Happy New Year, Inside Track readers. We’re back at it with a look at what the new tax law means for in-house counsel pay, lessons from Apple’s iPhone slowdown controversy and a list of employment issues to think about this year.
I’m Jennifer Williams-Alvarez, and as always I’m covering key issues for in-house lawyers, answering your pressing questions and keeping you in the know about what your colleagues are up to. If you have questions or something to share, you can email me at firstname.lastname@example.org or find me on Twitter at @jenkayw.
What’s happening –
THE TAX BILL AND YOUR PAYCHECK. The tax bill, passed by Congress and signed by President Donald Trump at the end of 2017, may mean major changes in the way executives are compensated, and that includes top in-house counsel.
➤ Say what? The new law impacts executive comp in a handful of ways, perhaps most significantly by closing a loophole that had provided tax advantages to companies where performance-based bonuses were a large component of executive pay. (Companies are prohibited from deducting executive compensation beyond $1 million. However, performance-based pay previously was exempt. No more.) Already, Netflix has announced plans to bump up some execs’ annual salary in response to the tax law, including that of GC David Hyman.
For certain execs, Netflix said in an SEC filing, salaries over $1 million previously resulted in a substantial surcharge to the company, so a compensation plan was implemented for some that relied heavily on bonuses in order to avoid the surcharges. “With the recent passage of federal tax reform, the Plan will no longer eliminate such surcharge. As such, the Committee has determined that all cash compensation for 2018 will be paid as salary,” the SEC filing reads.
➤ What to do? “Public companies will need to take a fresh look at their compensation practices as they enter a world without the performance-based compensation exception,” said Melissa Ostrower, a principal at Jackson Lewis. Eliminating the exception allows companies to be more creative and increases flexibility when it comes to executive comp, she said, adding that with the reduction in the corporate tax rate, “the loss of the deduction on compensation paid in excess of $1 million will not be as impactful as it was previously.”
Because of provisions in the new law that impose excise taxes on compensation paid to covered individuals in excess of $1 million a year and on excess parachute payments, large tax-exempt entities, in particular, will need to take a look at exec comp plans, Ostrower said. “These entities will want to restructure their executive compensation plans and arrangements to ensure that they avoid paying this 21% excise tax. Moreover, these new rules will serve as a further ‘check’ on the amount of compensation paid to high-level executives of tax-exempt entities.”
APPLE’S APOLOGY: GOOD OR BAD MOVE? On Dec. 28, in response to public backlash, Apple released a letter apologizing to customers for slowing down some older iPhones to prevent them from shutting off unexpectedly. For GCs and in-house counsel who are frequently involved in crisis management within their own companies, was this a move to follow, or something to avoid?
➤ The letter. In the unsigned letter, Apple quickly apologized and then moved on to explain why it was slowing down old phones and outlined steps to address consumer concerns, which included promising more transparency when it comes to the health of iPhone batteries.
➤ Right call? Overall, the response was a good move, said Richard Levick, chairman and CEO of public relations firm Levick. While the company’s response has “hardly been flawless, primarily because the king of tech forgot that customers are sophisticated and have bullhorns, too,” Levick said, the company’s failure to disclose “was overcome by an effective apology, which offered not only solace but a solution.”
By offering solutions, including a battery replacement program that will save iPhone users $50, “Apple more than made up for its failure to disclose,” Levick said. “Ultimately, leadership won out – and job well done. If you want to judge an apology, look at the level of sacrifice. Saying you’re sorry is easy. Meaning it at a cost is integrity.”
➤ Bigger picture. The fact that Apple’s apology is being scrutinized at all indicates that companies are under the microscope, according to Levick. “A few years ago, few would have parsed Apple’s apology,” he pointed out. Now, however, “[t]ech companies, and particularly the FAANG, must embrace the fact that they are no longer given a pass,” Levick said.
THE “FUCT” MARK. In a case questioning whether the “Fuct” mark is a registrable trademark, the U.S. Court of Appeals for the Federal Circuit recently ruled that barring trademarks that include immoral or scandalous language is an unconstitutional restriction on free speech. This, just months after the U.S. Supreme Court struck down the Lanham Act’s ban on disparaging trademarks.
So, is it now open season for offensive marks?
➤ Not necessarily. “For one thing, offensive trademarks, and especially those pushing boundaries with sex or drug references, have been filed frequently for many years,” said David Bell, partner at Haynes and Boone and co-head of the firm’s trademark practice group. “Offensive trademarks also may exist in the marketplace, and even develop common law (unregistered) trademark rights, without a federal U.S. registration. So, the prohibition against offensive marks may have deterred some businesses from pursuing such brands, but has never been enough to legally stop their use.”
What the decision may do, Bell added, is “open the door to companies pursuing edgier marks, as their marketing and branding team learn that full trademark protection is available for designs and words pushing the boundaries.”
➤ The Aftermath. Since the ruling, “more than two dozen trademark applications have been filed with the U.S. Patent and Trademark Office that would have been prime candidates for a ‘scandalous’ or ‘immoral’ refusal,” Bell said, noting that in some cases, the filers had previously filed a mark refused as scandalous or immoral. “These applicants were therefore likely waiting in the wings for the decision to issue,” he said.
➤ ICYMI: I spoke with Stussy GC John Sommer who argued the case.
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FCPA, IN-HOUSE LAWYER AND BRIBES. Former Keppel Offshore & Marine in-house lawyer Jeffery Chow admitted that he wrote contracts for the company that were used to pay bribes in Brazil. Relying on a recently unsealed transcript of his plea hearing in federal court, my colleague Sue Reisinger details Chow’s regret about not resigning from Keppel.
