How to keep up with evolving COVID-related regulations and mandates

Running a business presents a multitude of challenges, but the pandemic has added another layer of complexity as leaders struggle to stay compliant with ever-evolving laws and regulations regarding COVID-19.

“The biggest issues now facing employers are COVID-related — and not just operations and physical safety but complying with a host of local, state and federal laws and regulations,” says Molly Meacham, co-chair, Litigation Group, at Babst Calland. “Strategic planning is more important than ever, and you need to have a good grasp on the issues that may impact your business and be prepared to deal with them.”

Smart Business spoke with Meacham about issues impacting employers and the steps they can take to ensure compliance.

How can employers ensure compliance with local, state and federal regulations?

It can be a significant burden to monitor COVID-related local, state and federal government actions and court decisions. Employers have always had significant regulatory burdens, but they previously had more lead time to plan for compliance and implementation. COVID requires businesses to adapt, act quickly and be flexible. Unfortunately, COVID-related compliance can be expensive, with new laws requiring employers to provide items like additional paid leave, job-protected unpaid leave and regular COVID testing.

Understanding the current legal challenges and evaluating how they impact your business is key. And it’s not just local activity. COVID issues are developing quickly on the national stage. For example, a federal court in Georgia issued a stay effective across the country regarding the executive order requiring federal contractor employees to be vaccinated. Another court stayed the OSHA vaccinate-or-test requirement for companies with more than 100 employees, and yet another stayed the federal requirement for certain health care workers to be vaccinated. If those stays are lifted, impacted employers need to be ready to comply.

What steps should a business take to be prepared as things change?

It is risky to stand by until the court cases are decided, as that could leave you with a very short timeline for implementation of any necessary changes. Put policies and procedures in place in the background, which is typically possible at a reasonable cost, to prepare for the possibility of implementation. If you haven’t gone through that strategic planning and mandates are reinstated, it may be difficult to adjust on an abbreviated timeline, and your operations may be negatively impacted.

Put the building blocks in place so you understand the absolute minimum necessary for compliance. Your workplace policies may need to be adjusted, and you may need to source materials like COVID tests. A “wait-and-see” approach can be more expensive when you have to locate resources in a limited timeframe.

These issues don’t just impact in-person workforces. Many employers that went to a remote workforce during the pandemic are considering when, how and to what extent to resume in-person work. And employers accustomed to a Pittsburgh-based workforce may now have employees physically working in other locations and need to comply with employment laws in multiple states with different requirements.

How can an expert adviser help businesses prepare and stay in compliance?

Regularly check in with your advisers to make sure you understand the current state of COVID-related laws and regulations, how they impact your business and how different potential outcomes may impact your big picture. An attorney current on these issues will generally have a grasp of the overall landscape, so it is a worthwhile investment to have that issue-spotting conversation that will help you to know where your business stands.

These issues have the potential to significantly impact your organization. An informed adviser can help you navigate gray areas, maintain operations and minimize legal risk. You don’t have to implement your strategic plan regarding unresolved legal and regulatory issues, but engaging in the strategic planning process is critical so you are prepared to implement operational changes on short notice in response to future court decisions or government actions.

Insights Legal Affairs is brought to you by Babst Calland

How artificial intelligence is changing the mergers and acquisitions process

Artificial intelligence is revolutionizing the way attorneys approach due diligence, saving clients money, speeding up the review process and creating budget certainty.

“For a long time, AI was an alternative method to the usual approach of manually reviewing documents during an M&A transaction,” says W. Dane Fennell, an associate in the Corporate & Commercial Group at Babst Calland. “But now, clients expect ever-more efficient, accurate and speedy diligence results. To deliver, AI has become a critical tool in the due diligence process for deals of all sizes.”

Smart Business spoke with Fennell and Christian A. Farmakis, shareholder and chairman of the board at Babst Calland, about how AI is transforming due diligence in the legal marketplace.

What are some benefits of implementing AI in due diligence?

The amount of available data is growing at an exponential rate, creating pressure on those leading the M&A team. Just a few years ago, attorneys had months to work on a due diligence project, combing through what could be thousands of documents to gather and analyze data. The review timeframe has been drastically condensed as buyers and sellers both push to close deals faster.

Several years ago, we assisted with an acquisition that required three months of pre-closing diligence, and 18 months of post-closing confirmatory diligence. With a similar project earlier this year, we did the same work and reviewed the same number of documents in three weeks. Our AI tools allowed us to provide more cost-effective, accurate results in weeks instead of months, and oftentimes at a fraction of the price of a manual review.

