Mid-Term Report

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On Nov. 4, 2008, Barack Obama stood before cheering throngs in Chicago's Grant Park, his victory over John McCain decisively clear. Obama seemed subdued, warning Americans of the challenges ahead. With the economy teetering on the precipice, the new president seemed far more aware than his supporters that "Yes We Can" might easily turn into "No We Can't."

Despite the president's cautionary tone, expectations were sky high, and now, two years later, he and his Democratic compatriots are struggling to overcome voter disillusionment. While Obama takes credit for stemming the collapse of the financial system, and the recession has officially been declared over, unemployment and foreclosure rates remain stubbornly high. Congress passed a huge stimulus bill and then health care and financial services reform--the latter two massive pieces of complex legislation that left regulatory agencies to fill in many of the crucial details. The laws are so complex and ridden with so many "to be determined" provisions that few people claim to comprehend their full implications, though business clearly faces new regulatory and administrative hurdles.

To pass those bills, the administration had to sideline other policy priorities affecting U.S. companies, including climate change and immigration reform legislation. Both fell victim to concerns that they would further stress the fragile economy. Other expected changes that had corporate America on edge collapsed in the political winds, including the Employee Free Choice Act (EFCA), which business feared would propel a tsunami of union organizing efforts.

"It's the problem of every first-term president," says Candi Wolff, a partner at Hogan Lovells who worked in the George W. Bush White House. "You think you have such political capital, but once you start legislating, you get into the inevitable sausage-making."

Hogan Lovells Partner Bob Kyle, who worked in the Clinton White House, views the administration's success in passing three major pieces of legislation--the stimulus package, health care reform and financial reform--as significant political achievements. "Whether you like what Obama did or not, I don't think the story is that this was a do-nothing first two years," he says.

But most of the immediate impact on business has come on regulatory side. On some of his key agenda items, the president isn't waiting for Congress to act. Activist Cabinet and agency heads are aggressively formulating regulations and enforcing laws they say are necessary to protect workers, consumers and the environment.

As the nation heads into the off-year elections--the results of which will largely determine Obama's legislative prospects for the second half of his term--InsideCounsel takes a look at some of the administration's policy and regulatory moves that impact in-house attorneys.

Overhauling Health Care Coverage

When President Obama signed health care reform into law in March, he unleashed an onslaught of new regulations that ultimately will impact all but the smallest businesses in the country.

Exactly how is still not totally clear. "It is so complex it requires precision to understand what an employer's obligations are," says Sheldon Blumling, a partner at Fisher & Phillips.

Passed through the reconciliation process, the legislation did not go through the usual conference committee cleanup, leaving most details to be determined by regulation. So far, the Departments of Labor and Health and Human Services, along with the IRS, have issued about 1,000 pages of regulations, and Blumling estimates that ultimately will grow to tens of thousands of pages.

"You cannot underemphasize the range not only of what has already come out but what will be coming out" of the three federal agencies, says Wendy Krasner, a partner at Manatt, Phelps & Phillips. "There was a period in June and July when every day there was a new reg, a new proposed reg or a new 'Give us a comment on these regs.'"

Among the regulations already issued are 100 pages dealing with what is required for a health care plan to retain grandfathered status, thus exempting it from many of the mandates on new plans. In Blumling's view, those regulations make it nearly impossible for employers to keep a grandfathered plan.

The questions remaining are substantial, including how the new state-run health insurance exchanges will be structured. IRS regs for new W-2 form reporting requirements that start in 2012 should be forthcoming next year.

But the biggest question mark is whether employers simply will decide it is too expensive to provide employee health care and opt instead to pay a penalty. Starting in 2014, large employers--those with 50 or more full-time employees--will be required to offer their employees as-yet undefined "adequate and affordable" health insurance. If they don't, they face a fine of $2,000 per employee after the first 30 employees--the so-called "play or pay" mandate. That fine is expected to increase, but some employers are running the numbers and seriously considering dropping health coverage altogether.

"We are figuring out what the pay requirement will cost and what the penalties would cost, and some employers are taking a look at [not offering coverage]," Blumling says. "In the short run, smaller and medium-sized employers are considering getting out of the game. Large employers are concerned about perceptions and their ability to attract the talent they need."

Just how volatile a PR issue this could become was illustrated in late September, when the Wall Street Journal reported that McDonald's Corp. was considering dropping its "mini-med" insurance plan. McDonald's denied that, but faced criticism in the media and Congress nonetheless.

