submitting a draft Habitat Conservation Plan (“HCP”; a prerequisite to submission of a permit application) to FWS for review. Largely in response to comments from the agency, AWP had to revise the HCP many times, including at least 10 revisions in just the last three years. AWP contends that most of those revisions were in response to FWS comments that sought changes “to sections [of the HCP] that were previously agreed upon” or “foundational changes that should have been raised earlier.” Complaint, ¶28. As an example of the kinds of delays it has experienced, AWP notes that the FWS offered no response to its March 2013 draft HCP until March 2016.
Concerned that the FWS was intentionally refusing to advance the review process to the next stage, in December 2017 AWP unilaterally decided it was time to submit an Incidental Take Permit application, including the most recent version of its HCP. AWP also paid the required application fee and supplied an administrative “Environmental Assessment,” as required by the National Environmental Policy Act (NEPA). Four years later, AWP’s application remains pending with no end in sight. FWS has reportedly failed to comply with the deadlines set forth in its own timeline provided to AWP on August 4, 2020 to govern the completion of its review. Alleging violations of the federal Administrative Procedures Act, the Council on Environmental Quality’s NEPA regulations, and the FWS Planning and Incidental Take Permit Processing Handbook, AWP has asked the court to issue an order requiring that FWS complete its review of the AWP application by a date certain, retain jurisdiction over the case to oversee compliance with that order, and award AWP its costs and attorney’s fees in bringing the action.
AWP is not alone in its frustration over lack of action by FWS. On May 18, 2022, West Virginia Senator Shelley Moore Capito questioned FWS Director Martha Williams during a Senate hearing on the agency’s proposed 2023 budget (click here to access). Senator Capito inquired about significant delays in ESA permitting actions associated with highway development in West Virginia that have been pending before FWS since 2014. Rather than expand the agency’s budget to hire additional staff, FWS proposed that the State of West Virginia should pay FWS nearly $800,000 per year to fund additional staff to handle the State’s projects. Private businesses have also entered into similar agreements with FWS to pay the agency money in exchange for the assignment of staff dedicated to certain projects. In essence, both the states and private industry have to fund FWS to do its job in a timely fashion or else be stuck in perpetual regulatory limbo.
While FWS apparently lacks sufficient funding to handle its current workload, the agency recently proposed to expand its regulatory reach ever further. On June 7, 2022, FWS published a proposal to revise its regulations to authorize the agency to create populations of threatened or endangered species in areas where those species have never been known to exist. Historically, FWS has authority to re-introduce listed species into geographic areas within the species’ probable historical range, which are known as “experimental populations.” In other words, if the agency has evidence that a listed species once existed in an area, FWS can release the species to that area in an attempt to re-establish a population. FWS now seeks to expand the scope of eligible geographic areas to include locations outside of the species’ known historical range. FWS cites the impact of climate change on species and their habitats as justification for the proposed rule change. Under the proposed revised regulation, property owners and developers could face significant delays, or even outright cancellation, of projects in areas where FWS has chosen to attempt to establish a population of listed species. Comments on the proposed rule are due by August 8, 2022.
For questions about the Endangered Species Act and other environmental compliance issues, please contact Christopher B. (Kip) Power at (681) 265-1362 or cpower@babstcalland.com, or Robert M. Stonestreet at (681) 265-1364 or rstonestreet@babstcalland.com.
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PIOGA Press
(By Sean McGovern)
The Pennsylvania Department of Environmental Protection on March 12 shared an updated draft of its Environmental Justice (EJ) Policy for public comment. Among the many changes, the draft EJ Policy expands the role of the Office of Environmental Justice (OEJ), creates new requirements for unconventional oil and gas, and creates new enforcement priorities for the department. Comments were accepted through May 11.
Pennsylvania’s Environmental Justice Policy
The OEJ oversees environmental justice initiatives and policies in the state. The primary goal of the OEJ is to increase communities’ environmental awareness and involvement in DEP’s permitting process. In 2004, the department created the Environmental Justice Public Participation Policy to provide citizens in environmental justice communities enhanced public participation opportunities during certain permit application processes. The EJ Policy is a critical part of DEP’s environmental justice initiatives, providing guidelines for the agency’s approach to public engagement for permit application reviews in environmental justice areas as defined under the current EJ Policy.
In 2018, DEP circulated a draft revision to the current EJ Policy for public comment. Ultimately, the department withdrew the proposed draft revisions after public comments were received, and the current 2004 version of the EJ Policy remained in effect. DEP continued to evaluate revisions to the EJ Policy and in 2021 proposed to update the policy by incorporating, refining and expanding upon the withdrawn 2018 revisions. On March 12, DEP released the draft EJ Policy for a 60-day public comment period with several public meetings and informational webinars.
Significant revisions and additions to the draft EJ Policy
The draft EJ Policy proposes to make significant changes to the current policy. Below are some of the most significant changes recommended by DEP:
- Incorporation of executive order on EJ
The draft EJ Policy cites and incorporates the requirements Governor Tom Wolf ’s Executive Order on Environ mental Justice (Executive Order 2021-07), which was issued in October 2021 and formally established the OEJ. This contextualizes the draft EJ Policy into the broader effort to address environmental justice across the state executive agencies and federal EJ initiatives. The draft EJ Policy has been altered throughout to ensure OEJ will meet the requirements of the order.
- OEJ expanded roles and responsibilities
The draft EJ Policy describes the purpose and responsibilities of the OEJ. The draft policy gives DEP new roles and responsibilities and dictates how OEJ will engage with stakeholders and communities going forward. This marks a large expansion of the responsibilities of the OEJ, including coordinating an interagency council on environmental justice for the Commonwealth. By way of example, OEJ will provide training to DEP staff, maintain and reassess every two years the EJ Area Viewer, issue an annual report, develop strategic plans every five years, and help create and implement a Language Access Plan for the department.
- DEP maintains broad discretion on opt-in permits
While listed trigger permits automatically trigger the application of the current policy, DEP maintains the adverse cumulative environmental or public health stressors” shall be denied a permit. The New Jersey EJ law does not define “cumulative environmental or public health stressors.”
Without a definition of “cumulative impacts” in the draft EJ Policy, or under Executive Order 2021-07, it is unclear whether DEP will interpret that phrase similar to the New Jersey law. However, the department’s broad discretion under a subjective standard (“warrant special consideration”) and an undefined cumulative impacts standard make the applicability of the opt-in permit process hard to predict.
- Updated definitions of “EJ Area” and “Area of Concern”
Under the current EJ Policy, an EJ Area was defined as census tract with 30 percent or greater minority population or 20 percent or greater population below the poverty line. The draft policy defines an EJ Area as “the geographic location where Department’s EJ Policy applies.” Further, it states that the methods for identifying EJ Areas will be specific outside the policy for easier amendment. Because the definition of an EJ Area will live outside the policy, it will be more frequently amended to reflect recent data and definitions used in other agencies and community groups. Thus, the draft EJ Policy’s application and scope are not clearly defined or entirely predictable.
The draft EJ Policy simplifies the current definition of Area of Concern, which now is defined as the area within a half-mile of the proposed permit activity. The draft directs applicants to use the new EJ Area Viewer mapping tool to determine if a project is in an EJ Area and the project’s Area of Concern.
