By Emlyn Mandel.

The Foreign Corrupt Practices Act doesn’t ensnare just those involved in foreign corruption. It also can cover conduct in the United States that has nothing to do with either foreign officials or bribery schemes. So the recent release of the government’s new edition of the FCPA Resource Guide is worth noting even for those staying close to home.

The FCPA has two main components: an anti-bribery provision, which prohibits bribery of foreign officials, and accounting provisions, which require certain reporting companies to keep accurate books and records and maintain a system of internal accounting controls. The FCPA can be prosecuted both criminally by the U.S. Department of Justice and civilly by the Securities and Exchange Commission. In July 2020, the DOJ and SEC released the Second Edition to the FCPA Resource Guide, a manual relied upon heavily by practitioners and businesses in navigating the FCPA.^[1] The release marks the first substantive update to the Resource Guide since the First Edition was published in 2012. The Resource Guide is particularly valuable given the dearth of case law interpreting the FCPA.

The Second Edition reflects updates in the law over the past eight years in a number of different areas, including the definition of the term “foreign official;” the jurisdictional reach of the FCPA; the FCPA’s “foreign written laws” affirmative defense; the mens rea requirement and statute of limitations for criminal violations of the accounting provisions; updated data, statistics, and case examples; and new policies applicable to the FCPA that have been announced over the past several years by the DOJ and SEC.

A number of these changes are particularly noteworthy.

Insight on Who Can Be Prosecuted Under the FCPA

The jurisdictional reach of the FCPA has long been subject to debate. The anti-bribery provision of the FCPA lays out several categories of persons over whom the government may exercise jurisdiction, including “domestic concerns” (any individual who is a citizen, national, or resident of the United States or a business organized under United States law or with its principal place of business in the United States), no matter where in the world they act; companies issuing securities regulated by federal law (“issuers”), no matter where in the world they act; any officer, director, employee, or agent of a domestic concern or issuer, no matter where in the world they act; and foreign persons (including foreign nationals and companies) acting in the territory of the United States.^[2] The Resource Guide now mentions a recent Second Circuit case that had the effect of limiting jurisdiction, United States v. Hoskins.^[3] Hoskins held that a nonresident foreign national who was not an agent of a United States company and who acted outside American territory to allegedly participate in a foreign bribery scheme could not be liable for conspiracy to violate the FCPA, since such an individual was not in the class of individuals capable of committing a substantive FCPA violation. However, the government’s willingness to be guided by Hoskins in bringing future conspiracy prosecutions or enforcement actions is unclear, as the Resource Guide acknowledges conflicting authority from another jurisdiction.

Nevertheless, the Resource Guide does make some edits that align with the Hoskins holding. While the Resource Guide still asserts that a foreign national who engages in activity in American territory, such as by attending a meeting in the United States that furthers a foreign bribery scheme, may be subject to prosecution, it conspicuously removes language from the prior version that previously indicated “any co-conspirators, even if they did not themselves attend the meeting” may be subject to prosecution. It also removes the statement that a foreign national or company may be liable if she or it assists an issuer, regardless of whether the foreign national or company itself takes any action in the United States. In doing so it acknowledges that there is a limit to those whom the FCPA can reach.

Contrary to the specific delineations in the anti-bribery provision, the accounting provisions apply to “any person.”^[4] In that vein, the Resource Guide points out that the Hoskins holding does not extend to violations of the FCPA’s accounting provisions – an indication that the DOJ and SEC are likely to continue prosecuting violations of the accounting provisions even without an accompanying bribery charge. This is not new – a number of the options backdating cases of the 2000s were based in part on the FCPA.  The DOJ’s willingness to continue to bring charges based on the FCPA’s accounting provision is evident in, for example, the deferred prosecution agreement (“DPA”) between the DOJ and Novartis AG announced at the end of June 2020.  While one Novartis subsidiary was charged with violations of both the anti-bribery and the accounting provisions, former Novartis AG subsidiary Alcon Pte. Ltd. was charged only with conspiracy to violate the accounting provision.^[5]

Definition of “Instrumentality” Within The Definition of “Foreign Official”

The FCPA’s anti-bribery provision prohibits corrupt payments to “any foreign official.” The FCPA defines “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof,”^[6] a standard that can be difficult to evaluate given the sometimes murky intersection of government and business in countries such as China. The Resource Guide now incorporates important case law from the Eleventh Circuit that defines “instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”^[7] Esquenazi provided a list of five non-exhaustive factors that courts should consider in a fact-based analysis of whether the government “controls” an entity: the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fiscal accounts, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed. Esquenazi also provided a list of four non-exhaustive factors regarding whether the entity performs a function the government “treats as its own”: whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.

