By Scott Hall, Mari Clifford, Sabrina Larson, Amber Leong, and Bina Patel

Now that July 1, 2023 has passed, and the California Privacy Rights Act (“CPRA”) is in effect, California Attorney General Rob Bonta has indicated his intent to ensure compliance with the new statute by sending out letters to certain California companies—particularly those with numerous California employees—to ascertain compliance with the CPRA’s requirements for employees and job applicants. Enforcement of these provisions may move forward even though enforcement of certain CPRA regulations has been postponed until early next year as detailed in our previous client alert.

Please contact Scott Hall at shall@coblentzlaw.com or Coblentz Data Privacy & Cybersecurity attorneys if you receive a letter regarding your privacy compliance practices and would like assistance in responding.

By Scott Hall, Mari Clifford, Sabrina Larson, Amber Leong, and Bina Patel

You are likely aware of headlines spreading the news of a recent Superior Court of California decision that has delayed the enforcement of the California Privacy Rights Act (“CPRA”) regulations until March 29, 2024. However, while the enforcement of the regulations has been delayed until March of next year, the CPRA itself remains in effect (since January 1, 2023) and is enforceable. 

On June 30, 2023—the eve of the July 1, 2023 enforcement date of the CPRA regulations—a California state court judge granted an injunction delaying enforcement of the CPRA regulations until March 29, 2024. The court found that the regulations could not be enforced on July 1, 2023 because this did not give the adequate one-year notice from March 29, 2023, when the regulations were published. See Cal. Chamber of Comm. V. Cal. Privacy Protection Agency, 34-2023-80004106-CU-WM-GDS (Cal. Sup. Ct. June 30, 2023). Specifically, the court found that the voters who enacted the CPRA by ballot initiative intended businesses to have a 12-month grace period between the adoption of final regulations and their enforcement. Id. Accordingly, the court held that enforcement of any final regulation under the CPRA must be stayed for a period of 12 months from the date that individual regulation becomes final. For the first set of CPRA regulations that became final on March 29, 2023, that means enforcement must wait until March 29, 2024.

Takeaway: While this may seem like a nine-month reprieve, this should not be the time for companies to halt or delay CPRA compliance efforts. The CPRA itself is still in effect and enforceable even if the regulations are not. If businesses have not already done so, they should use this opportunity to finalize compliance under the CPRA and its current regulations. Additionally, this decision indicates that businesses will have a year to put into place compliance processes for any new regulations promulgated in connection with the CPRA going forward (e.g., for automated decisionmaking, data impact assessments, and other regulations still forthcoming), which is good news for businesses and compliance officers. 

The landscape of data privacy laws is constantly changing—with new states enacting new data privacy laws each week. By staying on top of CPRA compliance needs now, businesses will be in a better position to pivot quickly to adjust to new applicable state laws and new regulations yet to be issued under the CPRA.  

If you have any questions about CPRA compliance or other privacy issues, please contact Scott Hall at shall@coblentzlaw.com or Coblentz Data Privacy & Cybersecurity attorneys.

By Sabrina Larson and Christopher Wiener

On June 8, 2023, the Supreme Court issued a unanimous decision in Jack Daniel’s Properties, Inc. v. VIP Products, limiting the scope of a parody defense to a trademark infringement claim.

The Takeaways

• The test for likelihood of confusion must be applied where an infringer uses a trademark as a trademark to identify the source of its goods, even if it claims that use is a parody, rather than the First Amendment analysis applicable to the use of marks in expressive or artistic works.
• The use of a mark as a parody does not shield an infringer from a dilution claim (alleged based on famous marks) where it uses the trademark as a trademark, to identify the source of its goods.

Background

VIP makes and sells a line of dog toys called “Silly Squeakers” designed to look like and to parody popular beverage brands, including toys named Dos Perros, Smella Arpaw, and Doggie Walker, to name a few. At issue here is VIP’s “Bad Spaniels” toy, designed to evoke the distinctive Jack Daniel’s brand and bottle:

In addition to the overall trade dress of the bottle and label, the Bad Spaniels toy mimics numerous specific elements of the Jack Daniel’s bottle, many of which are registered trademarks. For example:

• “Bad Spaniels” instead of “Jack Daniel’s”
• “The Old No. 2 On Your Tennessee Carpet” instead of “Old No. 7 Tennessee Sour Mash Whiskey”
• “43% poo by vol.” and “100% smelly” instead of “40% alc. by vol. (80 proof ).”

As the Supreme Court wryly summarized, the “jokes did not impress” Jack Daniel’s. It claimed both trademark infringement and dilution.

Use of Someone Else’s Trademark in Expressive Works: The Rogers Test

VIP defended its use of the Jack Daniel’s trademarks under the First Amendment—claiming that the Bad Spaniels toy is an “expressive work.” It claimed that the Rogers test applied to its use of the trademarks and that as protected speech, the typical analysis for trademark infringement, whether the use of the trademark creates a likelihood of confusion as to the source of the goods, did not apply to the Bad Spaniels toy.

