Let the Shakedowns Begin: Tax False Claims Legislation in California
Legislators in Sacramento, California, are mulling over one of the most (if not the most) troubling state and local tax bills of the past decade.
Senate Bill (SB) 799, introduced earlier this year and recently amended, would expand the California False Claims Act (CFCA) by removing the “tax bar,” a prohibition that exists in the federal False Claims Act (FCA) and the vast majority of states with similar laws.
If enacted, SB 799 will open the floodgates for a cottage industry of financially driven plaintiffs’ lawyers to act as bounty hunters in the state and local tax arena. California taxpayers would be forced to defend themselves in high-stakes civil investigations and/or litigation – even when the California Attorney General’s Office declines to intervene. As seen in other states, this racket leads to abusive practices and undermines the goal of voluntary compliance in tax administration.
While the CFCA is intended to promote the discovery and prosecution of fraudulent behavior, Senator Ben Allen introduced the bill specifically to “protect public dollars and combat fraud.” The enumerated list of acts that lead to a CFCA violation does not require a finding of civil fraud. In fact, a taxpayer who “knowingly and improperly avoids, or decreases an obligation to pay or transmit money or property to the state or to any political subdivision” would be in violation of the CFCA (See Cal. Gov’t Code § 12651(a)(7)).
This standard is particularly inappropriate in the tax context and is tantamount to allowing vague accusations of noncompliance with the law, leading to taxpayers being hauled into court. Once there, taxpayers would be held hostage between an expensive legal battle and paying an extortion fee to settle. The CFCA is extremely punitive: Violators would be subject to (1) treble damages (i.e., three times the amount of the underreported tax, interest, and penalties), (2) an additional civil penalty of $5,500 to $11,000 for each violation, plus (3) the costs of the civil action to recover the damages and penalties (attorneys’ fees).
To the extent the action was raised by a private plaintiff (or relator) in a qui tam action, the recovered damages or settlement proceeds would be divided between the state and the relator, with the relator permitted to recover up to 50% of the proceeds (Cal. Gov’t Code § 12652(g)(3)). If the state attorney general or a local government attorney initiates the investigation or suit, a fixed 33% of the damages or settlement proceeds would be allotted to their office to support the ongoing investigation and prosecution of false claims (Cal. Gov’t Code § 12652(g)(1)).
Adding further insult to injury, the CFCA has its own statute of limitations independent of the tax laws. Specifically, the CFCA allows claims to be pursued for up to 10 years after the date the violation was committed (Cal. Gov’t Code § 12654(a)). A qui tam bounty hunter’s claim would supersede the tax statutes of limitations.
Next, the elements of a CFCA violation must only be shown “by a preponderance of the evidence” (Cal. Gov’t Code § 12654(c)). The common law burden of proof for fraud is by “clear and convincing evidence,” a much higher bar.
Absent amendments, SB 799 would put every significant California taxpayer in jeopardy when the taxpayer takes a legitimate tax return position on a gray area of the state or local tax law, even when the position was resolved through the California Department of Tax and Fee Administration, the California State Board of Equalization, the California Franchise Tax Board, or a local government. Settlement agreements, voluntary disclosure agreements, and audit closing agreements all would be disrupted if the attorney general or a plaintiff’s lawyer believes the underlying tax dispute or uncertainty is worth pursuing under the CFCA.
In countless cases in Illinois and New York, we have seen companies face False Claims Act shakedowns after the company already had been audited, had entered into a settlement with the state, or when the tax statute of limitations had long closed. SB 799 would bring the horrors experienced in Illinois and New York to taxpayers doing business in California.
Fundamentally, SB 799 threatens to open the litigation floodgates and undermine the authority of California tax administrators, putting tax administration in the hands of profit-seeking “whistleblower” bounty hunters. The goal of motivating whistleblowers and addressing tax fraud can be accomplished by simply adopting (and funding) a tax whistleblower program similar to the very successful programs offered by the Internal Revenue Service and many other states.
Ideally, SB 799 will be rejected in full or deferred for further consideration by an interim/study committee. With this in mind, the following amendments are essential to prevent the most severe abuses that stem from the CFCA’s application to tax.
Bring qui tam suits without government involvement. Eliminating the ability of private plaintiffs to bring qui tam suits without the involvement of the attorney general would significantly reduce the number of frivolous claims and give the state its sovereign right to decide whether a claim should be pursued under the CFCA. If this amendment is not accepted, companies that introduce new technology and innovative products will be at the greatest risk of being targeted for qui tam It is always the case that tax law does not keep up with technological advances. Thus, the gray areas of tax law will be most present for high-tech taxpayers.
Protect reasonable, good-faith tax positions. Companies should not be liable under the CFCA merely for taking a reasonable return position or otherwise attempting to comply with a reasonable interpretation of law. CFCA exposure should be limited to cases of specific intent to evade tax, proven by clear and convincing evidence. Tax law is notoriously murky, and good-faith disputes are what keep lawyers and accountants employed worldwide.