The Resource Guide notes that companies should consider these factors when evaluating the risk of FCPA violations and designing compliance programs.

Clarification of the Statute of Limitations and Mental State Requirement for Criminal Violations of Accounting Provisions

While criminal violations of the anti-bribery provisions carry a five-year statute of limitations,^[8] the Resource Guide clarifies that criminal violations of the accounting provisions carry a six-year statute of limitations.^[9] In contrast, the statute of limitations is five years in civil cases brought by the SEC.^[10]

In addition, the Resource Guide explains that, for criminal violations of the accounting provisions, prosecutors must show the violation was done “knowingly and willfully” rather than only “knowingly” as provided in the First Edition. This difference matters, as it provides a higher mens rea bar for prosecutors to meet. The Resource Guide acknowledges that “willfully” is not defined in the FCPA but remarks that it has generally been construed by courts to connote an act committed voluntarily and purposefully and with a bad purpose, i.e., with “knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law.” However, the government need not prove that the defendant was specifically aware of the FCPA or knew that his conduct violated the FCPA.

More Detail On What Makes An Effective Compliance Program

Even if it doesn’t prevent an FCPA violation, a company’s compliance program can have a major impact on the government’s charging and sentencing decisions.^[11] The Resource Guide now clarifies that “a company’s internal accounting controls are not synonymous with a company’s compliance program,” although the components may overlap. It states that, “[t]he truest measure of an effective compliance program is how it responds to misconduct.” According to the Resource Guide, an effective compliance program should have a well-functioning and appropriately funded mechanism to investigate wrongdoing, including analyzing root causes of the misconduct and integrating lessons learned.

In addressing successor liability, the Resource Guide explicitly acknowledges the potential benefits of corporate mergers and acquisitions in stemming corporate corruption, particularly when the acquiring entity has a robust compliance program in place and implements that program as quickly as possible. It goes on to state that in certain instances robust pre-acquisition due diligence may not be possible and, in those cases, timely discovery and remediation by an acquiring entity can help avoid successor liability. On the other hand, the potential pitfalls of successor liability are evident in a recent SEC settlement with Novartis AG, where the company’s failure to stop improper post-merger payments contributed to the SEC’s decision to prosecute the company.^[12] 

Incorporation of Recent DOJ and SEC Policies

Over the past several years the DOJ and SEC have rolled out several new policies, which the Resource Guide now expressly incorporates.

FCPA Corporate Enforcement Policy. This policy provides that, where a company voluntarily self-discloses misconduct, fully cooperates, and timely and appropriately remediates, there will be a presumption that DOJ will decline prosecution of the company absent aggravating circumstances. The Resource Guide adds three examples of declinations from the past few years, including instances where high-level corporate officers were involved, reinforcing how important self-disclosure, cooperation, and remediation can be.

Selection of Monitors in Criminal Division Matters. The Resource Guide now incorporates the DOJ’s guidance in determining whether to impose an independent corporate monitor as part of a company’s resolution. It notes that appointment of a monitor is not appropriate in all circumstances and should never be imposed for punitive purposes. A monitor may be appropriate, for example, where a company does not already have an effective internal compliance program or needs to establish necessary internal controls. DOJ’s guidance provides that, in determining whether to impose a monitor as part of a corporate resolution, prosecutors should assess (1) the potential benefits that employing a monitor may have for the corporation and the public, and (2) the cost of a monitor and its impact on the operations of a corporation.

Anti-Piling On Policy. The DOJ and SEC can coordinate responses with other authorities to avoid “piling on” with those who are prosecuting the same company for misconduct, which policy includes giving credit for penalties paid to other authorities both foreign and domestic.