- Unconventional oil and gas now included
Oil and gas unconventional well permits (and change in use) are now considered trigger permits and the draft EJ Policy includes new, specific provisions for unconventional oil and gas public engagement. Under the draft policy these permits will automatically trigger the policy requirements. Unconventional well permits are included in the draft EJ Policy’s list of trigger permits, at Appendix A. While permits listed in Appendix A trigger Sections II (“Permit Review Process”) and III (“Community Input”) of the draft EJ Policy, unconventional well permits will only trigger the application of Section IV (“Oil and Gas Public Engagement”). The draft policy’s Section IV proposes unique public participation requirements for unconventional oil and gas operations. The requirements of Section IV will apply retroactively to unconventional well permits already issued by DEP and create continuing obligations such as annual reports on active and anticipated drilling operations—even though such operations are not subject to an actual permit application submitted to the department.
- EJ Areas Viewer mapping tool
The draft policy requires the use of the new EJ Areas Viewer, which is available at pa.gov/EJViewer. The EJ Areas Viewer is an interactive mapping tool that contains environmental and demographic indicators, which can be updated and modified by DEP at any time based on new environmental justice related data. Along with other mapping tools, the department should use the EJ Areas Viewer to assist in decisions regarding all aspects of environmental justice, including determining if a potential opt-in permit should fall under the draft EJ Policy. Overall, the use of this and other mapping tools will allow DEP and OEJ to consider much more data—environmental, demographic, health, etc.—than under the existing policy.
- Climate initiatives
New requirements will push OEJ and DEP to harmonize the environmental justice initiatives with climate change initiatives. This focus will cut across the department―programs, rulemaking, policies and enforcement. DEP commits in the draft policy to ensure climate-related initiatives will consider and prioritize communities disproportionately impacted by climate change. The department also will ensure the Climate Action Plan addresses environmental justice and the impact of climate change on EJ Areas. Further, DEP will implement strategies for outreach and engagement with environmental justice and climate change vulnerable communities.
Babst Calland will be tracking the draft EJ Policy as the department responds to comments and moves to finalize the policy this year. If you have questions about the environmental justice developments described above, please contact Sean McGovern at 412-394-5439 or smcgovern@babstcalland.com.
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Reprinted with permission from the June 2022 issue of The PIOGA Press. All rights reserved.
Environmental Alert
(by Matt Wood and Mackenzie Moyer)
On May 18, 2022, the U.S. Environmental Protection Agency (EPA) added five per- and polyfluoroalkyl substances (PFAS) to its Regional Screening Level (RSL) and Regional Removal Management Level (RML) lists, increasing the total number of PFAS chemicals from one to six. The five added PFAS chemicals EPA are:
- Hexafluoropropylene oxide dimer acid and its ammonium salt (HFPO-DA, a/k/a GenX);
- Perfluorooctanesulfonic acid (PFOS);
- Perfluorooctanoic acid (PFOA);
- Perfluorononanoic acid (PFNA); and
- Perfluorohexanesulfonic acid (PFHxS).
These join perfluorobutanesulfonic acid (PFBS), which EPA added to the RSL and RML lists in 2014 (and revised in 2021 with an updated toxicity assessment). The RSLs and RMLs are not cleanup standards; they are risk-based values used to identify contamination and inform whether additional actions may be necessary at a given site to protect human health and the environment. Specifically, EPA utilizes RSLs to identify whether contaminated media at a given site should be further investigated (e.g., if a constituent’s concentration exceeds the RSL, it likely requires additional investigation; concentrations below the RSL generally do not). RMLs are one of many factors EPA uses to support a decision whether to conduct a removal action at a site. The updated RSL tables are available here and the RML tables are available here.
More broadly, these updates are among many PFAS-related steps EPA has taken or intends to take in the coming months and years. They follow three actions, described below, that EPA took in April 2022 to address PFAS in water.
- To better investigate and analyze PFAS in water, EPA published its Draft Method 1621, a screening method capable of measuring aggregated concentrations of chemicals with carbon-fluorine bonds at the parts per billion level, i.e., it measures concentrations of PFAS, as well as non-PFAS fluorinated compounds, such as pesticides and pharmaceuticals. EPA intends this method to be used to broadly screen for the presence of fluorinated compounds, with more sensitive methods, e.g., Draft Method 1633, utilized to identify specific PFAS compounds. Both of these methods are progressing through the validation processes.
- To address some discharges of PFAS, EPA issued a memorandum titled, “Addressing PFAS Discharges in EPA-Issued NPDES Permits and Expectations Where EPA is the Pretreatment Control Authority.” The memorandum includes monitoring provisions, analytical methods, pollution prevention, and best management practices to reduce PFAS discharges by applicable industrial direct dischargers (including, but not limited to, organic chemicals, plastics and synthetic fibers; metal finishing; electroplating; electric and electronic components; landfills; pulp, paper, and paperboard; leather tanning and finishing; plastics molding and forming; textile mills; paint formulating; and airports). Although the memorandum specifically focuses on EPA-issued permits and authority, EPA intends to publish similar guidance to state permitting authorities in 2022.
- To protect aquatic life from PFAS contamination, EPA proposed Clean Water Act freshwater aquatic life ambient water quality criteria for PFOA and PFOS. If finalized, states and authorized tribes can consider the criteria in developing their own water quality standards. The proposals are open to public comment through July 2, 2022 and a fact sheet summarizing the criteria is available here.
In addition to these examples, EPA continues to move toward accomplishing other PFAS-related goals, many of which are summarized in the agency’s “PFAS Strategic Roadmap: EPA’s Commitments to Action 2021–2024,” available here. Among its targets for 2022, EPA intends to propose national primary drinking water regulations for PFOA and PFOS (fall 2022), which would require monitoring of public water supplies (and further action if PFOA and/or PFOS are found to be present in concentrations above their respective maximum contaminant levels (MCLs)). EPA also intends to propose a rule to designate PFOA and PFOS as CERCLA hazardous substances (spring 2022), which would require facilities to report PFOA and PFOS releases above applicable reportable quantities and authorize EPA to use additional enforcement and cost recovery authority, including potentially “reopening” previously remediated Superfund sites. Final rules for each of these proposals are expected in 2023.
Between now and 2024, EPA also plans to collect data and develop PFAS Effluent Limitations Guidelines (ELGs) to be incorporated into direct discharger NPDES permits to limit pollutants from entering the nation’s waters. ELGs establish national technology-based regulatory limits for specific pollutants in wastewater discharges into surface water and into municipal sewage treatment facilities. EPA aims to publish proposed rulemakings for ELGs for the organic chemicals, plastics and synthetic fibers industries (summer 2023) and the metal finishing and electroplating industries (summer 2024). EPA intends to complete studies of electrical and electronic component facilities, textile mills, and landfills and data reviews of other industries, including leather tanning and finishing, plastics molding and forming, and paint formulating, to inform whether to initiate future related rulemakings. EPA released its Preliminary Effluent Guidelines Program Plan 15 in September 2021, available here, the final version of which is targeted for publication in fall 2022 and will address whether future regulatory actions are needed for other industries.