Defer to existing tax statutes. The CFCA should not override the California Revenue and Taxation Code provisions governing statutes of limitation or burden of proof.
Apply prospectively only. The CFCA should be limited in application to prospective matters (i.e., claims for taxable years beginning on or after January 1, 2026) to avoid retroactive liability and constitutional risk.
Additionally, there is an emerging body of caselaw involving the federal FCA, holding it violates the separation of powers under the US Constitution. Justice Thomas, in a dissent, suggested that the federal FCA might be unconstitutional because it transfers executive power to the private sector. A district court in Florida recently dismissed a qui tam action brought under the federal FCA on similar grounds. The California Constitution is structured like the US Constitution in this regard, with executive power vested in the governor and the attorney general serving as the chief law enforcement officer (See Cal. Const. art. V, §§ 1, 13). The qui tam provisions of the existing CFCA transfer these powers to private actors with no political accountability. It is likely these qui tam provisions of the CFCA similarly violate the California Constitution.
Will the Shift from Renewable Energy to Oil and Gas Result in Cheaper Energy Prices?
There is clearly a shift in the Trump Administration’s energy policy from renewable energy to foster and sustain more fossil fuel energy. This shift is being promoted by the auctioning of government oil and gas leases.
Public Land Leases
The Interior Department announced in late March that in the first 3 months of 2025, the federal government brought in nearly $40 million in revenue from oil and gas lease sales on public land.
The leases have a one-decade lifespan and as long thereafter as they produce oil and gas in paying quantities.
The U.S. will hold an oil and gas lease sale in the Gulf of Mexico, as planned by the Biden administration. A proposed notice for the auction will be published in June. The Biden administration had planned for 3 Gulf leases (permitting production and drilling rights), a historically low number that angered the oil and gas industry and drilling states.
The Energy Shift
It is likely that the Trump Administration will expand the number of leases from the 3 proposed by the Biden Administration. Doug Burgum, who heads Trump’s energy council, said that “unleashing U.S. energy will lower gasoline and grocery store prices while boosting national security.” Consistent with the shift in energy policy, the Trump administration removed the U.S. from the Paris Agreement on climate change and aims to slash regulations on planet warming emissions from oil, gas, and coal operations.
Different Outcome?
Will this energy policy shift result in cheaper energy prices for the consumer? Some speculate that many oil companies operating in the Gulf of Mexico will likely continue to do what they’ve done for years, which is sit on hundreds of untapped oil leases on millions of acres. The market is saturated with oil, making energy companies reluctant to spend more money drilling because the added product will likely push prices down, cutting into profits. As stated by Exxon Mobil CEO Darren Woods in the previously cited LA Illuminator article, “So, I don’t know that there’s an opportunity to unleash a lot of production in the near term, because most operators in the U.S. are [already] optimizing their productions today.”
Leases have been sold too quickly and cheaply in recent decades, according to a 2021 report by the U.S. Department of the Interior, which oversees BOEM. This fast and loose approach “shortchanges taxpayers” and encourages speculators to purchase leases with the intent of waiting for increases in resource prices, adding assets to their balance sheets, or even reselling leases as profit rather than attempting to produce oil or gas.
Others argue that if you want to slash energy prices, then renewable energy is the way to go, but we are shipping overseas. Shipping LNG overseas contributes to higher electricity and natural gas prices in the U.S., according to a recent U.S. Department of Energy report.
Only time will tell what the future holds for energy prices. Hopefully we will not have a Horizon Deepwater disaster in the meantime.
Compliance with Labor and Wage Laws Critical to Avoid Crippling Fines and Statutory Penalties by the New York State Department of Labor
Running a profitable small business in New York State is no easy task. Juggling finances, employee relations, and the day-to-day operations has become increasingly difficult in a turbulent, uncertain economy. And that is why being conscious of New York State’s labor and wage laws, which are often nuanced and confusing, is critical. A failure, even if unintentional, to abide by the state’s labor and wage laws could result in an unanticipated audit by the New York State Department of Labor (NYSDOL), and the fines that may follow from that audit could be described as shocking and crippling.
These failures, which are subject to a NYSDOL audit, could be unintentional, but in some instances, the NYSDOL will treat genuine mistakes much like it will treat intentional errors. For instance, if a business mistakenly pays an employee the incorrect overtime rate or neglects to meet the weekly salary threshold for overtime-exempt employees per state law, then the business may be subject to an audit from the NYSDOL. An honest mistake like this could be dangerously costly – well beyond what it would take to make the employee “whole.”
Penalties under the NYSDOL Audit
Under Labor Law §219, the NYSDOL has the ability to direct payment for interest on all wages owed, which is currently set to 16 percent via Banking Law §14-a. That, unfortunately, is just the tip of the iceberg.