Today, buyers need to have a better sense of the ‘game-changing’ issues that will guide their deal-making decisions. With AI, we can isolate ‘high-value’ issues from a large volume of raw data earlier in the diligence process.

As the deal process continues toward completion, we can home in on the relevant operational, legal and financial terms pertinent to the deal structure, eliminating the need to review every letter of every document in the data room.

How can using AI create budget certainty for clients?

By using AI, a law firm has the ability to aggregate metrics regarding previously completed projects that are similar in size, scope and complexity, and have comparable delivery windows. This enables a law firm to make business decisions regarding the size of the team needed for the project, as well as the total number of hours required for completion. All of this factors into providing the client a more accurate estimate of the expected cost of its deal diligence.

Will AI eliminate the role of attorneys in the due diligence process?

With machines doing the work formerly done manually by groups of contract attorneys, the fear is that attorneys will be out of work in the near future. But that is not the case. There is a very important human component to the process that will not be going away anytime soon.

Due diligence still requires human interpretation and gut feelings of experienced attorneys. Legal experience, coupled with deal experience, will continue to be required for all diligence projects to determine the type of AI tool to use and how to implement the AI to best deliver the desired results for a client.

AI helps speed up the process and lower costs, but the human element far outweighs a computer; it takes that human intervention to provide absolute certainty in reporting the diligence results. AI can be a fantastic tool for those who accept it and understand both its virtues and its shortcomings.

Insights Legal Affairs is brought to you by Babst Calland.

How FinTech is upending a traditional industry

For years, the banking industry has functioned in the same ways it always has. But FinTech — financial technology — is revolutionizing the way things are done and increasing access to financial tools for those who may not have previously had it.

“At its core, FinTech is when you have the convergence of an emerging technology and a financial service,” says Moore Capito, shareholder at Babst Calland. “It’s using innovation to compete with traditional methods of delivering financial services.”

Smart Business spoke with Capito about how FinTech is revolutionizing the financial industry, the opportunities it presents and challenges it poses.

How is fintech changing the financial industry?

There are a lot of unbanked, or underbanked, people that have difficulty accessing the traditional banking industry. FinTech products, sometimes in collaboration with a traditional bank, can provide better financial services to these individuals, especially in rural areas where there is less access to bricks-and-mortar banks.

There are potentially endless applications, from insurance to mobile banking, cryptocurrency, investment apps, and financial products including mortgages — the most well-known being PayPal. The onset of COVID accelerated the necessity and the willingness to adapt with FinTech, doing more transactions remotely from phones and bringing finance directly to individuals, instead of individuals going to a physical banking location.

On the economic development side, entrepreneurs are coding programs that create the functionality behind the apps. And states such as West Virginia have created regulatory sandboxes for FinTech entrepreneurs. These let participants apply to come in and test their products in the marketplace without going the traditional regulatory route, allowing them to become viable and ready for commercialization before becoming regulated by state agencies. It gives them two years to be able to exist with greater leniency and more flexibility, to be leaner and nimbler to develop their products.

What are the challenges of fintech?

Traditional finance wants to protect itself against changes to how it operates, which can be a challenge. In a lot of states, the banking industry is slow to move. It’s a conservative industry, and it is hesitant to accept change. It has resisted for a long time because emerging technology can be disruptive.

However, we need to be engaging with startup businesses that are innovating. We are living in a changing market, and we need to lean into these changes that are not only moving the industry forward but that are creating jobs. Disruption can be scary for big, entrenched industries. But while it can be intimidating, rising tides lift all ships and everyone becomes better as a result.

The second challenge is to ensure the consumer is protected. By their very nature, some startups fail, and we need to ensure no consumers are hurt in cases where a business doesn’t get off the ground.

What does the future of fintech look like?

It’s unbelievable how quickly it’s continuing to grow. Even with a recent downturn in the economy, we’ve seen increased investment; the venture capital community is investing billions of dollars in a year where there has been quite a bit of handwringing. While technology and disruption can be scary, these products, once tested and trusted, create conveniences that are making people’s financial lives happier and healthier.

The entrepreneurial community in the FinTech space is very vibrant, and they are attracted to places that want them. We have created a very welcoming and forward-thinking space for entrepreneurs that only not serves the state and the wider region, but that also has a global impact.