While the federal government focuses on it goals, some of which may implicate state requirements, many states continue to implement their own actions with respect to PFAS. Pennsylvania, for example, is progressing toward finalizing MCLs for PFOA and PFOS, the first time the commonwealth has set such regulations for any contaminant. In February 2022, the Environmental Quality Board (EQB) published a proposed rule to establish MCLs for PFOA and PFOS of 14 parts per trillion (ppt) and 18 ppt, respectively, which are similar to standards set in other states. EQB held five virtual public hearings on the proposed rule and accepted public comments through April 27, 2022 (comments are available here). If the rule is finalized as proposed, it will set initial compliance monitoring requirements beginning January 1, 2024, for community and nontransient noncommunity water systems serving a population greater than 350 persons and all bottled, vended, retail and bulk systems, and January 1, 2025, for systems serving fewer than 350 persons.
As the federal government and state governments move to address PFAS at their respective paces, in some cases working on the same issues (e.g., drinking water regulations), it remains to be seen how these efforts will or will not mesh. Regardless, Babst Calland attorneys will continue to track PFAS developments at the federal and state level and are available to assist you with PFAS-related matters. For more information on these developments and other remediation matters, please contact Matthew C. Wood at (412) 394-6583 or mwood@babstcalland.com, Mackenzie Moyer at (412) 394-6578 or mmoyer@babstcalland.com, or any of our other environmental attorneys.
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Legal Intelligencer
(By Varun Shekhar)
On April 6, the U.S. Environmental Protection Agency (EPA) published in the Federal Register a proposed rule that, if finalized, would establish a federal implementation plan (FIP) to address regional ozone transport under the Clean Air Act (CAA). The proposed rule is noteworthy based on the numerous adjustments it makes to existing nitrogen oxides (NOx) emissions budgets for a number of states, including Pennsylvania, as well as marking the first time that the EPA has used the regional ozone transport provision under the CAA to regulate sources other than electricity generating units (EGUs).
Background
Section 109 of the CAA directs the EPA to establish federal National Ambient Air Quality Standards (NAAQS) for certain pollutants deemed appropriate by the EPA. One of these pollutants is ozone, which is formed in part by photochemical reactions involving NOx and volatile organic compounds (VOCs). The most recent NAAQS for ozone was promulgated by the EPA in 2015, which establishes an eight-hour 70 parts per billion ambient standard. Section 110 of the CAA also directs states to submit to the EPA “state implementation plans” (SIPs), to detail how emissions from facilities in each state will attain the NAAQS. SIPs are also required to demonstrate that emissions from facilities in the state will not “contribute significantly” to nonattainment or interfere with continued attainment of the NAAQS by other states (often referred as the CAA’s “Good Neighbor” provision). If a state fails to submit a satisfactory SIP to achieve these requirements, the EPA is required under the CAA to develop and implement a FIP for that state.
The EPA’s approach to implementing the CAA’s Good Neighbor provision began in 2011 with enactment of the Cross-State Air Pollution Rule (CSAPR) (76 Fed. Reg. 48208), designed to address the 1997 ozone NAAQS among other things. Under this rulemaking, the EPA established a NOx emission budget and trading system for EGUs. The emission budgets, developed on a state-by-state basis, were based on a four-step process involving: identification of receptors in downwind states with demonstrated issues achieving the ozone NAAQS; determining those upwind states contributing to downwind nonattainment through ambient air quality modeling; identifying and quantifying the amount of emissions that significantly contribute to downwind nonattainment and the amount of emissions reductions needed to prevent such downwind nonattainment; and development and implementation of an emission budget. Based on each state’s budget, affected EGUs in each state would be allocated one allowance per ton of NOx emissions, which would be debited from their account at the end of each ozone season. Those sources with a shortfall of NOx allowances would need to purchase additional allowances.
CSAPR and its periodic updates—including the “CSAPR II” rulemaking in 2016 (81 Fed. Reg. 74504) which was developed in response to the promulgation of the 2008 ozone NAAQS—have been subject to litigation over the years. In particular, in Wisconsin v. EPA, 938 F.3d 303 (D.C. Cir. 2019), the U.S. Court of Appeals for the D.C. Circuit found that the emission budgets established by the EPA were not sufficient to fully eliminate upwind states’ significant contributions to downwind nonattainment, in violation of the CAA’s Good Neighbor provision. As a result, the EPA promulgated a subsequent revision to CSAPR and CSAPR II in April 2021 (86 Fed. Reg. 23054) to further reduce the emission budgets allocated to each state. The proposed rule implements further reductions to emission budgets, based on implementation of the 2015 ozone NAAQS which is more stringent than the 2008 ozone NAAQS.
Notable Features of the Proposed Rule
In the proposed rule, the EPA would continue to find that interstate transport of NOx emissions from EGUs in several states, including Pennsylvania, significantly contribute to downwind nonattainment of the 2015 ozone NAAQS. However, the proposed rule would expand the number of states subject to this finding and would also find that NOx emissions from certain non-EGU sources also are significant contributors to downwind nonattainment. Finally, the proposed rule would issue a FIP for these states, imposing a revised NOx emissions trading program among these states.
While the proposed FIP would not appreciably change the types of EGUs subject to the existing NOx trading program, it would, among other things, expand the trading program under the current iteration of CSAPR to include EGUs from eight other states. It would also reduce the amount of NOx emissions budgets for states by varying amounts between 2023-2025, and by roughly 25% beginning in 2026, reflecting an emissions level based on installation of post-combustion selective catalytic reduction (SCR) or noncatalytic reduction (SNCR) controls at 30% of coal-fired power plants. The proposed FIP’s NOx emissions trading program would also include a “recalibration” provision, such that a surplus of banked allowances among all sources in a state beyond a 10.5% target bank amount would be subject to downward adjustment.
Moreover, the proposed rule would establish additional emissions limits beyond a strict trading program for certain affected EGUs. Coal-fired EGUs with greater than 100 MW nameplate capacity would be subject to a daily emissions limit of 0.14 lbs NOx/MMBTU. If a facility exceeds this limit, it would be charged allowances at a penalty rate of three times the normal rate (i.e., three allowances surrendered per excess ton NOx emitted). In addition, the proposed rule establishes a 50-ton limit for NOx over the emissions level at 0.1 lbs NOx/MMBTU, for EGUs that are found to be responsible for contributing to a state’s exceedance of its “assurance level,” i.e., 121% of the state’s emissions budget. These limits have potentially significant implications for facilities with a seasonal operating pattern.
Finally, the proposed rule would establish NOx emissions limits for several types of industrial sources other than EGUs (including reciprocating internal combustion engines in pipeline transportation of natural gas, cement kilns, boilers and furnaces in iron and steel mills, glass furnaces, paper mills and other equipment for chemical, petroleum and coal product manufacturing). These limits would be established on a source category basis. However, sources in these categories would not be required to participate in the trading program established for EGUs. If finalized, this would mark the first iteration of CSAPR in which EPA would use the Good Neighbor provision of the CAA to establish emission limits for specific source categories.
Key Takeaways
The proposed rule not only represents increased stringency in the existing NOx emissions trading program among EGUs under the CSAPR, it also reflects a substantial expansion in the scope of industries regulated under the CAA’s Good Neighbor provision. Sources may want to consider whether the proposed rule will establish limitations that are more stringent than those arising under other provisions of the CAA (for example, the “new source performance standards” under Section 111, or “reasonably available control technology” standards developed by states under Section 182). It also remains to be seen whether future iterations of CSAPR rulemaking will further expand the types of sources covered by the rule.
