BREAKING: Seventh Circuit Certifies BIPA Accrual Question to Illinois Supreme Court in White Castle

Yesterday the Seventh Circuit issued a much awaited ruling in the Cothron v. White Castle litigation, punting to the Illinois Supreme Court on the pivotal question of when a claim under the Illinois Biometric Privacy Act (“BIPA”) accrues.  No. 20-3202 (7th Cir.).  Read on to learn more and what it may mean for other biometric and data privacy litigations.

First, a brief recap of the facts of the dispute.  After Plaintiff started working at a White Castle in Illinois in 2004, White Castle began using an optional, consent-based finger-scan system for employees to sign documents and access their paystubs and computers.  Plaintiff consented in 2007 to the collection of her biometric data and then 11 years later—in 2018—filed suit against White Castle for purported violation of BIPA.

Plaintiff alleged that White Castle did not obtain consent to collect or disclose her fingerprints at the first instance the collection occurred under BIPA because BIPA did not exist in 2007.  Plaintiff asserted that she was “required” to scan her finger each time she accessed her work computer and weekly paystubs with White Castle and that her prior consent to the collection of biometric data did not satisfy BIPA’s requirements.  According to Plaintiff, White Castle violated BIPA Sections 15(b) and 15(d) by collecting, then “systematically and automatically” disclosing her biometric information without adhering to BIPA’s requirements (she claimed she did not consent under BIPA to the collection of her information until 2018). She sought statutory damages for “each” violation on behalf of herself and a putative class.

White Castle before the district court had moved to dismiss the Complaint and for judgment on the pleadings—both of which motions were denied.  The district court sided with Plaintiff, holding that “[o]n the facts set forth in the pleadings, White Castle violated Section 15(b) when it first scanned [Plaintiff’s] fingerprint and violated Section 15(d) when it first disclosed her biometric information to a third party.”  The district court also held that under Section 20 of BIPA, Plaintiff could recover for “each violation.”  The court rejected White Castle’s argument that this was an absurd interpretation of the statute not in keeping with legislative intent, commenting that “[i]f the Illinois legislature agrees that this reading of BIPA is absurd, it is of course free to modify the statue” but “it is not the role of a court—particularly a federal court—to rewrite a state statute to avoid a construction that may penalize violations severely.”

White Castle filed an appeal of the district court’s ruling with the Seventh Circuit.  As presented by White Castle, the issue before the Seventh Circuit was “[w]hether, when conduct that allegedly violates BIPA is repeated, that conduct gives rise to a single claim under Sections 15(b) and 15(d) of BIPA, or multiple claims.”

In ruling yesterday this issue was appropriate for the Illinois Supreme Court, the Seventh Circuit held that “[w]hether a claim accrues only once or repeatedly is an important and recurring question of Illinois law implicating state accrual principles as applied to this novel state statute.  It requires authoritative guidance that only the state’s highest court can provide.”  Here, the accrual issue is dispositive for purposes of Plaintiffs’ BIPA claim.  As the Seventh Circuit recognized, “[t]he timeliness of the suit depends on whether a claim under the Act accrued each time [Plaintiff] scanned her fingerprint to access a work computer or just the first time.”

Interestingly, the Seventh Circuit drew a comparison to data privacy litigations outside the context of BIPA, stating that the parties’ “disagreement, framed differently, is whether the Act should be treated like a junk-fax statute for which a claim accrues for each unsolicited fax, [], or instead like certain privacy and reputational torts that accrue only at the initial publication of defamatory material.”

Several BIPA litigations have been stayed pending a ruling from the Seventh Circuit in White Castle and these cases will remain on pause going into 2022 pending a ruling from the Illinois Supreme Court.  While some had hoped for clarity on this area of BIPA jurisprudence by the end of the year, the Seventh Circuit’s ruling means that this litigation will remain a must-watch privacy case going forward.

Article By Kristin L. Bryan of Squire Patton Boggs (US) LLP

For more data privacy and cybersecurity legal news, click here to visit the National Law Review.

© Copyright 2021 Squire Patton Boggs (US) LLP

Court Rejects Netflix’s Challenge to Poaching Injunction

In the latest blow against Netflix’s aggressive recruiting practices, a California appellate court has affirmed a trial court’s injunction against Netflix and in favor of Twentieth Century Fox Film Corporation (“Fox”), thus permanently barring the streaming giant from poaching Fox executives by inducing them to breach their fixed-term employment contracts.

Netflix challenged the injunction, which was issued two years ago under California’s Unfair Competition Law (“UCL”), on two grounds. Netflix argued that there are triable issues of fact as to whether: (1) Fox had suffered damages; and (2) Fox’s employment contracts were void as against public policy. The Court of Appeal rejected both arguments, finding that the extent of damages to Fox was not relevant to its UCL claim. The Court also rejected Netflix’s public policy arguments, noting that there is well-settled law that fixed-term contracts are beneficial to both employers and employees and that, in any event, the challenged contractual provisions can be severed, even if they are in any sense unenforceable or unlawful.

The Court of Appeal also rejected Netflix’s challenges to the trial court’s permanent injunction, which barred Netflix from soliciting employees who are subject to fixed-term employment contracts with Fox or inducing such employees to breach their fixed-term employment contracts. Specifically, the Court rejected the argument that the injunction was vague or overbroad because Netflix had failed to explain the basis for the objection at the summary judgment hearing, despite having been given ample opportunity to do so. The Court also rejected Netflix’s argument that the injunction resulted in specific performance of personal services contracts, pointing out that the injunction only applied to Netflix’s tortious conduct—and did not bind any current or former Fox executives.

This decision follows a similar ruling late last year, when a trial court ruled in favor of our client Viacom in its anti-poaching lawsuit against Netflix.

A holding the other way for Netflix could have upended the way California employers solicit and retain employees, especially in the entertainment industry, where fixed-term employment agreements are relatively commonplace. Although the recent Court of Appeal decision is unpublished, it presumably sends a strong message to those who would poach the employees of a competitor who are subject to fixed-term employment agreements.

Article By Anthony J Oncidi, Philippe A. Lebel, and Dixie M. Morrison of Proskauer Rose LLP

For more labor and employment legal news, click here to visit the National Law Review.

© 2021 Proskauer Rose LLP.

SCOTUS Shelves Request to Review 11th Circuit Dark Tower Decision, Ending Copyright Saga

The Supreme Court’s refusal to review the Eleventh Circuit’s decision in DuBay v. King marks an end to a 4-year copyright battle concerning the lead character of Stephen King’s acclaimed series, The Dark Tower.  The Eleventh Circuit’s decision affirmed that the King’s anti-hero, Roland Deschain, is not substantially similar to William DuBay’s The Rook comic book character, Restin Dane. The decision illustrates the complexity of literary copyright infringement disputes, where a claim is brought based on a mix of original and stock character elements.

In 2017 William DuBay’s heir, Benjamin DuBay, sued novelist Stephen King, Marvel Entertainment, Sony Entertainment, and others for various counts of copyright infringement, alleging that King copied DuBay’s artistic expression based on purported similarity between lead characters of The Rook (Restin Dane) and The Dark Tower (Roland Deschain). The district court granted summary judgment to King, determining (1) that any similarities between the characters comprise unprotectable general ideas and scènes à faire elements; and (2) that the protectable original character elements in dispute are different, such that “no reasonable jury…could find the works substantially similar.” DuBay appealed.