Insights Legal Affairs is brought to you by Babst Calland.

Now might be time to appeal your commercial real estate assessment

COVID-19 has had a dramatic impact across the board, creating economic uncertainty and having an adverse effect on commercial property values that continues to this day. In Allegheny County, effects are perhaps most pronounced in the office market, and in particular in Class B downtown Pittsburgh office space, but no commercial property type with indoor space has been immune, says Peter Schnore, shareholder at Babst Calland.

“Tenants’ initial response to COVID was a wait-and-see holding pattern with respect to whether they were going to renew leases or move to new space,” says Schnore. “As a result, many landlords have had to dig deep to keep and attract tenants by offering unprecedented periods of free rent or tenant improvement allowances, creating an adverse impact on net operating income. The unknowns surrounding COVID are still affecting nearly all commercial property types, not just office properties.”

Smart Business spoke with Schnore about how COVID is impacting the value of commercial real estate and why it may be a good idea to review your recent tax assessment.

What is the current situation for owners of commercial real estate?

Future uncertainty while we remain in the throes of COVID is driving up risk of commercial property investment, driving down commercial property values. Landlord concessions — in some cases multiple years of free rent or triple-digit tenant improvement allowances — are increasing operating expenses and reducing short-term income, resulting in an immediate and substantial adverse impact on value. As a result, many properties that house office, retail, restaurants, hospitality and others now have assessments that are higher than the current value of the real estate merits.

COVID-19 has also impacted business owners who own their own space as they question whether they actually need the amount of space they own. If your space has been sitting partially empty for a year and a half now because employees are working remotely, do you really need to hang on to it? That is adding to the glut of available space on the market and driving down value, including the value of owner-occupied space.

Why might your assessment appear low but actually be high?

In Allegheny County, the last reassessment was in 2012 — thus, the assessment on your tax bill represents value from nearly a decade ago. Pennsylvania has no regular reassessment schedule, and it is easy to forget taxpayers have an annual right to challenge assessments. Each year, the state publishes an equalization ratio for counties based on a comparison of the county’s most recent years’ sales data vs. the sold properties’ assessments. In a properly filed appeal, this ratio can be applied to the property’s current fair market value to set the assessment. Because counties are not required to regularly reassess, the financial benefit of a decreased assessment may be enjoyed for many years.

Importantly, for Allegheny County, there has been a sudden and significant drop in this ratio from last year, the most significant drop since the last reassessment. That makes 2022 a particularly good year for owners to evaluate whether an appeal is warranted.

Owners of commercial properties in Allegheny County have until March 31, 2022, to initiate an appeal; for owners of property in the remainder of Pennsylvania, annual appeal deadlines are between Aug. 1 and Oct. 3, 2022, depending on the county.

What is the appeals process?

Start by gathering your income and expenses for the last three years. Work with an attorney to discuss what the income of the property has been and the expected rate of return. Whether an income-producing investment property or an owner-occupied facility, an attorney, often with the assistance of the right appraiser, can evaluate the current value and help determine whether an appeal is warranted.

Although you can’t file an appeal in Allegheny County until Jan. 1, 2022, talk to an attorney now. Getting your information in order allows you to be prepared when the filing period begins. Property taxes are often the most significant operating expense for an income-producing property, so it’s important to evaluate your situation, with the help of an attorney, to make sure you are not paying more than you should be.

Insights Legal Affairs is brought to you by Babst Calland

How to prevent employees from stealing — and detect theft if they are

You’ve just discovered someone is stealing from your company. Worse yet, what if a high-level person — a partner, an owner, a director or an officer — is involved?

“Particularly if the theft involves a substantial amount of money, an accomplice outside of your business, or if criminal investigatory agencies are involved, you should consult with an attorney about how best to interact with authorities, respond to possible subpoenas, conduct an internal investigation and craft a consistent message to employees and customers,” says Kevin Douglass, a shareholder at Babst Calland.

Of course, every employee with access to company financials poses a risk, and every company should take steps to protect itself.

Smart Business spoke with Douglass about how to keep your business from falling prey to a theft — and what to do if it happens anyway.

How can a company protect its assets?

Employees with the greatest access to the company’s finances are in the best position to take advantage. The easiest way to prevent stealing is to ensure that there are checks and balances built into your company’s financial system, regardless of the trust you have in employees or colleagues responsible for managing that system.

