The Volcker Rule Under the Trump Administration

By Perry Glantz

The so-called Volcker Rule—named after Paul Volcker, a former chairman of the Federal Reserve Board—was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act which forbids a banking entity from participating in proprietary trading or owning a hedge fund. The rule was designed to prevent banks that receive federal and taxpayer backing in the form of deposit insurance and other support from engaging in risky trading activities.

The Volcker Rule has been criticized for its complexity in practice and difficulty in consistent application. This complexity is compounded by the fact that five federal agencies are involved in the process of defining and enforcing the Volcker Rule. The final draft of the rules which comprise the Volcker Rule were approved by the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC) and the Commodity Futures Trading Commission (CFTC). Further difficulty is added by the fact that different agencies are tasked with enforcing the Volcker Rule on different trading desks within the same banks. For example, the OCC oversees trading within national banks, the SEC regulates broker-dealers and the CFTC regulates swaps dealers. J.P. Morgan Chief Executive, James Dimon, was quoted as stating that in order to enforce the rule the regulators would need a lawyer and a psychiatrist to assess the intent of every trader.

The election of Donald Trump has raised the question of whether the Volcker Rule will be repealed as part of the promised dismantling of Dodd-Frank. As with many campaign promises in any election cycle, the final action of the elected official may not completely conform to the rhetoric of the campaign trail. In that regard, the point person on the president-elect’s transition team for the selection of financial regulators is Paul Atkins. Mr. Atkins is a former member of the U.S. Securities and Exchange Commission under President George W. Bush. “During Atkins’s SEC tenure, he was an outspoken critic of regulations that forced hedge funds to register with the agency and a requirement that mutual fund boards be led by independent chairmen. He also voiced frequent opposition to imposing large fines on corporations, arguing that such sanctions disproportionately hurt shareholders rather than wrongdoers.”¹ This leadership in the transition team could indicate a move away from the type of restrictions imposed by the Volcker Rule. Indeed, President-elect Trump’s selection for treasury secretary, Steven Mnuchin has already said he will roll back the Volcker Rule.

In a recent article, the Wall Street Journal suggested that the Volcker Rule may not need to be repealed to be undermined.² As opposed to attempting to repeal the statute, a move that would require at least some Democratic support in the Senate, the new administration could simply choose not to enforce the Volcker Rule until it is decided what final action to take. In light of the relative recency of the approval of the final implementing rules and the infancy of any enforcement activities, the Volcker Rule could effectively be marginalized through inaction as opposed to action by the Trump administration.

1. Bloomberg Politics, Trump Said to Tap Critic of Wall Street Rules to Aid Transition, November 9, 2016
2. Wall Street Journal, How to Kill the Volcker Rule? Don't Enforce It, November 28, Ryan Tracy and John Carney

American Bankers Association v. National Credit Union Administration

By Perry Glantz

“Credit unions originated in mid-19th-century Europe as cooperative associations that were intended to provide credit to persons of small means; they were usually organized around some common theme, either geographic or associational.”¹ The Federal Credit Union Act (“FCUA”)² was enacted in 1934 to establish a system of credit unions to facilitate the stabilization of the nation’s credit structure and to achieve an increased availability of loans.

One prerequisite for a federal credit union is that its membership complies with one of the categories set forth in the FCUA. The three types of membership fields set forth in the FCUA are: (i) single common-bond credit unions—one group that has a common bond of occupation or association; (ii) multiple common-bond credit unions—more than one group, each of which has a common bond or association and is limited to no more than 3,000 members; and (iii) community credit unions—persons or organizations within a well-defined local community, neighborhood or rural district.³ It is the definition of community credit unions that has led to the current conflagration of the turf war between banks and federal credit unions.

The American Bankers Association (“ABA”) has filed a lawsuit in the United States District Court for the District of Columbia against the National Credit Union Association (“NCUA”) challenging the Final Rule issued by the NCUA regarding the community credit union field of membership.⁴ According to the ABA, the “Final Rule allows community credit unions to operate even though their field of membership is not limited to a single well-defined local community, neighborhood, or rural district, as Congress directed.”⁵ Specifically, the ABA challenges the inclusion of “combined statistical areas,”⁶ “core based statistical areas,”⁷ “areas adjacent to well-defined communities,” and the definition of “rural district” in the Final Rule. The ABA argues that these definitions of community credit unions would allow federal credit unions to serve millions of potential customers in areas that are sometimes larger than many entire states. The ABA contends that its member banks will be harmed by the Final Rule allowing federal credit unions to expand their tax-exempt operations at the expense of other financial institutions.

The NCUA has not responded to the Complaint as of the time of this writing. However, this litigation bears monitoring as a potential source of clarification of the “turf” to be divided between banks and credit unions.