The proposed rule will remain open for public comment under docket number EPA-HQ-OAR-2021-0668 until June 21, (which includes a 15-day extension granted by the EPA). Given the wide array of industries that may be affected by the proposed rule, it is expected that it will elicit a substantial number of comments from industry, nonprofit organizations, and state and local agencies.
Varun Shekhar is a senior associate in Babst, Calland, Clements and Zomnir’s environmental and transportation safety groups. His environmental practice focuses on compliance matters arising under the Clean Air Act and implementing regulations. Contact him at vshekhar@babstcalland.com.
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Reprinted with permission from the June 2, 2022 edition of The Legal Intelligencer© 2022 ALM Media Properties, LLC. All rights reserved.
Smart Business
(By Sue Ostrowski featuring Ben Clapp)
When conducting corporate or real estate transactions, prospective buyers need to be aware of the environmental risks of the proposed acquisition, or they could find themselves on the hook for millions of dollars in remediation and compliance liabilities.
“Buyers need to work closely with an experienced environmental transactional attorney, sometimes in tandem with an environmental consultant, to ensure they are not acquiring environmental liabilities they didn’t intend to acquire,” says Ben Clapp, shareholder in the Environmental, Corporate and Commercial, and Energy and Natural Resources groups at Babst Calland. “Sellers also need to ensure they do not remain saddled with liabilities they didn’t intend to retain after a sale.”
Smart Business spoke with Clapp about the environmental diligence process in a sale and how to address environmental risks in contractual provisions.
What should potential buyers be aware of regarding environmental risk?
Purchasing a property without proper safeguards could put a buyer at risk of substantial liability should environmental contamination or compliance issues be discovered after purchase. Property owners are generally responsible for contamination, regardless of whether they caused it, including contamination that existed prior to taking ownership. Acquiring a business with undiscovered compliance issues can result in significant capital outlays for corrective actions and raises the possibility of becoming subject to enforcement actions and fines.
Environmental diligence is key to assessing the scope of environmental risk associated with a given transaction. However, the extent of diligence a buyer is permitted to perform can differ based on transaction structure and relative leverage of the parties.
How can buyers identify potential environmental issues?
A Phase I Environmental Site Assessment, performed by an environmental consultant, is often a good place to start. A Phase I combines a noninvasive investigation with a review of publicly available records and interviews of key personnel to determine whether contamination is likely to exist.
If a Phase I identifies the presence or likely presence of hazardous substances, a Phase II investigation may be performed, which involves environmental sampling. Phase IIs can also provide some insight into the extent of contamination, whether it is migrating from the property, and the cost and timing of remediation that may be required. If a Phase II is recommended, the seller and their counsel must consider whether it is in its best interest to allow one.
When assessing environmental compliance, attorneys generally evaluate materials provided by the seller in response to a diligence request, review public records and conduct interviews of EHS personnel and management. This can be supplemented by a formal compliance review, usually performed by an environmental consultant.
How can contractual provisions help address risks?
It is critical that the purchase agreement allocates the responsibility for environmental risks clearly and with specificity so there is no confusion or ambiguity that could lead to litigation. Environmental representations and warranties can play an important role, as they require the seller to disclose known environmental issues. The scope of these provisions is often a key negotiation point. Depending on the transaction structure, other considerations include determining whether the seller will retain responsibility for pre-closing environmental issues, and whether, and to what extent, the seller will indemnify the buyer for environmental liabilities for events that occurred before closing. Because environmental laws establishing cleanup liability generally have no statute of limitations, sellers often want a sunset provision for the indemnity so they don’t remain on the hook in perpetuity for liabilities. Buyers, however, may seek an indemnity that survives as long as possible.
All it takes is one undiscovered environmental issue to significantly impact the economics of a transaction. Thorough diligence and thoughtful drafting and negotiation of contractual provisions can go a long way toward mitigating the risk of a party incurring unintended environmental liabilities.
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Legal Intelligencer
(By Alexandra Farone and Jessica Altobelli)
Regardless of the outcome of the Dobbs case, key employment discrimination standards on the topics of pregnancy and abortion will remain unchanged absent significant legislative amendment to Title VII.
By now, most of us have heard of the infamous U.S. Supreme Court draft opinion leak in the case of Dobbs v. Jackson Women’s Health Organization. The Supreme Court is expected to officially issue its opinion in early July, and if the leaked opinion is an accurate foreshadowing, the court will overturn Roe v. Wade and Planned Parenthood v. Casey to abolish the previously held constitutional right to pre-viability abortions. The leaked opinion, and the larger topic of abortion generally, are often considered third-rail topics in many workplaces, given the strongly held opinions on both sides of the issue. For the same reasons, current U.S. Court of Appeals for the Third Circuit law concerning pregnancy- and abortion-related discrimination, also tends to be an avoided topic. However, attorneys are likely to see a marked uptick in questions from employer-clients concerning their current legal obligations toward pregnant employees or employees who have sought or obtained an abortion. Regardless of the outcome of the Dobbs case, key employment discrimination standards on the topics of pregnancy and abortion will remain unchanged absent significant legislative amendment to Title VII.
Title VII of the Civil Rights Act of 1964 prohibits employment discrimination on the basis of sex. The Pregnancy Discrimination Act of 1978 (PDA) amended Title VII to prohibit sex discrimination on the basis of pregnancy. Specifically, the PDA extended the definition of “on the basis of sex” to include—but is not limited to—pregnancy, childbirth or related medical conditions. See 42 U.S.C. Section 2000e(k). Courts have interpreted “related medical conditions” to include postpartum medical complications as well. Courts are currently split as to whether breastfeeding or its complications are protected under the PDA, but the current trend tends to hold that they are PDA-covered conditions. The Third Circuit has not yet ruled on the issue.
It is less widely known, however, that the PDA also prohibits discrimination against an employee because she has elected to have an abortion. The Equal Employment Opportunity Commission (EEOC) guidelines interpreting the PDA state that the statute protects against adverse employment action “merely because [an employee] is pregnant or has had an abortion.” EEOC guidelines are not binding authority, but the Third Circuit has adopted this interpretation of the PDA.
In 2008, the Third Circuit decided in Doe v. C.A.R.S. Protection Plus, 527 F.3d 358 (3d Cir. 2008) that the protections of the PDA extend to women who have elected to terminate their pregnancies. In C.A.R.S., a female employee’s doctor recommended that she terminate her pregnancy due to severe health issues of the fetus. Immediately after Doe’s pregnancy was terminated, she requested a one-week leave period from employment to hold a funeral. Doe was terminated while on leave, and after her supervisor made a remark in which he indicated that Doe “did not want to take responsibility.” This statement’s exact meaning was unclear, but the court determined that the remark may raise a reasonable inference that the abortion was a factor in terminating Doe’s employment. After reviewing the PDA, its legislative history and EEOC interpretive guidance, the Third Circuit construed the phrase “related medical conditions” to mean that discrimination against a woman who opts to undergo an abortion constitutes sex discrimination under Title VII. The Sixth Circuit has held similarly. See Turic v. Holland Hospital, 85 F.3d 1211 (6th Cir. 1996).
