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Leland Frost

NAM’s Manufacturers’ Center for Legal Action to Be Recognized for Innovative In-House Compliance Practice

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National Association of Manufacturers (NAM) members know the Manufacturers’ Center for Legal Action’s (MCLA) Manufacturers’ Compliance Institute (MCI) for the valuable free legal information it provides through partnerships with world-class law firms. Now, the broader legal network is recognizing the MCI for its innovative work.

The Association of Corporate Counsel (ACC) Awards honor the work of leading in-house practitioners and legal departments, and the MCI will be honored at an ACC awards reception on October 25. The MCI will be recognized with a 2018 Corporate Counsel In-House Innovator Award, which honors in-house legal departments that develop innovative contributions for their organizations.

Through the MCI, NAM members can use an online portal to request access to a free 30-minute call with a respected major law firm. Many small to medium-sized manufacturers have no internal legal resources, yet are subject to scores of regulatory and legal requirements. The MCI program was designed to address the growing number of inquiries from member companies seeking practical guidance on regulatory and other legal issues. The MCI provides quick answers to often complex compliance questions while protecting member confidentiality.

Since the MCI’s launch in 2015, it has expanded from a partnership with one law firm to include six law firms with specialties in the areas of most concern to our members: Littler for labor and employment law; Sidley for environmental compliance; Squire Patton Boggs for global trade; Shook Hardy & Bacon for product safety; Wiley Rein for intellectual property; and Crowell & Moring for California Proposition 65 compliance.

The MCI has responded to hundreds of member inquiries and has helped NAM members better understand the maze of regulations that manufacturers must deal with daily, improved their ability to stay legally compliant and helped protect their investments and their reputations. In addition, training webinars offered through the program have reached thousands of individuals in our member companies, greatly facilitating their understanding of the legal and regulatory environment.

Illinois Court Issues a Shocking Ruling That Will Stifle Manufacturing Innovation

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AIM Inc., a.k.a. Automated Industrial Machinery, Inc., manufactures two-dimensional and three-dimensional computer-controlled metal bending machinery. Founded in 1992 by Constantine Grapsas, the company is an active machinery exporter via its two manufacturing facilities in North America and Europe. The governor of Illinois awarded AIM the Governor’s Export Awards for outstanding accomplishments in the export of goods and services around the globe.

Unfortunately, Illinois courts have failed to support the growth and well-being of such manufacturers through their astonishingly out-of-step interpretation of non-compete agreements.

After 13 years with the company, AIM’s VP of engineering, a company board member, officer and shareholder, quit and began directly competing with AIM, although there was a non-compete agreement in place. AIM filed suit. An Illinois lower court found the non-compete agreement unenforceable due to a lack of adequate consideration since the employee had signed it less than two years before leaving. AIM was also ordered to pay the defendant’s legal fees, and, because he was a shareholder, AIM had to provide yearly financial reports to the former-employee-turned competitor!

Thus, the Illinois courts have put its manufacturers in the position of potentially training their future competitors, with no way to legally protect themselves until after two years of employment. This does not make manufacturing in the United States more competitive, and the National Association of Manufacturers (NAM) and other organizations are working to help right this wrong.

AIM appealed the lower court’s ruling, and the NAM filed an amicus brief in the Illinois Appellate Court case, Automated Industrial Machinery, Inc. v. Christofilis, in support of AIM. Illinois is the only state that imposes a bright-line two-year rule for a restrictive covenant, which makes Illinois more expensive, and less attractive, for manufacturers to do business. In each of the states surrounding Illinois, an employer can hire an employee and expose that employee to proprietary trade secrets immediately, confident that the restrictive covenant securing its trade secrets will be enforced.

In an unpublished non-precedential opinion heard without oral argument, the Illinois Appellate Court affirmed the circuit court’s judgment. The Appellate Court acknowledged that there is a possibility that the Illinois Supreme Court would reject a two-year rule in favor of a more fact-specific approach.