The principal issue on appeal was whether the district court erred in assessing substantial similarity.  DuBay argued that the characters were substantially similar based on several shared characteristics, including: (1) similar names; (2) interaction with time-travel related towers; (3) having a bird as a companion; (4) having knightly characteristics; (5) wearing Western-style clothing; (6) surviving a fictionalized interpretation of The Alamo; (7) the use of knives; and (8) traveling back in time to save a young boy who becomes a gunslinger. DuBay also argued that the unique combination of these elements made Dane a distinctive character, and that Deschain is a copy of DuBay’s artistic expression in that character.

The Eleventh Circuit addressed DuBay’s contentions in two parts.

First, the court assessed whether each of the claimed character elements merit copyright protection. The court affirmed the district court’s holding that “character names do not merit copyright protection,” since mere words and short phrases cannot be protected under copyright law.  The court reiterated that only original elements of a copyrighted work can be afforded protection, and that certain claimed elements (i.e., “knightly heritage,” time travel to “different times and parallel worlds,” “western attire,” “fictionalized Alamo histories,” and “knife wielding”) are merely general ideas or scènes à faire that are “too general to merit copyright protection.”  The court then reviewed the remaining elements to determine whether the shared characteristics rendered the characters substantially similar.  Although both characters may be broadly similar in having bird companions, a relationship to towers and tower imagery, and past time travel experiences involving the rescue of a young boy, the court found that the depiction of these elements was different in each work.  For example, whereas Dane lives in and travels via tower shaped structures shaped like the namesake chess piece, Deschain embarks on an endless mission to find an elusive Gothic tower that connects parallel worlds and time periods.  Because the portrayals of each original element are distinguishable, the court determined that no reasonable jury could have concluded that the works were similar.

Second, the court examined whether the characters are substantially similar based on each character’s combination of the claimed elements (or the “look and feel” of the characters).  The Court recognized of the potential dangers of comparing works based on individual similarities alone because an original combination of unoriginal elements can potentially sustain a claim of copyright infringement.  However, the court found that any similarities of combined elements were “superficial” at best, and that the “look and feel” analysis actually hurt, rather than helped, DuBay’s case by highlighting differences in expression of shared original character elements.

Takeaway:

The Supreme Court’s refusal to hear Dubay reinforces the basic tenet of copyright law that general ideas or scènes à faire cannot be protected by copyright.  It also reminds litigants that although a combination of original and non-original elements can be protected under copyright law, broad similarities are usually insufficient to sustain a copyright infringement claim.

The case is DuBay v. King, 844 Fed. Appx. 257 (11thCir. 2019), cert. denied, 142 S. Ct. 490 (2021).

Article By Spencer K. Beall and Margaret A. Esquenet of Finnegan

For more intellectual property legal news, click here to visit the National Law Review.

© 2021 Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

The Time Has Come for Trademark Modernization Act Regulations

On Dec. 18, 2021, regulations implementing the Trademark Modernization Act of 2020 (TMA) went into effect. Trademark owners and practitioners should be aware of the new procedures and ensure they are ready for the changes.

Trademark Modernization Act Regulations

Our posts “Three Things to Know About the Trademark Modernization Act of 2020” and “The Trademark Modernization Act of 2020: New Rules and Procedures” from March and May 2021, respectively, gave an overview of the changes that will be implemented with the act. Most notably, the TMA provides for new procedures to challenge trademark registrations based on nonuse – expungement, and reexamination. It is intended that the new ex parte expungement and reexamination proceedings will be faster and more efficient alternatives to cancellation procedures before the Trademark Trial and Appeal Board. You can read the final rule here.

Another significant change is the requirement for filers to verify their identity with the United States Patent and Trademark Office (“USPTO”). This is part of the USPTO’s efforts to protect the integrity of the register and combat fraudulent filings, which have been on the uptick. Beginning in early 2022, the following must verify their identity with the USPTO using one of the verification options that includes an electronic process by ID.me

Trademark owners and corporate officers not represented by an attorney, US-licensed attorneys (including in-house counsel), and Canadian attorneys or agents are required to verify their identity. Paralegals and other support staff working for an attorney must be sponsored by a verified attorney. Trademark owners who are represented by an attorney do not currently need to verify their identities to sign electronic forms sent by their attorney; however, if the representation by that attorney ends, the owners will need to submit to the verification process.

It is important that trademark holders and practitioners prepare for these new policies and procedures to ensure they can complete filings on a timely basis.

Article By Danielle M. DeFilippis of Norris McLaughlin P.A.

For more intellectual property legal news, click here to visit the National Law Review.

©2021 Norris McLaughlin P.A., All Rights Reserved

EPA’s Stormwater General Permit is Safe. Does it Matter?

A Colorado-based NGO has dropped its 9th Circuit lawsuit challenging EPA’s Multi-Sector General Permit for stormwater discharges associated with industrial facilities.

On one hand, this is a victory for EPA which apparently offered nothing to settle the case before the NGO threw up its hands.

On the other hand, the General Permit is only applicable in Massachusetts, New Hampshire and New Mexico, the three states that have not been delegated the authority to issue such a permit (as well as tribal lands and other lands not subject to state jurisdiction).

Why did the NGO bring this suit to begin with?  Did it hope that the Biden Administration EPA would, when push came to shove, do something dramatically different than the Trump Administration EPA?

Whatever the reason, the NGO has apparently concluded that the current law and permit give it plenty of grounds to bring suits over stormwater discharges in the 9th Circuit and elsewhere.  There are already several such imaginative suits pending on the west coast.

Are the regulators in Massachusetts less able to issue and enforce stormwater permits than than their colleagues in 47 other states?  The answer is of course not.  They are completely able and more able than most.  And they already have authority under state laws and regulations that are broader in their reach than the federal law.

But the Massachusetts legislature has stood in the way, apparently because it doesn’t want to bear the costs of regulating in this area borne by 47 other states.  Uncertainty and the threat, if not the actuality, of litigation has been the unfortunate result of this dereliction for the regulated community, including the municipalities in which we live.

We deserve better.

“The Center for Biological Diversity (CBD) is dropping its legal challenge to EPA’s industrial stormwater general permit that sought stricter regulation of plastics pollution after settlement discussions were unfruitful, according to an attorney familiar with the litigation.“

Article By Jeffrey R. Porter of Mintz

For more environmental legal news, click here to visit the National Law Review.

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

Senator Manchin Announces That He Will Not Support the Build Back Better Act – Where Things Stand Now

Today, December 19, 2021, Senator Joe Manchin (D., W.Va.) said that he opposes the Build Back Better Act, which effectively prevents its passage.  While there are no immediate prospects for the Build Back Better Act to become law, future tax acts tend to draw upon earlier proposals.  With a view to future tax proposals, this blog summarizes the final draft that was released by the Senate Finance Committee on December 11, 2021 (the “Build Back Better Bill”), and compares it to the bill passed by the House of Representatives (the “House Bill”) and the prior bill that was released by the House Ways and Means Committee in September 2021 (the “Prior House Bill”), which the House Bill was based on.  In light of Senator Manchin’s announcement, this blog refers to the bills in the past tense.

