Federal Judge’s Comments In Willow Grove PFAS Case Suggest Time May Be Approaching When Pennsylvania (And Other States) Will Finally Deem These Chemicals “Hazardous Substances”

Fill the airplane with fire-fighting foam

Last week, Law360 reported on a hearing that occurred in the Federal District Court for Eastern Pennsylvania before Judge Gerald Pappert concerning PFAS.  The hearing concerned a motion to dismiss brought by the United States Navy of class action claims against it in two cases.  In each case, the plaintiffs sued the Navy demanding medical monitoring due to exposure to two PFAS compounds, PFOA and PFOS.  These two compounds are found in groundwater contaminated by the historical use of AFFF fire fighting foam by the Navy at the Willow Grove Naval Air Station in Montgomery County, Pennsylvania.  The two cases in question are Kristen Giovanni et al. v. U.S. Department of the Navy, case number 2:16-cv-04873, and Dorothy Palmer et al. v. U.S. Department of the Navy, case number 2:17-cv-00765.

The plaintiffs based their claim for medical monitoring of residents exposed to contamination (along with other potential claims) by referring to a Pennsylvania statute called the “Hazardous Sites Cleanup Act”, or HSCA.  Basically, this is Pennsylvania’s so-called “mini-Superfund” statute.  HSCA at the Pennsylvania state level is similar to Superfund or CERCLA at the federal level in that before HSCA claims even can be pursued, HSCA requires that the particular contaminant which is the source for the claim be designated as a “hazardous substance” under Pennsylvania’s Solid Waste Management Act (SWMA). To date, neither PFOA nor PFOS has been so designated.

While Judge Pappert has not yet ruled on the issue, the Law360 article contains strong quotes from last week’s hearing in which the Judge appears to be skeptical that a claim for HSCA-based medical monitoring can be sustained in Pennsylvania in the absence of a “hazardous substance” designation, either legislatively or regulatorily.  The following quote from Judge Pappert is highly instructive:  “This issue has been on the front burners in Pennsylvania for quite a while, I’m aware, but the General Assembly has to this point not addressed it.”  Judge Pappert then added, “I can’t rely on a law which doesn’t say what your claim needs it to say. Isn’t your remedy in Harrisburg?”

Based on those quotes, it is highly probable that Judge Pappert will not allow the plaintiffs’ medical monitoring claims to proceed unless one of two things happen.  Either the Pennsylvania Legislature must add PFOA and PFOS to that State’s “hazardous substances” list legislatively, or the Pennsylvania Department of Environmental Protection (PADEP) must do so from a regulatory capacity.  In Pennsylvania, the PADEP also has jurisdiction to so designate.

Neither of these two actions would be likely to happen quickly – even if there were the political will in Pennsylvania to do so.  Both take time, which means that the Giovanni and Palmer cases may be headed toward dismissal by Judge Pappert, at least temporarily.  Alternatively, the Judge might  decide to hold them in abeyance to give State governmental authorities time to consider their options and react.

No matter what Judge Pappert rules, it is likely to sharpen the highly charged emotions surrounding the Willow Grove PFAS contamination.  Unlike many other locations in Pennsylvania and indeed around the world where PFAS either currently remains an abstraction or PFAS concerns are just beginning to appear, the residents around the former Willow Grove Naval Air Station have been dealing with this issue for years.  The groundwater contamination already has resulted in public protests and other civilian unrest.

Outside of Pennsylvania, other states are moving on their own. For example, New Jersey already has made clear that it intends to move in this direction regardless of what happens in its neighbor Pennsylvania or nationally.

The predictable movement towards action by individual states is further bolstered by the inertia in Washington.  Neither the United States Congress nor the Environmental Protection Agency (EPA) has yet added substances like PFOA and PFOS to the federal hazardous substances list.  While bills have been introduced in Congress to do that, they have not progressed very far.

Should any compound make the federal Superfund list of “hazardous substances”, the effect would be significant.  First, liability for contamination would be strict, joint and several, without regard to fault, and with very few permissible defenses.  Second, similar liability would attach to most every state that has a separate mini-Superfund statute as well.