The Rogers test dates to a 1989 case from the Second Circuit, Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989), and has since been applied by courts in many circuits to analyze use of trademarks in “expressive works,” where trademark rights and free speech rights under the First Amendment intersect. Rogers addressed potential infringement in the context of titles of expressive works—Ginger Rogers claimed Fellini’s film title incorporating her name was an infringement. The court disagreed, reasoning that the “expressive element of titles requires more protection than the labeling of ordinary commercial products.”

Although Rogers dealt with titles of creative works, the test has since been applied broadly to the use of trademarks within an artistic or expressive work. When it is applied, Rogers requires dismissal of infringement claims where the trademark is used in an expressive work—without turning to a likelihood of confusion analysis—unless (i) the use of the mark has no artistic relevance to the underlying work or (ii) the use of the mark explicitly misleads as to the source or content of the work. The lead-up to the Bad Spaniels decision involved extensive debate over whether the Rogers test should be stricken or modified.

Jack Daniel’s Trademark Infringement Claim

The Supreme Court did not overrule the Rogers test, but it clarified that the test does not apply when the alleged infringer uses the trademark as a trademark—i.e., as a source-identifier for its own goods. Rogers remains a “cabined doctrine” applying only when the defendant uses the mark in a non-source identifying way. Here, the Court concluded, VIP was using the Bad Spaniels trademarks as trademarks, to identify the source of the VIP dog toy products, a point that VIP had earlier conceded in the case. Accordingly, the only question that remains is whether the Bad Spaniels trademarks are likely to cause confusion with the Jack Daniel’s trademarks as to the source of each party’s products.

The Supreme Court remanded the case to determine the question of likelihood of confusion. The issue of parody was, however, not resolved. While it cannot be analyzed under the Rogers test, VIP’s claimed use of the marks as parody will be relevant to likelihood of confusion. A successful parody must conjure up the original work while also creating a contrast, to make the message of ridicule or humor clear. If parody is done successfully, it is typically not likely to create confusion.

Jack Daniel’s Dilution by Tarnishment Claim

Jack Daniel’s also claimed that the Bad Spaniels toy constituted dilution by tarnishment of its famous trademarks. Dilution applies where the asserted trademark is famous—widely recognized by the public as designating the source of goods. 15 U.S.C. § 1125(c). Dilution can occur where an infringer uses a famous trademark for unrelated goods, creating an association that harms the reputation of the famous trademark: that is, for Jack Daniel’s, the association of its whiskey with dog excrement.

A statutory exception to dilution is where the use of the trademark is “noncommercial.” VIP argued that its Bad Spaniels toy, despite being sold to consumers, was a noncommercial use because it parodied Jack Daniel’s. The Court held, however, that the use of a trademark is not necessarily noncommercial simply because it parodies another’s product. Instead, it again matters whether the trademark is being used as a trademark, to designate the source of goods.

The Takeaways Revisited

The Bad Spaniels decision narrows defenses that rely on the parodic nature of the use of the trademark. Instead, even if the intended use is a parody, the traditional trademark infringement analysis of likelihood of confusion will apply if the trademark is used to designate the source of the goods. Likewise, the noncommercial exception to a dilution claim cannot be invoked simply because the use is an intended parody. Parody is and remains, however, relevant to the likelihood of confusion analysis. Those who engage in parodies should carefully consider whether the parody is being used as a source identifier of their own goods or services—and if it is, to carefully consider whether it is likely to cause confusion. Meanwhile, the Rogers test remains intact, applying, as it traditionally has, in instances where the parody is not being used as a trademark.

To view a PDF version of this article, please click here.

A Comprehensive Look at New Developments in Data Privacy Laws

By Scott Hall, Mari Clifford, Sabrina Larson, Amber Leong, and Bina Patel

Download a PDF version of this report here.

It has been a busy start to 2023 on the data privacy front: from new privacy laws being passed in several states and going into effect in others, to increases in privacy litigation and data breaches. Businesses need to be aware of new developments, new legal requirements, and steps that should be taken to comply with these laws and reduce business risk.

Our Spring / Summer 2023 Privacy Law Report highlights some of the most important privacy developments to be aware of for the coming year.

What the report covers:

• New State Privacy Laws
• California’s Upcoming Age-Appropriate Design Code Act
• Comprehensive Federal Privacy Law?
• EU-US Privacy Framework Status
• Trends in Privacy Litigation and Enforcement
• Health Privacy
• Biometric Privacy Laws
• SEC Cybersecurity Rule
• Data Breach Response

You can download the full report here. If your company needs assistance with any privacy issues, Coblentz Data Privacy & Cybersecurity attorneys can help. Please contact Scott Hall at shall@coblentzlaw.com for further information or assistance.