1. National Credit Union Administration v. First National Bank & Trust Company, 522 U.S. 479, 493 n. 6 (1998).
2. 12 U.S.C.A. §§ 1751 to 1795k.
3. 12 U.S.C.A. § 1759.
4. See Chartering and Field of Membership Manual, 81 Fed. Reg. 88,412 (Dec. 7, 2016).
5. American Bankers Association v. National Credit Union Administration, Case No. 16-2394, United States District Court for the District of Columbia, Complaint, December 7, 2016.
6. Combined statistical area” consist of two or more adjacent metropolitan and micropolitan statistical areas that have substantial employment interchange.
7. Core based statistical areas” consist of the county or counties or equivalent entities associated with at least one core (urbanized area or urban cluster) of at least 10,000 population, plus adjacent counties having a high degree of social and economic integration with the core as measured through commuting ties with the counties associated with the core.

Independent Community Bankers of America v. National Credit Union Administration

Ongoing litigation regarding the interpretation of the statutory limitations on credit unions’ ability to purchase or participate in commercial loans made to borrowers who are NOT members of the credit union

By Perry Glantz

A litigation filed in the United States District Court for the Eastern District of Virginia by the Independent Community Bankers Association (ICBA) challenges the legality of a final rule promulgated by the National Credit Union Administration (NCUA) that becomes effective January 1, 2017 and will arguably expand the ability of credit unions to purchase or participate in commercial loans originated by other lenders. The Federal Credit Union Act and regulations of the NCUA authorize credit unions to purchase interests in loans made to borrowers by other lenders. 12 U.S.C. § 1757(5)(E); 12 C.F.R. 701.22. The Federal Credit Union Act separately provides that a federally-insured credit union may not “make any member business loan that would result in a total amount of such loans” exceeding the lesser of 1.75 times the credit union’s net worth or 12.25% of the credit union’s total assets. 12 U.S.C. § 1757a(a).

According to the ICBA’s Complaint, the rule at issue “purports to free credit unions from a core statutory restriction that Congress placed on their commercial lending activities by allowing all federal and state credit unions insured by NCUA to acquire, essentially without limit, (a) entire commercial loans extended by other lenders, including other credit unions, to borrowers who are not members of the credit union (what NCUA refers to as “non-member commercial loans”), and (b) portions of such commercial loans originated by other lenders (what NCUA refers to as “non-member participation interests in commercial loans”).” The rule which is known as the “member business rule” (“MBL Rule”) allows credit unions to purchase non-member commercial loans or participate in non-member participation interests in commercial loans without those loans or participations counting towards the statutory limit on “member business loans” set forth in the Federal Credit Union Act. 12 U.S.C. § 1757a(a). The ICBA contends that the “rule violates the plain terms of the Federal Credit Union Act, as amended, 12 U.S.C. § 1751 et seq., which strictly limits the amount of commercial loans and interests in such loans of any kind that an insured credit union may hold on its balance sheet.” The ICBA Complaint alleges that “the MBL Rule exacerbates the unfair competitive harm that tax-exempt credit unions are able to inflict on community banks, which do not benefit from the tax advantages enjoyed by credit unions.”

The NCUA has moved to dismiss the Complaint on the grounds that the ICBA lacks standing to bring the claims. This argument is based on the lack of any actual impact on ICBA members as the MBL Rule at issue has not yet taken effect and, therefore, could not have caused any harm. Further, NCUA argues that the ICBA’s claims are barred by the applicable six year statute of limitations because the interpretation of the Federal Credit Union Act section 1757a(a) that is directly at issue in the present litigation was included in the rule issued by the NCUA in 2003. 68 Fed. Reg. 56,537, 56,544-45 (Oct. 1, 2003). Finally, the NCUA contends the Complaint should be dismissed because NCUA’s interpretation of section 1757a(a) is consistent with the language of that statutory provision. NCUA argues, “Section 1757a(a) states that ‘no insured credit union may make any member business loan that would result in a total amount of such loans’ to exceed the statutory cap on member business loans. 12 U.S.C. § 1757a(a) (emphasis added). By its plain language, this provision requires a credit union to include only loans extended to its members in calculating its aggregate member business loan limit.” The NCUA asserts that its interpretation is a “permissible construction” of the statute warranting deference from the Court under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

If the complaint can withstand the statute of limitations challenge, the arguments regarding the standing of the ICBA and the interpretation of the member business loan section of the Federal Credit Union Act seem to blend into one another. If the Court sides with the ICBA in its interpretation of section 1757a(a) requiring credit unions to include loans purchases or participations of any kind, and from any source in its calculation of the limitation on commercial loans, then it stands to reason that ICBA members are financially harmed by having to compete in the commercial loan market against tax-exempt federally insured credit unions. If, on the other hand, the Court sides with the NCUA and determines that the non-member business loans and non-member participation interests are not subject to the statutory cap then there is no claim and, therefore, no harm to support standing to bring the case.