Criminal Division’s Evaluation of Corporate Compliance Programs. This policy guides prosecutors in deciding whether the corporation’s compliance program was effective at the time of the offense and is effective at the time of a charging decision or resolution. These determinations can have a significant impact on  the appropriate form of any resolution or prosecution, monetary penalty, and compliance obligations contained in any corporate criminal resolution. The three overarching questions that prosecutors ask to evaluate a company’s compliance program are: (1) Is the program well designed? (2) Is the program adequately resourced and empowered to function effectively? and (3) Does the program work in practice?^[13]

Conclusion

The Resource Guide remains non-binding, but DOJ prosecutors and SEC enforcement attorneys will give significant weight to this guidance in determining whether to bring charges (and against whom) and how to resolve them. So this update provides valuable information for practitioners and enterprises in both proactively creating effective compliance policies and defending prosecutions or enforcement actions brought under the FCPA. It’s always a good idea to conduct periodic assessments of your company’s compliance program to ensure that it is appropriate to the company’s risk and that it is functioning effectively. With this enhanced guidance from the DOJ and SEC, now is an opportune time to check in.

For further information on the topic covered in this alert or for general FCPA or compliance guidance, contact Coblentz White Collar Defense & Investigations attorneys Timothy P. Crudo at tcrudo@coblentzlaw.com or Emlyn Mandel at emandel@coblentzlaw.com.

[1] https://www.justice.gov/criminal-fraud/fcpa-resource-guide

[2] 15 U.S.C. §§ 78dd-1(a); 78dd-2(a); 78dd-2(h)(1)(A); 78dd-2(h)(1)(B).

[3] 902 F.3d 69, 76-97 (2d Cir. 2018).

[4] 15 U.S.C. § 78ff(a).

[5] https://www.justice.gov/opa/pr/novartis-hellas-saci-and-alcon-pte-ltd-agree-pay-over-233-million-combined-resolve-criminal

[6] 15 U.S.C. § 78dd-1(f)(1)(A).

[7] United States v. Esquenazi, 752 F.3d 912, 920-32 (11th Cir. 2014).

[8] 18 U.S.C. § 3282(a).

[9] 18 U.S.C. § 3301(b).

[10] 28 U.S.C. § 2462.

[11] See U.S. Sentencing Commission Guidelines Manual (2018), §8B2.1 (discussing effective compliance and ethics program) available at https://www.ussc.gov/guidelines/2018-guidelines-manual-annotated; U.S. DOJ Justice Manual, 9-47.120 FCPA Corporate Enforcement Policy available at https://www.justice.gov/jm/justice-manual.

[12] https://www.sec.gov/litigation/admin/2020/34-89149.pdf at para. 24.

[13] https://www.justice.gov/criminal-fraud/page/file/937501/download

By Miles Imwalle, Katharine Van Dusen, Charmaine Yu, and Sarah Peterson.

Senate Bill 35 (SB 35) was one of the most promising bills to come out of a package of housing-related laws enacted by the California legislature in 2017. SB 35 authorized a potentially powerful procedure for reviewing proposed housing developments, requiring cities to deliver streamlined approvals of developments that are consistent with local zoning and design standards, and eliminating the arduous discretionary approval process that has long-stymied such developments in California. But until recently, SB 35 was untested in court. Now, two recent trial court decisions have affirmed that SB 35 is indeed a powerful tool: not only must projects be approved within three to six months, but the approvals are likely to withstand later legal challenges.

The more recent decision involved a challenge to the first large-scale project approved through SB 35. In 2018, the City of Cupertino approved a major redevelopment of the Vallco Fashion Mall under SB 35. The Vallco project proposed to add 2,402 units of housing to Cupertino, including 1,201 affordable units. The City reviewed the project and determined it was consistent with local standards, and the project was therefore approved under SB 35. In fact, because the project satisfied the local standards and otherwise met SB 35 requirements, the City had no discretion to reject the project application.