By Kyle Recker

Additional developments relating to the Silicon Valley Bank and Signature Bank failures have occurred, and the situation continues to evolve. Upon the closure of Silicon Valley Bank the FDIC initially created the Deposit Insurance National Bank of Santa Clara, into which it immediately transferred all insured deposits. The FDIC has subsequently established Silicon Valley Bridge Bank, N.A. (SVBB), a temporary national bank that will continue operations as a full-service bank. This is the same form of bridge bank that the FDIC utilized at the outset for Signature Bank when it formed Signature Bridge Bank N.A. (SBB). The FDIC has now transferred all insured and uninsured deposits at Silicon Valley Bank, as well as substantially all of the bank’s other assets and obligations, to SVBB.

Both SVBB and SBB are continuing to perform their obligations under all contracts, which are backed by the FDIC and the full faith and credit of the United States, and all counterparties are likewise expected to continue fulfilling their contractual obligations to each bank.[1] Earlier this week, the FDIC appointed Tim Mayopoulos as CEO of SVBB. Mr. Mayopoulos subsequently released a statement assuring customers that the bank is open for business, opening new accounts, making new loans, and fully honoring existing credit facilities.[2] A statement on the Signature Bank website also states that SBB is still “providing a full suite of loan, deposit, and banking services.”[3]

At this time, it seems that the FDIC’s strategy is to keep operations at both banks as intact as possible so that the banks can either be recapitalized or sold whole. During a call with Silicon Valley Bank clients on Wednesday, Mr. Mayopoulos reportedly implored them to move deposits to SVBB, and indicated that if they keep their deposits with other institutions then “that clearly limits the range of options.”[4] If a recapitalization or sale does not materialize with respect to either bank, liquidation remains a possibility. As covered in our previous alert, the FDIC retains the authority to halt lending operations and repudiate contracts and leases, as it determines to be in the best interests of the receivership, and may dispose of the bank’s assets in a piecemeal fashion. Those with ties to either bank should continue to monitor the situation.

Also on the horizon is a potential bankruptcy or other liquidation or restructuring event for Silicon Valley Bank’s parent company, SVB Financial Group, in which the parent company’s non-bank businesses and assets may be sold or otherwise administered.

For questions regarding any potential claims, or assistance evaluating existing credit facilities, leases, and other contracts to determine whether any actions may be appropriate in connection with recent events, please contact Kyle Recker at krecker@coblentzlaw.com or another member of the Coblentz team.

To view a PDF version of this article, please click here.

 

[1] See FDIC Financial Institutions Letter FIL-10-2023.

[2] A copy of this statement is available here.

[3] See https://www.signatureny.com/home.

[4] See this article at CNBC.

By Kyle Recker

By now, most will have heard the news that all deposits at Silicon Valley Bank have been made available to depositors. The Federal Deposit Insurance Corporation (FDIC), in a series of joint statements issued with the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System, announced that all deposits at Silicon Valley Bank – both FDIC-insured and uninsured deposits – have now been transferred to the Deposit Insurance National Bank of Santa Clara, a newly-created bank established by the FDIC.¹ 

New York regulators also shut down Signature Bank on Sunday, March 12, 2023, and appointed the FDIC as receiver. Similar to Silicon Valley Bank, both FDIC-insured and uninsured deposits have been transferred to Signature Bridge Bank, N.A., which will be operated by the FDIC as a full-service bank while it is marketed for sale to potential buyers.

The Systemic Risk Exception

The protection of all deposits at Silicon Valley Bank and Signature Bank, rather than only FDIC-insured deposits, was made possible by the so-called “systemic risk exception” (SRE). The SRE was created by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDIC Improvement Act), which prohibited the protection of uninsured deposits if the cost of the resolution of a failed bank to taxpayers would be increased as a result.² The SRE allows the FDIC to bypass this limitation by invoking the SRE if the Secretary of the Treasury, with the recommendation of the boards of the FDIC and the Federal Reserve System, determines that there would otherwise be “serious adverse effects on economic conditions or financial stability.” On Sunday, the FDIC invoked the SRE for Silicon Valley Bank and Signature Bank.

Bank Term Funding Program

The recent invocations of the SRE specifically apply to Silicon Valley Bank and Signature Bank; it does not mean that uninsured deposits at other financial institutions would be fully protected in the future (unless similar actions are taken). To restore confidence in the liquidity of the U.S. banking industry, the Federal Reserve Board also announced that it is establishing a new program known as the Bank Term Funding Program.³ Any FDIC-insured deposit institution may borrow funds under the program by depositing certain eligible securities with the Federal Reserve Banks as collateral, which will be valued at par rather than current market value. Advances are available for terms of up to one year, in amounts equal to the par value of the collateral. This will allow financial institutions to temporarily access liquidity equal to the par value of their securities which have lost market value, and currently represent unrealized losses a bank would be forced to realize now if it needed to sell the securities on the market (which essentially is what caused the run on Silicon Valley Bank).