Whatever the result, the MBL Rule and this litigation will impact the competitive landscape involving community banks and credit unions nationwide.

How to Manage ADA Website Compliance

By Angie Fletcher

Since 2015, over 240 businesses across the country have been sued by plaintiffs alleging their websites fail to provide access to people with certain disabilities. Many more businesses and financial institutions have received demand letters from a Pittsburgh law firm offering to “work constructively” in fixing their websites, among other things, for a fee. Regardless of courts’ variances of their application of the Americans with Disabilities Act to websites, plaintiffs strong-arm their targets into settlement agreements by using favorable arguments from previous lawsuits that have held the ADA applies to websites.

The ADA became law in 1990, and it aimed to prohibit discrimination against individuals with disabilities. Title III of the ADA prohibits discrimination on the basis of disability in “places of public accommodation.” Initially, the term “places of public accommodation” was applied to physical locations (such as stores, restaurants, and other commercial businesses) that were open to the general public. Neither Title III nor any other part of the ADA specifically discusses “website accessibility” for the disabled, but proponents argue that “places of public accommodation” includes websites.

While plaintiffs continue to send demand letters and file lawsuits, the Department of Justice (enforcer of the ADA), has yet to issue its rules or regulations for website compliance with the ADA. Businesses have anticipated the DOJ’s technical guidelines since 2010, but the continued evolution of the Internet, mobile applications, accessibility tools and assistive technologies have partly caused the DOJ to delay issuing rules or regulations until 2018.

We encourage businesses to begin taking precautionary measures to assist in defending similar allegations and make their websites accessible to the disabled, along with our other recommendations outlined in this article.

Conduct an Online Website Compliance Self-Audit

Until formal rules and regulations are provided, the DOJ and plaintiffs have consistently suggested that websites will be considered ADA compliant if they follow the Web Content Accessibility Guidelines (WCAG-2.0) Level AA. WCAG-2.0 defines how to make web content more accessible to a wide range of people with disabilities and provides requirements for text alternatives, i.e., increasing font, braille, speech, symbols, or simpler language, prerecorded audio-only or video-only content, and color distinctions by separating the foreground from the background. A complete list of the WCAG-2.0 Guidelines can be found here.

A few websites (search “website compliance assessment”) will generate a compliance report simply by typing in your business website address. Within a few seconds, the assessment will detect errors and list the website’s content failures. The best use of this information is to retain a website vendor who understands the nuances of WCAG-2.0 and can assist with website redesign and changes. Many businesses have already begun the process of improving the accessibility of their website either internally or through the use of a reputable website developer.

Review Risk Management and Insurance Policies

Businesses should review their insurance policies to ensure coverage for accessibility discrimination claims for their websites. There is insurance that expressly covers ADA public accommodation discrimination claims, such as a “third-party liability” endorsement to employment practices liability insurance policies. An employment practices liability policy and media liability policy each may extend coverage for costs incurred in defending website accessibility claims. While an employment practices liability policy typically covers lawsuits filed by employees against their employers, it may by broad enough to extend coverage for discrimination and harassment claims brought by customers and third parties and provide reimbursement for costs incurred in defending a lawsuit in court, judgments and settlements. A media liability policy may cover claims arising out of a company’s media (websites and mobile applications) and other media activities. It is important to review your insurance policy terms with your risk management team or insurance carrier as some policies may include a broad exclusion for discrimination claims or gaps in coverage, thus barring coverage for a website ADA claim.

Engage Your Lawmaker

Currently, there are two bills in the House of Representatives that aim to amend the ADA: (1) H.R. 3765, ADA Education and Reform Act of 2015, and (2) H.R. 241, ADA Compliance for Customer Entry to Stores and Services (ACCESS) Act of 2015. Both bills would provide businesses with an opportunity to comply with the ADA before a civil action commences.

Introduced in January 2015, the ACCESS Act of 2015 seeks to amend the ADA by imposing a notice and compliance opportunity before commencement of a private civil action. The ADA Education and Reform Act of 2015 was introduced a few months later in October 2015, and promotes compliance through education, requires clarifications of the requirements for demand letters, and provides for a notice and cure period before the commencement of a private civil action. You can read more about these proposed legislative bills here and here.

Contact your congressional representative and request their support on these legislative actions.