Beyond dropping coverage, employers have other alternatives, including increasing the employee share of health care premiums, a trend that started even before Congress acted.

"Your choices are to do nothing--pay the same share of your employees' health care costs, absorb the cost and continue on; or reduce the employer share of the cost; or eliminate the benefit altogether and pay the penalty," says Michael Zolandz, a partner at SNR Denton. "That's the calculus that will face employers."

Another option will be using more part-time employees--defined as those working fewer than 30 hours per week. Employers are not required to provide coverage for them.

While Blumling bluntly states that the bottom line for employers is "higher health care costs, higher taxes, more administrative burdens and much less freedom in benefit plan design," others are less pessimistic.

"There is tremendous hope that [as a result of health care reform] health care delivery systems will take on more responsibility for both quality and cost," says William Bernstein, a partner at Manatt, Phelps & Phillips. "Health care today is a siloed industry, and there is hope there will be a restructuring that will make it more organized, and, as a result, more efficient. If that doesn't happen, the expansion of coverage will result in increases in health care costs. That's the single biggest thing employers worry about."

And while many expect Congress to make changes in the health care reform package before it takes full effect in 2014, most don't expect repeal, in part because of recognition that the current system needed an overhaul.

"Most of those involved in health care from a legal perspective are tremendously interested in the system being reformed for the better," says Bernstein. "We all hope [the new law] will be a step forward, but the truth is we won't know for a long time."


Regulating Workers' Rights

Upon taking office, Obama's choice for Secretary of Labor rather audaciously labeled herself "the new sheriff in town." Hilda Solis clearly was putting employers on notice that the DOL's conciliatory "let's work together to solve this" posture in OSHA and wage-and-hour cases under the Bush administration was at an end.

"She has said she believes that many employers are in the 'catch me if you can' mode," says Hal Coxson, a shareholder at Ogletree Deakins. "She believes that only when they are caught to do they turn to compliance."

According to Coxson, this perception led to a new enforcement initiative known as "Plan-Protect-Prevent," requiring employers to involve workers in the preparation of compliance plans covering OSHA, the Fair Labor Standards Act (FLSA) and other worker protection programs. Under the FLSA, for example, employers and employees would work together to write a plan including which employees are classified as exempt, non-exempt or as independent contractors, and the legal justification for the classification. Employees would have the right to use the plan to trigger an investigation by the DOL. Coxson says the implications of handing this information to employees extends beyond heightened liability for a DOL enforcement action.

"We know employees could go to the DOL, but they could also go to a plaintiffs lawyer for an individual or collective action, or to a union for fodder for an organizing campaign," Coxson says.

At the EEOC, an enforcement initiative has been targeting employers who use criminal and credit background checks to screen potential employees. The EEOC also used its regulatory powers to change the rules in two key discrimination areas, making it harder for employers to defend a claim, according to Ken Yerkes, a partner at Barnes & Thornburg. Under the Age Discrimination in Employment Act (ADEA), it is harder to assert an affirmative defense that an adverse employment action was based on reasonable factors other than age. In the disability arena, it much easier for employees to claim they are covered by the Americans With Disabilities Act (ADA).

"This makes it much harder for an employer because there is no longer any ability to say the employee isn't disabled, which is how employers won a lot of cases," says Yerkes.

On the legislative front, the Democratic-controlled Congress barely had been seated when the Lilly Ledbetter Fair Pay Act flew through both houses in 2009. By extending the statute of limitations for filing pay discrimination claims, the bill in effect overturned a Supreme Court ruling that made it difficult for workers to bring wage inequity suits.

"When Lilly Ledbetter passed, it was shock and awe," Coxson says. "It was the first bill the president signed, and everyone thought the rest of the legislative agenda (on workers' rights) would come rushing out. That didn't happen."

Most significantly, the Employee Free Choice Act, the pet project of major labor unions, failed to gain traction in Congress. Many think the National Labor Relations Board will now pass rules that would achieve EFCA's goal of making union-organizing easier.

"[EFCA's failure] was a combination of a concerted lobbying campaign from the business community and the fact that there are only so many issues an administration can focus on from a legislative perspective," says Candi Wolff, a partner at Hogan Lovells. "It was a priority, but not a top priority of the administration."

Additionally, the Paycheck Fairness Act passed in the House but stalled in the Senate, and legislative efforts to extend the Family Medical Leave Act and attack the issue of misclassified independent contractors also hit roadblocks imposed by a determined GOP minority and an overcrowded Congressional calendar.