As PFAS concerns grow, it seems to be only a matter of time before PFAS substances like PFOA and PFOS wind up on both the federal list of “hazardous substances” and the separate lists of many states.  Therefore, all parties should act accordingly.

Contrary to what many property owners or PFAS dischargers think, there are options available to lessen both the scope and the likelihood of PFAS-related claims, or at least to minimize the costs and the potential health effects, ill will, bad publicity and other attendant issues.  These options should be taken carefully and proactively, and only after consultation with experienced professionals.

If you have questions on this blog post, please contact Marty M. Judge, or any member of the Flaster Greenberg’s PFAS Task Force.

End of Year Reminder – IRC Section 409A

New Year 2020 Loading Bar Concept

As the year is quickly coming to an end, it is especially prudent to review compensation arrangements from an Internal Revenue Code section 409A perspective. Generally, Section 409A applies to “deferred compensation” arrangements between a “service recipient” and a “service provider.”  The service recipient and service provider relationship may include the employer-employee relationship, and an employer’s relationship with its independent contractors.

Background.  Section 409A’s impact can be very broad and all-encompassing.  Effectively, any compensation arrangement where an employee (or other service provider) earns compensation by providing services to an employer in one taxable year, but is paid such compensation in a later taxable year, constitutes “deferred compensation” subject to Section 409A. Types of compensation arrangements that may be subject to Section 409A include (but are not be limited to) the following:

  • Annual or other multi-year bonuses earned in one year (g., 2019), but will be paid in a later year (e.g. 2020 or later)
  • Fringe Benefits provided by means of reimbursement of employee-incurred expenses if reimbursements occur in a later year than they were incurred
  • Severance arrangements paid (including health benefits) in years later than the year in which the employee separated employment
  • Non-qualified equity compensation plans that may provide for the grant of discounted equity (stock option plans, stock plans, phantom equity plans, etc.) with delayed vesting and exercise schedules

To be clear, “deferred compensation” arrangements are permitted under the Tax Code; however, such arrangements must be compliant with the complex rules underlying Section 409A.  In general, an election to defer compensation must be made in the year prior to which the compensation is earned, it must be in writing, and such compensation may then only be payable on “permitted distribution events” (i.e., death, disability, a specific date, change in control event, and separation of service) or within the “short-term deferral period.”  The “short-term deferral period” consists of the 21/2 month period following the end of the tax year in which an employee vests in compensation.

Section 409A Penalty. If subject to a Section 409A violation, the employee (or service provider) will be required to pay a current tax on any vested amounts of deferred compensation whether or not such compensation has been actually paid to the employee.  Additionally, the employee will be subject to an additional tax equal to 20% of the applicable deferred compensation amount, plus another interest-based tax amount (i.e., underpayment tax).  Deferred Compensation arrangements must be compliant from a documentary perspective as well as an operational perspective.

Not too late to correct potential issues Section 409A for 2019.  Employers and employees should review their compensation arrangements – from a documentary and operational perspective – to determine if they may be paying “deferred compensation.”  If employees earning their compensation in 2019 will be paid such compensation in 2020, then a deferred compensation arrangement may exist unless it is paid within the “short-term deferral period.”  Employers and their employees should review these plans or consult with an attorney to ensure these arrangements are compliant with Section 409A.  It is important for employees to review their compensation arrangements as well because the Section 409A penalty is assessed on the employee, and not the employer.

Additionally, employers and service recipients who intend to pay deferred compensation based on services being provided in 2020, (i.e., compensation earned during 2020 will be paid in 2021 or a later year), should make sure that such arrangements are compliant with Section 409A.  As previously mentioned, elections to defer compensation must be in place in the tax year prior to the year in which the compensation is earned – this would mean that compensation being deferred on account of services performed during 2020 should generally be in place by the end of the 2019 tax year.

If you have any questions or need more information about IRC Section 409A, please contact Eric Loi, member of Flaster Greenberg’s Taxation and Employee Benefits & Executive Compensation Departments. 