Implications for Non-Depositor Stakeholders

The invocation of the SRE provides relief to impacted depositors, but borrowers, landlords, and other stakeholders of these institutions remain in uncertain positions. Prior to passage of the FDIC Improvement Act in 1991, the typical practice of the FDIC was to retain and manage troubled assets of failed financial institutions itself. But this approach proved to be too costly and complex. Now, the FDIC strategy is to seek a buyer of a failed bank’s assets and liabilities as soon as possible, and before a bank actually fails, allowing a different financial institution to continue operations relatively seamlessly from the perspective of depositors and most other stakeholders.

In situations where an acquisition is not immediately possible, there are two key alternatives available to the FDIC. One option is to create a temporary national bank known as a “bridge bank” that can continue normal operations under the FDIC’s control while the FDIC markets the bank to potential bidders. The other option is to form a Deposit Insurance National Bank, which is a bridge bank but with more limited operations than a temporary national bank.⁴ The FDIC recently utilized both of these options in creating the Deposit Insurance National Bank of Santa Clara (in connection with Silicon Valley Bank) and Signature Bridge Bank, N.A. (in connection with Signature Bank).

It remains possible that the FDIC will find buyers of substantially all of the assets and liabilities of each bank, including their loan portfolios, in the coming days and weeks. As of the date of this publication, HSBC has already been lined up to acquire the operations of Silicon Valley Bank in the United Kingdom (for only £1). But what will it mean for non-depositor stakeholders if no buyers step up soon?

FDIC Servicing of Assets; Contract & Lease Repudiation

It is the FDIC’s responsibility to service the assets of a failed financial institution while under receivership until the assets are sold, and it has a number of operational mandates that apply to servicing those assets, such as maximizing the return from their sale, minimizing the amount of realized losses, and preserving availability and affordability of housing for those with low and moderate incomes.⁵ It also has broad latitude in determining liquidation strategies, and the power to repudiate contracts and leases entered into by the failed institution before entering receivership.⁶ This means the FDIC has the flexibility, within its operational mandates, to elect to terminate outstanding loan commitments, to dishonor letters of credit, and to terminate branch and office leases, among other things.

Borrower Concerns

As noted above, the FDIC is responsible for servicing the assets under receivership until those assets are sold. This includes servicing existing loans and outstanding loan commitments. It is FDIC policy to transfer day-to-day servicing of any retained loans to national servicers within 90 days of the financial institution’s failure while the FDIC continues efforts to fully liquidate the institution’s loan portfolio. A number of disposition strategies may be used by the FDIC in the liquidation process, including bulk sales and securitization.⁷ 

To be clear, borrowers should not expect any relief from fulfilling their contractual obligations owed under their credit facilities with a failed financial institution. But on the flipside, given the flexibility the FDIC has to cancel outstanding loan commitments, borrowers should also understand that advances may not be available under lines of credit or construction and development loans. The FDIC will analyze funding requests to determine if a requested advance is in the best interests of the receivership. For example, the FDIC may determine that it is necessary to fund all or a portion of the requested advance in order to preserve the value of collateral or maximize recovery. However, the FDIC’s role as receiver generally precludes it from continuing lending operations.⁸ 

Borrowers also should be aware that Signature Bank provided cash management services in connection with commercial real estate loans as the clearing bank and cash management bank. Lenders may soon be seeking a replacement to Signature Bank if a sufficiently creditworthy buyer does not assume the bank’s obligations under the relevant account control and cash management agreements. Some borrowers also may have selected Silicon Valley Bank as a clearing bank, and should also expect that replacement may be required.

Landlord Concerns

While the FDIC has the power to repudiate leases, that does not necessarily mean it will do so for all leases or that it will do so immediately. For example, all Silicon Valley Bank and Signature Bank branch locations are now open for business and operating as branches of the applicable bridge bank under the FDIC’s control and, so long as those branches remain open to the public, landlords remain entitled to contractual rent until such time as notice of repudiation is given. To the extent leases are actually repudiated, landlords will have a claim against the receivership estate for any unpaid rent due as of the date the FDIC was appointed receiver.⁹ The extent of recovery for claims for unpaid rent will depend on the extent of funds ultimately recovered by the FDIC from liquidation and made available to various classes of creditors.

Some landlords also may hold letters of credit delivered by tenants in lieu of cash security deposits. As with outstanding loan commitments, the FDIC has the ability to repudiate funding obligations under issued letters of credit. Unless the issuer’s obligations are assumed by a purchaser, landlords should not expect that attempts to draw on such letters of credit will be honored and should consider demanding replacements from tenants. Even if the issuer’s obligations are assumed, landlords should consider whether the buyer is of adequate credit quality before determining not to require a replacement letter of credit.

Other Stakeholders

Borrowers and landlords are not the only stakeholders aside from depositors that may be impacted by receivership of a failed bank. Other stakeholders include counterparties to swaps and other derivatives transactions, parties to purchase contracts (real property or otherwise), service providers, suppliers, and various other secured and unsecured creditors, as well as investors. But note that the actions being taken by the FDIC and the Federal Reserve in connection with the Silicon Valley Bank and Signature Bank failures are expressly not designed with the protection of investors and unsecured creditors in mind.