In a closely watched and hotly contested proceeding, a group of Cupertino residents known as Friends of Better Cupertino petitioned to overturn the approval. The lawsuit took over a year to resolve—more than triple the amount of time it took for Cupertino to approve the project in the first instance. The lawsuit challenged nearly every aspect of the approval, from Cupertino’s method of reviewing the application to its determinations that the project met the statutory criteria.

On May 6, 2020, the Court rejected each of petitioner’s arguments in a detailed, carefully reasoned 62-page decision (available here). Crucially for project applicants, the Court at the outset rejected the foundational premise of petitioner’s lawsuit, namely, that Cupertino had a legal obligation to deny the project application if it failed to meet the statutory criteria for approval. The Court held that municipalities are under no ministerial duty to reject any project submitted under SB 35: “nothing in [SB 35] requires an agency to enforce the eligibility criteria or its own local standards by affirmatively rejecting a noncompliant project.” Because there is no such duty, project opponents cannot tie up approved projects in years of litigation.

The Court’s decision also made clear that a city’s staff is fully authorized to review and approve an SB 35 project without involvement from the city council or the planning commission, and without any public hearing. While SB 35 authorizes limited public oversight, as long as the oversight does not chill or inhibit project approval, SB 35 “neither mandates a public hearing nor requires a decision to be made by a local planning commission.” Instead, SB 35 was enacted to “eliminate the involvement of elected officials in the process to make review ministerial rather than discretionary.” In rejecting petitioner’s argument that a public hearing was required, the Court recognized a key goal of SB 35: “to drastically reduce the politicization of the planning process and the use of tactics like those Petitioners resort to here.” The staff-level review and approval of Vallco’s SB 35 project was appropriate and fully consistent with the goals of SB 35.

While the Court denied Friends of Better Cupertino’s petition as procedurally defective because Cupertino would have had no duty to deny a non-compliant project, the Court also took pains to emphasize that the City’s approval of the project was, in any case, appropriate as a factual matter. The Vallco project actually satisfies each of the objective standards in SB 35, and the City was correct to approve it. As the Department of Housing and Community Development—the statewide agency in charge of implementing SB 35—has recognized, “[a]pproval of projects such as the Vallco project fulfill this legislative intent.”

The Vallco decision follows on another decision that gave proper effect to the SB 35 statute. That decision involved the denial by the City of Los Altos of a 15-unit project submitted under SB 35. In the decision, issued on April 27, 2020 (available here), the Court ruled that the City improperly denied the application because it had not adequately identified inconsistencies with specific objective standards. While the City had issued a denial letter claiming that the project included too few parking spaces and did not have “adequate” access, the Court faulted the letter for being vague and failing to identify any objective standards that the project violated. Because the City failed to issue a valid inconsistency determination within the statutory deadline, the Court held that the project “was deemed to comply with objective standards as a matter of law,” and directed the City to approve the project.

These two decisions fulfill SB 35’s promise as a powerful tool to obtain approvals of housing developments throughout the Bay Area and the State. The SB 35 procedure effectively limits the ability of local residents and politicians to block qualified housing developments from being approved in the first instance, and also limits their ability to use the courts to tie up projects that comply with SB 35’s criteria.

 

Coblentz Patch Duffy & Bass LLP attorneys assisted the applicant, Vallco Property Owner LLC, and its affiliate, Sand Hill Property Company, during all stages of entitlements and in the Friends of Better Cupertino litigation.

Brand owners now have greater incentive for pursuing infringers of their trademarks under a recent Supreme Court decision. Last week, the high court resolved a dispute between the circuits, ruling that trademark owners may recover the profits earned from the sale of infringing goods even if the infringer did not act willfully.

Writing for a unanimous Court in Romag Fasteners, Inc. v. Fossil, Inc., Justice Gorsuch conducted a statutory analysis. The Lanham Act expressly requires willful infringement to obtain certain forms of damages, but not to obtain an infringer’s profits. Congress could have imposed that requirement, but chose not to do so – so neither should the courts. This decision thus clears the way for an award of infringer’s profits even in cases of “innocent infringement.”