The easiest way to do that is to require that more than one person monitor the company’s cash flow, including approval or review of checks, credit and debit card usage, petty cash and invoicing. If that is not possible, consider an audit every couple of years by an independent accounting firm and provide them with full access to the company’s internal financial records.

An individual may only take small amounts in the beginning, increasing the amount and frequency as they gain confidence. And to cover their tracks, they likely will delete, alter or fabricate financial recordkeeping. If undetected, embezzlement can last years, or even decades, and add up to thousands or millions of dollars. Once someone starts down this path, they rarely stop until they are caught.

Company theft happens more often than you might think. No company wants to publicize the fact that an employee is stealing. Often, once detected, a business may choose to quietly terminate the employee and sweep the situation under the rug to avoid negative attention. But that does not mean that it did not happen.

Once theft is discovered, how should a company proceed in the immediate aftermath?

First, you must be certain the person has actually stolen from the business. As quickly as possible, perform an internal investigation and, depending on the complexity and scope, consider hiring an independent investigator or accountant to ensure your investigation is credible and comprehensive.

You also need to take steps to prevent further harm to your business, including likely termination of the employee, denying the offender access to the company’s accounts and finances, as well as other company records and property, including laptops and company phones. An employee under suspicion may intentionally delete computer files and/or alter records, so decisive and immediate action is necessary. If the individual has signature authority on a bank account, you need to remove that authority or consider closing the account.

After a theft is discovered, consider whether and how to communicate with other employees, customers and the public. Can you keep this quiet? Should you keep it quiet? What is the right messaging?

In addition, you must decide whether to report the theft and seek recovery of the stolen funds. Is a customer a victim via fabricated invoices or other means? If yes, consider your obligations with counsel given the company’s unwitting role in the theft.

How can an attorney help you navigate the crisis?

It is critical to receive sound advice as quickly as possible when confronted with a theft of company assets involving an owner or employee. Counsel can guide you through this stressful process, ensuring proper communication and messaging with governmental authorities, employees and customers, as well coordinating the internal investigation. In addition, counsel can help navigate the complex contractual issues that may arise in order to sever ties with an offending owner.

Insights Legal Affairs is brought to you by Babst Calland

Force majeure: Why these contract provisions are drawing new scrutiny

In the past, force majeure provisions were regularly overlooked in contracts, inserted as a boilerplate without much thought. That all changed with COVID-19, says Kate Cooper, shareholder at Babst Calland.

“With the pandemic, our clients suddenly cared a lot about whether their contracts included a force majeure provision, what it said, what it meant and how it could be interpreted,” says Cooper.

Smart Business spoke with Cooper about force majeure provisions and how approaches to them are changing.

What are force majeure provisions?

Force majeure provisions govern the conduct of both parties if unexpected or unforeseeable events result in a party being unable to deliver on the terms of the contract, with an emphasis on the unforeseeable. They’re designed to cover unexpected events and potentially allow you to delay delivering on a contract. But the provisions are not a get-out-of-jail free card, and in most circumstances, they do not let a party to a contract completely off the hook.

The disruption to the supply chain caused by the pandemic and government shutdowns has drawn renewed attention to these clauses. For example, when suppliers couldn’t deliver to their customers, those disruptions had a knock-on effect down the supply chain. Companies aiming to avoid breaching their contracts were hopeful that their force majeure provisions would provide them with relief. However, many were disappointed to find that what they wanted to do — whether that be delay performance obligations, or even terminate the contract entirely — wasn’t permitted by the language of the specific provisions set forth in their contracts.

How is the conversation regarding force majeure changing?

It will be difficult to argue that the pandemic is an unforeseeable event now that we are a year and a half into COVID-19, meaning that COVID-19 (and pandemics generally) will need to be specifically referenced in the provision in order for it to be enforceable in most jurisdictions. Contracts differ greatly in how they define force majeure, what types of events will trigger the provision and what remedies will be available to the parties, so businesses need to have a clear understanding of the specific language of their provision and its impact if triggered.

Businesses should ensure that they are tailoring their force majeure provisions to their particular circumstances, and they should consider whether it is more appropriate to include specific COVID-19 language outside of the force majeure clause.

When drafting new contracts, make sure you understand the events upon which you, or your counterparty, may wish to delay performance, and define these provisions in a clear way that connects the dots between that triggering event and the party’s inability to perform its contractual obligations.