Should the NYSDOL audit uncover that an employer owed wages to employees, it will seek to assess liquidated damages pursuant to Labor Law §218. These amounts could be devastating depending on the circumstances. The statute allows for damages of up to 100 percent of the unpaid wages “plus the appropriate civil penalty.” Labor Law §§198 (1-a) and 662 (2) provide that liquidated damages shall be assessed unless the employer provides a good faith basis for believing that the underpayment was in compliance with the law. The civil penalty can be just us much as the wages owed – or, in the worst cases, up to 200 percent of the wages owed.
The NYSDOL is technically supposed to consider statutory factors pursuant to Labor Law §218 (1) before assessing civil penalties, including “size of the employer’s business, the good faith basis of the employer to believe that its conduct was in compliance with the law, the gravity of the violation, the history of previous violations and, in the case of wages, benefits or supplements violations, the failure to comply with record-keeping or other non-wage requirements.”
Example Cases
But what does this look like in practice? Let’s take as an example In the Matter of Port Café, a New York State Industrial Board of Appeals (IBA) decision from December 2024. In that case, the NYSDOL found that Port Café owed $174,757.91 in unpaid wages. On top of those wages, the NYSDOL assessed 100 percent of liquidated damages – so another $174,757.91 – along with a civil penalty in the amount of another $174,757.91, increasing the total amount owed to approximately $690,500. Luckily (if you can say that) for the business in Port Café, the IBA affirmed the liquidated damages but revoked the civil penalties due to the company’s “size … good faith of the employer, gravity and type of monetary violations.” Port Café is a cautionary tale.
Once you are subject to a NYSDOL audit, there is a real cause for concern that the NYSDOL will assess damages and penalties that far exceed the amount of unpaid wages – sometimes up to 200 percent more. As hard as it is to believe, much of a NYSDOL decision to assess these extreme penalties is discretionary. The NYSDOL advises that it will give consideration to the size of a business, the good faith of the employer, and other factors, but some businesses still end up better off than others. The business in Port Café resorted to challenging the 200 percent of civil penalties with the IBA, which ultimately agreed that these penalties were excessive, but other times the IBA has affirmed these penalties.
In In the Matter of the Petition of Lookman Afolayan and Buka NY Corp, a June 2021 IBA decision, the business was subject to a NYSDOL audit that found unpaid wages amounting to $27,851.75. Even with the considerations as discussed above (e.g., size of business), the NYSDOL assessed 100 percent liquidated damages and 100 percent civil penalties – raising the amount owed to an astonishing $116,138.77. What was once a somewhat manageable amount to be owed by this business had snowballed into devastating fines and penalties.
Takeaways
With all of that said – and with the “bad news” aside – what should a business do if it is subject to a NYSDOL audit? An attorney can help guide the next steps, including gathering documentation that is responsive to the NYSDOL audit and ensuring “good faith” compliance so that the business has a stronger likelihood of avoiding the fullest extent of statutory liquidated damages and civil penalties. If penalties have already been assessed, having an attorney evaluate the totality of the audit and how the discretionary factors were applied by the NYSDOL, if at all, is critical to potentially reducing the damages owed on appeal.
Being subject to a NYSDOL audit and the potential statutory penalties is undoubtedly an uncomfortable and costly scenario, and the best way to dodge this situation is to comply with the relevant New York State wage and labor laws. Small miscalculations and errors could result in harsh penalties – and the one true way to avoid it altogether is to properly follow each applicable labor and wage law in New York State. This includes the overtime laws, the exemption laws, and the child labor laws, to name a few. An attorney can assist with assessing the applicability of these laws to a business to confirm compliance, and while that may appear painstaking, it is a way to safeguard compliance with the law to avoid an unexpected NYSDOL audit and the excruciating penalties that may follow.
Health Care Marketing: The Seventh Circuit Addresses “Referrals” Under The Anti-Kickback Statute
Health care organizations working with marketers, independent sales representatives, advertising, and other consulting support to promote sales of products or services received welcomed news that their arrangements may be lower risk than some believe. On April 14, 2025, the United States Court of Appeals for the Seventh Circuit issued an opinion providing a crucial interpretation of the meaning of “referrals” under the federal Anti-Kickback Statute (AKS), found at 42 U.S.C. § 1320a-7b.
The case, United States v. Sorenson, addressed whether a Medicare-registered distributor violated the AKS in making payments to advertising, marketing, and manufacturing companies that worked to sell orthopedic braces to Medicare patients. The court held that such payments were not “referrals” within the meaning of the AKS because the payments were made to entities that were neither physicians in a position to refer their patients nor other decisionmakers in positions to “leverage fluid, informal power and influence” over health care decisions.
Background
The AKS is a criminal law that prohibits the knowing and willful offering, paying, or receiving any form of compensation or benefit — known as “remuneration” — in exchange for patient referrals or generating business related to services or items reimbursable by federal health care programs (e.g., Medicare or Medicaid-covered drugs, supplies, or health care services). Remuneration is broadly defined to include anything valuable beyond just cash payments, such as free rent, luxury hotel accommodations, expensive meals, or inflated payments for consulting roles and medical directorships. The statute targets arrangements involving individuals who can influence patient decisions or have access to patients, thus affecting patient health care choices. A common example would be a physician receiving money for referring patients to specific health care providers, like hospitals or specialists, but the statute can reach non-physicians, as well, although such cases seem to be less common among those prosecuted. The AKS is also used as a basis for the assertion of civil false claims that are tainted or caused by a violation of the AKS.