High Risk, High Reward

Following Romag Fasteners, accused infringers will likely see an uptick in lawsuits seeking disgorgement of profits. The expanded availability of infringer’s profits bolsters the financial case for pursuing trademark infringers. Previously, plaintiffs seeking damages in some circuits had to prove that they lost sales to an infringer – a tricky task in a crowded marketplace. Most successful infringers have earned something for their efforts, though, all of which is now at risk. Even if profits are not awarded in every case, the chance that they will be is a significant benefit to plaintiffs. Brand owners should search and clear trademarks carefully.

The decision is also likely to increase deterrence for so-called “short-term” infringers. Some infringers are not deterred by the risk that their future sales will be banned – they simply roll the dice, make money while they can, and move on to greener pastures when challenged. Romag Fasteners modifies the calculus for them. Real money is now at stake.

The Supreme Court’s latest intellectual property decision continues the trend towards dismantling limitations to damages rooted in precedent but not statute. Careful monitoring of trademark use in the market – for both trademark owners and potential infringers – is now more important than ever.

For further information on the topic or for general IP assistance, contact Coblentz Intellectual Property attorneys Thomas Harvey at tharvey@coblentzlaw.com, or Christopher Wiener at cwiener@coblentzlaw.com.

In the current environment, it is tempting to let data privacy issues take a back seat to more urgent issues of health and safety.  But businesses cannot afford to forget about data privacy compliance, especially in light of the upcoming July 1, 2020 enforcement date of the California Consumer Privacy Act (“CCPA”), which Attorney General Xavier Becerra has said will not be delayed due to COVID-19 issues.  Businesses must continue to consider and address privacy compliance issues now and over the next few critical months.

In this article, we discuss how the CCPA impacts franchisee-franchisor relationships, franchise obligations under the CCPA, and potential consequences of non-compliance.

CCPA Penalties: Good News, Bad News, And Brand Reputation

The good news for franchisees and franchisors (and all businesses) is that only the Attorney General may bring a lawsuit against a business for most CCPA violations.  The exception to this, of course, is that the CCPA provides a private right of action for consumers affected by a data breach.  However, for most CCPA violations, there is no private cause of action and a consumer cannot commence a lawsuit against your company.

The bad news is that even under Attorney General actions, penalties of non-compliance with CCPA are steep.  Intentional violations carry a $7500 price tag per violation and unintentional violations are subject to penalties of $2500 per violation. And those violations are calculated on a per consumer basis.  When considered in perspective that California’s population exceeds 39 million, even unintentional violations can quickly add up to hundreds of millions of dollars in penalties. Both franchisees and franchisors (under the theory of vicarious liability) may be directly liable for these penalties.

In addition to monetary penalties, as more Americans become cognizant of and value their privacy, any lack of transparency or privacy violations can lead to bad PR, tarnishing the brand image and goodwill associated with the brand.  The franchise system depends on a strong brand. Once the brand reputation takes a hit, it is hard to overcome the negative connotations without spending significant resources. Both the franchisor, who has developed the strength of the brand, and the franchisee who is operating under the name of the brand, have much to lose as customers will not distinguish between franchisor-franchisees when punishing a brand.

Thus, the cost-benefit analysis weighs in favor of taking the CCPA seriously and evaluating if compliance is required at the franchisor and franchisee level.

Evaluating Whether CCPA Compliance is Required

Many franchisees and franchisors may not think they are subject to the CCPA.  Franchisors that have no presence and do no direct business in California may believe that they are exempt from complying with the CCPA.  Alternatively, franchisees may believe that their franchisor’s compliance with privacy obligations is sufficient to render them compliant.  While this may seem to make sense where personal information is generally collected through a corporate website or point of sale system operated by the franchisor, the information is processed by the franchisor and generally used by the franchisor, franchisees are not automatically absolved of having to comply with the CCPA by virtue of their franchise relationships.  In fact, some franchisors in their privacy policies explicitly disclaim any liability arising from their franchisee’s collection and use of personal information.

In sum, both franchisors and franchisees must independently evaluate their collection and use of personal information, their corporate relationships, and branding to analyze CCPA compliance.

A franchisor or franchisee must independently comply with the CCPA if they are either: 1) a business as defined in the CCPA or 2) an “entity that controls or is controlled by a business” and “shares common branding with the business.”