 

 

What the %@#&? Supreme Court Strikes Down Ban on Immoral or Scandalous Trademarks

istock-136562318-trademark.jpg

The Supreme Court struck down the Lanham Act’s prohibition on registering “immoral or scandalous” trademarks in its recent decision in Iancu v. Brunetti. Erik Brunetti is an artist who created a clothing line that uses the trademark FUCT. When he sought to register the mark, the U.S. Patent and Trademark Office (“USPTO”) denied his application, citing the Lanham Act’s prohibition on registering trademarks that contain immoral or scandalous matter. It is not hard to imagine that the mark would bring to mind perhaps the most famous four-letter curse word in American culture. Brunetti appealed and argued that the prohibition violates the First Amendment.

The Supreme Court agreed with Brunetti and held that the Lanham Act’s prohibition on registering immoral or scandalous trademarks is unconstitutional because it discriminates on the basis of viewpoint. By way of example, the Court pointed out how the USPTO registered the mark “D.A.R.E. TO RESIST DRUGS AND VIOLENCE” but refused to register “BONG HITS 4 JESUS” because it “suggests that people should engage in an illegal activity [in connection with worship]” and since “Christians would be morally outraged by a statement that connects Jesus Christ with illegal drug use.”

The Supreme Court’s rationale follows the same line of thinking from its decision in Matal v. Tam, two years ago, when the Court held that the ban on registering marks that “disparage” any person living or dead was unconstitutional. In that case, the Court also held that if a trademark registration bar is viewpoint-based, then it is unconstitutional under the First Amendment.

Does this mean that American consumers are likely to see an influx of brand names containing lewd, sexually explicit, and profane slogans? Not necessarily. While the Lanham Act’s prohibition had prevented the registration of immoral or scandalous marks, there is nothing that previously prevented individuals or businesses from using immoral or scandalous marks in commerce and enforcing the mark against potential infringers. Registration simply provides trademark owners with additional, valuable benefits such as the legal presumption of national ownership of a trademark. In other words, the landscape for offensive marks being used in the marketplace is unlikely to change too much, but owners will have an easier time protecting and enforcing these types of marks.

Questions? Let Eric know.

Eric ClendeningEric Clendening is a member of Flaster Greenberg’s Intellectual Property and Litigation Departments. He focuses his practice on intellectual property litigation and commercial litigation, including contract disputes, employment litigation, and other commercial disputes. He also advises clients on protecting and enforcing intellectual property rights online, including the resolution of domain name disputes and matters concerning e-commerce, online speech and conduct, and related intellectual property issues involving trademarks and copyrights.

Stairway to Retrial: 9th Circuit Court of Appeals Cites Error in Led Zeppelin Infringement Ruling

Vintage Radio Microphone with Vinyl Records

In 2016, a California jury decided that Led Zeppelin’s “Stairway to Heaven” did not infringe on Randy Wolfe’s “Taurus”.  However, the 9th Circuit Court of Appeals reviewed that decision and has now called for a do-over, citing reversible error in evidentiary rulings by the trial judge.  In particular, the Court of Appeals stated that the trial judge erred by failing to advise the jury that, while specific elements of a song are not protected, a combination of those elements could be protected, as well as prohibiting Wolfe’s camp from playing the actual recordings.

It has long been accepted that individual notes, chords, scales, rhythms and harmonies, as well as content in the public domain, are not protectable elements of a song.  However, the trial judge, U.S. District Judge R. Gary Klausner, failed to instruct the jury that, while these elements may not individually or separately constitute copyrightable material, a combination of these elements could well be original enough to make out a case for a protectable copyright.  Ninth Circuit Judge Richard Paez stated, in pertinent part:

Nowhere did the jury instructions include any statements clarifying that the selection and arrangement of public domain elements could be considered original. Jury Instruction No. 20 compounded the errors of that omission by furthering an impression that public domain elements are not protected by copyright in any circumstances. This is in tension with the principle that an original element of a work need not be new; rather, it need only be created independently and arranged in a creative way. See Feist Publ’ns, 499 U.S. at 345, 349; see also Swirsky, 376 F.3d at 849. Jury Instruction Nos. 16 and 20 in combination likely led the jury to believe that public domain elements—such as a chromatic scale or a series of three notes—were not protectable, even where there was a modification or selection and arrangement that may have rendered them original.