In Summary

The Internet, web-based applications, and mobile devices are becoming more prominent and remain an ever-present part of our lives. Plaintiffs’ firms are aggressively working with website testers and advocacy groups to test the limits of how the ADA applies to websites and other technology. In addition to our recommendations above, we advise that you keep continuous documentation of any efforts you undertake to make your website and other technology devices compliant. If you are contacted by plaintiffs or advocates about compliance violations, please contact us so that we can walk you through your options.

Colorado Criminalizes Passing Pets Off as Service Animals

By Angie Fletcher

The State of Colorado passed a new law criminalizing the intentional act of misrepresenting your pet as a service animal. Pursuant to HB16-1426, it is illegal to intentionally misrepresent your pet as an assistance, companion, or emotional support animal to avoid pet fees or have an animal in housing that otherwise does not allow animals. The new law was made effective January 1, 2017.

The Americans with Disabilities Acts of 1990 has defined a “service animal” as a dog or a miniature horse that is trained to do work or perform tasks for the benefit of a disabled individual. The ADA does not extend emotional support, well-being, comfort or companionship as the “work” or “tasks” of a service animal.

There are disabled individuals who legitimately require the assistance of a service animal in places of public accommodation (restaurants, movie theaters, grocery stores, hospitals, schools, etc.). While no vest, marking or documentation is required for an animal to qualify as a service animal, there have been a number of instances where a person will dress a dog in an official-looking vest under the guise that it is a “service animal.” The dog is then able to enter a place that it would otherwise not be allowed.

Current regulations allow businesses and other places of public accommodation to ask only two questions to the person: 

1.  Is the dog a service animal required because of a disability?
2.  What work or task has the dog been trained to perform?

A person without a disability who brings in a dog not properly trained as a service animal puts the business and its patrons at risk from damages, health issues, injury, or other problems. Not to mention the additional hardships placed on disabled individuals to gain acceptance of their legitimate, properly trained and necessary service animal.

Passing your dog – or miniature horse off as a service animal may result in fines up to $500.

FAA Planning to Change Regulations on Drone Flights Over People

By Dan Wennogle and James Montgomery

The FAA took some major steps forward regarding commercial drone use in 2016, and the trend is likely to continue into 2017. After issuing new rules and regulations that eased the regulatory burden of commercial drone use in the summer of 2016, the FAA has signaled its intent to permit limited flights of small drones over people. This could significantly increase the feasibility of practical commercial applications, such as using drones for inspections over active construction sites, industrial surveillance, home delivery, and residential utility line inspections.

The current regulation regarding the operation of drones over people is quite strict. It reads:

No person may operate a small unmanned aircraft over a human being unless that human being is:

(a) Directly participating in the operation of the small unmanned aircraft; or
(b) Located under a covered structure or inside a stationary vehicle that can provide reasonable protection from a falling small unmanned aircraft.¹

Under existing law,² companies may apply for and obtain a waiver to fly drones over people. However, the approval of any waiver lies within the sole discretion of an FAA administrator, and the applicant must provide sufficient grounds for the administrator to "find[] that a proposed small UAS operation can safely be conducted."³ To-date, the FAA has granted only 228 of these waivers, mostly for operating drones at night, but only one (1) waiver has been granted for the operation of drones over people.⁴

In November 2016, the FAA hinted at its intention⁵ to loosen the above restrictions by sending a new notice of proposed rulemaking to the Office of Information and Regulatory Affairs (the "OIRA") at the White House for preliminary review. The rule was originally anticipated to be released by 2016, but the FAA has recently backtracked on the release, stating that the new rule is "taking time."⁶ This may be due to the privacy and safety issues involved with regulating drones over public places like open-air concerts or festivals, and that might hinder progress in areas where those issues might be easier to address, like semi-controlled areas including construction sites or utility easements.⁷ Now may be a time for interested parties in those industries to push for an interim rule, or a proposed rule, that takes their ability to control the situation on the ground into account.

Even though the contents of the new proposed rule have not been released to the public, the FAA has stated that it will:

address the performance-based standards and means-of-compliance for operation of small unmanned aircraft systems (UAS) over people not directly participating in the operation or not under a covered structure or inside a stationary vehicle that can provide reasonable protection from a falling small unmanned aircraft. This rulemaking would provide relief from certain operational restrictions implemented in the Operation and Certification of Small Unmanned Aircraft Systems final rule (hereinafter the sUAS Operation and Certification rule).
What Can Commercial Drone Users Expect in 2017?
The Federal Register notice regarding the proposed rulemaking indicates the new rules will set standards and prescribe procedures for those wanting to operate small drones over people. The FAA has not indicated the specific performance-based standards it will impose with the new rules, but it is possible the new standards will be based on the standards that the FAA is currently using under Part 107.⁸ Some of the performance standards that could make their way into the new rules might require companies wishing to utilize commercial drones over people to do the following:

• Create a safety plan that can demonstrate any drone malfunction will not cause injuries to non-participating persons on the ground;
• Conduct a risk assessment and testing of drone programs, and be able to provide the FAA, if requested, with comprehensive data that addresses the design features and operational limitations of drones or drone fleets;
• Ensure there is limited or no risk to customers or bystanders due to a drone's rotating parts and sharp edges; and/or
• Demonstrate that pilots or operators of drones or drone fleets have the adequate knowledge, experience, and ability to safely operate drones over non-participating persons, including demonstrating that pilots or operators have recent flight experience.