In Sorenson, SyMed Inc., a Medicare-registered distributor of durable medical equipment, entered into a complex series of arrangements with a durable medical equipment manufacturer, PakMed LLC, a marketing agency, Byte Success Marketing, and a medical billing agency, Dynamic Medical Management, to advertise orthopedic braces to patients, to obtain signed prescriptions from the patients’ doctors, to distribute the braces, and then to collect reimbursement from Medicare.
The business model involved multiple steps. Initially, Byte and another marketing company, KPN, ran advertisements for orthopedic braces. Patients interested in the braces responded by submitting electronic forms containing their names, addresses, and physician contact details. These details were then sent to call centers, where sales agents from Byte or KPN reached out to patients to discuss brace orders and prepare prescription forms. Once additional details were collected and patient consent was obtained, the sales agents faxed prefilled, unsigned prescription forms to the patients’ doctors. The prescription forms prepared by Byte included SyMed’s name and corporate logo, along with a list of devices to be ordered.
Critical to the court’s analysis, physicians who received these unsigned prescription forms had complete discretion to either sign and return them to SyMed and Dynamic for further processing or to ignore them entirely. Physicians rejected approximately 80% of the orders originating from KPN and frequently disregarded those from Byte. If a physician decided to sign and approve a prescription, SyMed instructed PakMed to deliver the braces directly to patients, while Dynamic submitted billing to Medicare on SyMed’s behalf. SyMed retained a 21% service fee from the Medicare or insurance payments, from which it compensated Dynamic for its billing services, and forwarded the remaining 79% to PakMed. PakMed then used part of its share to pay KPN and Byte, the marketing firms, based on how many patient leads each had generated.
Based on this business model, a federal grand jury indicted Sorensen on four counts. Count One charged Sorensen with conspiring to offer and pay remuneration, including kickbacks and bribes, for furnishing services for which payment may be made in whole or in part under a federal health care program in violation of the AKS. Counts Two, Three, and Four charged Sorensen with substantive violations of the AKS citing three specific payments. The district court characterized the question as a “close call,” but ultimately convicted Sorensen because the evidence regarding willfulness allowed the jury to find beyond a reasonable doubt that Sorensen “knew from the beginning of the agreement in 2015 that the percentage fee structure and purchase of the doctor’s [sic] orders violated the law.”
Analysis
On appeal, the Circuit Court considered whether the payment fell within the prohibitions of the AKS, which require that a payor act with the intent to induce referrals from the payee (recipient) to implicate the statute. As the court noted, in considering whether a payment falls within the prohibitions of the AKS, the focus is on an intent to induce referrals — as opposed to the titles or formal authorities — from the payee in order to “broaden liability to reach operatives who leverage fluid, informal power and influence” over health care decisions. Payments to non-physicians, however, present uncommon scenarios, as the power to guide patients to specific providers and approve care presents a significantly lower risk in comparison to such power held by a physician.
The Department of Justice (DOJ), which had commenced the prosecution, made the argument that the term “refer” is broad, “encapsulating both direct and indirect means of connecting a patient with a provider.” In DOJ’s perspective, the inquiry was to be focused on substance, not form, and thus a non-physician makes a referral within the meaning of the AKS when he or she “steer[s] a patient to a particular provider,” even if the referring person is neither a “‘relevant decisionmaker”’ nor “in a similar position as the relevant decisionmaker.” The court, however, rejected such a broad interpretation, noting that DOJ produced no evidence that Sorensen, PakMed, KPN, or Byte authorized medical care in such a way to implicate the AKS referral prohibition.
Moreover, the fact that SyMed shared revenue with PakMed on a percentage basis did not render the arrangement illegal. The court noted that “percentage-based compensation structures are not per se unlawful.” Instead, to violate the AKS, “payments have to be made in order to induce an unlawful referral,” which “requires proof beyond showing that a percentage-based compensation contract existed.”
Fundamentally, due to an advertiser’s lack of “any sort of informal power and influence over healthcare decisions,” here, the Court concluded that there was no referral under the AKS. There was a notable difference “between a payment to induce referrals from a payee who is in a position to make or influence healthcare decisions, which violates the statute, and a payment for advertising services, which does not.” Without authority to act on behalf of a physician, authorize medical care, or unduly influence physician decision making, a violation of the AKS did not exist. Under the arrangement in question, physicians always had ultimate control over their patients’ health care choices and applied independent judgment in exercising that control.
