Manufacturing Updates - Spring 2021

Pullman & Comley, LLC

Welcome to Manufacturing Updates, Pullman & Comley’s new quarterly publication that summarizes important legal developments for manufacturers. Manufacturing Updates brings together insights from attorneys across our many practice areas serving the manufacturing sector, covering topics ranging from the laws governing employee health and safety, to renewable energy and environmental concerns, to negotiating protections in your contracts that safeguard your future business.

The events of the past year had a significant impact on all of us, and the manufacturing sector demonstrated true resilience as it implemented smarter technology to respond to supply chain challenges, navigated changing executive orders and legislation, and faced a host of new workplace issues operating in a public health crisis. As we emerge from the pandemic and take on the challenges and opportunities of our next normal, we look forward to continuing to be a resource to you. If you have questions on any of the issues covered in this newsletter, or any other legal topics, we invite you to contact us directly.

In this Spring 2021 issue of Manufacturing Updateswe cover…

Battle of the Forms: A Cautionary Tale for Suppliers
Failure to recognize, consider and overcome the "battle of the forms "at the contract formation stage may lead to disastrous results. Learn from this article why it’s critical to pay attention and negotiate the best protections you can get.

Top Five (5) Concerns Selling or Acquiring an Entity with Government Contracts
Contract review gets complicated when the selling entity has government contracts. This article provides additional considerations to address in the diligence process to minimize delays and maximize contract value.

Newsflash: Connecticut Remediation Regulations Published and Effective as of February 16, 2021
The 2021 revisions make a number of changes to the existing RSRs adopted in 1996 and amended in 2013, including those that address widespread polluted fill, groundwater, Licensed Environmental Professional approval of cleanups and criteria, and other regulatory provisions.

DOL Officially Axes Independent Contractor Rule of Previous Administration
It's official - the U.S. Department of Labor has withdrawn the Independent Contractor Rule that was to become effective on May 7, 2021. What does this mean?

Did You Know? The American Rescue Plan Act Includes a Mandatory COBRA Subsidy Provision that Imposes New Obligations on Employers
The American Rescue Plan Act (ARPA), signed into law in March 2021, requires employers to provide subsidized COBRA coverage to employees who qualify for and elect COBRA continuation coverage due to either a reduction in hours or an involuntary termination of employment. Employers must also comply with a host of complicated timelines and deadlines, and required notices must be sent to eligible employees by May 31, 2021.  

Protecting a Company's Most Valuable Assets: Its Trade Secrets, Employees and Customers
With the right agreements and precautions, a company can mitigate the misappropriation of important confidential information related to trade secrets, staff and customers

Electronic Signatures: The New Normal Amidst Remote Work
This alert addresses the rise in electronic signatures since the start of the pandemic, the laws governing the validity of electronic signatures and their limitations.

Analysis of Selected 2020 Changes in Connecticut Law Governing Business Entities
In an April 2021 Practical Guidance® article, Nancy Hancock addresses several noteworthy laws affecting businesses that were enacted during the abbreviated 2020 legislative session of the Connecticut General Assembly.  


Battle of the Forms: A Cautionary Tale for Suppliers

Your company has just been awarded its biggest contract ever and everyone in the sales department is joyously high-fiving each other. This contract for clips will put the company on a whole new growth trajectory now that Air National has accepted you as a preferred supplier. You know this because you just took the call from Air National’s EVP of Procurement, who said that she and her team were impressed with your company’s focus on quality. A confirmatory email follows with Air National’s first purchase order (PO) for 10,000 clips. This PO consists of two pages: the first is an order form which specifies part numbers, pricing, volume requested and dates of delivery; the second page contains Air National’s terms and conditions regarding delivery site, warranty and quality standards, change of specification process, product liability obligations to be imposed on your company and a clear expression that Air National has the right to seek recourse from your company for defective clips or clips that are not within specifications. There is also reference to a web address where the Air National Quality Manual can be found. This manual is incorporated into the Air National terms and conditions.

You immediately fire an email back to Air National with your invoice, which contains your company's own form of terms and conditions, confirming acceptance of the PO.  Your terms include a limitation of damages to the price paid under the contract for the parts, a limitation of remedy to repair or replacement of defective clips, a limited warranty which merely provides that the clips will be manufactured to the specs within tolerance and that process changes or product configuration changes are subject to negotiation on price. In your excitement to go into production with the clips, and your confidence that the relationship with your new customer will be long and productive, you never focused, or even thought about, the differences in the two sets of terms and conditions and the problems those differences could create. 