Summary of Significant Changes to Current Law in the Build Back Better Bill

Individual taxation

  •  A 5% surtax would have been imposed on income in excess of $10 million ($5 million for a married individual filing a separate return) and a 3% additional surtax would have been imposed on income in excess of $25 million ($12.5 million for a married individual filing a separate return). The surtax would have also applied to non-grantor trusts but at significantly lower thresholds – the 5% surtax would apply to income in excess of $200,000 and the 3% surtax would apply to income in excess of $500,000.  The individual income tax rates would have otherwise remained the same as under current law.
  • The 3.8% net investment income tax would have been expanded to apply to the active trade or business income of taxpayers earning more than $400,000. As a result, active trade or business income allocated to a limited partner of a limited partnership or a shareholder of a subchapter S corporation would have been subject to the net investment income tax. Under current law, the tax applies only to certain portfolio and passive income.  Under current law, a limited partner of a limited partnership and a shareholder of a subchapter S corporation is otherwise not subject to self-employment taxes.  The Build Back Better Act would not have had otherwise imposed self-employment taxes on S corporation shareholders or limited partners.
  • The exemption of gains on the disposition of “qualified small business stock” would have been reduced from 100% to 50% for taxpayers earning more than $400,000/year, and all trusts and estates.
  • “Excess business losses” in excess of $250,000 ($500,000 in the case of a joint return) would have been carried forward as business losses (thus remaining still subject to the limitation) and would not have been converted to net operating losses, and the excess business loss provision would have been made permanent. It currently is scheduled to expire in 2026.
  • Losses recognized with respect to worthless partnership interests would have been treated as capital losses (rather than ordinary losses as is often the case under current law), and would have been taken when the event establishing worthlessness occurs (rather than at the end of the year under current law).
  • The wash sale rules would have been expanded to cover commodities, foreign currencies, and digital assets, like cryptocurrency, as well as dispositions by parties related to the taxpayer.
  • The constructive ownership rules would have been expanded to cover digital assets, like cryptocurrency.

Business taxation

  • A corporate minimum tax of 15% would have been imposed on “book income” of certain large corporations. But the corporate income tax rates would have remained unchanged at 21%.
  • 1% excise tax would have been imposed on the value of stock repurchased by a corporation.
  • The interest expense deduction of a domestic corporation that is part of an “international financial reporting group” and whose average annual net interest expense exceeds $12 million over a three-year period would have been disallowed to the extent its net interest expenses for financial reporting purposes exceeds 110% of its proportionate share (determined based on its share of either the group’s EBITDA or adjusted basis of assets) of the net interest expense for financial reporting purposes of the group. The disallowed interest deduction could be carried forward for subsequent years.
  • Losses recognized by a corporate shareholder in liquidation of its majority-owned corporate subsidiary would have been deferred until substantially all of property received in the liquidation is disposed of by the shareholder.
  • Corporations spinning off subsidiaries would have been limited in their ability to use debt of the subsidiary to receive tax-free cash.

International taxation

  • A foreign person who owns 10% or more of the total vote or value of the stock of a corporate issuer (as opposed to 10% or more of total vote under current law) would have been ineligible for the portfolio interest exemption.
  • The Build Back Better Bill would have substantially revise the various international tax rules enacted as part of the Tax Cuts and Jobs Act (“TCJA”), including “GILTI”, “FDII” and “BEAT” regimes.
  • Foreign tax credit limitation rules would have been applied on a country-by-country basis.
  • Section 871(m), which imposes U.S. withholding tax on U.S.-dividend equivalent payments on swaps and forward contracts, would have been expanded to require withholding on swaps and forwards with respect to, or by reference to, interests in publicly traded partnerships.[1]

Proposals Not Included in the Build Back Better Bill

The Build Back Better Bill would not have:

  • Increased individual and corporate income tax rates (other than the surtaxes);
  • Changed the tax treatment of carried interests;
  • Affected the “pass-through deduction” under section 199A;
  • Affected “like-kind” exchanges under section 1031;
  • Increased the cap on social security tax withholding;
  • Changed the $10,000 annual cap on state and local tax deductions;[2] or
  • Treated death as a realization event.

Discussion

Individual Tax Changes

Surtax on individuals

The Build Back Better Bill would have added new section 1A, which would have imposed a tax equal to 5% of a taxpayer’s “modified adjusted gross income” in excess of $10 million (or in excess of $5 million for a married individual filing a separate return).  Modified adjusted gross income would have been adjusted gross income reduced by any reduction allowed for investment interest expenses.  Modified adjusted gross income would not have been reduced by charitable deductions and credits would not have been allowed to offset this surtax.  An additional 3% tax would have been imposed on a taxpayer’s modified adjusted gross income over $25 million (or in excess of $12.5 mm for taxpayers filing as married filing separately).  The surtaxes would also have applied to non-grantor trusts at significantly lower thresholds – the 5% surtax would apply to modified adjusted gross income in excess of $200,000 and the 3% additional surtax would have applied to modified adjusted gross income in excess of $500,000.

As a result, the top marginal federal income tax rate on modified adjusted gross income in excess of $25 million would have been 45% for ordinary income and 31.8% for capital gains (including the net investment income tax).  Nevertheless, the Build Back Better Bill rate on capital gains would have remained meaningfully less than the 39.6% rate proposed by the Biden Administration.

The Build Back Better Bill did not include a change to the individual income tax rates, which was a major departure from the Prior House Bill.  The Prior House Bill included a similar surtax on individual taxpayers, but the threshold was lower at $5 million for taxpayers that file joint returns and the surtax rate was 3%.

The surtax would have been effective for taxable years beginning after December 31, 2021.

Application of net investment income tax to active business income; increased threshold

The Build Back Better Bill would have expanded the 3.8% net investment income tax to apply to net income derived in an active trade or business of the taxpayer, rather than only to certain portfolio income and passive income of the taxpayer under current law.

As a result, the 3.8% net investment income tax would have been imposed on limited partners who traditionally have not been subject to self-employment tax on their distributive share of income, and S corporation shareholders who have not been subject to self-employment tax on more than a reasonable salary. This proposed change was generally consistent with the Biden administration’s proposal to impose 3.8% Medicare tax (although the additional net investment income tax proposed in the Build Back Better Bill would not be used to fund Medicare).

The Build Back Better Bill also would have limited the 3.8% net investment income tax so that it applies only to taxpayers with taxable income greater than $400,000 (and $500,000 in the case of married individuals filing a joint return), rather than $250,000 under current law.

These changes were consistent with the proposals in the Prior House Bill and would have applied in taxable years beginning after 2021.

Limitation on “qualified small business stock” benefits

The Build Back Better Bill would have limited the exemption of eligible gain for disposition of “qualified small business stock” (“QSBS”) to 50% for taxpayers with adjusted gross income of $400,000 or more, as well as all trusts and estates, and would have subjected the gain to the alternative minimum tax.

Very generally, under current law, non-corporate taxpayers are entitled to exclude from tax up to 100% of gain from the disposition of QSBS that has been held for more than 5 years.[3]  In addition, gain from the sale of QSBS can potentially be deferred if proceeds are reinvested in other QSBS.

The same proposal was included in the House Bill and the Prior House Bill.  The Prior House Bill contained a proposal to increase corporate tax rates, which together with the proposed changes to the QSBS rules, would have further limited desirability of investing in QSBS. The Build Back Better Bill, the House Bill and the Prior House Bill only addressed the rules applicable to exclusion of gain from the sale of QSBS, and did not alter the rules allowing for deferral of gains for proceeds invested in other QSBS.   Although the benefits associated with ownership of QSBS would have remained significant, had the Build Back Better Bill passed, in light of the reduction in potential gain that would have been excluded, the Build Back Better Bill would have required a reevaluation of choice-of-entity decisions based on QSBS benefits.