It is also possible the FAA might require specific technology to be utilized in flights over people. Some of this technology might come in the form of requiring:

• A certification by the drone manufacturer that the drone has undergone rigorous inspection and safety testing;
• Multiple backup batteries;
• Six or more motors;
• Six or more separate rotors;
• A backup radio link;
• An "auto-hover" or "return-to-home" feature if connection is lost between the drone and the operator; and/or
• Software and hardware requirements to prevent hacking and unauthorized use of sUAS, and to prevent flights into unauthorized or protected areas.

In addition to complying with the forthcoming performance-based standards and any technology requirements that will make their way into the new rules, it will also be critical in 2017 for companies wishing to utilize commercial drone flights to adopt a written privacy policy and to adhere to best privacy and security practices in the drone industry. These practices will likely include:

• Abstaining from collecting unnecessary personal information when there is a reasonable expectation of privacy;
• Destroying any unnecessary personal information that has been recorded or stored by drone flights;
• Minimizing the flight of drones over private property;
• Establishing processes or programs by which the public can request deletion of stored personal information;
• Requiring industry-approved training for drone operators;
• Collecting, reporting, and tracking incident data;
• Requiring mandatory pre-flight inspections and checklists; and/or
• Displaying signage or ground warnings about overhead operations when feasible.

The proposed regulations will create the potential to influence manufacturing and operation costs for commercial drones. Once the proposed rules are released, they will be open for public comment for a period determined by the FAA, likely 60 days. Companies who could benefit from using small drones over people should consider whether they wish to make an official comment on the new proposed rules once they are issued. Those companies should also consider contacting one of the professionals in Stinson Leonard Street LLP's Unmanned Vehicles and Systems group about reviewing and updating contracts, insurance policies, and safety manuals to address the issues raised by the commercial use of drones. Staying on top of the law, including the various areas discussed in this article, can allow companies to stay ahead of the competition in this fast-evolving area.

1. 14 C.F.R. § 107.39
2. Id. at §§ 107.200; 107.205
3. Id. at § 107.200
4. Part 107 Waivers Granted, FED. AVIATION ADMIN., https://www.faa.gov/uas/request_waiver/waivers_granted/ (last accessed Dec. 28, 2016)
5. Department Regulatory Agenda; Semiannual Summary, FED. AVIATION ADMIN., https://www.federalregister.gov/documents/2016/06/09/2016-12913/department-regulatory-agenda-semiannual-summary (last accessed Dec. 28, 2016)
6. Linda Chiem, FAA Chief Says Drone Flight-Over-People Rule Still in Works, LAW360, https://www.law360.com/ articles/878464/faa-chief-says-drone-flight-over-people-rule-still-in-works (last accessed Jan. 9, 2017)
7. Id.
8. Performance Based Standards, FED. AVIATION ADMIN., https://www.faa.gov/uas/request_waiver/media/ performance_based_standards.pdf (last accessed Dec. 28, 2016)

Emerging Products Liability Threats to Growing Marijuana Industry

By Zane Gilmer

Twenty nine states and the District of Columbia now have laws that permit some form of legal marijuana (either medical, recreational, or both). As the marijuana industry continues to expand, so too do the legal issues facing the industry. One of these emerging legal issues is the threat of products liability exposure for marijuana manufacturers and distributors.

LAWSUITS

Plaintiffs’ lawyers have already begun testing products liability cases against the industry. For instance, in October 2015 a medical marijuana consumer filed a putative class action lawsuit against Colorado marijuana company LivWell (Flores v. LivWell, Case No. 2015CV33528). The lawsuit alleged that LivWell treated its marijuana with a dangerous fungicide, Eagle 20, which emitted a poisonous cyanide gas when it was burned. The Court dismissed the lawsuit because it found that the plaintiff did not suffer any harm and, despite the fact that it was treated with a problematic fungicide, the marijuana still performed as intended (the plaintiffs admitted smoking the marijuana without harm). Although the plaintiff in that case was unsuccessful, the case is still significant because it marks the first class action products liability lawsuit filed in the United States.

