The Learned Concierge
Welcome to your monthly legal insights on the trends impacting the Retail, Hospitality, and Food & Beverage Industries.
Bankruptcy:
Rite Aid Files Chapter 11 Bankruptcy
On October 15, 2023, Rite Aid filed a chapter 11 bankruptcy petition in the US Bankruptcy Court for the District of New Jersey. What once was the biggest drugstore chain in the US, valued at $13 billion at its height in 1998, has fallen to a measly $40 million market value today. The cause of the bankruptcy is based on a few factors: the deteriorating environment and market for drug stores; too much competition with bigger chains like CVS and Walgreens; and numerous legal battles regarding alleged filling of unlawful opioid prescriptions that helped fuel the nation’s crippling opioid epidemic.
The Bankruptcy Court approved the first day requests for financing and bid procedures on an interim basis. Rite Aid has reiterated that the stores currently remain open, but a priority of the bankruptcy case is to right size their footprint. At this stage, the Debtors have not provided insight into the locations that may be closed. The Debtors are coordinating two sale processes in bankruptcy—the sale of the (1) Elixir Pharmacy and (2) Rite Aid retail pharmacy. The bankruptcy is set on a quick track with the anticipated sale hearings for the assets scheduled before the end of the year 2023. Clark Hill will continue to monitor for updates.
Labor and Employment:
Tip Credits to Be Phased Out in Chicago
Chicago’s City Council passed the “One Fair Wage” Ordinance on October 6, 2023, which will gradually phase out the City’s “tip credit” regulations over a five-year period until they are eliminated completely by June 30, 2028. What does this mean for restaurant owners? Chicago employers will be required to increase employee minimum wages by a fixed percentage over the next five years and will not be able to offset wages by tips earned.
What is the potential impact on consumers? That remains to be seen, but impacts may include restaurants and bars passing along blanket service charges or increasing food and beverage prices. It may also result in layoffs or closures as owners struggle with increased labor costs.
Employees may see a widening of the pay gap between front end and back of the house workers as all workers will receive the same minimum wage, but tipped workers may still receive gratuities. For more information, visit here.
The US Department of Labor Enters a Consent Judgment Requiring Newport, R.I. Restaurants to Pay $554,000 in Back Pay and Liquidated Damages
The DOL (Department of Labor) issued a press release announcing the consent judgment reached with the owners of several Newport area restaurants, including Stoneacre Brassier, Stoneacre Gardens, Stoneacre Tapas and individual owners Christopher Bender and David Crowell. The federal lawsuit alleged that owners violated the Fair Labor Standards Act by: (i) improperly included managers and owners in tip pools and failed to pay the front-of-house employees participating in tip pools the minimum wage; (ii) failed to pay employees the correct overtime rate; and (iii) did not maintain adequate records of working hours for employees. The judgment included a back pay award of $283,061, a liquidated damages award of $270,519 and $11,419 in civil money damages. As a reminder, individual owners can be personally liable for wage violations even though the restaurant may be owned by a corporate entity.
Mandatory Workplace Protection Prevention Act Required in California: A First-of-its Mandate That will Impact Nearly Every Industry Open to the Public
California employers may wish to start preparing to implement Workplace Violence Prevention Plans (WVPP) and to train employees on workplace violence. California passed SB (Senate Bill) 553, which was signed by the Govenor and becomes effective on July 1, 2024. The new law will be administered by CAL/OSHA and has extensive requirements. It requires employers to train employees on workplace violence hazards, to maintain records of violent incidents, and to conduct periodic reviews of the effectiveness of the WVPP. It applies to all employers in California unless they are already covered by California’s Workplace Violence in Healthcare standard, or have employees that telework from a location that is not under the employer’s control, or whose workplace is not open to the public and the employer has 10 employees or less, or the workplace facility is operated by the California Department of Corrections or law enforcement agencies. For detailed information on the new law and its requirements, visit here.
Intellectual Property:
Starbucks And Workers United Clash Over the Right to Use Name and Logo
Starbucks has sued Workers United, the union that represents more than 360 of its unionized stores in the United States alleging trademark infringement. The dispute arose when members of the union or its affiliates posted messages of support for Hamas or Palestine. Starbucks received backlash from consumers, including hundreds of complaints, calls for boycotts, and vandalization of several stores. Starbucks argues that the public wrongly attributed the posts as a statement of Starbuck’s position on the turmoil in the Middle East and that the posts did not represent the Company’s views, positions or beliefs. To read more about the recently filed lawsuit here.