This error was compounded by the trial court, according to the Ninth Circuit, when it also barred the jury from hearing the actual songs during the trial.

The district court excluded the sound recordings under Federal Rule of Evidence 403, finding that “its probative value is substantially outweighed by danger of . . . unfair prejudice, confusing the issues, [or] misleading the jury . . . .” Fed. R. Evid. 403. Here, the district court abused its discretion in finding that it would be unduly prejudicial for the jury to listen to the sound recordings in order to assess Page’s access to “Taurus.” The district court acknowledged that the recordings were relevant to whether Page had access to “Taurus,” as Page would have heard and allegedly copied a recording of “Taurus.” The district court was concerned, however, that allowing the jury to hear the recordings would confuse them.

While it is understandable for the trial judge to be concerned that listening to both songs in their entirety, when many of the individual elements are not protectable, could confuse the jury, the Ninth Circuit did not feel that this potential prejudicial effect outweighed its probative value.  While not explicitly stated, the Ninth Circuit may well have been suggesting that there would be no prejudice if the parties and their experts do their job in properly explaining the permissible and non-permissible elements.

However, the Ninth Circuit also suggested another reason that the songs should be played to the jury; specifically, that there could be probative value in the jury merely observing the reactions of the parties while the songs are being played.

Although the jury could still draw conclusions and inferences from Page’s demeanor during his testimony, allowing the jury to observe Page listening to the recordings would have enabled them to evaluate his demeanor while listening to the recordings, as well as when answering questions. Limiting the probative value of observation was not proper here, as the risk of unfair prejudice or jury confusion was relatively small and could have been reduced further with a proper admonition. For example, the district court could have instructed the jury that the recordings were limited to the issue of access and that they were not to be used to judge substantial similarity.

It seems inconceivable that Jimmy Page, Robert Plant and/or John Paul Jones are going to have any reaction while listening to the recordings, let alone any reaction that should lead a juror to draw any conclusion.  All of the parties have heard both versions numerous times prior to trial and, thus, there will certainly be no surprise.  The parties will also be even better prepared for testimony during the new trial.  They will be cognizant that any reaction could impact the outcome, as the court has signaled that any reaction is now something to look out for.

As the song goes, “There’s a feeling I get, when I look to the west.”  In this case, that feeling is that playing both songs in this California Federal Courthouse may confuse the jury and lead to a different result.

Questions? Let Jeff know.

Jeff Cohen is a member of Flaster Greenberg’s Litigation, Intellectual Property, Corporate and Real Estate Practice Groups. He has been a trial attorney for more than 23 years, counseling and representing a diverse range of clients in matters related to commercial contracts, shareholder and partnership agreements, trademarks, copyrights, patents, including Hatch-Waxman, insurance coverage, franchise disputes and commercial construction.

Gifts and Medicaid: Gifting to Children and Grandchildren

Clients often ask me, can they make gifts to their children and grandchildren without a problem concerning Medicaid?  Often, what they have in mind is the $15,000 annual exclusion, which is a federal provision, not a Medicaid regulation. The $15,000 annual exclusion permits a taxpayer to give up to $15,000 away per year without being required to file a gift tax return. Married couples may split gifts and currently give up to $30,000 per person per year if they both agree.