But that doesn't mean the administration has abandoned its labor and employment agenda. "The focus has shifted to the regulatory agencies to make the changes the president supports," says Coxson. "That's where a lot of change is occurring."

Yerkes notes, for example, that while Congress has yet to act, the DOL and the IRS both have announced programs to crack down on employers that misclassify workers as independent contractors.

"What the administration can't accomplish through legislation, it is committed to getting the job done in any other way," Yerkes says. "The president will move his agenda through administrative agencies and not wait for Congress to act."


Gunning for GHGs

The political winds have forced the administration's hand on its chief environmental priority--reducing greenhouse gases (GHGs), the chief contributor to climate change. The legislative effort to establish a CO2 "cap and trade" program got off to a quick start, passing the House in mid-2009. But the Senate backed away, fearful of voter reaction to legislation that opponents painted as bad for the already troubled economy.

"Climate change is always a difficult issue because the regional differences are significant," says Candi Wolff, a partner at Hogan Lovells. "Those that have sun see it one way, those that have coal see it another. If you look at the states in the most economic distress, it happens to be a lot of the coal states. That made it politically difficult."

At one point in early spring, it looked as though the Senate might put together a viable bill by tying GHG regulation to more politically popular energy independence goals. But that effort fell apart, leaving the administration to take what almost everyone agreed was the worst possible approach to reducing GHGs -regulating their emission under the Clean Air Act (CAA).

The Supreme Court had set the stage for EPA regulation of greenhouse gases before President Obama ever took office. In 2007, the high court rejected the agency's contention that it had no authority to regulate GHGs under the CAA and ordered it to determine whether GHGs endanger public health and welfare. The agency's affirmative answer to that question in its December 2009 "endangerment finding" in effect mandated a regulatory regime controlling GHG emissions from both mobile sources (motor vehicles) and stationary sources (industrial facilities) to fulfill EPA's responsibilities under the CAA.

"The EPA and the administration told the public and the Congress early in the president's tenure that they understood the CAA was not well devised to regulate GHG emissions," says John Cooney, a partner at Venable. "But if no statute passed Congress, they were determined to use their existing authority [under the CAA] to go ahead."

Accordingly, in 2010 the EPA and the National Highway Traffic Safety Administration (NHTSA) issued rules reducing GHG emissions from cars and light trucks and raising fuel economy standards. In the works are similar regulations covering medium and heavy duty trucks.

When Congressional action still seemed possible, the EPA delayed action on regulating stationary source GHG emissions, but in the absence of a new law, regulation appears likely to move forward in 2011. To lessen the burden on the states, which must issue CO2 permits to implement the new regulations, the EPA issued the "tailoring rule." In effect the rule phases in the program, which will require GHG emission permits initially for the largest emitters, including utility and concrete plants, and then gradually for other facilities by size. The agency also raised the threshold for the level of CO2s that triggers the need for a permit, which in effect will exempt many businesses from compliance.

How this process proceeds depends in part on the result of litigation challenging the endangerment finding, the tailoring rule and the elevated threshold for CO2s. The plaintiffs are seeking to consolidate all the related cases into one mega-case in the D.C. Circuit. While the cases challenge the authority of the EPA to regulate GHGs, phase in the regulations rule and change the threshold, Foley Hoag Partner Seth Jaffe is skeptical.

"The Supreme Court told the EPA what to do," Jaffe says,
"I honestly don't get what those opposing the endangerment finding and the EPA regulations really think the end game is. The endangerment finding will be upheld, and anything opposite of it will be struck down." He adds that plaintiffs should "be careful what they wish for" in challenging the tailoring and threshold rulings. "If the EPA can't tailor the rules, it's not like they are going away. It will just become unbelievably over-regulatory."

Cooney thinks the end game is control of the political debate once the matter re-emerges in Congress. Proposed laws to further defer implementation of the EPA regulations or to rewrite the CAA to bar regulation of GHGs altogether seem likely to compete with yet another attempt to write a law specifically addressing climate change.

"The litigation is an effort to establish the terms when Congress has to debate the issue," Cooney says.

Tom Lindley, a partner at Perkins Coie, thinks the need for new legislation to support the smart grid necessary to advance solar, wind and biomass programs, coupled with the complications for multi-state corporations of dealing with differing state GHG regulatory regimes, will ultimately result in a law marrying climate change controls with renewable energy.