The proposal would have been effective retroactively and apply to sales or exchanges of stock on or after September 13, 2021, which is the date that the Prior House Bill was released.

Excess business losses

Under current law, for taxable years that begin before January 1, 2027, non-corporate taxpayers may not deduct excess business loss (generally, net business deductions over business income) if the loss is in excess of $250,000 ($500,000 in the case of a joint return), indexed for inflation.  The excess loss becomes a net operating loss in subsequent years and is available to offset 80% of taxable income each year.  The Build Back Better Bill would have made this limitation permanent and would treat the losses carried forward to the next taxable year as deduction attributable to trades or businesses, which would have been subject to the excess business losses limitation under section 461(l).  As a result, no more than $250,000/$500,000 in losses could be used in any year, and excess business losses would never have become net operating losses.  Unlike deductions that are suspended under the passive activity rules and at-risk rules that become deductible upon a disposition of the interest in the relevant trade or business, the excess business losses continue to be limited after the sale of the relevant trade or business.

This proposal is consistent with the Prior House Bill and would have been retroactive and apply for taxable years beginning after December 31, 2020.

Worthless partnership interest and limitation on loss recognition in corporate liquidations

Under current law, if a partner’s interest in a partnership becomes worthless, in the taxable year of worthlessness the partner may take an ordinary loss if the partner receives no consideration and a capital loss in all other cases.  As a practical matter, this rule allows for an ordinary loss if the partner has no share of any liabilities of the partnership immediately prior to the claim of worthlessness, or a capital loss if the partner has a share of any partnership liability immediately prior to the claim of worthlessness (because relief of partnership liabilities is treated as consideration received in a sale).  Under current law, if a security (not including an obligation issued by a partnership) that is held as a capital asset becomes worthless, the loss is treated as occurring on the last day of the taxable year in which the security became worthless.

Under the Build Back Better Bill, if a partnership interest becomes worthless, the resulting loss would have been treated as a capital loss (and not an ordinary loss).  Also, in the case of a partnership interest or a security that becomes worthless, the loss would have been recognized at the time of the identifiable event establishing worthlessness (and not at the end of the taxable year).  The proposal would also have expanded the scope of securities subject to worthless securities rules to included obligations (bond, debenture, note, or certificate, or other evidence of indebtedness, with interest coupons or in registered form) issued by partnerships.  These proposals were also included in the Prior House Bill and would apply to taxable years beginning after December 31, 2021.

The Build Back Better Bill would also have deferred the loss that is recognized by one corporate member of a controlled group[4] when a subsidiary merges into it in a taxable transaction under section 331 until substantially all of the property received in the liquidation is disposed to a third-party.  This proposal would effectively have eliminated taxpayers’ ability to enter into Granite Trust transactions to recognize capital losses by liquidating an insolvent subsidiary.[5]  A similar loss deferral rule would also have applied to dissolution of a corporation with worthless stock or issuance of debt in connection with which corporate stock becomes worthless.  This proposal would have applied to liquidations occurring on or after the date of enactment.

Expansion of wash sale and constructive sale rules

The Build Back Better Bill would have expanded the application of wash sale rules and constructive sale rules to cryptocurrencies and other digital assets.

The Build Back Better Bill would also have expanded the wash sale rules to include transactions made by related parties.  The wash sale rules disallow a loss from a sale or disposition of stock or securities if the taxpayer acquires or enters into a contract to acquire substantially similar stock or securities thirty days before or after the sale giving rise to the claimed loss.  The basis of the acquired assets in the wash sale is increased to include the disallowed loss.  Under the Build Back Better Bill, a wash sale would also have occurred when a “related party” to the taxpayer (other than a spouse) acquires the substantial similar stock or securities within the thirty-day period.[6]  More significantly, the disallowed loss in a wash sale triggered by a related party (other than a spouse) would have been permanently disallowed under the Build Back Better Bill. If the Build Back Better Bill had passed, it would have been challenging for certain taxpayers to comply with the related party provisions—and very difficult for the IRS to enforce it.  Under the provision, if a parent were to sell stock at a loss and, within 30 days, her child were to purchase the same stock, the parent’s loss would have been denied, even if neither parent nor child knew about each other’s trades.

The Build Back Better Bill would have exempted from the wash sale rules foreign currency and commodity trades that were directly related to the taxpayer’s business needs (other than the business of trading currency or commodities).  This exception would not have applied to digital assets.

Finally, the Build Back Better Bill would have provided that an appreciated short sale, short swap, short forward, or futures contract is constructively sold under section 1259 when the taxpayer enters into a contract to acquire the reference property (and not when the taxpayer actually acquires the reference property, as current law provides).

The changes were the same as those proposed in the Prior House Bill.  The proposal would have applied after 2021.

SALT deductions

The Build Back Better Bill has a “placeholder for compromise on deduction for state and local taxes”.  This is a key departure from the House Bill, which included an increase to the current annual $10,000 cap on SALT deductions to $80,000 until 2030, at which time the $10,000 annual limitation would apply again.

Business Tax Changes

Corporate alternative minimum tax

The Build Back Better Bill would impose a 15% minimum tax on “book income” of corporations with a 3-year average book income in excess of $1 billion.  A corporation’s book income would have been calculated based on the corporation’s audited financial statement (or if publicly traded, the financial statement shown on SEC Form 10-K), but adjusted to take into account certain U.S. income tax principles.[7]  Because this is a minimum tax, a corporation would have paid any excess amount of this minimum tax over its regular tax for the applicable tax year.  This minimum tax would also have applied to a foreign-parented U.S. corporation if the U.S. corporation has an average annual book income of $100 million or above.

The Prior House Bill did not include this corporate minimum tax based on book income, but the Biden administration’s tax reform proposals included a similar corporate minimum tax for large corporations.  The Build Back Better Bill does not otherwise provide for an increase in corporate income tax rates.

The corporate minimum tax would have been effective for tax years beginning after December 31, 2022.   

Limitation on business interest expense deductions

The Build Back Better Bill would have introduced an additional interest deduction limitation for a U.S. corporate member of an international group that has disproportionate interest expense as compared to the other members of the group.  New section 163(n) would generally have limited the interest deduction of a U.S. corporation that is part of an “international financial reporting group” and has net interest expense that exceeds $12 million (over a three-year period) if the ratio of its net interest expense to its EBITDA (or if an election is made, the aggregated bases of its assets)[8] exceeds by 110% of the similar ratio for the group.

Proposed section 163(n) was similar to what was included in the Prior House Bill, as well as a proposal that was included in the Senate and House bill for TCJA that was ultimately dropped in the conference agreement between the Senate and the House.  This limitation appears to target base erosion interest payments that may not be captured under the BEAT regime (which is further discussed in detail below).

The Build Back Better Bill would also have revised section 163(j) to treat partnerships as aggregates for purposes of applying the business interest expense limitation.  As a result, the section 163(j) limitation would have been applied at the partner level.  Under current law, the limitation, which very generally limits business interest expense deduction to 30% of EBITDA, is applied at the partnership level.   The interest deductions limited under section 163(j) or (n) (whichever imposes a lower limitation) would have continued to be allowed to be carried forward indefinitely (as opposed to 5 years under the Prior House Bill).