Are You A Business?

A “business” under the CCPA is defined as any legal entity, operated for profit, that (1) collects the personal information of consumers and determines the purposes and means of processing the consumer information, (2) does business in CA, and (3) meets any of the following thresholds: a) has annual gross revenues exceeding twenty-five million ($25,000,000); b) buys, receives, sells or shares for commercial purposes the personal information of 50,000 or more consumers, households, or devices; or c) derives 50% or more of its annual revenues from selling consumers’ information.

If a franchisor or franchisee meets any of the above thresholds on its own, it is a business under the CCPA and must independently comply with the statute.  In such a circumstance where a franchisee independently meets these requirements, it is not sufficient that a franchisor provides a privacy policy or certain privacy notices; the franchisee is required to maintain their own privacy policies and notices and comply with other CCPA requirements.

Do You Satisfy the Business Branding and Control Test?

If a franchisor/franchisee does not independently meet the definition of a business, the inquiry then shifts to whether it is an “entity that controls or is controlled by a business” and “shares common branding with the business.”  To make this determination, a franchisee should consider: 1) the franchisor’s status as a business, 2) the franchisor’s control over the franchisee, and 3) shared common branding.  Similarly, a franchisor should consider: 1) its franchisees’ status as a business, 2) its control over its franchisees, and 3) shared common branding with its franchisees.

1. Franchisor/Franchisee Status As A “Business”

Unless your franchise is part of an extremely limited business model, most franchisors will likely meet the twenty-five million revenue threshold and satisfy the above definition of a “business” under CCPA if they are doing any business in California and collecting any personal information of consumers. If the franchisor is a business, the franchisee should next inquire regarding the remaining two factors of control and branding for a franchisee.

While many franchisors who are not directly subject to the CCPA may not need to worry about their franchisees hitting the $25 million revenue trigger for CCPA compliance, it is possible that franchisees may, through website visits or other means, collect information from over 50,000 California consumers, households, or devices per year. If a franchisee is a “business” under the CCPA due to its collection of information in this regard, the franchisor must then look to control and branding to determine its own potential compliance obligations.

2. Control

“Control” or “controlled” under the CCPA means, “ownership of, the power to vote, more than 50% of the outstanding shares of any class of voting security of a business; control in any manner over the election of a majority of directors, or individuals exercising similar functions; or the power to exercise a controlling influence over the management of a company.”

Certain aspects of the definition of “control” are relatively clear to evaluate.  For example, ownership is apparent based on whether a franchisor jointly owns a franchise with a franchisee. Similarly, whether or not the franchisor has the power to vote can be determined from corporate legal documents.

There is more uncertainty regarding the phrase “the power to exercise a controlling influence over the management.”  As written i.e. – the power to exercise – could mean that a franchisor does not have to actually exercise any controlling influence over management, it must only be vested with the power to exercise such influence. There is much ambiguity as to what “controlling influence over the management” means.

Generally, franchisors exert considerable control over their franchisees. For example, standard franchise agreements include provisions defining the franchisee’s sale territory and location, services offered by the franchisee, required training for franchisee employees, strict quality control requirements over the products and services offered by the franchisee, design and décor, and limitations on use of franchisor branding and intellectual property.  Franchise agreements often include non-compete clauses restricting the franchisee from competing with the franchisor’s business.  Therefore, one can argue that a franchisor has broad control over the management of a franchise and CCPA compliance is warranted by any franchisee under the control of a franchisor that is a business.  The practical consequences of such an interpretation of “control” is that any franchise, regardless of its location and size, if collecting California consumer data, is required to comply with the CCPA.  So a hotel-franchisee of an international hotel chain in New York City, NY must comply with the CCPA regardless of the number of Californians visiting the franchisee hotel.

