Please note: Coblentz is not taking on new clients for Proposition 19 matters at this time.

Proposition 19, which will be on California’s November 2020 ballot, dramatically changes the property tax rules exempting certain intra-family transfers and primary residence transactions for certain individuals such as those over age 55 or severely disabled.[1] This memo illustrates the impact of the proposed change for properties transferred between parents and children, which could significantly increase the cost to future generations of keeping legacy properties within the family.[2]

California property tax is assessed based on the property’s purchase price and the cost of any improvements to the property. Unless a “change of ownership” occurs, the assessed value of real property increases by no more than 2% annually. Because average appreciation of California real property has far exceeded the 2% annual adjustment since the enactment of Proposition 13 in 1978, long time owners of California real estate generally enjoy a very low property tax burden relative to owners of newly acquired property. California currently provides two valuable exemptions from reassessment, which allow the continuation of this benefit after transfers of qualifying property interests between parents and children.[3] First, a transfer of parent’s principal residence to a child is completely exempted from reassessment. The child succeeds to the parent’s assessed value regardless of the value of the property or its assessed value at the time of transfer. Second, transfers of real property interests which are not the parent’s primary residence (residential or commercial) are exempted from reassessment to the extent of $1 million of assessed value, regardless of the fair market value of the property.

Proposition 19 revises the Parent-to-Child Exemptions to limit (1) the types of transfers between parents and children that can be exempted from reassessment, and (2) the property tax benefit available. First, only a transfer of the parent’s principal residence to the child where the property continues as the child’s principal residence qualifies. Second, provided the transfer meets the principal residence requirements, the child’s assessed value is then determined based on whether the property’s value at the time of transfer is greater than the parent’s assessed value by more than $1 million. If the value of the property at the time of the transfer exceeds the parent’s assessed value by less than $1 million, then the child takes the parent’s assessed value. If the value of the property at the time of the transfer exceeds the parent’s assessed value by more than $1 million, then the child’s assessed value is the current value of the property less $1 million. The following hypotheticals illustrate the consequences under current law versus Proposition 19

Hypothetical No. 1 – Prop 19 Increases Taxes 10x

Facts:

• Property #1 is Mom’s principal residence: $10M FMV, $500,000 assessed value
• Property #2 is Mom’s secondary residence: $5M FMV, $1M assessed value
• Mom’s total assessed values that she pays property tax on is $1.5M
• Property tax rate is 1.25% (estimated)
• Mom’s estimated total property taxes are $18,750
• Mom gives Property #1 and Property #2 to Child and claims exemption
• Child does not use either property as principal residence

Child’s Assessed Values and Property Tax Consequences:

Current Law	Proposition 19
Property #1 assessed value $500,000 (exempt under R&T Code Section 63.1(a)(1)(A)) Property #2 assessed value $1M (exempt under R&T Code Section 63.1(a)(1)(B))	Properties #1 and #2 are both reassessed to their fair market value because of the requirement the property be both Mom and Child’s principal residence before and after transfer, respectively
Assessed value is $1.5M, total, same as Mom’s	Assessed value is $15M, total
Property tax is $18,750, total, same as Mom’s	Property tax is $187,500, total

 

Hypothetical No. 2 – Prop 19 Increases Taxes 9.3x

Facts:

• Same facts as Hypothetical No. 1, except that Child maintains Property #1 as Child’s principal residence after the transfer.