The proposals would have been effective for tax years beginning after December 31, 2022.

Limitation on using controlled corporation’s debt in a spin-off transaction

The Build Back Better Bill would have limited the ability of a U.S. “distributing corporation” to effectively receive cash tax-free from a spun-off “controlled corporation” subsidiary.  Under current law, a controlled corporation can issue debt securities to its parent distributing corporation that the distributing corporation can then use to redeem its own outstanding debt on a tax-free basis in connection with the spin-off of the controlled corporation.  The Build Back Better Bill would have required the parent distributing corporation to recognize gain in this transaction to the extent that the amount of controlled corporation debt it transfers to its creditors exceeds (x) the aggregate basis of any assets it transfers to its controlled corporation in connection with the spin-off less (y) the total amount of liabilities the controlled corporation assumes from it and (z) any payments that the controlled corporation makes to it. This effectively would have treated the debt securities issued by a controlled corporation as same as any other property distributed by the controlled corporation (which is commonly called as “boot”).

The proposal would have applied to reorganizations occurring on or after the date of enactment.

Excise tax on corporate stock buybacks

The Build Back Better Bill would have imposed a nondeductible 1% excise tax on publicly traded U.S. corporations engaging in stock buybacks. The tax was to be imposed on the value of the stock “repurchased” by the corporation during the tax year, reduced by value of stock issued by the corporation during the tax year (including those issued to the employees).  The term “repurchase” is defined as a redemption within the meaning of section 317(b), which is a transaction in which a corporation acquires its stock from a shareholder in exchange for property.  Repurchases that are (i) dividends for U.S. federal income tax purposes, (ii) part of tax-free reorganizations, (iii) made to contribute stock to an employee pension plan or ESOP, (iv) made by a dealer in securities in the ordinary course of business, or (v) made by a RIC or a REIT are not subject to the excise tax.  Also, repurchases that are less than $1 million in a year are excluded.

It was unclear how the value of repurchased stock was to be determined in calculating the excise tax amount.  The types of transactions that would have been covered under the proposed rule is also unclear.  The term “repurchase” was very broad and it could have had applied to different types of transactions, such as redemption of redeemable preferred stocks or redemption of stock in a company’s acquisition transaction.  The rule would also have had significant impact on de-SPAC transactions, which involve redemption rights for shareholders of the SPAC.  The Treasury would also have been provided with a broad authority to issue regulations to cover economically similar transactions.

The proposal would have applied to repurchases of stock after December 31, 2021.

International Tax Changes

Portfolio interest exemption

Under current law, a foreign person that owns 10% or more of the total voting power of a corporate issuer of debt is not eligible for the “portfolio interest” exemption, which provides for exemption from withholding on interest paid on certain debt.  Current law does not prohibit “de-control structures” under which the sponsor of a fund will typically invest a small percentage of the capital of a U.S. blocker in exchange for large percentage of its voting stock, thereby ensuring that no foreign investor will own 10% of the voting power of the U.S. blocker and permitting those foreign investors who own more than 10% of the value of the U.S. blocker to take the position that they may avoid U.S. withholding tax on interest received from the U.S. blocker.  The Build Back Better Bill would have revised this exception so that any person who owns 10% or more of the total vote or value of the stock of a corporate issuer would have been ineligible for the portfolio interest exemption.  This change would have prevented the de-control structures.

This proposal, which was also included in the Prior House Bill, would have applied to obligations issued after the date of enactment (i.e., all existing obligations would have been grandfathered).  However, if a grandfathered obligation was “significantly modified” for U.S. federal income tax purposes, it might have lost its grandfathered status.  Also, any subsequent draws on existing facilities that are made after the date of enactment would not have been grandfathered.

GILTI

The “global intangible low-taxed income” (“GILTI”) regime generally imposes a 10.5% minimum tax on 10-percent U.S. corporate shareholders of “controlled foreign corporations” (“CFCs”) based on the CFC’s “active” income in excess of a threshold equal to 10% of the CFC’s tax basis in certain depreciable tangible property (such basis, “qualified business asset investment”, or “QBAI”).  GILTI is not determined on a country-by-country basis, and, therefore, under current law a U.S. multinational corporation may be able to avoid the GILTI tax with respect to its subsidiaries operating in low-tax rate countries by “blending” income earned in the low tax-rate countries with income from high-tax rate countries.  Taxpayers are allowed 80% of the deemed paid foreign tax credit with respect to GILTI.

The Build Back Better Bill would have imposed GILTI on a country-by-country basis to prevent blending of income from a low tax-rate country with income from a high-tax rate country. This general approach would have been largely consistent with the prior proposals made by the Biden administration and the Senate Finance Committee.[9]

The Build Back Better Bill would have determined net CFC tested income and losses and QBAI on a country-by-country basis.  The Build Back Better Bill would have achieved this by using a “CFC taxable unit” – net CFC tested income and loss would have been determined separately for each country in which CFC taxable unit is a tax resident.  The Build Back Better Bill would have allowed a taxpayer to carryover country-specific net CFC tested loss to succeeding tax year to offset net CFC tested income of the same country.  In addition, taxpayers would no longer have been able to offset net CFC tested income from one jurisdiction with net CFC tested losses from another jurisdiction.  These proposed changes on determining net CFC tested income on a country-by-country basis were consistent with the Prior House Bill’s proposals.

The Build Back Better Bill would also have (i) reduced the exclusion amount from 10% to 5% of QBAI, (ii) increased the effective tax rate on GILTI for corporate taxpayers from 10.5% to 15%,[10] and (iii) helpfully reduced the “haircut” for deemed paid foreign tax credit for GILTI from 20% to 5% (i.e., 95% of GILTI amount would have been creditable as deemed paid credit).

The GILTI proposals would generally have been effective for taxable years beginning after December 31, 2022.

FDII

The “foreign-derived intangible income” (“FDII”) regime encourages U.S. multinational groups to keep intellectual property in the U.S. by providing a lower 13.125% effective tax rate for certain foreign sales and provision of certain services provided to unrelated foreign parties in excess of 10% of the taxpayer’s QBAI.  The lower effective tax rate is achieved by 37.5% deduction allowed for FDII under section 250.

The Build Back Better Bill would have reduced the section 250 deduction for FDII from 37.5% to 24.8%, which would have had the effect of increasing the effective rate for FDII from 13.125% to 15.8%.[11]  The Build Back Better Bill further provided that if a section 250 deduction actually exceeded the taxable income of the taxpayer, the deduction would have increased the net operating loss amount for the taxable year and could be used in subsequent years to offset up to 80% of taxable income.

This proposal generally would have been effective for taxable years beginning after December 31, 2021.

BEAT/SHIELD

The “base erosion and anti-abuse tax” (“BEAT”) generally provides for an add-on minimum tax, currently at 10%, on certain deductible payments that are made by very large U.S. corporations (generally, with at least $500 mm of average annual gross receipts) whose “base erosion percentage” (generally, the ratio of deductions for certain payments made to related foreign parties overall allowable deductions) is 3% or higher (or 2% for groups that include banks and securities dealers).