In early 2016 another marijuana products liability case was filed by the guardians of three children against a dispensary and manufacturer (Kirk v. Nutritional Elements, Case No. 2016CV31310). According to the lawsuit, the children’s father purchased and consumed marijuana edibles and then murdered the children’s mother. The lawsuit alleges that the dispensary and manufacturer failed to warn of the side effects of consuming marijuana, including delirium and paranoia. The lawsuit is currently pending.

OTHER POSSIBLE CLAIMS

Below is an overview of some of the common claims the marijuana industry must be aware of.

Failure to Warn

Failure to warn claims are based on the premise that the manufacturer and/or distributor failed to warn consumers about certain dangers associated with using or consuming the product. Common dangers that plaintiffs may argue should have been disclosed, but were not, include health risks, addictive nature of products, limitations on ability to operate motor vehicles, and proper dosage. Because the marijuana industry is still relatively new and formal studies regarding short and long term risks are limited, it can be difficult to know what manufacturers and distributors should actually be warning consumers about (i.e., the scope of their duty to warn). Nevertheless, industry participants should consider disclosing known risks to avoid failure to warn claims.

Negligence

Negligence claims are often similar to failure to warn claims in that they may be premised on the argument that the manufacturer and/or distributor had a duty to act reasonably, which includes a duty to warn consumers about certain health risks, and failure to make such warnings constitutes negligence.

Intentional Misrepresentation/Fraud/Concealment

Fraud-related claims would likely arise as a result of allegations that a manufacturer and/or distributor intentionally concealed or lied about certain things concerning their products. For instance, in the Flores case, the plaintiffs argued that the defendants’ marketing materials falsely claimed that their products were of a higher/better quality than others, but, according to the plaintiffs, that was untrue given that the products had been subjected to the Eagle 20 fungicide. Industry participants must monitor their marketing and advertisements to ensure that they are not making false claims.

Design Defect

Design defect claims are based on the argument that a product is designed in a way that is not suitable or safe for its intended purpose. Many marijuana manufacturers alter marijuana in various ways (e.g., developing hybrid strains and creating edibles). These activities could provide the basis for a design defect claim based on a consumer claiming that the alteration or design led to additional health risks (e.g., caused greater risk of cancer), made the product more dangerous in some way, or even made it more addictive. As such, industry participants should consider these risks in connection with testing and marketing their products.

Breach of Contract

By purchasing a product, the consumer enters into a contract with the distributor and/or manufacturer. Consumers have used breach of contract claims in other products contexts to argue that distributors and/or manufacturers breached their contracts with the consumer when the product did not perform as expected or was more dangerous than they believed it would be.

Breach of Warranty

Breach of warranty claims generally arise when a consumer argues that a manufacturer and/or distributor made a certain representation about their product that turned out not to be true. This can take a number of forms, but one of the most likely forms it could take in the marijuana context is with regard to claims about the effectiveness of medical marijuana to cure, prevent, or control certain medical ailments. If a manufacturer or distributor makes a claim that its medical marijuana can or does have some medical benefit and it turns out that the representation is untrue, then the consumer may have a breach of warranty claim. Industry participants, therefore, must take care in making unsubstantiated representations about their products and should consider including a disclaimer of all implied and express warranties.

Youth Marketing

Tobacco plaintiffs have previously brought claims against tobacco companies based on the premise that tobacco companies improperly directed marketing and advertisements at youth in an effort to get young people to begin using tobacco and, thus, become addicted at an early age. Although youth marketing of marijuana is illegal in most jurisdictions that have legalized marijuana, a plaintiff could attempt to rely on a youth marketing claim if advertisements or marketing efforts are directed at youth. Thus, industry participants must ensure that their marketing and advertisements are not directed at youth.

Unfair or Deceptive Trade Practices

Many states have some form of unfair or deceptive trade practices laws that generally prohibit companies from using fraudulent or deceptive practices. In the past, some state attorney generals relied on those laws to bring claims against the tobacco industry. Those claims were largely based on allegations that the tobacco industry concealed or misrepresented the addictive nature and health risks of tobacco use. Given the general parallels between the tobacco and marijuana industries from a product stand point, the marijuana industry must be aware of these claims.

Bottom Line: Although the marijuana industry is still very much evolving, marijuana manufacturers and distributors must understand that given the nature of their products they face serious products liability risks. However, those risks can be minimized by taking proactive steps in the testing, marketing, and distribution of their products. Industry participants should work with an experienced products liability attorney (such as those at Stinson Leonard Street LLP) to evaluate their individual risks and work to implement processes to minimize them.