The FDIC will establish a process for submitting proofs of claims in the receivership proceedings sometime in the near future, and potential claimants should consult with counsel to preserve their positions within the receivership proceedings as they progress. FDIC receiverships typically are administered in ways that are similar to state court receiverships or bankruptcy cases, but they are not governed by state law or the bankruptcy code.

For questions regarding any potential claims, or assistance evaluating existing credit facilities, leases, and other contracts to determine whether any actions may be appropriate in connection with recent events, please contact Kyle Recker at krecker@coblentzlaw.com or another member of the Coblentz team.

To view a PDF version of this article, please click here.

 

[1] FDIC press releases may be accessed here.
[2] To read more about the history behind the passage of the Federal Deposit Insurance Corporation Improvement Act of 1991, refer to this 2013 article by Noelle Richards of the Federal Reserve Bank of Philadelphia.
[3] A copy of the term sheet for the program is available here.
[4] For a more complete discussion of the FDIC strategies, refer to Chapter 6 of Crisis and Response: An FDIC History, 2008-2013.
[5] See 12 USC §§ 1821(d)(13)(E) and 1823(d)(3)(D).
[6] See 12 USC § 1821(e).
[7] See Crisis and Response, linked in footnote 4, above.
[8] See A Borrower’s Guide to an FDIC Insured Bank Failure.
[9] See 12 USC § 1821(e)(4)(B).

By Jessica Wilson

Structuring a family’s investment activities can be complex. Across assets, activities, relationships and the particular circumstances of each family member-investor, a family office will typically provide a spectrum of services. While the role of the family office is, in part, to substitute the range of independent advisors needed, structuring a family office in a tax-efficient manner can be difficult due to the limitations that the tax law places on related persons and managing one’s own investments. One such limitation has been the inability to deduct trade or business expenses related to the family office. However, recent court cases offer new guidance to family offices that may entitle taxpayers to a deduction for trade or business expenses if the family office is structured properly.

Background

Lender Management, LLC v. Commissioner of Internal Revenue, T.C. Memo. 2017-246 (2017), provides family offices with a potential way to obtain trade or business expense deductions under Internal Revenue Code (the “Code”) Section 162 in connection with rendering investment management services.

Prior to tax reform legislation enacted in December of 2017 (the “2017 Tax Act”), Code Section 212 allowed taxpayers to deduct expenses incurred for the production or collection of income, to the extent such expenses exceeded 2% of the taxpayer’s adjusted gross income. The 2017 Tax Act suspended miscellaneous itemized deductions under Code Section 212 from 2018 through 2025.

Code Section 162, on the other hand, has not been suspended. Section 162 allows a taxpayer to claim as a deduction all of the ordinary and necessary expenses paid or incurred by the taxpayer during the taxable year in carrying on a “trade or business.” For example, payment of salaries and other compensation is deductible as a trade or business expense. However, it has long been held that an investor is not, by virtue of activities undertaken to manage and monitor his or her own investments, engaged in a trade or business.

Therefore, given the suspension of deductions under Section 212, it would be beneficial for the owners of income-producing activities if those activities were treated as a trade or business expense for tax purposes rather than as an investment activity engaged in for the production and collection of income.

Lender Facts

A recent case that many taxpayers and practitioners have been relying on to work around the suspension of Code Section 212 is Lender Management, LLC v. Commissioner. The Lender case involved a family business consisting of multiple LLCs. Every LLC at issue in Lender was co-owned, whether individually or through an entity, by the child, grandchild or great-grandchild of the family patriarch, or by the spouse of one of those people. Lender Management, LLC (“Management LLC”) directed the investment and management of assets owned by three investment LLCs, each of which were owned by Lender family members. Management LLC was also owned indirectly by two Lender family members. Management LLC owned only a minority interest in the investment LLCs.

The operating agreements of the investment LLCs provided Management LLC with a profits interest as compensation for its services to the extent that it successfully managed its clients’ investments. While Management LLC was owned by, and provided services to, Lender family members, it also held itself out as an active management entity to various governmental authorities, clients, investment banks, hedge funds and private equity funds. While each investor in the investment LLCs was in some way a member of the Lender family, Management LLC’s clients did not act collectively. The Tax Court noted that they were geographically dispersed, and some of them were even in conflict with each other. Thus, it did not simply make investments on behalf of the Lender family group. It provided investment advisory services and managed investments for each of its clients individually, regardless of the clients’ relationship to each other.

The Tax Court found that Management LLC was engaged in a trade or business for purposes of the deduction under Code Section 162. The Tax Court focused its attention on the activities of Management LLC and the family relationship among the investors. While family relationships are generally subject to heightened scrutiny, Lender Management’s activities and the positive facts in this case satisfied the Tax Court and the deduction under Section 162 was allowed.