On the other hand, one can argue that the franchisor’s control is only exerted initially when the franchise is set up and wanes over time to quality control only.  The location, territory, products, and services offered are all one-time decisions.  The franchisee maintains control over day-to-day activities such as installing equipment, hiring and managing employees, determining wages, all of which the franchisor has no control over.  Thus, there is no ongoing “controlling influence” on the franchisee operations and no CCPA compliance is warranted.  The concern over this interpretation of “control” is that a franchisee may never have to comply with the CCPA.  This would render the language in the statute pertaining to entities that control or are controlled by a business and share common must comply with the CCPA superfluous. It would also contradict the general spirit of the CCPA that aims to provide transparency and clarity in the collection and use of personal information of California consumers.  For example consider a burger franchise in Roseville, CA that collects personal information of CA residents and shares it with the franchisor corporation.  The franchisor then uses this information to engage in targeted advertising, sells this information to third parties, and shares the data with its affiliates and partners, etc.  The CA consumer in Roseville had no notice or transparency when visiting the franchise about how his/her personal information would be used, sold, or shared by the franchisor. This is exactly the situation the CCPA seeks to remedy.

The CCPA is unchartered territory so ultimately what constitutes “control,” what actions can be categorized as “controlling influence,” and what is “management” are questions that will be resolved by forthcoming enforcement actions.  Each franchise circumstance is different and, for now, franchisors and franchisees should evaluate their data collection and use policies and assess “controlling influence” exerted by franchisors over franchisees while making a good faith determination of whether or not to comply with CCPA.

3. Common Branding

Common branding means a “shared name, servicemark, or trademark.”  The essence of a franchisor-franchisee relationship is to enable the franchisee to use the franchisor’s trademark, name, processes, and know-how.  The franchisee seeks to benefit from the franchisor’s brand recognition and reputation in the market. As a result, franchisees will almost always share the name and mark of the franchisor and satisfy the common branding requirement.

Because the CCPA applies to companies that control or are controlled by a business AND share common branding with a business if these two elements are met, and either the franchisor or the franchisee is deemed a “business,” both entities are likely subject to CCPA.

Conclusion

The decision of whether or not a given franchisor or franchisee must comply with CCPA and how it can achieve this goal should be evaluated on a case-by-case basis.  Depending on the situation, resourceful legal solutions may be successful in navigating CCPA compliances in light of the complexities of franchise relationships.  For example, in unique situations, it may be possible for a franchisee to enter into a “service provider” agreement with the franchisor thereby shifting the CCPA obligations on the franchisor. Alternatively, franchisors and franchisees may be able to change their corporate relationships, operations or management functions to avoid getting pulled into CCPA liability when they would not otherwise be covered by the CCPA.

If you are a franchisor, franchisee, parent, subsidiary or other business and are evaluating whether or not you should comply with CCPA or how to comply, contact Cybersecurity and Data Privacy attorney Scott Hall (shall@coblentzlaw.com) to determine further obligations. You can also review additional CCPA articles and resources in our CCPA Resource Center.

With the COVID-19 pandemic threatening people’s health and wreaking economic havoc in California and worldwide, parties to commercial contracts are asking whether force majeure and the closely related doctrines of commercial impracticability and frustration of purpose, can avoid or suspend their obligations in a contract.

As just one example, commercial and retail tenants have sought relief from their obligation to pay rent, given that many retail establishments like restaurants have been forced to close or have seen revenues plummet. Beyond leases, the COVID-19 crisis may affect performance of obligations under other commercial contracts (like loans or services or supply contracts), because cash flow and supply chains are disrupted, employees cannot come to a workplace, or government orders have required business closures.

Contracts Containing a Force Majeure Clause

As a first step, read through the contract and check whether it contains a force majeure clause. If it does, review its language closely. Force majeure generally requires two conditions to excuse performance: (a) the occurrence of unforeseen, extraordinary circumstances that create a risk that neither party has agreed to bear, and (b) the extraordinary circumstances were beyond the control of the party seeking to suspend or avoid performance. Contractual force majeure provisions typically list a series of events that the parties have agreed would excuse performance, including, as examples: a pandemic, epidemic, public health emergency, government action, or, more generally acts of God or events beyond the control of either party. In addition to listing particular triggering events, force majeure clauses typically state that performance is suspended for the duration of the event, and, in some cases, for a reasonable period beyond the event. Some force majeure provisions may require that the party invoking it provide notice to the other party, including advising of the expected duration that performance will be suspended.