As a last resort, AIM will now be appealing to the Illinois Supreme Court, but the court can choose which cases it accepts for review. It is hoped the Supreme Court will review this important case and employ a fact-specific, totality of the circumstances test when examining a post-employment restrictive covenant.

NAM Asks Supreme Court to Protect Manufacturers from Frivolous Securities Fraud Lawsuits

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The 2nd Circuit Court of Appeals has interpreted securities laws as requiring disclosure of information about uncertain future conditions, which potentially subjects many public companies, particularly manufacturers, to increasing and unwarranted civil suits. Because of these concerns, the National Association of Manufacturers (NAM) filed an amicus brief in November 2016, asking the U.S. Supreme Court to review the 2nd Circuit’s decision in Leidos, Inc. v. Indiana Public Retirement System. After the Supreme Court agreed to hear this case, the NAM filed another amicus brief addressing the merits of the case on June 28.

This case concerns liability for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 based on a failure to disclose adverse “trends” and “uncertainties,” which requires management to use its judgment in describing known trends and uncertainties that are “reasonably likely” to occur. This is part of necessary disclosures of many reports required of publicly traded manufacturing companies under federal securities laws, including quarterly and annual reports. The 2nd Circuit’s decision calls for far more disclosure than a pure materiality standard, and it calls for disclosure of purely “soft” information, all of which makes it easily susceptible to hindsight pleading.

The Supreme Court needs to resolve this issue because there is an express circuit split between the 9th and 3rd Circuits, on the one hand and the 2nd Circuit on the other. The 9th and 3rd Circuits hold that not disclosing a “trend” or “uncertainty” does not give rise to 10(b) liability, while the 2nd Circuit has held that it does. The 2nd Circuit’s holding will open up a significant new category of securities fraud claims, and, contrary to earlier Supreme Court decisions, it subjects companies to securities fraud liability for omitting disclosures, even when the “omitted” information is not necessary to make any affirmative statement not misleading. This represents a dangerous precedent and exposes issuers to ever-increasing litigation, and the hindsight problem is exacerbated by the fact that it concerns disclosures of “soft information” that are often subjective.

If the 2nd Circuit’s ruling is allowed to stand, plaintiffs might start pleading everything as a “trend” or “uncertainty” that should have been disclosed. Public companies could be exposed to “fraud-by-hindsight” litigation if shrewd plaintiffs allege that an event was known to management as being reasonably likely to occur, including knowledge of “soft information.” This issue is a slippery slope where manufacturers may be subject to private suits for securities fraud for failing to disclose information that may not be material.

Because the 2nd Circuit’s ruling introduces more uncertainty into an area that demands certainty and predictability, the logical outcome for companies is to over-disclose potential “trends and uncertainties” so that they might mitigate the increased likelihood of being sued for securities fraud. As the Supreme Court first anticipated more than 40 years ago, such a rule of law will “lead management simply to bury the shareholders in an avalanche of trivial informationa result that is hardly conducive to informed decision-making.” A win in this case would significantly limit public company exposure to liability for securities fraud as well as provide clarity regarding disclosure obligations.

EPA Hears Manufacturers’ Concerns and Delays Risk Management Program Rule

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The Environmental Protection Agency’s (EPA) new Risk Management Program (RMP) rule, published on January 13, 2017, revised an existing rule designed to reduce chemical hazards and related accidental releases. The rule imposes various recordkeeping, auditing, disclosure and mitigation mandates under the Clean Air Act on companies that handle various chemicals, which include many manufacturing companies. The new requirements were not adequately evaluated or justified by the Obama administration, and we have been working with the EPA under the Trump administration to improve some of these problems.

For example, the rule raises significant security concerns from required disclosures of hazardous material information and compliance issues that will cause irreparable harm to manufacturers by requiring them to make available sensitive information that could expose plant vulnerabilities. The rule also imposes costly audit requirements for “each covered process” without justification, and the agency failed to conduct an adequate assessment of the costs and benefits.