The Build Back Better Bill would have expanded the BEAT regime.  The proposal would have increased the BEAT tax rate gradually from 10% up to 18% by the taxable year starting after December 31, 2024.  The proposal would also have substantially revised the formula for calculating “modified taxable income”, which generally appeared to have increased the income amount that would have been subject to the BEAT regime.  Finally, the Build Back Better Bill would have eliminated the 3%/2% de minimis exception.  These proposals were generally consistent with the BEAT proposals in the Prior House Bill, but with different tax rates.

The Build Back Better Bill did not include the Biden administration’s “Stopping Harmful Inversions and Ending Low-Tax Developments” (“SHIELD”), which had been proposed to replace the BEAT regime.

Changes to Subpart F regime

The Build Back Better Bill would have significantly changed the subpart F regime.  The Build Back Better Bill would have helpfully reinstated section 958(b)(4) retroactively.  Section 958(b)(4) had prevented “downward” attribution of ownership of foreign person to a related U.S. person for purposes of applying subpart F regime.  Section 958(b)(4) was repealed in the TCJA, which allowed stock owned by a foreign person to be attributed downward to a U.S. person for purposes of determining a foreign corporation’s CFC status.

To address the situation that had prompted the repeal of downward attribution, the Build Back Better Bill would have introduced a new section to apply the GILTI and subpart F regimes to a foreign corporation that would have been a CFC if the downward attribution rule had applied, but only if the U.S. shareholder held at least 50% of vote or value of the foreign corporation’s stock.  This regime would have been effective for taxable years beginning after the date of the enactment.

The Build Back Better Bill would also have allowed a U.S. shareholder of a foreign corporation to elect to treat the foreign corporation as a CFC, which may have permitted a taxpayer to exclude foreign-source dividends received from the foreign corporation under the Build Back Better Bill’s amended section 245A (which is discussed below).  The Build Back Better Bill also would have limited the scope of foreign base company sales and services income, which is includible as subpart F income, to sales and services provided to U.S. residents and pass-through entities and branches in the United States, which effectively would have subjected foreign base company sales and services income for non-U.S. sales and services to the GILTI regime.  The Build Back Better Bill also would have amended section 951(a) so that a United States shareholder that receives a dividend from a CFC would have been subject to tax on its pro-rata share of the CFC’s subpart F income (generally negating any deduction under section 245A with respect to the dividend), regardless of whether the shareholder held shares in the CFC on the last day of the taxable year.  Current law requires a United States shareholder to include Subpart F income only if it owned shares of the CFC on the last day of the taxable year.

Foreign tax credits

The Build Back Better Bill would have imposed the foreign tax credit limitation on a country-by-country basis.  Currently, foreign tax credits are calculated on an aggregate global basis and divided into baskets for active income, passive income, GILTI income, and foreign branch income.  The revised rules would have calculated foreign tax credit limitations based on a country-by-country “taxable unit”, which is consistent with the “CFC taxable unit” used under the Build Back Better Bill’s GILTI rules.  Together with the proposed amendments to the GILTI regime, this revision to the foreign tax credit limitation rules would have sought to prohibit taxpayers from using foreign tax credits from taxes paid in a high-tax jurisdiction against taxable income from a low-tax jurisdiction.

The Build Back Better Bill would have made a number of other changes to the foreign tax credit rules, including and repealing the carryback period (which, under current law, is 1 year, but retaining the current 10-year carryforward period for excess foreign tax credit limitation).

This proposal would have been generally effective for taxable years beginning after December 31, 2022.

Dividends from foreign corporations

The Build Back Better Bill would have amended section 245A so that the foreign portions of dividends received only from a CFC (rather than any specified 10-percent owned foreign corporation) would have qualified for the participation exemption (and not have been subject to U.S. federal income tax) under section 245A.[12]  Currently, section 245A allows foreign-source dividends from any specified 10-percent owned foreign corporation (a broader concept than CFC) to be exempt from U.S. tax under section 245A.  Although the provision appeared to narrow the scope of section 245A, as noted above, the Build Back Better Bill would have permitted a taxpayer and a foreign corporation to make an election to treat the foreign corporation as a CFC, in which case the benefits of section 245A would have been available to all dividends paid by the electing foreign corporation (even if U.S. shareholders own less than 10%).  This provision was consistent with the proposal in the Prior House Bill and would have been effective for distributions made after the date of the enactment.

Anti-inversion rules

The Senate Finance Committee’s Build Back Better Bill would have significantly expanded the anti-inversion rules.  Generally, under current law, a foreign acquirer of an inverted U.S. corporation – typically, an existing U.S. corporation that is acquired by a foreign acquirer and whose shareholders continue own the U.S. corporation indirectly through their ownership in the foreign acquirer – is treated as a U.S. corporation for U.S. federal income tax purposes, if the continuing ownership stake of the shareholders of the inverted U.S. corporation is 80% or more.   If the continuing ownership stake of the shareholders of the inverted U.S. corporation is between 60% and 80%, certain rules designed to prevent “earnings stripping” – or deductible payments by the U.S. corporation to its foreign parent – apply.

The Build Back Better Bill would have lowered the 80% threshold in treating a foreign acquirer of an inverted U.S. corporation as a U.S. corporation for U.S. federal income tax purposes to 65%.  The Build Back Better Bill would also have lowered the 60% threshold in applying the earnings stripping rules to 50%.  Finally, the Build Back Better Bill would have expanded the scope of the anti-inversion rules to cover acquisitions of substantially all of the assets constituting (i) a trade or business of a U.S. corporation or partnership, or (ii) a U.S. trade or business of a non-U.S. partnership.

This provision was not included in the House Bill, but it did reflect some elements of an anti-inversion rule proposal by the Biden administration, such as the lowering of the 80% threshold to treat a foreign acquirer as a U.S. corporation for U.S. federal income tax purposes and the expansion of the scope of the rules to cover certain asset acquisitions.  This proposal would have applied for taxable years ending after December 31, 2021.

FOOTNOTES

[1] Unless otherwise noted, all section references are to the Internal Revenue Code of 1986, as amended.

[2] The House Bill contained a provision that would raise the $10,000 cap to $80,000 for 2021 through 2030.

[3] The amount of gain eligible to be taken into account for these purposes by any taxpayer and any corporation is subject to a cap generally equal to the greater of (i) $10 million cumulative exclusions of gain with respect to that corporation and (ii) 10 times the taxpayer’s aggregate adjusted tax bases of QSBS of the corporation disposed of in that year.

[4] Generally, corporations connected through stock ownership of more than 50%.  Section 267(f).

[5] In a Granite Trust transaction, a corporate parent that owns a depreciated subsidiary reduces its ownership in the subsidiary to below 80% before liquidating the subsidiary so that the liquidation is taxable and any built-in loss of the parent in the subsidiary’s stock would have been recognized.

[6] A related party for this purpose includes (i) the taxpayer’s spouse, dependent, (ii) any corporation, partnership, trust or estate that is controlled by the taxpayer, and (iii) the taxpayer’s retirement account and certain other tax-advantaged investment accounts for which the taxpayer is the beneficiary or the fiduciary.

[7] For example, if a corporation owned foreign corporations that are “controlled foreign corporations” for U.S. federal income tax purposes, the corporation would have had to take into account its pro-rata share of such foreign corporation’s book income.  Also, prior year’s net operating losses (calculated for book purposes) could have been used to reduce the book income, but could have only offset 80% of the book income for the subsequent year.

[8] The election to use the aggregated bases of assets in lieu of EBITDA was added in the Senate Finance draft of the Bill.