Child’s Assessed Values and Property Tax Consequences:

Current Law	Proposition 19
Same result as Hypothetical No. 1 Property #1 assessed value $500,000 (exempt under R&T Code Section 63.1(a)(1)(A)) Property #2 assessed value $1M (exempt under R&T Code Section 63.1(a)(1)(B))	Property #1 receives a limited exemption from reassessment of the fair market value, less $1M ($10M – $1M = $9M) If Property #1 FMV were instead $1M then the assessed value would remain $500,000 and Child would have same property tax as Mom for Property #1 Property #2 is reassessed to its fair market value because of the requirement the property be both Mom and Child’s principal residence
Assessed value is $1.5M, total, same as Mom’s	Assessed value is $14M, total
Property tax is $18,750, total, same as Mom’s	Property tax is $175,000, total

 

 

[1]           Note that Prop 19, if passed, would expand the ability of certain homeowners, such as those over age 55 or severely disabled, to transfer the assessed value of their principal residence to a replacement residence and likely provide property tax savings to such homeowners.  In particular, Prop 19 would allow such a transfer of assessed value to a replacement residence in any California county.

[2]              R & T Code Section 63.1 provides the “Parent-to-Child” exemptions. The Parent-to-Child exemptions are for transfers “between” parents and children. The Parent-to-Child exemptions are also available for transfers between grandparents and grandchildren in certain circumstances. For purposes of this illustration, “parent” is the transferor and “child” is the transferee.

[3]              Note that certain procedural requirements must be satisfied to benefit from these exemptions and that other types of exemptions exist other than the Parent-to-Child transfers.

Now may be an opportune time to gift assets out of your estate, particularly through an estate planning technique known as the Grantor Retained Annuity Trust (“GRAT“)—a small silver lining of the alarming pandemic and down economy. As you undoubtedly noticed, the stock market and other economic indicators declined significantly in reaction to the COVID-19 pandemic, and the federal interest rates declined in tandem. The federal interest rates remain exceptionally low and many asset values are still generally depressed despite some gains and volatility in the stock market since its initial downturn. A GRAT is a highly efficient wealth transfer vehicle in low interest rate environments when funded with assets that are expected to appreciate considerably after the gifting date. It uses virtually none of your lifetime gift and estate tax exemption amount (currently $11.58 million per person) and has practically no downside risk, which is key in this volatile environment.

GRAT Structure

A GRAT is an irrevocable trust that is generally structured with a short term to which you gift property that is expected to appreciate over that term—you may consider contributing a concentrated position or securities in one asset class. The GRAT pays an annuity to you during the trust term equal to 100% of the value of the assets at the time you transfer them into the GRAT plus a small amount of interest. The amount of interest included in the annuity (also known as the “hurdle rate”) is based on the Internal Revenue Code Section 7520 rate, which is tied to the applicable federal rate (“AFR”). The GRAT then transfers all remaining appreciation to your beneficiaries, either outright or often to a continuing irrevocable grantor trust (“IDGT”) at the end of the term. Click here to view a flowchart for a simple example of a GRAT structure.

The current Internal Revenue Code Section 7520 rate is exceptionally low in September (0.4%). Gifting certain stocks or interests in assets currently depressed but expected to rebound will shift that relatively significant appreciation out of your estate while using almost none of your lifetime gift and estate tax exemption. If the gifted assets do not appreciate, then the downside is only lost transaction costs because all assets transferred to the GRAT are ultimately distributed back to you. The beneficiaries or IDGT that receives the GRAT appreciation can mirror the provisions of your existing estate plan or you can provide for additional beneficiaries or changed terms, which we can discuss in more detail.

You can also “roll” these GRATs, meaning that when the annuity is paid to you on the applicable anniversaries of the GRATs, you can fund those annuities into new GRATs and continue the process. Click here to view the flowchart for an example of a rolling GRAT structure.

Further, if the GRATs fail from the start because of an immediate downturn, the GRATs are structured so that you can swap the assets back to yourself in exchange for assets of an equal fair market value and then you can fund new GRATs right away to take advantage of the immediate downturn.

Income Tax Consequences of GRATs

The GRAT and IDGT are “grantor trusts” for income tax purposes. You, as an individual, are taxed on the income and realized gains of the GRAT and IDGT. Instead of the trusts bearing their own tax liabilities at the compressed trust tax rates, your payment of the taxes will be a tax-efficient wealth transfer as it will not utilize any of your lifetime gift and estate tax exemption. Grantor trust status may be switched off for the IDGT at any time, in which case the IDGT will bear its own tax liabilities at all times in the future.