This scenario is repeated daily in production facilities across the country. What also is occurring more frequently is that original equipment manufacturers (OEM), under extreme pressure from their end-user customers, are asserting claims against their downstream suppliers based on quality and pricing issues. The terms and conditions that are applicable here have an enormous effect on the outcome of these claims. 

This means it's time for you to understand how the law deals with these differing sets of terms and conditions – the customer’s and yours.

The law describes this scenario as a “battle of the forms,” because the parties have crafted and delivered competing and conflicting writings. This scenario can produce a wholly unintended contract. While a fact finder, be it a judge, a jury or an arbitrator, may conclude that there was no contract because the parties’ minds never met on all essential terms, modern commercial law allows a fact finder to determine that a contract was formed even when there are contradictory terms and conditions passed back and forth. Implicit in this conclusion is that there was sufficient agreement to create a valid, binding contract. 

What does this mean? How can there be a contract with conflicting terms? And if there is a contract with terms in conflict, what happens to those terms when a dispute arises? The answer is found in UCC § 2-207, which provides a statutory basis for a court to eliminate conflicting terms and conditions in competing writings and to deem contractual only those terms that are consistent. See UCC § 2-207(3).

The biggest problem for downstream suppliers in this regard occurs when the customer’s terms and conditions acknowledge that you can be liable per UCC §2-715 for an award of incidental and consequential damages, but your terms and conditions say clearly and unambiguously that you will not be liable for these types of damages. Per UCC 2-207, both these provisions can be eliminated and replaced with a very broad right in favor of your customer. The result for you – liability for consequential damages – can be devastating. Imagine, for a moment, that one of the parts you shipped is defective, and as a result, your customer’s assembly line is shut down until the defective part is discovered and removed. The customer’s employees are called in, but are idled due to the shutdown and other parts suppliers or fabricators are halted in their work. For an error with a fifteen cent part, you could be facing millions of dollars of liability. Consequential damage claims just like this are regularly asserted by the big volume production companies because their customers specifically impose these charges on them and demand to be made whole if they suffer any loss in production or delay in supply.

Based on your failure to recognize, consider and overcome the battle of forms problem at the contract formation stage, you may be unwittingly assuming this type of liability with potentially disastrous results.

The lesson is this: pay attention at the contract formation stage to the battle of forms and where the terms and conditions of each party conflicts, negotiate the best protections you can get. You may not get any protections at all, but at least you will know what your exposures are and can plan for them accordingly – or you can walk away. And, of course, you may achieve sufficient protection to avoid the most disastrous of consequences, and that can be enough to conclude that the rewards are worth the risk. 

For assistance with these issues, contact Andrew Glassman, Co-Chair of Pullman's Business Organizations and Finance Practice.


Top Five (5) Concerns Selling or Acquiring an Entity with Government Contracts

Contract review is one of the most onerous (and important) processes in any due diligence process when buying or selling a company. We all know that those contracts are the backbone of many businesses - they document the relationships and operations of the business and are often the value of what a buyer is purchasing. This review process can get complicated when the selling entity has government contracts that may be governed by special rules known as the Federal Acquisition Regulations System (FAR). FAR was established to set forth uniform policies and procedures for acquisition by all executive branch agencies. 

Individual agency acquisition regulations may implement or supplement FAR, in addition to internal agency guidance. For example, the Department of Defense has certain certification requirements in order to establish security clearance for defense contracts. FAR reminds contractors that the government is acting on behalf of the American taxpayer in procuring goods and services for government agencies, and the individual contract officers act on behalf of the government to ensure that each contract benefits the government.

Buyers, sellers and their advisors should address government contracts as early in the diligence process as possible in order to expedite any required changes that might delay closing. In addition to a careful review of the contract terms and any specific agency regulations, below are just a few of the considerations:

  1. Address novation early. In an asset purchase, all contracts being purchased need to be assigned to buyer. Government contracts subject to FAR cannot just be assigned, the government requires what is called a novation. A novation is a three-way amendment to the contract entered into by buyer, seller, and the government that replaces the original contract. In order to request a novation, seller must submit a written request to the government contracting officer. The government contracting officer must then go through an internal process (including a 30-day wait) to evaluate whether it is in the government’s interest to recognize buyer as a successor in interest to seller. If approved, seller will prepare a novation agreement using the government’s form which will require that buyer accept all of seller’s liabilities under the contract and ratifies all actions taken by seller.  Seller will be required to guarantee buyer’s performance under the contract as it exists and as it may be amended. Parties should budget at least 45 days for the novation process, and more if there are additional requirements.  It is important to remember that the government is under no obligation to consent to a novation, so addressing the process early and openly is paramount.
  2. Ensure buyer is qualified. Government contractors must meet certain requirements to be eligible for government contracts. For example, contractors must generally be United States entities and cannot be owned by certain foreign persons. In many strategic acquisitions, buyer is already a government contractor qualified through the System for Award Management (SAM) registry. If buyer is not already qualified in SAM, then buyer will need to take steps to become qualified with the government prior to the transaction. This will include diligence on buyer’s ownership, parent company, and other relationships the government deems relevant to confirm that buyer can satisfactorily perform under the contracts. The government may also require evidence of financial ability to perform.
  3. Manage the timing of the transaction. If seller does significant government work it may be in a constant cycle of bidding on and receiving government contracts. A sale could impact current contracts and contracts under bid. Any change in ownership must be investigated and approved prior to a bid being awarded, which could either delay closing or result in forfeiting the contract.
  4. Alert and involve the contracting officer. If seller has multiple locations and multiple government contracts then it might be required to use a corporate administrative contracting officer (CACO) to deal with corporate management and perform certain functions on a corporate-wide basis. This person will need to be involved in the novation process and should be a member of buyer’s management team.
  5. Consider record retention policies. Seller is required by FAR to maintain certain records for a lengthy period of time, usually three or four years from the conclusion and final payment of the contract. These records can be voluminous and any failure to maintain these records could subject buyer to liability. Buyer should take steps to ensure that all necessary records are transferred post-sale.

By addressing these issues early, the parties can minimize any potential delay and maximize the value of government contracts which are likely already factored into the purchase price.

If you have any questions related to this article, please contact Business Organizations and Finance attorney Kelly O'Donnell.


Newsflash: Connecticut Remediation Regulations Published and Effective as of February 16, 2021

The long-awaited revisions to the Remediation Standard Regulations (RSRs) and to the Environmental Use Restriction (EUR) regulations were published by the Connecticut Secretary of State on February 16, 2021. The revised regulations are effective upon publication. These amendments to the regulations were sought by the Connecticut Department of Energy and Environmental Protection (DEEP) as part of its efforts to overhaul Connecticut’s remediation programs. The revised regulations are applicable to properties that are already undergoing remediation pursuant to state requirements as well as those properties that become subject to state requirements in the future.

The RSRs provide criteria for the remediation of polluted soil or groundwater as required by statute. The RSRs were initially adopted in 1996 and amended in 2013. The 2021 revisions make a number of changes to the existing RSRs, including those that address pesticide contamination, widespread polluted fill, groundwater volatilization criteria, Licensed Environmental Professional (LEP) approval of cleanups and criteria, use of background concentrations as criteria for cleanups, and clarifications of many other existing regulatory provisions.

The DEEP's regulations pertaining to Environmental Land Use Restrictions (ELURs) have been in place since 1996. ELURs are an accepted alternative to achieve remediation by restricting usage and/or requiring the preservation of certain protective structures (such as impermeable caps) as a way to prevent exposure to contaminants. The DEEP's proposed amendments in effect create a new application process as well as address the use of Notice of Activity and Use Limitations (NAULs) in addition to the ELURs. 

There are many forms, applications and processes associated with both sets of revised regulations that will need to be updated. DEEP states that complete applications received prior to February 16 will be honored, and DEEP reports that it is currently reviewing up to 40 revised forms pursuant to the new regulations. The agency expects to have the new forms and processes ready and published soon and asks the regulated community to check the DEEP website and watch for emails on this point. 

Further information can be found here.

Should you have any questions concerning these regulatory revisions, please feel free to contact one of the members of our Environmental Practice, including Jean Perry Phillips, Gary O’Connor or Lee Hoffman.


DOL Officially Axes Independent Contractor Rule of Previous Administration

It’s official – the U.S. Department of Labor has withdrawn the Independent Contractor Rule that was to become effective on May 7, 2021. The rule – proposed by the DOL during the Trump administration – had overwhelming support from business groups, as it would have given companies greater flexibility in classifying workers as independent contractors rather than employees. The withdrawal comes as no surprise. The Biden administration had previously delayed the effective date of the rule pursuant to a regulatory freeze on rules finalized towards the end of the previous administration. Shortly after issuing the delay, the DOL announced its proposal to withdraw the rule altogether. To learn more about the rule, read our previous blog post explaining its content.