Because the pending Supreme Court decision will likely only affect the constitutional right to pre-viability abortion, it will not likely affect the statutory language of the PDA or its interpretation. In order for current Third Circuit precedent on the matter to change, Congress would likely have to further amend Title VII to explicitly state that abortion is excluded from the definition of a pregnancy- or childbirth-“related medical condition.”
Most often, the PDA is implicated when a pregnant employee is treated differently than a nonpregnant employee due to the pregnancy itself. For example, pregnant employees may not be singled out to require medical clearances to perform their job duties if such clearances are not required of employees who are not pregnant and have similar work abilities. Similarly, if an employee is absent for pregnancy-related reasons, the employer must hold her job open for the same length of time that jobs are held open for employees on sick or temporary disability leave.
If an employer allows temporarily disabled employees to take disability leave or unpaid leave, the employer must allow an employee who is temporarily disabled due to pregnancy to do the same. Impairments resulting from pregnancy, such as gestational diabetes or pregnancy-related sciatica, may be disabilities under the Americans with Disabilities Act depending on the particular circumstances. Therefore, employers may have to provide a reasonable accommodation for pregnancy-related disability absent an undue hardship. Often, such accommodations are in the form of modified duties such as weight-related lifting restrictions or alternative work assignments.
Notably, the PDA requires that employer-provided health insurance cover expenses for pregnancy-related conditions on the same basis as expenses for other medical conditions, but the PDA specifies that insurance coverage for expenses arising from abortion is not required unless the life of the mother is endangered, or medical complications arise from the abortion.
Employers should review their policies to ensure they contain adequate protections against discrimination. Specifically, employers should consider all practices that may implicate PDA-covered employees to ensure that no disparate impact will result. Such policies most often include sick leave policies, doctor’s note requirements, remote work policies, short-term disability leave and light duty availability. If the leaked Dobbs opinion becomes the official decision of the Supreme Court, eliminating the constitutional right to pre-viability abortions, some state legislatures and governors are likely to follow suit by passing legislation expanding abortion prohibition in their states. If this occurs, employers with multi-state operations should monitor their policies to ensure that pregnant employees traveling to another state to obtain an abortion are treated no differently than employees traveling out-of-state for any nonpregnancy-related reason.
Alexandra Farone is an associate in the litigation and employment and labor groups of Babst, Calland, Clements and Zomnir. Farone’s employment and labor practice involves representing corporate clients, municipalities, and individuals on all facets of employment law, including restrictive covenants, discrimination claims, human resources counseling, grievances, and labor contract negotiations. Contact her at at 412-394-6521 or afarone@babstcalland.com.
Jessica Altobelli is an associate in the firm’s litigation and employment and labor groups. Altobelli has a broad range of litigation experience in several practice areas including employment, general liability, transportation, and school district defense. Contact her at 412- 394-6557 or jaltobelli@babstcalland.com.
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Reprinted with permission from the May 26, 2022 edition of The Legal Intelligencer© 2022 ALM Media Properties, LLC. All rights reserved.
PIOGA Press
(By Blaine Lucas and Anna Jewart)
What is a “substantive validity challenge?”
Under Pennsylvania law, the question of where certain uses are permitted to occur is fundamentally a local issue. By delegation of the police power through the Municipalities Planning Code, 53 P.S. §§10101 et seq., local governments are vested with the power to adopt zoning ordinances and zoning maps outlining what uses are allowed in what areas within their boundaries. Zoning ordinances are presumed to be valid, and the decision as to where specific uses are permitted is largely within the discretion of the local governing body.
A party challenging the substance of a zoning ordinance bears a heavy burden of proving the provisions are “arbitrary, and unreasonable, and have no substantial relationship to promoting its public health, safety, and welfare.” When reviewing these types of challenges, courts are required to balance the public interest to be served with the confiscatory or exclusionary impact of the ordinance on individual property rights. Although property owners frequently challenge the substantive validity of ordinances they feel are too confiscatory, objectors have also challenged ordinances for being too permissive of a certain use―alleging that they fail to have the required connection to public health, safety or welfare.
Act 13, Robinson II and challenges under the ERA
In 2012, the Pennsylvania General Assembly enacted Act 13, a comprehensive update to the former Oil and Gas Act. Shortly thereafter, the Pennsylvania Supreme Court was tasked with considering the impact of the Article I, Section 27 of the Pennsylvania Constitution, known as the Environmental Rights Amendment (ERA) on Act 13, in which a plurality of the court ultimately invalidated certain provisions of Act 13 limiting the authority of local governments to regulate oil and gas development.[1] This decision triggered a wave of challenges from objectors arguing local ordinances are substantively invalid because they fail to place sufficient restrictions on oil and gas uses or allow them in allegedly incompatible zoning districts. To date, these types of claims have been consistently rejected by local zoning hearing boards, Common Pleas Courts and the Pennsylvania Commonwealth Court. The body of case law following Robinson II makes it clear that―as is the case with any type of use regulated by local zoning―where oil and gas development occurs is squarely within the purview of the municipality, while how it occurs is a state regulatory matter.
Recently, the Commonwealth Court reiterated these principles in Murrysville Watch Committee v. Municipality of Murrysville Zoning Hearing Board.[2] On January 24, the court affirmed the decisions of the Westmoreland County Court of Common Pleas and the Murrysville Zoning Hearing Board, denying a challenge to the oil and gas regulations in the municipality’s zoning ordinance. On February 23, the objectors filed a petition for allowance of appeal with the Pennsylvania Supreme Court. As we await a decision from the court on whether it will hear the appeal, Murrysville Watch offers an opportunity to revisit the courts’ treatment of substantive validity challenges to oil and gas zoning ordinances, an issue which they have addressed with remarkable consistency.
Where to permit oil and gas development remains a local issue
As noted above, Robinson II opened the door to ERA-type substantive validity challenges, resulting in the Supreme Court’s decisions in Gorsline v. Fairfield Township [3] and Robinson IV [4] and several Commonwealth Court decisions including Frederick v. Allegheny Township Zoning Hearing Board,[5] Delaware Riverkeeper Network v. Middlesex Township Zoning Hearing Board [6] and Protect PT v. Penn Township. [7] A brief overview of the decisions in these cases is helpful in analyzing how courts can be expected to treat these types of challenges moving forward.
A. Frederick v. Allegheny Township Zoning Hearing Board:
The ordinance: The zoning ordinance in Allegheny Township, Westmoreland County allowed oil and gas wells as a use by-right in all zoning districts, with some additional requirements. While it did not expressly require any setbacks for oil and gas development, application of the state-mandated 500-foot setback between a well-head and an existing building left less than 50 percent of the township available for development. Objectors brought a validity challenge, arguing the ordinance violated substantive due process and the ERA.
The analysis: The challenge was denied by both the local zoning hearing board and Westmoreland County Common Pleas Court. The en banc Commonwealth Court affirmed on appeal. In analyzing the ERA claim, the Commonwealth Court addressed the Supreme Court’s 2017 ruling in Pennsylvania Environmental Defense Foundation v. Commonwealth, [8] in which the Supreme Court held challenges raised under the ERA should be decided in accordance with its text. Noting the precise duties imposed upon local governments by the ERA are unclear, the Commonwealth Court decided the relevant standard to be whether the governmental action “unreasonably impairs” the environmental values implicated. However, it also found the Supreme Court’s holding in Robinson II did not authorize municipalities to act beyond the scope of their enabling legislation and that they were not authorized to replicate the environmental oversight the General Assembly conferred upon the Department of Environmental Protection or other state agencies.