“I should have refused to draft the contract that we used for paying bribes and I should have resigned from Keppel,” Chow told a federal magistrate judge in late August. “Instead, I discussed the economic terms of the contracts with my seniors at Keppel and acting in agreement with my seniors, and others at Keppel, I drafted the contracts and made sure that they were executed.”
Read more here.
“You asked the question, why did I take this job? Actually, the opportunity to … be able to have the impact of helping to put in place processes and systems that actually work well to protect both people, whether it’s women or people of color, or frankly riders and drivers. That was an incredible opportunity to me.”
- Uber chief legal officer Tony West on a recent Recode Decode podcast, talking about why he took on his new role at Uber.
Question of the week –
With each edition of the newsletter, we’re answering a question for in-house attorneys by going to top practitioners in those areas. If you have a pressing question you’d like answered, send it my way.
This week’s question: What are the key employment issues in-house counsel need to think about in 2018?
➤ Prevent #MeToo From Becoming #YouToo. While many companies have policies addressing inappropriate and unwelcome sexual behavior in the workplace, it only takes a glance at the recent headlines to see that existing policies may not be enough. Allegations are likely to increase as tolerance for inappropriate sexual behavior in the workplace is waning.
Employers should take proactive measures designed to prevent wrongful conduct and respond appropriately when it does occur. Consider updating and reissuing existing sexual harassment policies. Communicate with employees to ensure they are aware of the reporting procedures. Conduct a new round of supervisor and coworker training.
A review of existing employment agreements and templates may also be prudent. Severance agreements that include provisions preventing victims of sexual abuse from speaking out, and arbitration clauses that prohibit employees from bringing sexual harassment claims in court, may become a thing of the past – proposed legislation could void such agreements. Employers should closely monitor developing federal and state law in this area to ensure these agreements remain enforceable.
➤ Know the New Laws Governing New Hires. A growing number of cities and states, including California, Oregon, New York City, and Philadelphia, have recently passed laws preventing employers from inquiring into applicant salary histories. While each state law is unique, the overall intent is the same – to prevent and end gender-based pay disparities. In 2018, compliance will require significant efforts to educate recruiters and interviewers about the new laws. Job applications and hiring protocols should be reviewed to ensure that questions relating to salary history are removed. Employers that expect to hire in multiple states may want to consider adopting a uniform policy that applies to all employees, regardless of location, to eliminate opportunities for improper inquiries.
➤ Don’t Leave Your Employees Short. Expansion of paid and unpaid protected leaves has been part of the national discussion for the past several years, but most of the action thus far has been at the state and local levels. Paid sick leave of varying lengths is now required in several jurisdictions, and states are adopting paid family leave laws. The variances among jurisdictions, however, increases the possibility for inconsistent application by employers as well as employee abuse. Companies should designate an employee or team of employees to track and approve leave to improve uniformity and curtail misuse. Pay attention to unique notice requirements that vary depending on the location of the business.
➤ Outlook on Medical Marijuana Issues Is Hazy. In some states, employers may now be required to accommodate employees who use medical marijuana. In July 2017, the Massachusetts Supreme Court held that employees may bring disability discrimination suits under state law against employers that fail to accommodate them for using marijuana for medicinal reasons. Holding that “off-site” use of medical marijuana in certain circumstances may be a reasonable accommodation, the court reasoned that all employers must engage in the interactive process before penalizing employees for using marijuana for medical reasons.
The Massachusetts decision may inspire similar lawsuits in other jurisdictions this year. Employers should be aware, however, that this decision contradicts current federal case law and other states that have decided the issue. Employers choosing to prohibit marijuana use should check state authority and re-evaluate their drug policies for compliance.
Don’t miss –
Wednesday, January 10. Tune in for a New York City Bar teleconference on how tax reform will impact executive compensation. Along with Jackson Lewis’Melissa Ostrower, attorneys from Wachtell Lipton, Akin Gump and more will speak about the implications of the recent tax reform. Also slated to join the discussion is Sony employee benefits counsel Adrienne Scerbak. Register here.
January 29 – February 1. It’s almost time for ALM’s Legalweek event in New York City, where panelists will look at how tech is impacting the legal industry, as well as consider business and regulatory trends. Speakers include counsel from JPMorgan Chase, Goldman Sachs, Wells Fargo, Bristol-Myers Squibb.
Friday, February 9. The Federal Bar Association is hosting its 5th annual fashion law conference in New York City, where panelists will discuss everything from trademark licensing to money laundering and employment issues in the fashion industry.
On the move –
Amazon to Apple. Apple recently recruited three execs from Amazon Studios, including the latter’s head of production legal affairs, Tara Pietri, who will head Apple’s legal affairs division. Pietri, who confirmed to me today that she is, in fact, making the move this month, has been with Amazon since 2014. Before joining the Seattle-based giant, she was senior director of legal and business affairs at A&E. Pietri joins Apple just months after the company’s general counsel, Bruce Sewell, announced his retirement.
Taking Some Time. In-house veteran Olga Mack has left her role as general counsel of San Francisco-based ClearSlide, after more than two years with the company. Mack, who has previously held in-house roles at Yahoo, Visa and online dating platform Zoosk, told my colleague Stephanie Forshee that she is taking time off for now, but that “at some point [she] will take on another GC opportunity.”