On February 28, the NAM and other industry associations submitted to the EPA a petition for reconsideration of the RMP, and the agency agreed to meet with us the following week to listen to our concerns.

The NAM and industry groups also filed a lawsuit on March 13 in the U.S. Circuit Court of Appeals for the District of Columbia, asking the court to review the validity of the Obama administration’s action implementing changes to the RMP rule under the Clean Air Act. Later that same day, EPA Administrator Scott Pruitt issued a 90-day delay of the effective date of the RMP rule. This will give the agency time to review our concerns and will temporarily suspend the compliance burden.

We are pleased that the EPA listened to manufacturers’ issues with the new rule and that it agreed to delay the effective date. This delay gives the EPA time to reconsider and review the rule’s requirements, without imposing unnecessary confusion and compliance costs on manufacturers.

The Manufacturers’ Center for Legal Action will continue to monitor developments affecting manufacturers and provide regular updates. Please do not hesitate to contact NAM Associate General Counsel Leland Frost at lfrost@nam.org with any questions.

European Court of Justice Sets Aside Judgment Requiring Disclosure of Confidential Business Information

By | intellectual property, Manufacturers’ Center for Legal Action, Shopfloor Legal | No Comments

On November 23, the European Court of Justice (ECJ) released its decision in European Commission v. Stichting Greenpeace, setting aside a lower court judgment requiring disclosure of confidential business information (CBI). While the ECJ’s decision is certainly good news for manufacturers, it is not yet a clear victory.

The plaintiffs requested the public disclosure of a massive amount of CBI relating to certain pesticides used both in the United States and Europe, including how products were manufactured and their final composition in order to assess potential environmental emissions. The lower court broadly interpreted EU emissions disclosure rules in favor of the plaintiffs, which left two options for companies selling goods in the European Union. Either they accept that their trade secrets will be made public, meaning that their data can be used and abused anywhere in the world by competitors, or they decide not to market their products in the European Union altogether, with obvious adverse consequences for the companies and the European Union as a whole.

In 2015, the ECJ granted the National Association of Manufacturers (NAM) intervener status, and in so doing, the court recognized the interest of the U.S. industry in this case. The NAM argued that the lower court’s interpretation was excessively broad and that the lack of adequate protection for the confidentiality of proprietary data in the European Union would be a significant barrier to market access for U.S. manufacturers of many products. The NAM is a strong supporter of global trade and investment rules that promote trade on a level playing field and provide a system in which all countries abide by core principles, including the protection of intellectual property. Governmental protection of CBI is needed to justify the considerable time, cost and effort involved in developing and marketing new technology as well as updating and improving older technologies.

The ECJ agreed with the NAM that the lower court erred by broadly interpreting EU disclosure for the emissions rule. The ECJ set aside the judgment and provided a more limited interpretation of EU disclosure rules. However, the ECJ did not assess whether the CBI in this case falls under that limited interpretation, and it sent the case back to the lower court to decide. Once the lower court decides whether the CBI at issue must be still disclosed under the limited interpretation, this case will potentially be appealed again. In the meantime unfortunately, the exact scope of the rule remains unclear. We prevailed on the larger attack against disclosing the CBI, but the fight will continue on this issue and in future cases concerning whether specific fact patterns fall within the emissions rule.

NAM Continues Fight Against OSHA’s New Silica Rule

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On May 2, 2016, the National Association of Manufacturers joined with the American Foundry Society to challenge the Occupational Safety and Health Administration’s (OSHA) new crystalline silica rule, which cuts the current permissible exposure limit in half and requires employers to implement costly engineering controls. The rule attempts to limit exposure to silica-containing materials, such as concrete and stone, in industries like brick manufacturing, foundries and hydraulic fracturing. We are fighting this rule on all fronts by both petitioning for review of the final rule and intervening to address the union filings directly. Last week, on November 11, we filed our joint industry opening brief to oppose this rule, which will severely stunt the economy and burden manufacturers. Read More

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