Violence/Theft in the Workplace:
CVS Shoplifting and Store Closings
Shoplifting and violence to employees and alleged shoplifters is taking its toll on retailers nationwide. “The shoplifting epidemic cost retailers nearly $100 billion in 2021, and the number of shoplifting complaints surged to more than 63,000 last year — a 45% jump over the roughly 45,000 reported in 2021 and a nearly 275% jump compared to the mid-2000s, police statistics show.”
CVS announced that it plans to close about 900 locations by the end of 2024, which represents nearly 10 percent of all its stores. This is part of CVS’ strategy to move much of its business online and away from potential thieves. The strategy has been fueled by a string of disturbing incidents, including the fatal shooting of CVS store manager Michael Jacobs, 49, in September by an accused shoplifter in Arizona.
Other CVS stores in urban areas are experiencing devastating amounts of theft. For example, the routine looting carried out on a Washington DC CVS is shocking as images emerge of entire shelves cleared by gangs of children, who reportedly target the store every day.
This trend is of course also true of other retail establishments that experience inventory loss through theft, vandalism, or violence. Some employers, such as Lululemon, have enacted strict “hands-off” policies of non-interference with thieves to protect their employees from harm or legal liability.
International Trade:
Tips for Shoring Up Supply Chain Contracts in Year 2023
Our Retail, Hospitality, Food & Beverage Core Team Member, Mark Ludwikowski authored a noteworthy article along with Clark Hill’s Kelsey Christensen published by Reuters Legal News: “How Can Retailers Shore Up their Supply Chain Contracts in 2023?”
Cyber/Privacy:
Small Business Remain Hot Target for Cyber Attacks
The Identity Theft Resource Center’s recent report found that 73% of respondents in their study reported having suffered a cyber-attack in 2022. Despite these numbers, the same study found that few small businesses are adopting cybersecurity best practices—with adoption rates for multi-factor authentication, mandatory strong passwords, and limits on access to sensitive data based on job duties only having been employed by 20-34% of small businesses.
Reminder: October was Cyber Security Month
Have you had your check-up yet?
White House Issues Sweeping Executive Order on AI (Artificial Intelligence)
On October 30, 2023, the White House issued a sweeping executive order on the safe, secure, and trustworthy use of artificial intelligence. Among the provisions in the order are: (1) requirements for those developing the most powerful AI systems to share their safety test results and other critical information with the U.S. government; (2) requirements for NIST (National Institute of Science and Technology) to develop standards, tools, and tests to help ensure that AI use is safe, secure and trustworthy; (3) requirements for the Department of Commerce to develop guidance for content authentication and watermarking to help Americans recognize AI generated content and prevent fraud; and (4) requirements to use AI to help develop AI tools to find and fix software vulnerabilities in critical software to help protect vital systems and infrastructure from cybersecurity threats.
Delaware Joins States with Comprehensive Consumer Data Privacy Laws
On Sept. 11, 2023, Governor John Carney of Delaware signed into law the new Delaware Personal Data Privacy Act. Advertised as the “strongest privacy bill in the nation,” the law adds to the growing complex tapestry of state data privacy laws now in place in the U.S. Those in the Retail, Hospitality and Food & Beverage Industry who collect consumer data will have a new set of regulations and procedures to follow if they do business in Delaware. To learn more, read Jason Schwent and Melissa Ventrone’s excellent article on the new law here.
The Securities and Exchange Commission (“SEC”) Charges SolarWinds Corporation’s Chief Information Officer with Fraud
On October 30, 2023, the SEC charged the Chief Information Security Officer of SolarWinds Corporation with fraud and internal control failures. The SEC alleged that from its initial public offering in 2018 through December 2020, the company was the target of a massive cyber-attack. Despite this, in its filings with the SEC, the CISO (Chief Information Security Officer) and SolarWinds only disclosed generic and hypothetical risks at a time when the company knew of specific deficiencies in SolarWinds’ cybersecurity practices and of the significant increased risk the company faced at that time. The statements made to the SEC were directly at odds with statements made internally which disclosed concerns with the security of its operations. Further internal communications revealed that SolarWinds and the CISO were aware of significant cybersecurity vulnerabilities but failed to resolve those issues or sufficiently raise them within the company.
Product Liability Law:
Avoiding Product Liability Claims
Retailers are routinely brought into product liability suits for multiple reasons, where they are left defending a product they didn’t design or manufacture. Fortunately, there are some common-sense steps that can be taken by the retailer in preparing for and defending product liability suits. A primer for retailers facing product liability claims is explored in the article “Common Sense and The Defense of Retailers in Product Liability Suits” by Clark Hill’s Barry Sutton.