"The awkwardness of multiple differing state regulatory programs and the regulatory and economic burden that patchwork quilt of diverse programs creates for business is increasing corporate pressure for some form of intelligible, plannable nationwide program," Lindley says.


Reining in Wall Street

When President Obama took office, the economy was on the brink of collapse. The root causes of the calamity included deregulation of the financial services industry, the development of complex and risky derivatives, and a real estate bubble inflated by a surge in sub-prime lending. Mortgages written with little or no financial backing were bundled into securities that were certified as sound by rating agencies and insured with credit-default swaps. The ultimate result was a deep recession, a tidal wave of home foreclosures and millions of lost jobs.

So it was no surprise that once billions in bailout money stabilized the financial system, the administration and Congress would turn their attention to reining in Wall Street. The result was the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law July 21. Dodd-Frank imposes sweeping changes on regulation of the entire financial services industry from banks to hedge funds to credit rating agencies to insurance companies to investment advisers. It establishes a new regulatory structure, eliminating some existing agencies and adding others. Like the health care reform bill, it is a wide-ranging outline that will be filled over time--the 2,300 page bill calls for more than 240 rulemakings by agencies including the Commodities Futures Trading Commission, the Federal Reserve, the SEC and the newly created Consumer Financial Protection Bureau.

"It's an unbelievable document," says Richard Gottlieb, a partner at Dykema. "It pieced together into one quilt some very disparate patches."

While the details remain to be determined, the law mandates changes that will impact not only lenders of money and sellers of financial products, but also borrowers and purchasers.

"This will change the delivery mechanism and products offered by financial services companies," says Jeffrey Hare, a partner at DLA Piper. "No one goes untouched by the implications."

The main thrust of the legislation is consumer protection, under the new-established Bureau of Consumer Financial Protection. The independent agency within the Federal Reserve will oversee every entity offering consumer financial products. That industry wasn't happy when Obama named Elizabeth Warren, a Harvard Law School professor deemed extraordinarily liberal by business interests, to set up the bureau, with a dual appointment as an assistant to the president. While the specific rules won't be issued until the bureau staffs up, Warren is expected to take a tough approach to protecting consumers from potentially dangerous investments. Hare warns that will come at a cost.

"[Dodd-Frank] provides enhanced protection for the individuals who use financial services products, from investment products to basic loan and deposit products," Hare says. "It will increase compliance costs for institutions that offer those products."

Some of those costs will come from the law's mandate for improved disclosure, which will require rewriting of virtually all consumer documents related to financial products.

"The current system of financial disclosure never worked well," says John Cooney, a partner at Venable. "It's verbiage only a banking lawyer could love and no one ever reads." Cooney suggests that the complicated explanations of financial products could be stripped down to bullet points--"a summary sheet that consumers could read and understand." Hare is more skeptical: "There is a question as to whether there will be an increased consumer benefit [from simplified documents]," he says.

At the same time, changes in the Truth in Lending Act impose a national standard on mortgage underwriting, focusing on the borrower's ability to repay. "This will be a big change in the way lenders do business and in the way Americans receive loan products," Gottlieb says.

Other significant changes include establishing a Federal Insurance Office within the Treasury Department. "For the first time ever, the federal government is taking a role in the regulation of insurance," previously the province of state government, says Gottlieb. "It will look at issues in the regulation of insurance that can contribute to systemic failures," he adds, a reaction to AIG's role in the recent financial crisis.

The law creates another key regulatory agency, the Financial Stability Oversight Council, with broad powers to monitor, investigate and assess any risks to the U.S. financial system. It will for the first time provide general regulatory oversight to nonbank financial institutions, such as investment advisory firms, that are deemed to be "systemically important." Like most provisions of the bill, the devil will be in the details.

"A lot of the day-to-day implications, such as how they will determine what defines a systemically important company, are yet to be determined," Hare says. "The question is, when the rules come out, how will it all play out?"


The Dodd-Frank Act is aimed at the financial services
sector, but every public company, regardless of industry,
is mandated to permit shareholders to weigh in on pay.

Every three years, a public company will be required to hold a nonbinding shareholders' vote on its executive compensation scheme. It also must disclose the median compensation of all employees excluding the CEO, and the ratio of that figure to the CEO's total compensation.

"There were instances of egregious compensation that led to incentivized risk for short term gain," says Jeffrey Hare, a partner at DLA Piper. "Now companies will have to be more transparent in the way they compensate executives. In an egregious situation, the SEC has the ability to demand payback of compensation paid to executives."

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Mary Swanton

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