Working with an expert legal adviser allows you to draft your contracts on a practical level in order to protect your business interests when these events arise and future disruptions occur. Relevant questions include, ‘How do your operations work? How do you fulfill contracts? What would be an impediment to doing so?’ It may be appropriate to explore options that would permit parties to renegotiate the contract or extend delivery times upon the occurrence of one of these unforeseeable events.

Pre-pandemic, most businesses did not anticipate the importance of force majeure provisions and defining the ‘unforeseeable.’ Now that so many companies have experienced how challenging these issues can be as a result of the COVID-19 pandemic, and how nuanced the interpretation of these force majeure provisions are, business leaders need to focus on crafting the appropriate coverage in their agreements for these risks post-pandemic. Paying close attention to these issues at the time your contract is being negotiated and collaborating with your counterparty on identifying potential issues and how to resolve them can prevent your business from having to absorb the costs of dealing with these issues when they occur, or entering into litigation to resolve them.

Insights Legal Affairs is brought to you by Babst Calland

Interest rates and their impact on estate planning strategies

Evidence of rising inflation has caused the Federal Reserve to accelerate the timeframe on when it will next raise interest rates. This will have an effect on borrowing costs, stocks, bonds, commodities, currencies, as well as estate planning strategies.

Smart Business spoke with William J. Stein, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC, about how interest rates impact estate planning and what to consider in both high and low interest rate environments.

How do interest rates affect estate planning?

Interest rates are fueled in part by increases in the federal funds rate, which is the interest rate that banks charge each other for short-term loans. Increases in the federal funds rate typically have a chain-reaction effect on long-term interest rates, including the two primary interest rates used in many estate planning strategies — the Section 7520 rate and the Applicable Federal Rate (AFR). Certain estate planning strategies depend on investments returning more than the 7520 Rate to be successful, so they tend to be most effective when the 7520 Rate is low. The AFR is the minimum interest rate that must be charged on loans to avoid triggering imputed income or gift taxes. Certain strategies that use the AFR to determine the present value of payments are more effective when interest rates are higher because a higher AFR will lead to a lower present value and, therefore, a lower tax cost for a particular strategy.

What Strategies Are Available In High- and Low-Rate Environments?

Efficient higher-rate environment strategies include the Qualified Personal Residence Trust (QPRT) and the Charitable Remainder Annuity Trust (CRAT).

In a QPRT, a homeowner places a residence in trust but retains the right to live in the residence rent-free for a designated period, then the residence passes to the trust beneficiaries. The initial transfer to the QPRT is a taxable gift of the remainder interest, calculated using the 7520 Rate. The higher the rate, the higher the value of the grantor’s right to use the residence during the designated period, and the lower the future remainder interest. So as the 7520 Rate increases, the taxable gift decreases, making the QPRT a more attractive strategy at higher interest rates. With a CRAT, the grantor places an asset in a charitable trust. The trust pays an annuity to the grantor for a term of years. At the end of the annuity term, the remainder is given to a designated charity. The value of the remainder, calculated using the 7520 Rate at the time the trust is created, gives the grantor an income tax charitable deduction. The higher the 7520 Rate, the higher the value of the charitable interest.

Planning when interest rates are low often involves leveraging lending strategies to transfer wealth with little or no gift tax. Efficient wealth transfer strategies in a low interest rate environment include intra-family loans, the Charitable Lead Annuity Trust (CLAT) and the Grantor Retained Annuity Trust (GRAT). The simplest method is to make a cash loan structured as an interest-only loan with a balloon payment on maturity. If the assets purchased with the loan proceeds appreciate more than the interest rate paid on the loan (the AFR), the excess passes to the borrower free of gift tax. With a GRAT, the grantor places assets into an irrevocable trust but receives payments over the term of the GRAT equal to the original value of the assets plus any appreciation up to the 7520 Rate. Any appreciation in excess of the 7520 Rate passes to the trust beneficiaries. A CLAT is similar to a GRAT, in that asset appreciation over the 7520 Rate passes to the trust beneficiaries gift tax free. However, the annuity payments during the lead term are paid to a charity instead of the grantor. Depending on how the CLAT is structured, the grantor may receive a charitable income tax deduction when the trust is funded.

What else should those who are estate planning this year consider?