One interesting observation of the Court was that if the entities and the advertisers had all worked for the same company, their actions would never have been viewed as federal crimes. To align incentives, employers regularly structure compensation based on how much business employees generate. The AKS recognizes this common practice. Among its exclusions, for example, the statute contains a safe harbor provision, 42 U.S.C. § 1320a-7b(b)(3)(B), that exempts payments by “an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services․” Though this comment was resigned to a footnote, perhaps the Court was signaling that the distinction between independent contractor and employer is not as critical as some commenters have worried in the past.
Conclusion
Both physicians and non-physicians can wield formal or informal influence over patients’ choices of health care providers, often leveraging personal relationships to limit competition and harm patients, and consequently increasing costs for federal health care programs. The AKS explicitly prohibits payments intended to induce improper influences, which is consistent with public policy. In this case, however, Sorensen’s payments to PakMed, KPN, and Byte were compensation for legitimate, routine services — such as advertising, manufacturing, and product delivery — and not in exchange for patient referrals.
Although refraining to comment on the broader social implications or desirability of aggressive, even intrusive, marketing strategies like Sorensen’s, the court noted that vigorous advertising alone was not equivalent to illegal patient referrals. Since no evidence was presented that would permit a reasonable jury to conclude beyond a reasonable doubt that Sorensen made payments or agreements in exchange for referrals as defined by the AKS, the district court’s judgment was reversed.
This decision does not mean that providers, manufacturers, or others engaged in the health care ecosystem need to change any current practices. But it does stand for an important milestone in the ongoing interpretation of the AKS, one of the key fraud and abuse enforcement tools, that will be closely monitored by entities defending against AKS or FCA actions premised on certain compensation arrangements that previously had been questioned. Under the Court’s ruling, heath care providers may structure compensation arrangements involving marketing and sales without implicating AKS, as non-physician recommendations may evade classification as an illegal referral. The Court’s ruling, emphasizing the payee’s inability to leverage influence or power over health care decisions, suggests that providers could, with the proper safeguards in place, utilize percentage-based compensation structures or per lead compensation arrangements with marketing and sales teams. Providers should consult legal counsel on structuring any such arrangement to ensure AKS compliance and meet any applicable safe harbor protections.
ERISA in the Supreme Court: Implications of Cunningham v Cornell University
On April 17, 2025, the U.S. Supreme Court issued a unanimous opinion in Cunningham v Cornell University, addressing the pleading standard applicable to prohibited transaction claims under the Employee Retirement Income Security Act (ERISA).
Which Party Must Address Prohibitive Transaction Exemptions in a Motion to Dismiss?
Plan participants filed suit against plan fiduciaries, alleging that the fiduciaries had engaged in a prohibited transaction by retaining two of its recordkeepers and paying excessive recordkeeping fees to keep them. The question presented to the Supreme Court is an important procedural question: Who—at the motion to dismiss stage—had the burden of pleading and proving whether the service provider exemption applies?
The Supreme Court resolved a lower court split by ruling that it is not the participants’ responsibility to plead the absence of a prohibited transaction exemption. Instead, the plan sponsor must show that a prohibited transaction exemption applies as an affirmative defense. Exemptions are not—as the defense argued and the Second Circuit held—elements of the pleading, such that plaintiffs must demonstrate their absence to survive a motion to dismiss.
What are Prohibited Transactions and Why Are Exemptions Needed?
ERISA categorically bars certain “prohibited transactions” between a plan and a related party (a so-called “party-in-interest”) to prevent conflicts of interest subject to several detailed exemptions, which allow plans to interact or conduct business with a party-in-interest if certain requirements are met. Because of the extremely broad nature of the prohibited transaction rules, the retirement industry would have difficultly functioning without the prohibited transaction exemptions. For example, in the absence of the exemptions, virtually every payment of fees to a plan vendor for services would be a prohibited transaction. However, there is a commonly used statutory exemption for reasonable arrangements with service providers for the provision of necessary services as long as no more than reasonable compensation is paid.
Supreme Court Decision May Lead to More Litigation
As the concurring opinion noted, the motion to dismiss stage has become “the whole ball game” because the cost of discovery can often drive defendants to settle meritless suits based on purely financial considerations. The Supreme Court acknowledged that this lower standard for plaintiffs could open the floodgates to more litigation, and directed trial courts to use other methods and civil litigation rules to attempt to weed out meritless cases.
Recommended Actions
This is a procedural ruling steeped in technical principles of statutory construction and interpretation of civil litigation rules. Nonetheless, there is a simple takeaway for plan sponsors. The hurdle for participants to survive a motion to dismiss in a suit against plan fiduciaries just got easier, so it is more important than ever for plan sponsors to manage litigation risk by making themselves unattractive targets. This means plan sponsors and fiduciaries should focus on engaging in prudent, compliant and well-documented actions and plan administration processes, particularly in the areas of vendor selection and management and investment selection.