Hellmann

About a year after the Lender decision, the Hellmann family petitioned the Tax Court for a similar issue. However, the Hellmann family had less favorable facts.

The Hellmanns were a group of family members who owned and operated GF Family Management, LLC (“GFM”). Like Lender, the issue raised in Hellmann was whether GFM was engaged in a trade or business within the meaning of Section 162, which would entitle it to claim ordinary business expense deductions for its operating costs. The IRS, as it did in Lender, argued that GFM was not engaged in a trade or business.

The Hellmann case eventually settled without a ruling, so it cannot be certain how the Court would have ruled. Prior to settlement, however, the Tax Court issued an order outlining some of its preliminary thoughts, which highlighted the differences between Hellmann and Lender:

• There were four Hellmann family members related to the court case; they all resided in the same city, had a good relationship, and the family office made investment decisions for the group as a whole. While the Lender family members, on the other hand, were geographically dispersed, in some cases did not get along or did not know each other at all, and the family office made decisions for each family member separately.
• The Hellman family members owned 99% of the relevant investment partnerships, and each of the four family members held a 25% interest in the family office. In contrast, the Lender family office did not own a significant portion of the LLCs it managed, and most of the family members who invested in the LLCs did not have an ownership interest in the family office.

Concluding Thoughts

While the Lender case does provide a helpful look at what the Tax Court views as a valid trade or business for purposes of deducting expenses under Code Section 162, it is important to keep in mind that the facts are key. The structure in Lender may not be the typical family office structure, but for clients with the appropriate expertise and family structure, Lender potentially provides an avenue for deducting family office expenses under Section 162.

Each family office attempting to deduct expenses under Section 162 should analyze its unique circumstances in connection with these cases. This article was authored by Jessica Wilson. If you are interested in establishing a family office, restructuring an existing family office to fit within this guidance, or would like to learn more about ways to maximize value to your family, please contact Jessica Wilson at jwilson@coblentzlaw.com or James Mitchell at jmitchell@coblentzlaw.com.

To view a PDF version of this article, please click here.

By Peter Wang

This alert updates our initial alert on the CTA published on March 1, 2021, to reflect the final rule published by the Financial Crimes Enforcement Network (FinCEN) bureau of the U.S. Department of the Treasury on September 30, 2022.

On January 1, 2021, Congress passed the Corporate Transparency Act (CTA) as part of the 2021 National Defense Authorization Act. The CTA requires most private companies formed in the U.S. or registered to do business in the U.S. to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) bureau of the U.S. Department of the Treasury. Although the CTA is intended to eliminate the anonymity of individuals that use shell companies for illegal activities, the reporting requirements will affect legitimate private companies. Companies should be aware of and prepare for the new reporting requirements to avoid civil and criminal penalties for failure to file the information when required.

FinCEN was tasked with adopting regulations detailing how the CTA would be implemented.  On September 30, 2022 FinCEN published its final rule implementing the CTA’s requirements for reporting.

Who Must Report?

Companies that are required to report their beneficial owners and applicants to FinCEN under the CTA are:

• Any domestic corporation, limited liability company, or other entity (limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships and business trusts) that is created by the filing of a document with a secretary of state or similar office (including an American Indian tribal office).
• Any foreign corporation, limited liability company, or other entity (limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships and business trusts) that is formed under the laws of a foreign country and registered to do business in any state or tribal jurisdiction by filing of a document with a secretary of state or similar office (including an American Indian tribal office).

Legal entities that are not created by the filing of a document with a secretary of state or similar office, including certain trusts, are excluded from the reporting requirements.

Who is Exempt from Reporting?

Twenty-three types of entities are exempt from the reporting requirements, most of which are regulated entities already required to report beneficial ownership information to regulators. The 23 types of exempt entities are Securities Issuers; Domestic Governmental Authorities; Banks; Domestic Credit Unions; Bank Holding Companies and Savings and Loan Holding Companies; Registered Money Transmitting Businesses; Broker-Dealers; Securities Exchange or Clearing Agents; Other Exchange Act Registered Entities; Registered Investment Companies and Advisers; Venture Capital Fund Adviser; State-Regulated Insurance Companies; State-Licensed Insurance Producers; Commodity Exchange Act Registered Entities; Public Accounting Firms; Public Utilities; Financial Market Utilities; Pooled Investment Vehicles; Tax Exempt Entities; Entities Assisting Tax Exempt Entities; Large Operating Companies; Subsidiaries of Exempt Entities; and Inactive Entities.

Large operating companies may also be exempt. For the large operating company exemption, the entity must have:

• 20 or more full-time employees in the U.S.;
• Operating presence at a physical office in the U.S. (not including a residence or shared space, except spaces shared with affiliates); and
• Filed a tax return in previous year showing more than $5 million in U.S.-sourced gross receipts or sales.