[9] The Senate Finance Committee’s prior proposal (which included a draft legislation and a section-by-section explanation) provided for mandatory exclusion of high-taxed income.  This approach was different than the Build Back Better Bill, but the general approach of disallowing “blending” of income between high-tax jurisdiction and low-tax jurisdiction was the same.

[10] This would have been achieved by reducing the deduction provided to corporate taxpayers under section 250 from the current 50% level to 28.5%.  The Build Back Better Bill would have not changed the tax rate to be applied to a non-corporate taxpayer’s GILTI amount.  This was a lower rate than what was proposed in the Prior House Bill (37.5%), but the effective tax rate under the Prior House Bill was higher due to the increased income tax rates.

[11] The FDII deduction was higher under the Prior House Bill (at 21.875%), with an effective tax rate of 20.7% (taking into account the increased corporate rate).  The Senate Finance Committee’s prior proposal also stated that the FDII deduction would have been reduced, but did not commit to a specific percentage.

[12] The Build Back Better Bill would have also amended section 1059 so that if a corporation received a dividend from a CFC that was attributable to earnings and profits of the foreign corporation before it was a CFC or before it was owned by the corporation, the non-taxed portion of that dividend would have reduced the basis of the CFC’s stock, regardless of whether the corporation had held the CFC’s stock for 2 years or less.  Therefore, CFC’s dividends that are exempt from tax under section 245A could have been subject to the proposed expanded section 1059.

Article By David S Miller, Muhyung (Aaron) Lee, Amanda H Nussbaum, Arnold P May, and Daniel J. Paulos of Proskauer Rose LLP

For more legislative legal news, click here to visit the National Law Review.

© 2021 Proskauer Rose LLP.

Patch Up – Log4j and How to Avoid a Cybercrime Christmas

A vulnerability so dangerous that Cybersecurity and Infrastructure (CISA) Director Jen Easterly called it “one of the most serious [she’s] seen in [her] entire career, if not the most serious” arrived just in time for the holidays. On December 10, 2021, CISA and the director of cybersecurity at the National Security Agency (NSA) began alerting the public of a critical vulnerability within the Apache Log4j Java logging framework. Civilian government agencies have been instructed to mitigate against the vulnerability by Christmas Eve, and companies should follow suit.

The Log4j vulnerability allows threat actors to remotely execute code both on-premises and within cloud-based application servers, thereby obtaining control of the impacted servers. CISA expects the vulnerability to affect hundreds of millions of devices. This is a widespread critical vulnerability and companies should quickly assess whether, and to what extent, they or their service providers are using Log4j.

Immediate Recommendations

  • Immediately upgrade all versions of Apache Log4j to 2.15.0.
  • Ask your service providers whether their products or environment use Log4j, and if so, whether they have patched to the latest version. Helpfully, CISA sponsors a community-sourced GitHub repository with a list of software related to the vulnerability as a reference guide.
  • Confirm your security operations are monitoring internet-facing systems for indicators of compromise.
  • Review your incident response plan and ensure all response team information is up to date.
  • If your company is involved in an acquisition, discuss the security steps taken within the target company to address the Log4j vulnerability.

The versatility of this vulnerability has already attracted the attention of malicious nation-state actors. For example, government-affiliated cybercriminals in Iran and China have a “wish list” (no holiday pun intended) of entities that they are aggressively targeting with the Log4j vulnerability. Due to this malicious nation-state activity, if your company experiences a ransomware attack related to the Log4j vulnerability, it is particularly important to pay attention to potential sanctions-related issues.

Companies with additional questions about the Log4j vulnerability and its potential impact on technical threats and potential regulatory scrutiny or commercial liability are encouraged to contact counsel.

Article By Philip J. Bezanson, Brittney E. Justice, Claire E. Cahoon, and Seth D. DuCharme of Bracewell LLP

For more cybersecurity legal news, click here to visit the National Law Review.

© 2021 Bracewell LLP

Stay of OSHA Emergency Temporary Standard Lifted By Sixth Circuit – “All Systems Go,” For Now…

A divided panel of the United States Court of Appeals for the Sixth Circuit lifted the stay on the Occupational Safety and Health Association’s Emergency Temporary Standard (“OSHA ETS”) late Friday night (December 17, 2021). The Sixth Circuit had previously been selected at random to hear the consolidated OSHA ETS litigation.

As a result of the Sixth Circuit’s ruling, OSHA announced that it would exercise enforcement discretion with respect to the compliance dates of the OSHA ETS.  To provide employers with sufficient time to come into compliance:

  • OSHA will not issue citations for noncompliance with any requirements of the OSHA ETS before January 10, 2022; and

  • OSHA will not issue citations for noncompliance with testing requirements before February 9, 2022.

These “extensions” are conditioned on an employer exercising reasonable, good faith efforts to come into compliance with the OSHA ETS.

Ultimately, the Sixth Circuit found that the petitioners (Republican-led states, businesses, religious groups, and individuals) were unable to establish a likelihood of success on the merits. In doing so, the Sixth Circuit considered and analyzed a myriad of statutory and constitutional arguments. Two out of the three judges on the panel determined that the petitioners would be unlikely to be successful on their constitutional arguments that OSHA violated the commerce clause or the non-delegation doctrine.

Under the Occupational Safety and Health Act, OSHA is required to show that health effects may constitute a “grave danger” in order to warrant an emergency temporary standard. The Sixth Circuit held that the determination as to what constitutes “grave danger” should be left, in the first instance, to the agency. The Sixth Circuit expressly disagreed with, and in effect overruled, the United States Court of Appeals for the Fifth Circuit by holding that OSHA was not required to make findings of exposure in all covered workplaces. The Sixth Circuit held that to require so would mean that no hazard could ever rise to the level of “grave danger.” Ultimately, the Sixth Circuit found that OSHA had shown that COVID-19 is a danger and relied on proper science in issuing the ETS. The Sixth Circuit further held that simply because OSHA did not issue the ETS at the beginning of the pandemic did not mean the agency did not consider COVID-19 an emergency worth addressing.

The Sixth Circuit’s decision was appealed this morning to the Supreme Court; however, this appeal does not alter the decision unless and until the Supreme Court rules.  In the meantime, employers should resume (or continue) preparations to comply with the ETS requirements. For a summary of the OSHA ETS and its requirements, visit here.

Article By Lilian Doan Davis and Isaac T. Caverly of Polsinelli PC

For more coronavirus legal news, click here to visit the National Law Review.

© Polsinelli PC, Polsinelli LLP in California

Current Pandemic-Related Regulations for Business Travel to the United States, Germany, and the EU

Recently, due to the availability of COVID-19 vaccines, many countries decided to lift their entry restrictions or change them in such a way that travelers who had recovered from COVID-19 infections or been vaccinated were allowed entry. Here is an overview of some of the current entry requirements for international travel.

Entry Into the United States

Since November 8, 2021, individuals have been allowed to enter the United States again from Europe. For 20 months, an entry ban had been in place in the United States for travelers from Brazil, China, India, Iran, Ireland, the Schengen Area (26 countries), South Africa, and the United Kingdom. A proclamation issued by President Joe Biden on October 25, 2021—“A Proclamation on Advancing the Safe Resumption of Global Travel During the COVID-�19 Pandemic”—ended these entry restrictions and the need for national interest exceptions (NIE) to the restrictions. Travelers from most countries (a recent U.S. ban on travel from eight African countries took effect on November 29, 2021) may enter the United States if they are fully vaccinated and present negative coronavirus test results (via RT-PCR tests or antigen tests) that are no more than three days old at the time of departure.