AIPLA Conference on Trade Secret Litigation Recap: Part 1
At the recent AIPLA Trade Secret Summit, one of the nation’s premier conferences on trade secret law, critical issues surrounding the protection of confidential business information took center stage. The discussions reinforced the importance of safeguarding trade secrets and proprietary data against theft, liability, and employee mismanagement—particularly during key employment transitions such as hiring, active employment, and separation. These considerations are essential for companies striving to maintain their competitive edge while navigating complex legal and ethical challenges.
Hearing firsthand how companies handle these issues reinforced just how vital it is to stay proactive and ahead of the curve. Our team has put together a series of key take aways from the event that may help companies to guard against unfair competition and trade secret theft. Our first topic for consideration is joint representation.
Joint Representation
Representing an onboarding employee and the company concerning the hiring of the individual can be a tricky proposition. There are good reasons for engaging in a joint representation with proper warnings and there are definite pitfalls.
One of those pitfalls is the appearance that the new employee and the new employer are joined at the hip relating to the conduct of the employee exiting a former employer (especially if the former employer is a direct competitor). When this situation occurs, the first step is to review the representation from an ethical standpoint under existing Ethics and Professionalism rules.
It is considered ethical to simultaneously represent multiple clients whose interests may not ultimately be aligned if the law does not prohibit the representation and if no client asserts a claim against any other client involved in the proceeding.
First things first—obtain an acknowledgement from the new employee that there is no restrictive covenant impeding the employment, the employee has exited his former company without any trade secret/confidential/proprietary information, and the employee has not destroyed or spoliated any information that belongs to the former employer.
If these factors check out, proceed cautiously with the caveat that if it is learned that the acknowledgement is false, representation of the employee will end and representation of the company will continue. In this type of situation, informing each party of the risks of dual representation is key to continued representation of the company when bad facts present themselves. This is not to say that disqualification may still occur, particularly if privileged information obtained from the onboarding employee could assist the employer in defending any claims.
A key case to review before undertaking any dual representation is Upjohn v U.S, 449 U.S. 383 ( 1981).
DoD Workforce Transformation and Strategic Implications for Defense Contractors
The Department of Defense has initiated a far-reaching transformation of its civilian workforce through the Workforce Acceleration and Recapitalization Initiative, formalized in the Deputy Secretary of Defense memorandum “Guiding Principles for The Department of Defense Workforce Optimization.” This comprehensive restructuring represents the most significant overhaul of DoD civilian personnel in decades, aiming to create a leaner, more agile organization exclusively focused on mission-critical functions that enhance national security capabilities. The initiative signals a fundamental shift in how the Pentagon operates, moving away from decades of organizational expansion toward a more focused, technologically advanced defense establishment.
Strategic Pillars of the Initiative
The DoD’s transformation is built upon four interconnected strategic pillars designed to fundamentally reshape its civilian workforce structure and operations. The first pillar, mission-centric realignment, requires all civilian positions to demonstrate direct contribution to core defense priorities including combat readiness, strategic deterrence, and operational effectiveness. This represents a significant departure from previous approaches that often allowed support functions to expand without clear connections to mission outcomes. Under this new framework, positions will undergo rigorous evaluation against mission-critical thresholds, with those failing to demonstrate direct impact facing potential consolidation, reclassification, or elimination. This realignment will enable the DoD to shift personnel and funding toward high-priority defense capabilities that directly enhance America’s military advantage, particularly in contested domains like cyber, space, and advanced weapons systems.
The second pillar focuses on organizational streamlining to eliminate the bureaucratic layering that has accumulated over decades. Parallel functions across components will be consolidated to reduce redundancies that have historically slowed decision-making and diluted accountability. This consolidation aims to accelerate decision velocity throughout the organization—a critical capability in an era of great power competition where operational tempo continues to increase. Enhanced fiscal discipline represents another key benefit, as consolidated operations will maximize resource utilization and effectiveness, potentially freeing billions for modernization priorities rather than administrative overhead. The DoD estimates that eliminating duplicative functions could reduce administrative costs by up to 15% while simultaneously improving service delivery.
Technological modernization forms the third pillar, with the DoD implementing a Digital-First operational approach across all appropriate functions. This goes beyond simple automation to encompass comprehensive digital transformation, including advanced AI solutions for tasks ranging from maintenance scheduling to personnel management. Legacy systems that have hindered interoperability and operational effectiveness will be systematically phased out and replaced with integrated platforms capable of supporting multi-domain operations. This digital transformation will enable enhanced analytics capabilities to support evidence-based resource allocation, allowing the DoD to make data-driven decisions about where to invest limited resources for maximum strategic impact. The initiative specifically targets a 30% reduction in manual processes by FY2026.
The final pillar involves strategic outsourcing based on a comprehensive reassessment of which activities genuinely require government performance versus those better suited for contractor delivery. This represents a nuanced approach rather than wholesale privatization, focusing particularly on non-inherently governmental functions in retail, recreational services, and certain administrative areas. The DoD is developing sophisticated frameworks to determine optimal service delivery models, considering factors beyond immediate cost savings to include mission alignment, performance quality, and strategic flexibility. This approach creates significant opportunities for contractors who can demonstrate superior capability, efficiency, and innovation in delivering these services.
