On June 29, the Federal Trade Commission (FTC) published its updated Guides Concerning the Use of Endorsements and Testimonials in Advertising (“Guides”), together with an FAQ document, FTC’s Endorsement Guides: What People Are Asking (“FAQ”). One day later, it announced its proposal for a new Trade Regulation Rule on the Use of Consumer Reviews and Testimonials (“Trade Regulation”). In the spirt of the FTC’s FAQ, we figured we would post a brief one of our own, highlighting some of the big changes (and non-changes).
With continued headwinds that include rising interest rates, high inflation and the general sentiment of a recission that is always right around the corner, the outlook for merger and acquisition activity generally – and for the retail industry in particular – seems likely to include more transactions with distressed targets than in recent years. Here is a brief summary of some unique considerations for deals involving distressed targets to help you brush up your playbook for potential transactions as the U.S. and world continue to navigate a challenging macroeconomic environment:
- Transaction Structure – Given the general ability to pick-and-choose what assets a purchaser wants to acquire, and what liabilities a seller is willing to assume, distressed transactions frequently are structured as asset sales rather than equity sales or mergers. The benefits to a buyer of being able to select the assets it purchases and the liabilities it assumes, and tax benefits of the step-up in basis that the buyer can receive by purchasing assets, typically outweigh the burden of additional third-party consents associated with asset deals. It is critical for buyers in an asset deal to ensure that the purchase agreement is clear on the assets being purchased to ensure that the scope includes everything the buyer intends to purchase and the liabilities that it is (and is not) assuming to avoid taking on unintended obligations from a seller.
Over the last few years, perhaps prompted by the proliferation of subscriptions for consumer goods and services during the pandemic, several states have passed new automatic renewal laws (ARLs) that regulate continuing or renewing contracts. Other states have likewise amended existing ARLs to add detailed restrictions and requirements. Our most recent coverage of those efforts can be found in our Fall 2021 and Summer 2022 alerts.
With such activity at the state level, it was only a matter of time before federal regulators joined the fray. The Federal Trade Commission (FTC) recently did so by issuing a statement regarding its nearly 50-year-old Negative Option Rule. As announced by the FTC, the existing federal regulatory regime has “major gaps”: the Negative Option Rule regulates only “prenotification plans” (where sellers send products and charge for them unless consumers decline); the Telemarketing Sales Rule (TSR) regulates only telemarketing; and the Restore Online Shoppers’ Confidence Act (ROSCA) regulates only online purchases.
On May 11, 2023, the Minnesota Legislature agreed to a new law rendering void and unenforceable all future covenants not to compete, with limited exceptions for agreements entered into in connection with the sale or dissolution of a business. Following a final vote in the House and Senate, the law will be sent by Gov. Tim Walz for his signature. The law is written to take effect July 1, 2023, and to apply to contracts and agreements entered into on or after that date. With enactment, Minnesota will become the fourth state to impose a complete ban on employment-related noncompetes (joining California, Oklahoma and North Dakota).
The law prohibits any noncompete agreement with an employee or independent contractor that restricts the person from working for another business after termination of employment or independent contractor engagement regardless of a person’s income, with only two very limited carveouts for noncompetes agreed upon (1) during the sale of a business where the agreement prohibits the seller from carrying on a similar business within a reasonable geographical area for a reasonable period of time, or (2) in anticipation of the dissolution of a business where the dissolving partnership or entity agrees that all or any number of the partners, members, or shareholders will not carry on a similar business in a reasonable geographical area for a reasonable period of time. Subject to those limited exceptions, the law provides that any “covenant not to compete” contained in a contract is void and unenforceable. Importantly, a “covenant not to compete” does not include nondisclosure, confidentiality, trade secret, or non-solicitation agreements (including specifically those restricting the ability to use client or contact lists or restricting the solicitation of customers). Also, because “covenant not to compete” is defined in terms of prohibiting conduct “after termination of the employment,” the new law will not prohibit agreements that restrict an employee or independent contractor from working for another business while performing services for a business.
Consumers are increasingly conscious of how the products they buy impact the environment. Due to this heightened focus on environmental issues, consumer-facing companies frequently highlight the environmentally friendly attributes of their goods and services in advertising and on product labels. Unfortunately, leading companies are facing a wave of “greenwashing” class action lawsuits challenging these environmental claims. The Federal Trade Commission’s Green Guides provide some direction for companies seeking to avoid problematic environmental claims. However, the Green Guides are currently nonbinding and they do not preempt state law. The plaintiffs’ bar has seized upon this ambiguity and many preeminent companies have faced greenwashing class actions alleging claims under state consumer fraud statutes and related common law theories of liability. The FTC has also filed lawsuits against several companies. Consumer-facing companies should take immediate action to assess whether they are complying with the Green Guides and to review their exposure to greenwashing claims.