Travelers must prove to their airlines that they have been fully vaccinated with internationally recognized vaccines prior to their departures. Currently, the United States recognizes vaccines the Pfizer-BioNTech, Oxford-AstraZeneca, Oxford-AstraZeneca/Covishield, Covaxin, Moderna, Johnson & Johnson/Janssen, BIBP/Sinopharm, and Sinovacvaccines. A traveler’s last vaccination must have taken place at least 14 days before the planned date of travel. The United States accepts the EU Digital COVID Certificate as proof of vaccination.

Exempt groups include persons on diplomatic or governmental foreign travel, children under 18 years of age, and persons who cannot be vaccinated with a COVID-19 vaccine for documented medical reasons. Persons exempt from the October 25, 2021, proclamation’s requirements may enter the United States without being fully vaccinated, but they must quarantine for seven days upon arrival and test for COVID-19 infection three to five days after entry.

Regardless of the COVID-19–related entry requirements, all travelers still need an Electronic System for Travel Authorization (ESTA) entry permit issued by U.S. Customs and Border Protection (CBP). CBP advises travelers to apply online for ESTA authorization at least 72 hours in advance of departure.

Requirements for Entry Into the European Union

The European Union (EU) has a common approach to travel from third countries to EU member states. Entry requirements are constantly being adapted to the pandemic situation as international travel gradually opens up. Currently, in principle, any person from a third country who has been fully vaccinated with a vaccine approved by the European Medicines Agency (EMA) (BioNTech-Pfizer, Moderna, AstraZeneca, and Janssen-Cilag) may enter the European Union. The last vaccination must have taken place at least 14 days before the planned entry.

EU citizens and residents as well as their family members are allowed to enter EU member states without being fully vaccinated. Further exceptions apply to persons for whom absolutely necessary reasons for entry exist. “Absolutely necessary reasons” may exist, among other things, for highly qualified employees from third countries if their labor is necessary from an economic point of view and their work cannot be postponed or carried out abroad.

The EU also maintains a list of countries where the epidemiological situation has improved sufficiently (the so-called “EU White List”), so that entry from these countries is possible regardless of an individual’s vaccination status. This list is constantly updated according to the epidemiological situation. The United States is not currently on the EU White List, so entry from the United States is only possible for fully vaccinated persons.

Each EU member state may set its own additional entry requirements. The EU’s “Re-open EU,” a clearinghouse of information regarding EU member states’ pandemic-related measures, offers an overview of the quarantine and testing requirements of the individual countries.

Requirements for Entry Into Germany

All travelers to Germany from third countries that are not on the EU White List and are not EU citizens or residents must be fully vaccinated. In exceptional cases, entry is possible if it is absolutely necessary.

In addition, all travelers aged 12 or older must provide proof of vaccination. Before crossing the border, proof of vaccination or convalescence, or a test result showing negative for infection (e.g., an antigen test that is no more than 48 hours old or an RT-PCR test that is no more than 72 hours old), must be presented for inspection by the carrier or at the request of the Federal Police.

For previous stays in high-risk or virus-variant areas, digital travel registration is also mandatory. The Robert Koch Institute provides a current list of all high-risk and virus-variant areas.

Nonvaccinated or recovered travelers entering from high-risk areas must also present a negative test upon entry and enter domestic quarantine for 10 days. The domestic quarantine can be ended prematurely if another negative test result is presented five days after entry.

At present, travel from a virus-variant area is not possible, as a travel ban is in force for countries where virus mutations are widespread. Entry is possible only in a few exceptional cases (for example, for German nationals and persons with residence and an existing right of abode in Germany, as well as their immediate family members). Irrespective of vaccination or convalescent status, these travelers are obliged to register their entries digitally, present negative test results upon entry, and go into quarantine for 14 days. Only vaccinated and recovered persons may shorten their quarantine periods by presenting further negative test results five days after entry.

Employer Inquiries Into Employees’ Vaccination and Recovery Status

These extensive regulations raise a question as to whether an employer may inquire into an employee’s vaccination status, or whether the employee has recovered from a COVID-19 infection in connection with an upcoming business trip.

The vaccination and/or convalescence status of an employee, under 9 (1) of the EU’s General Data Protection Regulation (GDPR), is considered health data and thus protected personal information according to Art. An employer may request and process this information only if there is a legal basis for doing so. If a business trip requires proof of an employee’s vaccination against COVID-19 (e.g., due to entry restrictions), an employer may request and process this information from the employee in individual cases. However, employers may only request the information in the context of specific business trips and are prohibited from retaining the information for any other purposes.”

The COVID-19–related entry regulations of many countries may largely determine the feasibility of a contemplated business trip, as the prospect for international business travel will likely depend on the vaccination status of the employees involved. This situation may result in a legitimate interest on the part of the employer to inquire into employee vaccination status because the employer would otherwise be unable to find out whether a particular employee met the entry requirements of the destination country. Only by inquiring into vaccination status can the employer ensure that the employee is not turned away at the border—i.e., that the employee can fulfill the duty to provide the contractually agreed upon work within the scope of the business trip.

Whether an employer’s query regarding an employee’s vaccination status is legitimate is therefore a case- and fact-specific inquiry, which depends above all on the entry regulations of the destination country. If the destination country requires complete vaccination for entry, it may be permissible from a data protection perspective to ask about an employee’s vaccination status.

Article By Cynthia Lange of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

For more COVID-19 and travel-related legal news, click here to visit the National Law Review.

© 2021, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

5th Circuit Rejects Request from United Airlines Employees to Block Company’s COVID-19 Vaccine Mandate

In a decision from the New Orleans-based Fifth Circuit, in a bid to block the company’s COVID-19 vaccine mandate, a divided court rejected an emergency request for an injunction from United Airlines employees. The request came in the wake of a November ruling by a federal judge in Fort Worth, Texas, which also ruled in favor of United Airlines.

United Airlines was the first major air carrier to implement a vaccine mandate and has so far granted about 2,000 exemptions. Its policy would place on unpaid leave any employees who fail to get the COVID-19 vaccine (and who fail to qualify for an exemption). The key question, in this case, is the extent to which United Airlines has accommodated employees’ religious or medical exemptions. The six plaintiffs claim that United Airlines’ policy is a violation of Title VII of the Civil Rights Act of 1964, which, among other things, requires employers to make reasonable accommodations for all aspects of an employee’s religious beliefs, absent “undue hardship on the conduct of the employer’s business.”

While the Fifth Circuit did not rule on the merits, two of the three judges denied the motion for an injunction citing previous decisions but did not offer any additional reasoning. Judge James C. Ho dissented asserting that the mandate placed a substantial burden on one’s religion and calling the harm a “quintessentially irreparable injury, warranting preliminary injunctive relief.” The Fifth Circuit did, however, grant a request from the plaintiffs for an expedited appeal. That hearing and the court’s decision should provide some guidance on the legal constraints and guidelines for COVID-19 vaccine mandates.

This article was written by Nelson Mullins attorneys Mitch Boyarsky and Benjamin Lichtman. For more articles regarding vaccine mandate challenges, please click here.