Implementation Roadmap
The DoD has established a structured, multi-phase implementation approach to ensure systematic transformation while maintaining operational continuity. The assessment phase, which concluded with initial organizational review submissions due April 11, 2025, and required components to conduct preliminary evaluations of their organizational structures and workforce compositions. This phase established baseline metrics and identified immediate opportunities for consolidation or elimination of redundant functions. The current detailed planning phase, culminating in comprehensive implementation plans due May 24, 2025, requires components to develop specific restructuring roadmaps, including position-by-position analyses, technology implementation strategies, and contractor transition plans where applicable.
The execution phase will extend throughout FY2025-2026, with a carefully sequenced implementation approach designed to minimize operational disruption while achieving transformation objectives. The workforce impact is projected to reduce civilian positions by 5-8% (approximately 60,000 positions), implemented through a combination of hiring freezes, voluntary separation incentives, and targeted reductions in low-priority areas. This represents the most significant DoD workforce reduction since the post-Cold War drawdown. Recognizing the risk of losing critical talent during this transition, the DoD has developed a sophisticated talent retention strategy emphasizing enhanced performance-based incentives to retain high-performing personnel in mission-critical roles. This includes expanded use of retention bonuses, accelerated promotion pathways, and specialized training opportunities for personnel in priority capability areas.
Implications for Defense Contractors
The DoD’s transformation creates a rapidly evolving landscape that presents both significant opportunities and potential challenges for defense contractors across all sectors. In terms of emerging opportunities, the initiative will drive heightened demand for contractors offering AI, automation, and digital workflow solutions that directly support the DoD’s technological modernization objectives. Companies with proven capabilities in areas like predictive analytics, process automation, and secure cloud implementation will find expanding markets as components seek to accelerate their digital transformation. The increased outsourcing of previously government-performed functions will expand managed service opportunities, particularly in areas like logistics, facilities management, and certain administrative functions where private sector efficiency and innovation can deliver superior outcomes at lower costs.
Advisory services represent another growth area, with increasing need for expertise in change management, organizational transformation, and performance optimization as DoD components navigate complex restructuring processes. Contractors with demonstrated experience in large-scale organizational transformation, particularly those with relevant public sector experience, will be well-positioned to capture this growing demand. Additionally, as the DoD shifts remaining personnel toward higher-value functions, training and development requirements will expand, creating opportunities for contractors offering specialized technical training, leadership development, and certification programs aligned with the DoD’s evolving capability needs.
To effectively capitalize on these opportunities, contractors should consider several market positioning strategies. First and foremost, they must recalibrate their offerings to directly support the DoD’s core operational priorities, emphasizing how their products and services enhance lethality, readiness, and strategic advantage rather than simply providing administrative support. This requires a sophisticated understanding of the DoD’s mission requirements and capability gaps, along with the ability to articulate clear, compelling value propositions in terms that resonate with defense decision-makers focused on mission outcomes.
Contractors should also position their service offerings as enablers of the DoD’s digital transformation goals, demonstrating how their solutions can accelerate the transition from manual, paper-based processes to integrated digital workflows that enhance efficiency and effectiveness. Proposals should emphasize cost-effectiveness and operational improvements, providing quantifiable metrics that demonstrate how contractor solutions deliver superior value compared to status quo approaches or competing alternatives. With the DoD likely to consolidate contract vehicles as part of its efficiency initiatives, contractors should prepare for potential bundling of previously separate contracts, potentially necessitating new teaming arrangements or capability expansions to remain competitive in this evolving procurement environment.
Risk mitigation represents another critical consideration for contractors navigating this transformation. Portfolio diversification should be a priority, reducing exposure to contracts supporting non-essential functions that may face elimination or significant reduction. Contractors should conduct comprehensive reviews of existing agreements to assess vulnerability to consolidation or elimination, developing contingency plans for at-risk contracts while identifying opportunities to expand in growth areas. Relationship management becomes increasingly important in this environment, with contractors needing to strengthen engagement with program offices likely to gain importance in the reorganization while developing relationships with emerging decision-makers in priority capability areas.
Finally, contractors should develop agile delivery models with flexible staffing and delivery approaches to accommodate the DoD’s evolving needs. This includes the ability to rapidly scale services up or down as requirements change, provide hybrid on-site/remote delivery options, and integrate seamlessly with government and other contractor teams in increasingly complex delivery ecosystems. Contractors who demonstrate this agility and responsiveness will have significant advantages in capturing new opportunities while maintaining existing business relationships through the transformation period.
Strategic Outlook
The DoD’s workforce transformation represents a fundamental shift in how the Department structures its workforce and delivers on its mission. Rather than a simple cost-reduction exercise, it reflects a strategic realignment aimed at creating a more lethal, responsive, and technologically advanced defense establishment capable of prevailing in increasingly complex and contested operational environments. This transformation will reshape the defense contracting landscape for years to come, creating new opportunities for innovative, mission-focused companies while challenging traditional business models and relationships.