This article provides a high-level overview of the FTC’s Green Guides, analyzes the recent wave of greenwashing class actions and identifies practical strategies that companies can use to mitigate the risk of greenwashing litigation.
Some good news for California employers. Recently, the U.S. Court of Appeals for the Ninth Circuit ruled that California employers can require employees and applicants to sign arbitration agreements as a condition of employment, reversing its own prior decision which vacated U.S. District Court for the Eastern District of California’s grant of a preliminary injunction against enforcement of Assembly Bill 51 (AB 51).
By way of background, AB 51, which was signed into law in 2019 and codified in California Labor Code § 432.6, was enacted to protect employees from “forced arbitration” by making it a criminal offense for an employer to require an employee or applicant for employment to consent to arbitrate specified claims a condition of employment. After the District Court granted preliminary injunction against enforcement of AB 51 in January 2020, in September 2021, a divided three-judge panel of the Ninth Circuit Court vacated the preliminary injunction, which was the subject of a previous client alert.
The recent trend of increasing union activity in retail and service industry workplaces makes it imperative that retailers, even those that do not have a unionized work force, understand the National Labor Relations Act (“NLRA”), and the ways the NLRA (as interpreted and enforced by the National Labor Relations Board “NLRB”) can impact an employer’s ability to protect its brand image through standard practice such as employee uniforms, severance agreements, and restricting certain activities on their premises.
Union organizing and election successes are on the rise at retail and service industry locations. Since December of 2021, employees at nearly 300 Starbucks locations have voted to unionize. At the end of 2022, approximately 5% of all retail workers were represented by labor unions and the trend of increased unionization shows no sign of reversing.
Class action litigation is a significant risk for consumer-facing companies. An adverse outcome in a class action case can result in astronomical liability. Moreover, defending a class action may consume company resources and divert attention from core business objectives. To mitigate these risks, executives and in-house lawyers must take deliberate and decisive action when presented with a newly filed class action case, a litigation threat letter or mounting consumer complaints that appear to be headed toward litigation.
The list below outlines the first steps a company should take to gather and preserve the information that may be necessary to defend against consumer class action claims. For each of these steps, it is imperative that in-house attorneys or outside counsel take the lead to ensure preservation of the attorney-client privilege and attorney work product protections.
The National Labor Relations Board (Board) issued a decision in February which should be on every employer’s radar, even if your employees are not unionized. The decision, McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023), limits the confidentiality, non-disclosure, and non-disparagement terms employers may include in severance agreements with their lower-level employees. In the decision, the Board reversed course from two recent decisions which provided more latitude to employers in what they could include in agreements with former employees as long as signing the agreement was voluntary and the agreement was not offered under coercive conditions.
In McLaren Macomb, the Board snaps back to its earlier line of cases that held that provisions in a severance agreement that restrict an employee’s participation in the Board’s unfair labor practice proceedings violate the National Labor Relations Act (the Act). The Board also signaled that it may expand on this precedent, testing not just whether a severance agreement interferes with participation in an unfair labor practice proceeding but also whether it restricts an employee’s ability to exercise other rights protected by Section 7 of the Act. Because Section 7 gives employees the right to talk about working conditions with other employees and even the general public, broad-based confidentiality and non-disparagement clauses will likely run afoul of the new requirements. In March, the General Counsel issued additional guidance that indicated that the NLRB will broadly interpret this holding and go after not only confidential, non-disparagement, and non-disclosure clauses but any portion of a severance agreement that might restrict a former employee’s participation in Board proceedings or exercising his or her Section 7 rights.
In 2022, California Gov. Gavin Newsom signed many laws impacting California employers. Some of the new laws became effective immediately and others, including some that were signed into law just weeks ago, take effect January 1, 2023, or later. These new laws address several topics, including supplemental paid sick leave, pay transparency, leaves of absence and fast-food restaurant employment standards.
As a reminder, the minimum wage in California is increasing to $15.50 per hour on January 1, 2023, for all employers — regardless of the number of workers employed by an employer. Also, many cities and local governments in California have enacted minimum wage ordinances exceeding the state minimum wage.