For those considering implementing or updating estate plans this year, additional considerations include utilization of the temporarily increased transfer tax exemptions, the potential for increased transfer tax rates and higher income tax rates given the current political climate, and the possible repeal of the step-up in basis at death.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Guidance on steps to protect your business against cyberattacks

Recent high-profile cybersecurity breaches have highlighted how vulnerable even the largest businesses are to disruption. But even the smallest of businesses face risks, says Ashleigh Krick.

“Organizations may think they are not at risk and do not have valuable information, but they should think again,” says Krick, an associate at Babst Calland. “It does not matter what information you have when a hacker just wants money. It’s not just about data; it’s also about shutting down your business to force you to pay a ransom.”

Smart Business spoke with Krick about steps every business can take to protect itself.

How have recent cyberattacks drawn attention to the vulnerability of businesses?

Recent cyberattacks on Colonial Pipeline and JBS Foods have demonstrated the cyber vulnerabilities of even our nation’s most critical industries. In May, Colonial Pipeline fell prey to a ransomware attack, forcing it to halt transportation of gasoline and other fuels on the largest refined products pipeline on the East Coast. The effect was felt by everyone along the East Coast, as disruption to gasoline supply caused consumer panic and gasoline prices to skyrocket.

Not a month later, JBS Foods, the world’s largest processor of fresh beef and pork, was attacked by ransomware, causing its plants to shut down and rendering the business incapable of processing meat. We are still seeing effects from that, which could disrupt the U.S. market and international markets.

In the aftermath of these attacks, the federal government became immediately involved in how businesses were responding to ransomware attacks and questioning whether mandatory cybersecurity standards in the most critical industries are needed.

What should businesses be thinking about cybersecurity?

Every business should be thinking about about cybersecurity. First, conduct risk and security vulnerability assessments to understand your cybersecurity practices, threats and vulnerabilities. If you are unable to do an assessment internally, a consulting organization can help.

Cybersecurity risk and security vulnerability assessments identify information assets that could be affected by a cyberattack and evaluate a business’s information security risks. The assessment should evaluate where your vulnerabilities lie and identify safeguards to address those. It should identify your most critical facilities, activities and information, and the potential pathways to gain access to your networks.

Also, businesses must assess where they are in terms of cybersecurity policies and practices. How do you describe those activities, and how are those practices protecting your information and systems? Are those policies sufficient, or do they need revisions?

What are the next steps?

After evaluating your risks, vulnerabilities and current practices, think about an incident response plan that maps out the response if your business were subjected to a cyberattack. Who would lead that response, and how would you coordinate with internal and external stakeholders?

Review incident response plans often to keep up to date with lessons learned from internal or external cyberattacks and to address new vulnerabilities or potential pathways for malicious actors to gain access to your systems.

It is also important that businesses designate an individual internally to act as a cybersecurity coordinator. This person is charged with establishing and updating procedures, ensuring compliance, reviewing data or security breaches, leading incident response and coordinating with relevant government entities or industry data-sharing organizations. It’s nice to have a plan, but if it is not followed, it’s worthless.

Finally, with the significant uptick in cybersecurity incidents, businesses need to stay aware of the pathways hackers can use to gain access to their systems. The federal government and states are getting involved in privacy and cybersecurity issues, including calling for changes to laws and regulations. Businesses must stay current on changing laws and regulations and how new obligations affect their operations.

History is likely to repeat itself, and there is the potential for severe consequences to both big industry and small businesses. It’s not a question of if, it’s a question of when. Businesses must be asking these questions now to prepare and protect against cyberattacks.

INSIGHTS Legal Affairs is brought to you by Babst Calland.

No-hire provisions now unenforceable in Pennsylvania

This year, the Pennsylvania Supreme Court made a ruling that will likely upend no-hire provisions in the state. Companies that currently utilize a no-hire strategy will need to find other solutions to accomplish the same end, or risk running afoul of the law.

Smart Business spoke with Michael J. Torchia at Semanoff Ormsby Greenberg & Torchia, LLC, about no-hire clauses, the ruling, and alternate strategies to achieve similar ends.

What is a no-hire clause and what are some of its benefits?

It is common for a contract between two companies to contain a “no hire” clause. This is a provision where one or both of the companies agree not to solicit and/or hire the employees of the other. There are business situations where these clauses are found, for example, when a company:

  • Leases its employees to another company such as a temporary provider or PEO (Professional Employer Organization)
  • Permanently assigns its employees to another company, such as a company that handles marketing or promotions and its employees are hired specifically to work on a project for their client, the other company.
  • Professional services companies (such as attorneys, accountants, consultants) that provide embedded employees to their clients for a project or some length of time.
  • Temporarily assigns employees to work on a project, such as an IT or Human Resources company that serves as outside consultants for their clients.