A tradeoff between making the gifts discussed herein and retaining them until your death is that assets held at death receive a full step-up in basis for income tax purposes. The income tax basis of assets transferred to the IDGT generally has a “carryover basis” as your basis attaches to the property when gifted to the GRAT. (Note that in certain circumstances this planning could foreclose recognition of losses on gifted assets.) Once the IDGT receives the assets, you may reacquire the assets by substituting other assets with an equal fair market value at the time of the reacquisition. In particular, you may swap assets of the IDGT for other assets that have a relatively high basis to minimize capital gains consequences upon a sale by the IDGT.

Gift Tax Consequences of GRATs

A small “adjusted taxable gift” (e.g., typically less than $100) is made upon the transfer of property to the GRAT. There is no gift tax due in connection with the transfer, assuming you have remaining lifetime exemption from gift and estate tax.

Gift Tax Return Due

Although there is no gift tax due, you need to file a gift tax return (Form 709) reporting the transfer of property to the GRAT at the same time you file your 2020 income tax return. Either we or your accountant will prepare the gift tax return.

Estate Tax Consequences of GRATs

Once the property is transferred from the GRAT to the remainder beneficiaries of the IDGT at the end of the GRAT term, the property is not considered part of your taxable estate and will not be taxed at your death. Your lifetime exemption from gift and estate tax will be reduced by the amount of the “adjusted taxable gift” discussed in Paragraph III above. If you do not survive the GRAT term, however, any remaining GRAT property is includable in your taxable estate and may be subject to estate tax depending on your remaining gift and estate tax exemption just as if you never implemented the GRAT planning.

Please reach out to Coblentz Family Wealth attorneys if you would like to further discuss the GRAT technique and why this may be an opportune time to implement a GRAT gifting strategy.

Major tax reform discussions are ongoing in Washington and Sacramento while everyone at home is busy navigating the pandemic. Many commentators are predicting that budgetary pressures resulting from the COVID-19 stimulus measures will necessitate a near-term reversal of some of the 2017 federal tax cuts and provide further rationale for the passage of significant California property tax propositions. We encourage you to revisit your estate plan and consider gifting strategies in light of the potential legislative changes and unprecedented economic environment as highlighted below.

Estate, Gift, and GST Tax Increases Under Biden’s Proposal

In 2020, the lifetime exemption allows individuals to transfer up to $11.58 million free of estate and gift tax and generation-skipping transfer (“GST”) tax either by gift during life or upon death. Transfers in excess of those exemption amounts, other than to charity or to or for the benefit of a spouse, are taxed at a 40% rate. Biden and Sanders published 110 pages of policy reforms that would restore the estate tax regime to the “historical norm.” Many commentators are speculating this proposal means reducing the estate and gift tax and GST tax exemptions from $11.58 million per person to $3.5 million per person. However, “historical norm” could also mean even lower exemption amounts and a higher tax rate.[1] If not sooner amended, the estate and gift tax and GST tax exemptions are slated to revert to pre-2017 levels effective January 1, 2026, absent Congressional action.

The IRS issued guidance confirming that transfers taking advantage of the current exemption amounts will not be “clawed back” by a change to the law, making 2020 the time to utilize the balance of your exemptions by making gifts before any legislation becomes effective.

Property Tax Increases Under California Propositions 15 and 19

Propositions 15 and 19 will be on California’s November 2020 ballot and, if passed, could significantly change the property tax landscape.