Certain subsidiaries may also be exempt. For the subsidiary exemption, if a reporting company is directly or indirectly owned by one or more exempt entities and an individual is a beneficial owner of the reporting company exclusively by virtue of such individual’s ownership interest in the exempt entity, the reporting company’s report should list the name of the exempt entity in lieu of the beneficial ownership information of such individual.

What must be Reported?

Reporting companies must file a report with FinCEN containing the following information regarding its “beneficial owners”:

• Full legal name;
• Date of birth;
• Current residential or business address; and
• Unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document), such as a driver’s license or passport.

For reporting companies formed or registered on or after January 1, 2024, the reporting company must also report the above information for “company applicants.”

Definitions of Beneficial Owner and Company Applicants

A “beneficial owner” is any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company.

An individual exercises “substantial control” over a reporting company if such individual:

• Serves as a senior officer (except for corporate secretary or treasurer);
• Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
• Directs, determines, or has substantial influence over important decisions made by the reporting company; or
• Has any other form of substantial control over the reporting company, including as a trustee of a trust.

The five exclusions from the definition of a beneficial owner include:

1. Minor children, if the child’s parent’s or guardian’s information is reported properly;
2. Individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
3. An individual acting solely as an employee who is not a senior officer;
4. An individual whose interest in an entity is only through a right of inheritance; or
5. Certain creditors.

“Ownership interests” includes equity interests in the reporting company, as well as capital or profit interests, convertible instruments, warrants or rights or other options or privileges to acquire equity, capital or other interests in a reporting company. Any debt instrument is also deemed to be an “ownership interest” to the extent it enables the holder to exercise the same rights as one of the specified equity or other interests in the definition of “ownership interests.”

When determining whether an individual owns or controls 25% or more of the ownership interests, the individual’s ownership interests should be aggregated and should be compared to the “undiluted ownership interests” of the reporting company. If options or profits interests are outstanding, they are deemed to be exercised and “in the money” for purposes of the 25% ownership test. If there is more than one class of equity interests outstanding, the 25% threshold is determined as a percentage of all outstanding interests if possible, but, failing that, more than 25% of any class of equity interests triggers the reporting requirement.

An individual may directly or indirectly own or control an ownership interest of a reporting company through a variety of means, including through the following, among others:

• Joint ownership with one or more other persons of an undivided interest in an ownership interest;
• Control of such ownership interest owned by another individual; and
• With regard to a trust or similar arrangement that holds an ownership interest:
  • acting as a trustee of the trust or other individual (if any) with the authority to dispose of trust assets;
  • being a beneficiary of the trust who (a) is the sole permissible recipient of income and principal from the trust, or (b) has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
  • being a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust: (a) through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities that separately or collectively own or control ownership interests of the Reporting Company, or (b) through any other contract, arrangement, understanding or relationship.

“Company applicants” are limited to two persons:

• The individual who directly files the document to create or register the reporting company; and/or
• The individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.

For example, if an attorney oversees the preparation and filing of incorporation documents and a paralegal files them, the reporting company would report both the attorney and paralegal as company applicants.

When are Reports Due?

Reporting companies created or registered before January 1, 2024 will have until January 1, 2025 to file their initial beneficial ownership reports with FinCEN. Reporting companies created or registered on or after January 1, 2024, will be required to file initial beneficial ownership reports within 30 days of formation or registration.

If there is any change with respect to required information previously submitted to FinCEN concerning a reporting company or its beneficial owners, including any change with respect to who is a beneficial owner or information reported for any particular beneficial owner, the reporting company is required to file an updated report within 30 calendar days of when the change occurred.

How Will Companies Report?

FinCEN is developing a Beneficial Ownership Secure System (BOSS) where the reports will be submitted electronically through an online interface. The BOSS will be secured to the highest information security protection level under the CTA. FinCEN intends to issue additional regulations governing who may access the information and what safeguards will be required to ensure that the information is secured and protected.

FinCEN will also publish reporting forms and guidance documents that companies will use to comply with their obligations under the CTA in advance of the date the reports are due.

What Happens if a Reporting Company Fails to Report?

Companies or individuals who violate the CTA will be subject to civil penalties of not more than $500 per day, capped at $10,000, and imprisonment of up to two years if an individual willfully provides false information or fails to report. Beneficial owners and senior officers of the reporting company can be held liable.

What Should I do Now?

Management of companies should determine if they are a reporting company and start compiling the required information on all of the beneficial owners and company applicants. They should also consider including the following in their company’s operative documents:

• A representation by each shareholder, member or partner, as applicable, that it will be in compliance with or exempt from the CTA;
• A covenant by each shareholder, member or partner, as applicable, requiring continued compliance with and disclosure under the CTA or to provide evidence of exemption from its requirements;
• An indemnification by each shareholder, member or partner, as applicable, to the company and its other shareholders, members or partners, as applicable, for its failure to comply with the CTA or for providing false information; and
• A consent by each disclosing party for the company to disclose identifying information to FinCEN, to the extent required by law.