Urban Renewal Puts Non-conforming Businesses and Buildings at Risk

By Ryan Sugden

Urban redevelopment is often heralded for creating vibrant new neighborhoods and increasing tax revenue. But for existing businesses and buildings, the story may be different. When a city changes zoning as part of its redevelopment efforts, existing uses are grandfathered in as legally non-conforming. With this status, the business may operate, and the building may be used as before. However, cities often view non-conforming uses and buildings as impediments to redevelopment—few developers want to build condos next to a factory. Accordingly, when pursuing redevelopment, cities have an incentive to strip unsuspecting landowners of their “non-conforming” status, which can render once valuable property nearly worthless.

As a result, owners of existing buildings and businesses need to be vigilant to protect their property rights and status as legally non-conforming to avoid losing significant investments in their properties and businesses.

Existing land and business owners have rights in existing uses when zoning changes occur

Status as legally non-conforming is a double-edged sword. Non-conforming uses typically cannot be expanded, and they cannot change. And when a non-conforming structure is destroyed, it cannot be rebuilt. But, non-conforming status can be valuable. It allows a business to remain open despite zoning changes, and in some cases can create a virtual monopoly (imagine a corner store in a residential area).

Non-conforming uses also receive legal protection. Unless a city takes property through its power of eminent domain (and compensates the landowner for the property’s value), a city cannot immediately eliminate a non-conforming use or building.¹ And, non-conforming status is retained even through changes in ownership. As a result, a non-conforming business can stay open in near perpetuity. In many cases, a developer will buy out a non-conforming building at market value, raze it, and redevelop the land in compliance with the new zoning. But in other cases, a business or landowner will not want to sell or there is no market for it, and the owner will lose his entire investment if his non-conforming status is lost.

Non-conforming status will be lost unless the business operates or a building is used continually

Keeping non-conforming status can often be the difference between turning a profit and losing everything. To avoid these consequences, landowners need to be aware of their rights as well as the risks of owning a non-conforming business or building.

• Status as a non-conforming use can be lost if a business is closed, or building is vacant, for a “reasonable” amount of time.

A city cannot immediately eliminate a non-conforming use without exercising its power of eminent domain. Some states utilize a process called “amortization,” in which a city sets a deadline (often months or years away) and requires that a business or building come into compliance with underlying zoning by then. Other states, like Colorado and Minnesota, prohibit amortization.² Another way that cities eliminate non-conforming uses is to require that the use or building remain in continual operation. If a non-conforming use is vacant or closed for longer than a certain period of time (known as the “discontinuance period”), the business or building will lose its non-conforming status.

Discontinuance periods vary. In Minnesota, the discontinuance period is one year.³ In Colorado, municipalities are free to set their own discontinuance periods, but the period must be “reasonable” in length.⁴ There is little guidance on what is “reasonable,” which has led to discontinuance periods that vary from one year in urban areas to 60 days in suburban communities.⁵

As a result, owners of non-conforming buildings and businesses should be aware of the discontinuance period in their community, so they do not risk losing their non-conforming status in the event they must close or have a vacancy.

• Non-conforming status may be lost even if the owner does not intend to abandon his non-conforming status.

In some states, like Colorado and Nebraska, non-conforming status can be lost even if the owner does not intend to abandon the status.⁶ This means that a property owner can lose his non-conforming status even if he is actively trying to reopen or find a new tenant. This presents an acute problem in cities with short discontinuance periods. Consider a commercial warehouse, where finding a suitable tenant can take a year or more. If a tenancy unexpectedly ends, a landlord may not be able to find a replacement tenant before the discontinuance period passes. As a result, a short discontinuance period can effectively eliminate a warehouse’s non-conforming status once the first vacancy occurs. Landowners can challenge discontinuance periods, on these grounds, arguing that the period is unreasonable in the unique commercial circumstances of the building or business in question.

Landowners will also face unique business issues. Because a landowner need not intend to abandon a use to lose the non-conforming status, it may be wise for a landowner to accept a less desirable tenant to avoid having a vacancy extend longer than the discontinuance period. The value of preserving the non-conforming status may outweigh the business risks of the new tenant.

• Landowners should be prepared to show how their property has been used when the zoning changed.

Non-conforming status protects only the ways in which property was used when the zoning changed, and a landowner typically bears the burden of proving each use in the event the city challenges the owner’s non-conforming status. As a result, when a zoning change occurs, or if the zoning has already changed, landowners should document each of the ways the property is being used, with periodic updates, to show that the uses have not terminated for longer than the discontinuance period. When preparing these records, landowners should consult with counsel who can review the city’s zoning code to determine each of the ways the property could have been used before the zoning changed. The more non-conforming uses there are for a building, the more valuable it likely becomes.

Finally, in the event a city challenges a landowner’s non-conforming status, the landowner is entitled to notice and an opportunity to object to a city’s determination that the non-conforming status has been lost. Landowners also have appellate rights, typically before a board of zoning appeals and the city council, and ultimately to a district court. If a city is investigating a landowner’s non-conforming status, or if the city has already made a determination, the landowner should engage counsel to ensure that a proper record is made and arguments are preserved in the event an appeal to the district court is necessary.