But the federal tax rules and the Medicaid rules are “apples and oranges” in this case. Different rules apply here for Medicaid than for tax purposes. While a gift of less than $15,000 would not require a federal gift tax return, even small gifts, payments of medical and educational expenses of others, and gifts to children and grandchildren and others, of any amount, can jeopardize Medicaid coverage for long-term care for New Jersey residents.  This is because of the rules which apply during the five year Medicaid look back period. If there are any gifts made by the Medicaid applicant within the five years immediately preceding the filing of the applicant’s first Medicaid application, all of the gifts made during that five year period will be totaled and a Medicaid penalty period corresponding to the value of the total gifts will be imposed. Due to the Medicaid penalty period, Medicaid will generally deny coverage for long-term care, for a period of time corresponding to the total amount of all of the gifts made during the five years immediately prior to the filing of the Medicaid application.  Under the current New Jersey policy, even if some of the gifts are returned, the total amount of all of the gifts made during the lookback period can be subject to a Medicaid penalty period. This can have disastrous results on a Medicaid application.

For example, assume that Billy and Sue are husband and wife and they together make $92,000 in gifts to their children between February 1, 2012 and January 31, 2017. If a Medicaid application was filed for Billy in the month of February, 2017, even if $90,000 of the gifts are returned by the children back to Billy and Sue, a Medicaid penalty in the sum of $92,000 can be imposed on Billy and Sue because that was the amount of the total gifts made during the five year Medicaid look back period for Billy.

Fortunately, there are sometimes strategies available to push back against this very harsh result.  When filing any Medicaid application in New Jersey, consulting with an experienced elder law attorney is advised.

Questions? Let Jane know.

 

Jane Fearn-Zimmer is a shareholder in the Elder and Disability Law, Taxation, and Trusts and Estates Groups. She dedicates her practice to serving clients in the areas of elder and disability law, special needs planning, asset protection, tax and estate planning and estate administration. She also serves as Chair of the Elder & Disability Law section of the NJSBA.

 

 

Medicaid and Gifts

Medicaid will not pay for long term or home and community based care during a Medicaid penalty period. A penalty period will generally be imposed where uncompensated gifts have been made during the five years immediately preceding the filing of the Medicaid application. This period is known as the Medicaid lookback.  The length of the penalty period is computed based on the total amount of gifts during the look back period. Under the current Medicaid divisor, approximately one month of ineligibility is imposed for every $10,000 given away during the lookback period.

Many applicants are unaware that there is a rule, which applies to Medicaid applications filed in New Jersey after May 26, 2010, as well as to Medicaid applications filed in other states, including Ohio, preventing recalculation of the penalty period where some, but not all of the gifts made during the lookback period, were returned. The rule, as stated in New Jersey, is found in Medicaid Communication 10-06 and requires that the penalty period cannot be decreased for the returned gifts unless all of the assets given away have been returned.  This rule can have very harsh consequences, which are illustrated in a recent case from Ohio.

In Paczko v. Ohio Dept. of Job & Family Servs., (2017 OH 9024 (Oh. Ct. App., 8th Dist., Cuyahoga County, No. 105783, Dec. 14, 2017), an elderly woman transferred the sum of $146,122 to a trust, which would benefit her children. She later applied for Medicaid during the five year lookback period. The sum of $89,227.38 was returned from the trust to the elderly woman to pay for her care. She sought to reduce the original Medicaid penalty period computed on the total transfers during the preceding five years, by the sum of the returned gifts.  At the Board level, the Ohio Medicaid agency gave her limited for her returns, and denied her request for additional credit for all of the gifts returned. Her appeal was denied at both the Staff Hearing Officer and Court of Common Pleas levels.

While the Paczko case is not binding on the New Jersey courts, the case is a good illustration of what can happen when there is a partial return of gifts without further planning and a Medicaid application is filed within the five year lookback period. The take away from Paczko is that, in New Jersey, as in Ohio, applicants for Medicaid re well-advised to be mindful of the “no credit for partial returns” rule and to consult an attorney before filing any Medicaid application, or proceeding to a Medicaid Fair Hearing, to determine what solutions may be available.

Questions? Let Jane know.

 

Jane Fearn-Zimmer is a shareholder in the Elder and Disability Law, Taxation, and Trusts and Estates Groups. She dedicates her practice to serving clients in the areas of elder and disability law, special needs planning, asset protection, tax and estate planning and estate administration. She also serves as Chair of the Elder & Disability Law section of the NJSBA.

 

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