B. Delaware Riverkeeper Network v. Middlesex Township Zoning Hearing Board:
The ordinance: The Middlesex Township, Butler County zoning ordinance allowed oil and gas well site development as a use by-right in some zoning districts and as a conditional use in other zoning districts. However, when other ordinance limitations were applied, less than 30 percent of the township was available for drilling.
The analysis: After a complicated procedural history, the Commonwealth Court, in an unpublished opinion, affirmed the decisions of the zoning hearing board and Common Pleas Court. The Commonwealth Court quoted liberally from its earlier decision in Frederick, and similarly concluded that the ordinance violated neither substantive due process nor the ERA.
C. Protect PT v. Penn Township:
The ordinance: The Penn Township, Westmoreland County zoning ordinance established an overlay district in which natural gas operations were authorized by special exception. The overlay district covered 55 percent of the township’s land mass and, after the application of setbacks, left 9.64 percent of the township available for development. The challengers argued that unconventional natural gas drilling was a heavy industrial use incompatible with the underlying agricultural and residential zoned areas, rendering the zoning ordinance invalid.
The analysis: On appeal, the Commonwealth Court held the objectors failed to establish that unconventional natural gas development posed any substantial actual risk to the environment or health of township residents. The court found the trial court properly determined that the ordinance, which permitted oil and gas development in specific and targeted areas of the township that are rural and not densely populated, did not violate the ERA or due process.
D. Murrysville Watch Committee v. Municipality of Murrysville Zoning Hearing Board
The ordinance: The Municipality of Murrysville, Westmoreland County zoning ordinance authorized oil and gas wells as a conditional use in an overlay district, which encompassed portions, but not all, of the rural residential zoning district. The ordinance also imposed a setback of 750 feet from the edge of a well pad to “protected structures.” Application of these geographic limitations, along with the ordinance’s steep slope restrictions, left only five percent of Murrysville’s land mass available for unconventional oil and gas development. Objectors argued the ordinance violated substantive due process because unconventional oil and gas drilling allegedly is an industrial land use incompatible with the stated purpose of the underlying residential zoning district. In a related argument, objectors contended that the overlay constituted an unconstitutional spot zone because certain portions of the rural residential zone were included in the overlay, while other portions were not.
The analysis: Relying heavily on both Frederick and Protect PT, the Commonwealth Court concluded the objectors failed to introduce any evidence of incompatibility and instead observed the municipality, through the multi-year efforts of a task force, had balanced its goal of economic development with its obligation to protect the health, safety and welfare of property owners within the overlay district. The court also noted the ordinance contained extensive additional substantive regulations and review processes applicable to oil and gas development. The court denied the objectors’ ERA claim, looking again to Frederick and Protect PT, concluding that the objectors did not prove that the challenged ordinance “unreasonably impairs” citizens’ rights under the ERA. Finally, the objectors asserted that the overlay violated the equal protection rights embodied in Article III, Section 32 of the Pennsylvania Constitution, on the basis that only the oil and gas industry was granted an overlay in residentially zoned areas and that residents of the rural residential district are not treated equally. The court rejected this claim, finding that the municipality had a rational basis for creation of the overlay district, based on available acreage and population density. [9]
Via Frederick, Delaware Riverkeeper, Protect PT and Murrysville Watch, the Pennsylvania Commonwealth Court has developed a cohesive body of case law affirming the authority of Pennsylvania municipalities to authorize oil and gas development within their boundaries. To date, the Pennsylvania Supreme Court has declined to hear appeals in Frederick, Delaware Riverkeeper and Protect PT. The industry would hope to see a similar result from the Supreme Court in Murrysville Watch.
Blaine A. Lucas is a Shareholder in the Public Sector and Energy and Natural Resources groups of Pittsburgh Law Firm Babst Calland. Anna S. Jewart is an associate in Babst Calland’s Public Sector group and focuses her practice on zoning, subdivision, land development and general municipal matters.
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[1] Robinson Twp. Washington County v. Com., 83 A.3d 901 (Pa. 2013)
[2] No. 579 C.D. 2020 (Jan. 24, 2022)
[3] 186 A.3d 375 (Pa. 2018)
[4] 147 A. 3d536 (Pa. 2016)
[5] 196 A. 3d 677 (Pa. Cmwlth. 2018)
[6] No 2609 C.D. 2015, 2019 WL 2605850 (Pa. Cmwlth. Nov. 14, 2019)
[7] Protect PT v. Penn Twp. Zoning Hearing Bd, No. 1632 C.D. 2018, 2019 WL 5991755 (Pa. Cmwlth. Nov. 14, 2019)
[8] 161 A.3d 911 (Pa. 2017).
[9] The Commonwealth Court also found that the objectors failed to demonstrate the challenged ordinance violated the Pennsylvania Municipalities Planning Code. 53 P.S. §§10101 et seq., or that it was inconsistent with the municipality’s comprehensive plan.
Reprinted with permission from the May 2022 issue of The PIOGA Press. All rights reserved.
Smart Business Dealmakers
(By Adam Burroughs featuring Kevin Wills)
Around 2019, Edward Saxon, CEO of Conco Systems, and his four siblings were running the business as equal partners when they recognized it was nearing time for a change.
“All of a sudden we woke up one day and realized we are all in our 60s and the runway was getting short,” Saxon says. “And first I said, ‘I’ll be happy to go. I’ve been running it. You guys can have a shot.’ They got together and said, ‘We don’t want the shot.’ Two of them wanted to go and do their own thing.'”
Having heard stories of deals run without professional help that fell apart, Saxon decided to enlist the help of an investment banker. That was a big help, he says, because not only do they bring buyers to the table but they do a lot of work getting the business prepared, putting a CIM (confidential information memorandum) together, helping owners understand where the real value is in their business and adding value beyond what the owners recognize.
Kevin Wills, an attorney with Babst, Calland, Clements and Zomnir, says when someone is looking to sell a business, one of the first things they should do is look into the potential impediments to doing a deal. That could include a shaky organizational structure, a complicated cap table, issues with unanimous consent, any convertible notes that need to be dealt with, or any rights of refusal.
“A fundamental transaction, like the sale of the business, usually triggers rights in people that aren’t operating day-to-day, and you don’t always think of those people,” Wills says. “So, if you got a family-run business with three family members mainly running it but the next generation of grandkids have trusts that are already in there and they have to consent to everything, you want to make sure you don’t have rogue holdouts that could hijack your deal or leverage better terms for themselves. You want to make sure that you’re in a position to sell, from a structural standpoint.”
Wills says customer contracts should be in place, even when business has been continuing without one in place, and that consent for any IP or software that’s licensed is obtained so that it can travel with the deal.
“You want to make sure that before you start going to people and saying, ‘Hey, we’re ready to talk about business,’ that you understand what could prevent you from being able to do your transaction,” he says.
Conco Systems did its roadshow, bringing potential buyers to Pittsburgh. The company received 15 good offers. Saxon says they interviewed nine that met or exceeded the minimum, and chose a group that wasn’t the highest but had made a solid offer. That began the next stage of the process.