The DOL received over 1,000 comments in response to its notice of the rule ’s proposed withdrawal. In addressing concerns from companies, trade associations, and business advocacy organizations that the DOL was attempting to eliminate the ability of employers to classify workers as independent contractors, the DOL stated that it “recognizes, and has always recognized, that there are bona fide independent contractors that do not fall under [the Fair Labor Standards Act].”

The rule’s withdrawal triggers the agency’s return to a multifactorial balancing test that, according to the DOL, has been used “for decades.” A major reason given for withdrawing the Rule is that it would have departed from legal precedent. Federal and state courts, and the DOL itself, have historically used an “economic realities” test — which considered a variety of factors but did not assign any of them more weight than others – to determine whether a worker is an independent contractor or employee under the FLSA. In departing from this multifactor test, the proposed rule would have elevated two “core factors” above the rest: (1) the nature and degree of control over the work and (2) the worker’s opportunity for profit or loss.

The rule’s primary purpose in elevating the two factors was to provide more clarity to the regulated community. Many business groups commented that employers are currently uncertain how to classify a worker under the Department’s economic realities test because they do not know how the DOL will evaluate all the different factors. In fact, the DOL’s primary sub-regulatory guidance states that a whopping seven factors should be used in the analysis.

Under new leadership, the DOL now disagrees that the proposed rule would have provided greater clarity. Rather, given the rule’s departure from court precedent, there is no telling whether courts would have deferred to the rule’s guidance. This could create conflicts among courts, and between courts and the DOL. In the current view of the DOL, the rule could therefore have actually resulted in greater uncertainty for employers.

In any event, the proposed new rule is off the table. What could have been will remain a mystery as the new administration shifts DOL policy back toward more employee-friendly rules. Only time will tell whether the DOL intends to create new guidance or regulation on the topic. In its withdrawal, the Department did not propose any new regulatory guidance to replace the rule. For now, employers should take the opportunity to evaluate potential misclassification risks under the DOL’s long-standing economic realities test.

For more information on this topic, or assistance with compliance review, contact any of the attorneys in our Labor, Employment, and Employee Benefits group.


Did You Know? The American Rescue Plan Act Includes a Mandatory COBRA Subsidy Provision that Imposes New Obligations on Employers

The American Rescue Plan Act (ARPA), signed into law in March 2021, requires employers to provide subsidized COBRA coverage to employees who qualify for and elect COBRA continuation coverage due to either a reduction in hours or an involuntary termination of employment. Employers are required to pay the eligible individual’s COBRA premium for coverage periods from April 1 through September 30, 2021. Our summary of the new COBRA subsidy rules is here.

The Department of Labor’s Employee Benefits Security Administration recently published a new webpage about the COBRA premium subsidy, including frequently asked questions (FAQs) and various model notices. Employers have until May 31, 2021, to provide the notice of the opportunity to elect subsidized coverage and individuals have 60 days following the date that notice is provided to elect subsidized coverage. Employers must take immediate action or they will face an excise tax for failing to comply, which can be as much as $100 per qualified beneficiary (no more than $200 per family) for each day the employer is in violation for the COBRA rules.

The DOL guidance is available here.

If you have any questions related to this article, please contact Employee Benefits attorneys George Kasper or Zachary Zeid.


Protecting a Company's Most Valuable Assets: Its Trade Secrets, Employees and Customers

Among its most valuable assets are a company’s trade secrets, staff and customers. But protecting these can be much more difficult than protecting equipment or inventory. With the right agreements and precautions, a company can mitigate the misappropriation of these valuable assets.

Trade Secrets

Trade secrets are generally defined as financial, business, scientific, technical, economic, or engineering information that has actual or potential independent economic value. The value is enhanced when the information is kept confidential and not generally known or ascertainable by others who could obtain economic value from the disclosure or use of that information. Federal law (18 U.S.C. §1831 et seq.) makes it a crime to wrongfully disclose, copy, steal, etc. a trade secret (with a few narrow exceptions) or to receive or accept trade secrets that were stolen and allows a court to impose significant fines and jail sentences for such activities. Connecticut law (C.G.S. §35-50) permits a court to grant injunctive relief if there is an actual or threatened misappropriation of a trade secret and to impose punitive damages if the misappropriation was “willful and malicious.” Both statutes require that the owner take reasonable steps to keep the information secret in order to be protected under the law.