• Proposition 15: Split Roll Tax for Commercial/Industrial Properties. The “split roll” would assess taxes for certain commercial and industrial properties based on their fair market value. Accordingly, Prop 15 removes limitations established under Proposition 13 (1978) that place a 2% cap on increases to the assessed value of these types of properties. Commercial or industrial properties whose fair market value does not exceed $3 million are exempted from Prop 15 reassessment. There is a significant exception to this $3 million threshold: the value of a subject property must be aggregated with the values of any other commercial or industrial properties in California for which a direct or indirect beneficial owner of the subject property shares a direct or indirect ownership interest. Note that the split roll system established under the Prop 15 proposal does not change the overall property tax rate, nor does it apply to residential property or agricultural property.
• Proposition 19: Change Assessed Value Calculations for Residential Property. Proposition 19 would expand exemptions allowing certain homeowners such as those over age 55 to transfer their assessed values to replacement residences in different counties within California, but would significantly narrow or eliminate existing exemptions from reassessment for other intra-family transactions. If you have any California real property with a low assessed value that you hope to pass to future generations, there are several strategies you might consider to take advantage of the current expansive exclusions from reassessment. See a more detailed explanation of Prop 19 here.

Low Interest Rates Favor GRATs, CLATs, and Sales to IDGTs

The current low interest rate environment makes certain wealth transfer vehicles especially attractive. Three of these techniques are briefly described below.

1. GRAT. A grantor retained annuity trust (“GRAT”) is a short-term irrevocable trust to which you transfer property that you expect to appreciate or generate income at a rate greater than that assumed by the IRS. The GRAT pays an annuity back to you during the trust term roughly equal to 100% of the value of the assets at the time you transferred them into the GRAT plus interest at a rate which the IRS publishes on a monthly basis. To the extent that the contributed assets generate income or appreciate at a higher rate than that IRS assumed rate, the excess appreciation passes to your beneficiaries free of tax. See a more detailed explanation of GRATs here.
2. CLAT. A charitable lead annuity trust (“CLAT”) is similar to a GRAT, except that the annuity is paid to a charitable beneficiary. The annuity distributable to the charitable beneficiary can be set at a value of the assets contributed to the trust. The non-charitable beneficiaries receive all appreciation above the contributed amount adjusted for the hurdle rate. A CLAT can be structured either to provide you a charitable income tax deduction in the year of creation or provide the CLAT deductions for the annuities paid to the charitable beneficiary. Please contact us to discuss the many variations on and ways to structure CLATs if you are interested in gifting a portion of your estate to charity.
3. Sales to IDGT. A sale of assets to an irrevocable grantor trust (“IDGT”) is a tax-efficient way to further leverage the use of lifetime estate, gift, and GST tax exemptions. Assets are sold to the IDGT in exchange for a note which bears interest at a rate tied to the IRS assumed “applicable federal rate,” which presently is very low. The IDGT pays you the low interest and principal for the duration of the note. You pay the income taxes on assets owned by the IDGT (for as long as you wish) which is a further tax-free wealth transfer. There are many ways to tailor sales to IDGTs that we are happy to discuss with you in more detail.

Low Income Tax Rates Favor ROTH Conversions

It is unknown what future income tax rates will be, but income tax rates for high-earners may be increased through Biden’s proposal to reverse the 2017 tax cuts or other California and federal proposals to increase tax revenue after the COVID-19 stimulus. Federal and state taxes are owed on the conversion; however, future distributions from the Roth account are then income tax-free. Contact your financial advisor to discuss whether a Roth conversion or partial conversion is advantageous.

Tax Haven States Benefit Trust Planning for Legacy Assets

California’s high state income tax rates are encouraging residents to move out of state, but another option may be to transfer legacy assets to a trust in a favorable tax state. Legacy assets that are expected to be held for future generations and not used for current expenses or distributions might be held in a trust outside of California and accumulate and grow free of state income taxes. We are happy to discuss the optimal structure for legacy assets and advantages of different states with you in more detail.

For more information or to discuss your estate planning and gifting strategies, please contact Coblentz Family Wealth attorneys.

 

[1]           Earlier in his campaign, Biden proposed eliminating the step-up in basis at death so that beneficiaries would have income tax due on the sale of estate assets.

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.