When Actions Speak Louder Than Words

By Charles Redd

Cases decided over the past several years have demonstrated that defective trust administration, whether negligent or intentional, can cause a tax disaster even if the underlying trust instrument is technically sound.

In Estate of Atkinson, 309 F.3d 1290 (11th Cir. 2002) Melvine Atkinson created a charitable remainder annuity trust (CRAT) funded with stock worth about $4 million. Under the CRAT's governing instrument, Melvine was to receive a lifetime annual annuity of $200,000. The trust instrument provided for annuity payments to be made to successor beneficiaries following Melvine's death, if they agreed to pay their share of any estate taxes due at her death. After the death of the last annuity beneficiary, all remaining trust property was to be distributed to charity. Melvine died, and her estate claimed a charitable estate tax deduction in an amount equal to the present value of the charitable remainder interest in the CRAT as of Melvine's date of death.

There was just one problem. It turned out that, although there was no ambiguity or defect whatsoever in the trust instrument, no annuity payments had ever actually been made to Melvine. Accordingly, the Internal Revenue Service, on audit of Melvine's estate tax return, disallowed the charitable deduction for the CRAT remainder because the CRAT had failed to operate in accordance with Internal Revenue Code Section 664, the applicable Treasury regulations and the requirements of the trust instrument. The estate argued that the IRS, by focusing stringently on the CRAT rules, would deny a substantial charitable deduction because of a "foot fault" or a minor mistake, ignoring the certainty that CRAT property worth millions of dollars would pass to charity as a result of Melvine's death.

The U.S. Court of Appeals for the Eleventh Circuit sided with the IRS. The Court concluded the CRAT didn't give rise to an estate tax charitable deduction under IRC Section 2055 because "the CRAT regulations were not scrupulously followed." Id. at 1296.

In Securities and Exchange Commission v. Wyly, 56 F.Supp. 3d 394 (S.D.N.Y. 2014), Sam and Charles Wyly created and funded 17 offshore trusts and designated professional asset managers in the Isle of Man as trustees. The beneficiaries, in a variety of combinations among the trusts, included Sam and Charles, their spouses, their children and charitable organizations. Each trust had three trust protectors: Sam and Charles' lawyer, the chief financial officer (CFO) of the Wylys' family office and the CFO of a Wyly-related offshore entity. Neither any of the trustees nor any of the trust protectors was a "related or subordinate party" within the meaning of IRC Section 672(c). Among the trust protectors' powers were to "add[] or substitute[e] a charitable organization as a beneficiary and to remove and replace the trustees."

In making investments (including in Wyly family businesses and a fund run by Sam's son-in-law) and in purchasing lavish personal use items accessed and enjoyed by the trust beneficiaries, the trustees always followed the directions of the trust protectors, who received their marching orders from Sam and Charles.

The trusts were designed to be non-grantor trusts for federal income tax purposes. The trusts' governing instruments were properly drafted to accomplish this purpose. Because these were foreign, non-grantor trusts, none of the income generated by and retained in the trusts would be subject to U.S. income tax. At least that's what Sam and Charles thought.

The Court first observed that the trustees had powers of disposition in respect to beneficial enjoyment potentially giving rise to grantor trust treatment under IRC Section 674(a), but then said the trustees were ostensibly independent within the meaning of Section 674(c). The Court concluded, however, that the Section 674(c) independent trustee exception (which, if it applied, would have rendered Section 674(a) inapplicable) didn't apply because the trustees' powers of disposition weren't solely exercisable by them. Taking note of the facts that: (1) the trustees invariably followed the directions of the trust protectors; (2) in giving directions to the trustees, the trust protectors invariably followed the instructions of Sam and Charles; (3) the trust protectors were explicitly empowered to remove and replace the trustees; and (4) Sam and Charles had close relationships with the trust protectors, the Court reached this conclusion, despite the fact that Sam and Charles had no legal right to control the trust protectors.

In the end, the Court had no difficulty concluding that economic realities, rather than the literal terms of the underlying trust instruments, should control the income tax status of the trusts. The Court was convinced Sam and Charles, as trust seniors, effectively controlled the actions of the trustees. The result was that, since the Section 674(c) independent trustee exception didn't apply, the trusts were treated as grantor trusts, a disastrous result that ultimately forced the Wyly brothers into bankruptcy.
The foregoing decisions demonstrate the ability of the Courts to reach similar results in circumstances involving unassailable trust instruments coupled with maladministration. The assessment of any trust must include a careful consideration of the realities of its administration.