The most common and important step that a company can take to provide clear evidence that it is taking reasonable steps to protect its trade secrets is to require employees, contractors, vendors, and any other people who may have access to a company’s trade secrets, to execute non-disclosure, or confidentiality, agreements. Such agreements should provide that the company’s confidential information, which would include trade secrets as well as employee information and other confidential data, must be kept confidential until it becomes public by legal means. The federal trade secrets law requires that such an agreement include language specifying certain exceptions to the prohibition on disclosing a trade secret including in connection with a government investigation or whistleblower situation. A non-disclosure agreement puts the other party to the agreement on notice that he or she is expected to protect confidential information and that the company will take action if the counterparty wrongfully shares it. Without non-disclosure agreements in place, a company may have a difficult time proving to a court that it took reasonable steps to protect its trade secrets.

In addition to non-disclosure agreements, company rules and policies should require that confidential information be protected by all employees. For example, computer systems should be protected from invasion by outside entities, company policy should prohibit removing trade secrets from the company’s offices, and access to trade secrets should be limited to employees with a need to know.

Non-Solicitation and Non-Competition Agreements

Companies that spend time and money training employees, such as manufacturers who need employees who are trained on high-tech equipment, cannot afford to lose those employees to competitors. There are some steps that employers can take to discourage the loss of employees to competitors. One such step is to have employees and vendors sign non-solicitation agreements. These agreements require employees to promise that if they leave the company they will not try to induce other employees to follow. Vendors and contractors may not be direct competitors but may still seek to hire good employees from a company; a company can require that these parties sign an agreement not to do so. Non-solicitation agreements may also be used to prevent employees, vendors or contractors from soliciting customers of a company.

Another common tool for minimizing the departure of employees who want to work for a competitor of the employer is a non-competition agreement, or “non-compete.” A non-compete between an employer and an employee restricts the ability of an employee to work for a competitor of the employer for some period of time after the employee ceases employment with the employer. If a former employee violates a non-compete, the employer can ask a court to enjoin the former employee from working for the competitor. Because a non-compete restricts an employee’s ability to earn a living, most courts throughout the U.S. require that the agreement protect a genuine interest of the employer in a reasonable way and be limited by time and/or geography. In Connecticut, there are specific professions for which non-competition agreements must be limited or are not permitted, including physicians, security guards, nurse’s aides, and media personalities. The Connecticut General Assembly is currently considering bills that would restrict the terms of non-competition agreements generally. Several other states have also modified their laws on the permissible extent of non-competition agreements, or restricted the enforcement of such agreements.

Companies should strongly consider taking steps to protect their trade secrets, their employees and their customers, but need to consult with an attorney conversant in the drafting of the necessary covenants in order to maximize a company’s ability to enforce them.

If you have any questions related to this article, please contact Business Organizations and Finance attorney Karen Wackerman.


Electronic Signatures: The New Normal Amidst Remote Work

With government-mandated stay-at-home orders and many people still working remotely, original wet-ink signatures on legal documents have become inconvenient and difficult to obtain. Electronic signatures are not a new phenomenon but with more people working remotely, the demand for electronic signatures used in commerce is more important than ever in order to conduct business and document transactions in a timely and reliable manner. The question many people have is whether electronic signatures are legally enforceable, and if so, what legal documents can be electronically signed, and how? This article explores the landscape of electronic signatures going forward.

Read the complete article written by Pullman Real Estate attorneys Joshua Cole and Potoula Tournas.


Analysis of Selected 2020 Changes in Connecticut Law Governing Business Entities

Governor Lamont's declaration of a public health and civil preparedness emergency on March 10, 2020 effectively suspended the 2020 legislative session of the Connecticut General Assembly. Despite an abbreviated term, several noteworthy laws affecting businesses were enacted. In a Practical Guidance® article written by Co-Chair of Pullman's Business Organizations and Finance Practice, Nancy A. D. Hancock, the summaries of these key laws are addressed, including:

  •  New environmental protection provisions 
  • Revisions to the Connecticut hemp program, and 
  • New bond authorizations for state capital projects and grant programs 

To read the complete article, including new and renewed states of emergency that expired on May 20, 2021, please click here.

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