“We started repeating everything we did with the broker,” Saxon says. “The data room stuff just makes you crazy because you got it from stuff we had originally put together, then you got the attorneys for the buyer and then you’ve got the quality of earning guys from the buyer and none of them like to look to the room to see what’s there, so you’re getting four and five requests for the same pieces of data. And every time you’re sending it you’re thinking, ‘I’m just giving them another reason to cut the price.'”
The deal was getting close to close and then Saxon says things unexpectedly started to turn south.
“It wasn’t that they were ghosting us or anything, but it was constant nitpicking — ‘What are you going to do here,’ and, ‘This value isn’t what we thought this was at,'” he says.
Saxon set up a meeting with the potential buyers in Atlanta and unexpectedly met someone new. Through the negotiations, he was told he had been talking with the decision-makers, but it was clear that the person he just met was “the man behind the curtain.” That meant being re-asked many of the questions he had answered before but without a firm commitment, so he decided to walk away from the potential deal and regroup.
He connected a second group of potential buyers with much better chemistry, which led to a deal that closed. Now the company is growing, having recently made an investment in a small testing company, is adding more people and expanding.
Mike Livanos, managing director at Stellex Capital, says a well-prepared seller makes for a much smoother process with fewer surprises along the way. That happens in part by preparing for as many potential questions as possible that could come from a buyer.
“Put yourself in the perspective of the person across the table and anticipate,” Livanos says.
Additionally, while many buyers will want to know what has happened over the business’s recent past, as well as the story that goes with the numbers, they also want to know what’s expected to happen next.
“We’re looking for the next five to 10 years,” he says. “In my ownership period, usually five to seven years. And then for the next person that I’ll sell it to, I’ve got to sell them the next story. So, I’m looking 10 to 15 years out. A family business is usually prepared for what they know, but they’re not yet prepared for what comes next. It’s the best family sellers that prepare for that.”
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Smart Business
(By Sue Ostrowski featuring Justine Kasznica and Ember Holmes)
Every business, no matter how big or small, faces the risk of a cyberattack.
“If you are on the internet or have networked assets — and almost every business does — you are at risk,” says Justine Kasznica, a shareholder in Babst Calland’s Emerging Technologies, Corporate and Commercial, Mobility, Transport and Safety, and Energy and Natural Resources groups. “The current geo-political climate and the Russia-Ukraine war underscore the paramount importance of cybersecurity to our national security, as Russia has threatened to counter any action the U.S. may make in support of Ukraine with cyberattacks.”
Adds Ember Holmes, an associate in the Corporate and Commercial and Emerging Technologies groups of Babst Calland, “It is prudent that all business owners assess their current situation regarding cybersecurity threats, address areas that are lacking and shore up policies.”
Smart Business spoke with Kasznica and Holmes about the Biden administration’s response to the threat, and how business owners can minimize risk and stay compliant with regulatory requirements.
Who should be concerned about cyber threats?
Threats to cybersecurity impact every business, and ignoring these is irresponsible and dangerous. Small business owners may not think they are at risk, but they are often perceived as not having the resources larger businesses have, making them targets of malevolent attacks. This is especially true for businesses storing or processing personal or sensitive information.
There are also regulatory issues. Small businesses may be prevented from working in certain industries or with certain customers if their systems don’t meet compliance requirements.
How can a business reduce the risk of cyberattacks?
Start with a privacy security assessment. Experts ask standard questions and walk through the company’s structure and systems to get a baseline assessment of the business’s cybersecurity health and its awareness of regulatory requirements. They can then work within the company’s budget to propose a streamlined path to compliance and shore up practices that are proactive.
Younger companies need a strategic pathway to become compliant with regulations and best practices and create cybersecurity policies and develop disaster recovery and business continuity plans.
For larger companies, issues often stem from a broad base of operational functions that don’t work in concert. Focus on creating consistent, cohesive practices and policies across the organization. It is vital that those dealing with critical infrastructure services adopt a proactive security culture, and evaluate and address their vulnerabilities.
There’s not a one-size-fits-all approach because there aren’t overarching regulations, only industry-specific advisories and guidance, making it difficult to know how to best tackle cybersecurity. Technology is changing rapidly, and owners who think they are not at risk and fail to take steps to protect themselves are leaving their businesses wide open to a potential attack.
How is the federal government responding to threats to American cybersecurity?
On March 21, 2022, President Biden released a statement advising that the Administration has received intelligence suggesting that Russia is planning to engage in malicious cyberattacks in retaliation for sanctions imposed in response to its invasion of Ukraine. It alerted business owners, especially those in the critical infrastructure realm, of the potential attacks and make them aware of Shields Up, a campaign to help prepare for, respond to and report cybersecurity incidents. All organizations must be prepared to defend against cyberattacks and to immediately respond if one should occur. The statement outlined steps the Administration has taken to strengthen defenses and strongly urged private business owners in the infrastructure sector to improve their efforts to prevent, detect and respond to cyberattacks by taking advantage of public-private partnerships.
It is critical that all business owners act before an incident occurs, when they are best positioned to secure their systems. Deal with it now — spend the resources, gain cybersecurity literacy in your operations and be ready, because it’s not if, but when an attack will occur.
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Babst Calland Attorney Christina Manfredi McKinley, selected to Super Lawyers, part of Thomson Reuters, 2022 Rising Stars for Business Litigation. Only a few attorneys from each state are selected to Super Lawyers designation for any given year. The multi-factor selection process includes independent research, peer nominations and evaluations, as well as professional achievement in legal practice.
Babst Calland Attorney Gina Falaschi, selected to Super Lawyers, part of Thomson Reuters, Rising Stars for 2022. Based in the Firm’s Washington, DC office, she provides legal services for issues involving Environmental law. Only a few attorneys from each state are selected to Super Lawyers designation for any given year. The multi-factor selection process includes independent research, peer nominations and evaluations, as well as professional achievement in legal practice.
Pittsburgh Business Times
(By Justine Kasznica)
Attorney Justine Kasznica would be the first to admit that she moved to Pittsburgh to take a chance on an apparent regional business renaissance driven by a promising technology sector. Over time, the region hasn’t disappointed.
“It’s an incredibly exciting time to be in this region and to be an attorney working with emerging technologies,” said Kasznica, who quickly would find her way into the center of Pittsburgh’s technology universe and help drive significant industry growth as part of a flourishing entrepreneurial ecosystem here.
“We are absolutely capturing a moment in history in this tri-state region,” she said. “To be able to experience the outputs of the efforts of the technologists across the region and to be part of the investor and adviser teams who are helping them grow is as rewarding as it is exciting.”
Today, Kasznica serves as a shareholder of Pittsburgh law firm Babst Calland, leading the firm’s emerging technologies group and serving on the front lines of a local industry sector that has gained global recognition while also facing its share of business and legal challenges. Babst Calland is one of the Pittsburgh region’s largest law firms.
Kasznica recently shared her insights on Pittsburgh’s burgeoning tech sector, from opportunities to greatest challenges, with the Pittsburgh Business Times as part of the law firm’s ongoing “Business Insights” interview series. The series is produced in partnership with the Pittsburgh Business Times.