The benefit of these “no hire” (sometimes referred to as “no poaching”) provisions is obvious — the referring company can assign employees to the other without fear of losing the employees they have trained, and they can hire them out again and again. Worse yet, without these clauses, the employee who leaves to join a customer does so without the referring company getting anything in return.

What did the Pennsylvania Supreme Court recently decide?

In April, 2021, the Pennsylvania Supreme Court in Pittsburgh Logistics Sys., Inc. v. Beemac Trucking, LLC affirmed a Superior Court ruling holding that these no-hire clauses are now unenforceable under Pennsylvania law.

In a case of first impression, the Pennsylvania Supreme Court held that a “no-hire” provision between a logistics provider and a shipping company that prohibited the shipping company from hiring the provider’s employees during the contract and for two-year period following termination of contract, was unenforceable. The Court stated:

“We believe these types of no-hire contracts should be void against public policy because they essentially force a non-compete agreement on employees of companies without their consent, or even knowledge, in some cases. We believe that if an employer wishes to limit its employees from future competition, this matter should be addressed directly between the employer and the employee, not between competing businesses.”

How might companies that utilize no-hire clauses achieve similar ends now that the laws have changed?

For a company seeking to protect its employees, the safest method would be to have a direct restrictive covenant agreement with the employee, providing the requisite consideration. Another way, although this has not been tested in the courts, is to have the agreement between the companies subject to the law of a state that will enforce the no-hire provision.

But the immediate task for employers is clear: review your current agreements and know whether or not your employees are protected from solicitation and hiring.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Protecting your innovations outside the United States

If you’re considering selling your innovative product or commercializing your novel processes in another country, protecting your innovations with a patent in that country may be key to your success. But trying to navigate the process alone can prove difficult.

“It’s surprising how complicated it can be, and there are a lot of places to get tripped up,” says Carl Ronald, shareholder at Babst Calland. “While you can try to do it on your own, hiring a patent attorney can make the process much smoother, ensuring you are including all relevant information and complying with all relevant deadlines to protect your invention in the most cost-effective way possible.”

Smart Business spoke with Ronald about when you might need international protection and how a patent attorney can help you navigate the complex process.

When should a company consider applying for a patent outside the U.S.?

A U.S. patent only provides a protectable interest here in the U.S.; you can’t stop someone from using what your patent teaches to compete with you in other countries unless you’ve timely filed in those countries, as well. If you have an international customer base that is purchasing products or services that, in the future, may be produced with, employ, or contain your patented process or device, you should seek protection, at a bare minimum, in those countries where your anticipated market is largest.

Keep in mind the importance of secrecy before filing your application. In the U.S., you have one year to file a patent application covering your invention after you disclose it publicly. Other nations are not so lenient and, in many countries, any disclosure of your invention to someone who does not have an obligation of confidentiality will destroy novelty and likely preclude you from ever obtaining a patent in that country.

What is the process for filing in a foreign country?

In general, the first step for most U.S.-based applicants is to file either a provisional or a nonprovisional patent application (your “priority filing”) in the USPTO. Once the application has been reviewed for national security issues that would prohibit you from filing outside the country, a foreign filing license grants permission to file in other countries.

If you want to practice your invention in just one or two other countries, your patent attorney can file directly with those countries, so long as the foreign filing license has been granted and it’s less than a year since your original U.S. filing.

However, if you’re seeking patents in more than one or two countries, it’s likely more cost-effective to file an international application through the Patent Cooperation Treaty (PCT). The PCT provides a unified procedure for filing a single patent application that will preserve your ability to ultimately seek protection for your invention with each of its participating members, which includes nearly all industrialized countries.

Deadlines are important; you must file a PCT application within one year of the filing date of your priority filing. After your PCT is filed, you have up to an additional 18 months in most countries before you are required to file your application directly in each country where you’d like to have protection.

How can a business determine if it should apply for a patent outside the U.S.?

Every business has competition in the marketplace and seeks an edge — something to differentiate it from its competitors. One of the ways to compete is to maximize the value of its products and processes and to ensure others are not unfairly competing with it.

If a particular innovation satisfies a need in the marketplace and obtaining a patent will provide a competitive advantage, patent protection should be strongly considered for any country where the innovation is sold.

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