Contracts Without Force Majeure Provisions

Even where a contract does not contain a force majeure provision, California law may excuse performance of a contract when extraordinary events not within the contemplation of the contracting parties, and beyond their control, make performance impossible or commercially impracticable. See, e.g., City of Vernon v. City of Los Angeles (1955) 45 Cal.2d 710. California Civil Code Section 1511 and the California Commercial Code Section 2615(a) reiterate these common law principles: The failure to perform or a delay in performance is excused when it is rendered impossible or impracticable by the occurrence or nonoccurrence of an event not within the contemplation of the parties and beyond their control, unless one of the parties explicitly agreed in the contract to assume the risk of such event.

Although force majeure and commercial impracticability are potentially viable defenses to performance of a contract, they are generally reserved for extraordinary situations. The current pandemic and government shelter-in-place measures may indeed be truly extraordinary, at least at the moment, for certain businesses and certain contracts entered into before the possibility of a COVID-19 event was reasonably anticipated. As time passes and the pandemic, government action, and government aid develop, however, the situation should change and become less exceptional.

Assuming that the current pandemic and government action would trigger a force majeure defense for contracts entered into, for example, before February 2020, the party seeking to avoid performance must still prove causation and is required to reasonably mitigate damages. Did the party invoking force majeure have other business problems before the pandemic that are causing or substantially contributing to the inability to perform? Has the party undertaken reasonable, diligent measures to mitigate the effect of the COVID-19 pandemic, such as redirecting its business efforts and minimizing costs? Moreover, why should the counter-party to the contract be forced to bear the risk of the pandemic?

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed into law on March 27, 2020 and other state enactments that may follow should also offer some contracting parties with sufficient relief and mitigation such that continued, or renewed, performance with pre-existing contracts may be required. The CARES Act provides hundreds of billions of dollars of funding available for Small Business Association loans, which will provide “forgiveness” (no repayment required) for amounts the businesses spend on interest payments for mortgages, payroll, utilities, and rent for an eight-week period after a loan originates. Government aid may enable businesses to mitigate their damages sufficiently that continued performance with contracts is required.

The full text of the CARES Act is available here and a thorough summary of both business and employment benefits under the act can be found here.

Issues for Consideration

• Review the contract for a force majeure provision and the particular contract language. Where the contract contains a specific provision, its language and the manner in which it allocates risks between the parties should take precedence over California’s common law and statutory law.
• If you are seeking to suspend or avoid performance, give the other party written notice, regardless of whether the contract requires it. If you are the counter-party seeking to require performance and you receive notice, ask reasonable questions – why in particular does COVID-19 justify suspending performance for this business, for how long, and what accommodations in lieu of suspending performance altogether could you (or the other party) propose?
• The party attempting to suspend or avoid performance needs to seek to mitigate damages. Likewise, the party seeking to enforce the contract should be flexible, where possible, both as a good business practice to further the relationship and to show that you were flexible or even proposed mitigation measures. Ask what you can do to facilitate performance, such as agreeing to delay or defer a payment for a certain period of time, or, possibly to waive or diminish interest payments or a late fee for a particular period. If litigation later ensues, a party’s flexibility should help to show that the party seeking to avoid performance could have found a way to perform with reasonable proposed accommodations or mitigation measures.

Aggressive litigants may also seek to take tactical advantage of the COVID-19 pandemic to avoid contracts they do not like. If you are faced with a baseless or overreaching claim that the COVID-19 pandemic has made contractual performance impossible, you may need to push back forcefully. And before you seek to take tactical advantage of the pandemic, keep in mind that courts are unlikely to look with sympathy on parties who try to exploit a worldwide health and financial crisis. Force majeure provisions should only be invoked where appropriate.

Any decision about whether to invoke force majeure or how to respond to a counter-party’s invocation of it is fact-specific. We expect to provide future updates on issues in specific contexts. For example, how will lenders and debtors address loan defaults if the pandemic triggers a long-term recession? How will commercial and residential landlords deal with sky-rocketing numbers of tenants who may suddenly be unable to pay rent?