Investment funds should consider adding similar representations and covenants by their investors to their subscription and management agreements. Lenders should also consider adding similar representations and covenants by their borrowers to their loan documents.

For questions, or to further discuss how to prepare your business to comply with the Corporate Transparency Act, please contact Peter Wang at pwang@coblentzlaw.com or any member of the Coblentz Corporate team.

 

 

 

By Hannah Jones, Anthony Risucci, Fred Alvarez

Beginning January 1, 2023, California will join a minority of jurisdictions that impose significant pay transparency requirements on employers. California’s law, however, goes further than existing mandates in Colorado, New York City, and other states and municipalities. In case you missed it, California’s new law was covered extensively in our previous alert.

To recap, SB1162 imposes four main obligations of California employers. First, employers with 15 or more employees must post pay scales on all job postings. Second, the new law will require all employers—regardless of size—to provide pay scale information to employees upon request. Third, employers must maintain pay history information for every employee for three years after termination. Finally, employers with more than 100 employees must submit annual “pay data reports” to the California Civil Rights Division by the second Wednesday of every May starting May 2023.

Failure to comply with SB1162’s pay scale mandates can result in civil penalties ranging from $100 to $10,000 per violation, depending on the circumstances. While the Labor Commissioner is authorized to assess and levy penalties, the new law also provides a private right of action for individuals to seek injunctive and “any other relief that the court deems appropriate” for violations. While the law has yet to be tested in court, and despite there being a private right of action, aggrieved employees may also attempt to claim the right to sue collectively under the California Private Attorneys General Act (PAGA)—a law that allows employees to pursue civil penalties on behalf of the state on a representative basis without meeting the rigorous requirements of class certification. Thus, non-compliance can lead to significant litigation exposure beyond just the penalty for one violation.

To assess whether your organization is ready for California’s pay transparency obligations and to protect against the litigation risks of non-compliance, consider the following:

1. Have you established the “pay scale” for all positions within your organization?
2. How will you set the “pay scale” range given factors like geography, experience and education, and will you follow the same formula for each role?
3. Do you have a process for responding to employee requests for pay scale information?
4. How will you draft job postings for remote positions that can be performed anywhere, including California?
5. Are you compliant with existing pay transparency laws (e.g., Colorado and New York City), and will you provide pay transparency information to applicants and employees outside of states that require it?
6. What additional pay records will you need to maintain beyond your current practice?
7. How will you respond to questions from existing employees that request pay information regarding where they sit in the pay scale?

While this is not an exhaustive list to help prepare for pay transparency in 2023, these are some of the key questions that each organization should consider and answer before the new year. Contact Coblentz Patch Duffy & Bass LLP’s Labor and Employment practice group for more information about pay transparency compliance.

By Sabrina Larson 

In December 2020, Congress passed the Trademark Modernization Act (the “TMA”), providing for numerous changes in the processes for registering trademarks and maintaining trademark registrations in the United States. Key elements of the TMA come into effect on December 1, 2022. This client alert discusses important terms of the TMA that companies should be aware of that provide new tools to clear unused trademarks from the U.S. Trademark Register and for the Trademark Office (the “USPTO”) to move applications through examination more efficiently.

Key terms of the TMA:

Office Action Response Time Shortened to Three Months
To-date, applicants for trademark registration have had six months to respond when the USPTO raises issues on an application (an “Office Action”). The TMA shortens the response time to three months. The TMA provides the option for Applicants to obtain one three-month extension to respond to an Office Action, for a $125 fee. This shortened response time is expected to significantly speed up the timing for obtaining trademark registrations.

Two New USPTO Ex Parte Proceedings
The TMA creates two new proceedings under which anyone can petition the USPTO to investigate the validity of a U.S. trademark registration. Under these so-called “ex parte” proceedings, a party can petition to have a trademark registration to be reexamined with regard to select goods or services, or expunged entirely, based on a reasonable investigation showing that the mark has not been used for some or all of the goods or services covered by the registration. The petition for expungement may be filed between 3 and 10 years after a mark is registered, and the petition for reexamination must be filed within 5 years of registration. These new Trademark Office proceedings create opportunities to clear the U.S. Trademark Register of registrations that are based on inaccurate claims of use in commerce in the United States. The proceedings are expected to be faster, more efficient, and less extensive (and generally less expensive) alternatives to more formal proceedings before the Trademark Trial and Appeal Board.

Trademark Litigation: Presumption of Irreparable Harm
The TMA creates a statutory nationwide uniform standard of a presumption of irreparable harm to be applied in trademark cases where the trademark owner establishes infringement. This resolves a previous circuit split among the courts and reduces the evidentiary burden on trademark owners seeking to obtain injunctive relief in litigation.

If you have any questions about the TMA or seek counsel regarding trademarks, please do not hesitate to reach out to Sabrina Larson.