Universities, R&D, and entrepreneurial support
So what has made the region’s tech sector – sometimes referred to as Pittsburgh’s innovation economy – so strong and thriving, even compared to the likes of California’s Silicon Valley?
“Although several years old at this point,” Kasznica said. “the 2017 Brookings Report identified R&D – which was two times the national average – as a key driver of Pittsburgh’s innovation economy. What that means is our universities are an incredible strength for the region, resulting in the tremendous tech opportunities around areas including autonomous mobility, robotics and AI, material science, advanced manufacturing and life sciences. I think these have been shown to be the region’s key strengths.”
Field robotics and the emergence of autonomous mobility research and development in Pittsburgh, she added, was one of the reasons she moved to Pittsburgh as an attorney. Among her goals: to help provide a legal framework for autonomous systems across industry sectors, including robots, drones, and commercial space – “basically air, land, sea and space robots,” Kasznica said.
What she found in the region, in the meantime, was a diversity of entrepreneurial support systems in place to help bridge the gap between academic research and economic development in Pittsburgh.
“I would say there has been a helpful increase in consolidation of efforts and resources to translate R&D into commercial products and services,” Kasznica said. “You’re seeing that with a lot of the universities, [technology] incubators and accelerators in the region who are working alongside workforce development organizations in a more coordinated fashion to bolster the successful commercialization of new technologies.”
The other significant driver, she said, has been access to capital and other resources, which continues to improve as the region gains greater attention worldwide for its work in autonomous systems, robotics, life sciences and other areas of technology commercialization.
“We obviously could still do better at that, but in the last year, we’ve seen the announcements of new venture and angel investment funds in the region. This is good news,” Kasznica said. “In addition, an opportunity exists for large enterprises to deploy strategic investment capital to support the region’s emerging technology companies.”
Where the opportunities are
Kasznica said the emerging technologies group at Babst Calland is seeing some of the greatest opportunities for tech-based growth in autonomous vehicles and autonomous systems. That said, she also identified the so-called Internet of Things, or IoT, as another area of economic promise for the region.
IoT is “very strong,” she said. “That is essentially the networking of physical hardware and software.”
Then there’s energy innovation.
“We’re seeing a tremendous opportunity for energy innovation in this region, including a variety of renewable energy technologies, electrification and smartgrid technologies, as well as technologies aimed at digitizing traditional energy assets, and optimizing existing systems and processes,” Kasznica said.
And with the many technology opportunities for the region comes the inevitable threat to the region’s cybersecurity – which in itself presents an opportunity for solutions-oriented technology development.
“A key, underlying theme that transcends all of these are data privacy and cybersecurity,” said Kasznica. “Whenever we talk about networked systems of any kind, we have to worry about cyber threats. The security and preservation of data is at the core of our emerging technologies legal practice.”
What to watch out for
Having worked with many local emerging technology companies over the years, Kasznica identifies several common pitfalls which ought to be addressed and avoided.
“Because our region is so strong in R&D, there’s a tendency for companies to build cool tech for the sake of building really cool tech.” she says. The question is whether there is a willing market for such cool tech. In addition to proving technology fundamentals, companies need to be engaging in customer discovery to really understand the market and build an appropriate business model around their tech (or in some cases adapt their tech or pivot their strategy to solve an actual market problem).
“These are brilliant inventors who have just birthed this most incredible technology,” she continued. “To connect that to an actual paying customer is where the real money is made…having a well-rounded understanding of those pieces and collaborating with experts to address those issues early on in their development is probably one of the greatest challenges and opportunities for our tech sector right now.”
Another fundamental issue is a recognition that there is no one-size-fits-all approach to successful technology business models. “I want to make sure our clients, particularly those working in robotics, IoT and hardware-dependent technologies, recognize that what might apply to largely software-driven [software-as-a-service] platforms in terms of scaling and ROI is not always the right approach for them. There’s a real opportunity for different models of growth for companies in this region, including organic growth by growing a satisfied customer base, and focusing on leveraging non-dilutive R&D investment and strategic investment in addition to venture capital investment.
“I would say that we need to recognize what is unique and the strength of our region,” she added, “and encourage appropriate business methodologies customized for each client.”
Regulatory hurdles to innovation
As lawyers, Kasznica and her Babst Calland colleagues do spend considerable time helping their clients navigate state and federal regulations that can have a dampened effect on innovation development and commercialization.
“Across all of these tech sectors, regulatory barriers are a key issue, and I would say they fall into three categories,” she said. “One is regulatory overload, or regulatory uncertainty. A classic example of this is data privacy. We have a patchwork quilt of laws and regulations that are both federal and state right now. To help advise a company to be able to be compliant with a myriad of laws can be complicated.”
Another barrier, for both young and mature companies alike, she said, are laws that do not anticipate technological change and can end up becoming barriers to commercialization. She cited, for example, aviation regulations and motor vehicle safety standards, and how those regulations, which were thoughtfully designed to ensure safe skies and roads for human operators and passengers, are no longer adequate (or even applicable) when applied to unmanned aircraft or autonomous vehicles.
“As a result, a lot of what we end up doing for our emerging technology clients is compliance by seeking exemptions from existing laws,” Kasznica explained.
Kasznica also said regulations are by their nature often “reactive,” and unable to anticipate fast-evolving technologies. As a result, it is prudent for lawmakers to seek industry input when designing laws addressing new technologies to ensure that the laws are flexible enough to allow for invariable technological change.
Advice to startups and mature companies
Whether a technology company is large or small, there are barriers to success across four segments – quality, resources, agility and culture. For young companies, the greatest challenge is a lack of resources (and consequently an inability to deliver highest quality products on time every time). But these same companies often are agile and have a dynamic culture that can attract and retain next generation critical talent. For large companies, resources are not often an issue, but culture and agility are often compromised (which can lead to a dispassionate workforce over time, resulting in high levels of attrition and impaired quality).
At Babst Calland, our goal is to work with large and small technology companies alike, and recognize and play to their strengths while working to solve their weaknesses. What this translates to is a commitment to offer to young technology companies a business partnership of sorts – quality legal services and legal and regulatory solutions that fit within their budget, while working alongside them to pursue appropriate capitalization and fundraising strategies. For established companies, this means serving as a trusted advisor, to find legal and regulatory solutions that enable them to comply with the law and deliver the highest quality products and services, and to provide market insights that enable them to anticipate and be able to adapt quickly to respond to market and technological trends and changes whether through acquisition, investment or in-house development of new technology.
That advisory partnership approach, Kasznica said, is what she most enjoys about working with large and small companies within the tech sector.
“With the technology-driven evolution that this region is experiencing, I see an opportunity for lawyers to embrace and play that advisory role, by working as trusted partners to our clients, understanding their business goals, and helping them not just by delivering the quality legal product that they need, but also helping to contextualize that work within the greater business narrative.”
And the result of such partnership with tech companies? “I really believe that this region is poised for even a stronger presence in the technology sector. And as attorneys were once involved as critical partners and enablers of the industrial revolution, we have an opportunity to be critical partners and enablers of the current technological revolution, sitting at the table with founders, leaders and investors, not simply as legal service providers, but as business advisors, offering strategic counsel on everything from formation to commercialization to investment – all in service of protecting our clients’ business interests and assets.”
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Business Insights is presented by Babst Calland and the Pittsburgh Business Times.