Contractors who proactively align with this vision—emphasizing mission impact, digital capabilities, and operational efficiency—will find significant opportunities in this evolving landscape. Those who continue with business-as-usual approaches may face increasing challenges as the DoD reshapes its contractor relationships to match its new organizational reality. The most successful contractors will be those who position themselves as strategic partners in the transformation journey, offering solutions that directly advance the DoD’s core objectives while demonstrating exceptional value and performance. As this initiative unfolds over the coming years, it will fundamentally reshape the relationship between the Department and its industrial base, creating a more integrated, efficient, and effective defense enterprise capable of meeting the complex security challenges of the 21st century.
The Performance Review- Arbitration Agreements – What, Why, and How [Podcast]
GT Shareholders Brian Kelly and Michael Wertheim discuss changes in California’s employment arbitration landscape and its integration with federal law. (Plus, would Col. Nathan Jessup’s famous courtroom soliloquy have the same impact bouncing off the four corners of a conference room at an arbitration proceeding?)
GT’s The Performance Review – California Labor & Employment Podcast is a discussion on the latest trends and developments in California Labor & Employment law.
New USTR Measures Target Chinese Maritime Sector: What You Need to Know
The Office of the United States Trade Representative (“USTR”) issued a detailed notice on April 17, 2025, regarding actions and proposed actions in response to China’s alleged targeting of the maritime, logistics, and shipbuilding sectors for dominance. The measures, USTR argues, will “disincentivize the use of Chinese shipping and Chinese-built ships, thereby providing leverage on China to change its acts, policies, and practices, and send a critically needed demand signal for U.S.-built ships.” Below, we break down the key elements of the notice and their potential impacts.
Background
The USTR launched an investigation under Section 301 of the Trade Act of 1974 (“Trade Act”) following a petition received by five national labor unions on March 12, 2024. The petition alleged that China’s policies unfairly harm U.S. commerce by targeting dominance in critical maritime-related sectors. Following a review, USTR determined that these practices displace foreign firms, reduce opportunities for U.S. businesses, and weaken supply chain resilience due to dependencies on China’s controlled sectors. As a result, in the closing days of the Biden administration, USTR issued a determination that these actions are unreasonable and actionable under the Trade Act.
The investigation revealed that China’s dominance strategy restricts U.S. competition, undermines supply chain security, and creates vulnerabilities in critical economic sectors. In response, on February 21, 2025, the USTR issued a Federal Register notice proposing certain responsive actions, including service fees and restrictions on certain maritime transport services, which resulted in the USTR convening a two-day public hearing and receiving nearly 600 public comments from industry stakeholders. USTR published its determination on responsive actions on April 17, 2025, Notice of Action and Proposed Action in Section 301 Investigation of China’s Targeting the Maritime, Logistics, and Shipbuilding Sectors for Dominance, Request for Comments.
Key Elements of the Notice of Action
Restrictions on Chinese Vessel Operators, Owners, and Chinese-Built Vessels. The plan includes a first phase with a 180-day grace period, after which fees will be implemented on Chinese vessel owners and operators calling in the United States based on net tonnage. Chinese operators and owners will face a port fee of $50 per net ton beginning on October 14, 2025, which will increase by $30 a year over the next three years.
Chinese-built vessels that are not Chinese-owned or controlled will face a lower phased fees of $18 per net ton or $120 per discharged container, whichever is higher. Those fees will also increase by $5 per net ton annually until 2028, with container fees increasing proportionally.
The fees will be applied per U.S. voyage, and not at each U.S. port call, as had been initially proposed, remedying objections raised by smaller U.S. ports. The fees will also only be levied up to five times per year on any given ship.
All Liquified Natural Gas (“LNG”) carrier vessels (whether Chinese-built or Chinese-owned or operated) are exempt from the new fees, but the carriage of LNG from U.S. ports is subject to separate cargo reservation requirements outlined below.
A number of exemptions were adopted to address objections raised in the March comment period by various U.S. shippers, ports, terminals, and regional carriers. These exemptions are only available Chinese-built vessels that are not Chinese-owned or operated. They include:
U.S.-owned vessels, where the U.S. entity owning the vessel is controlled by U.S. persons and is at least 75 percent beneficially owned by U.S. persons;
Vessels arriving at U.S. ports empty or in ballast (to avoid impacts to U.S. exports);
Smaller and medium-size vessels (with a capacity equal to or less than 4,000 Twenty-Foot Equivalent Units (“TEU”), 55,000 Deadweight Tonnage (“DWT”), or individual bulk capacity of 80,000 DWT);
Vessels engaged in shortsea shipping (entering a U.S. port in the continental United States from a voyage of less than 2,000 nautical miles from a foreign port or point);
Specialized chemical tanker vessels; and
Vessels enrolled in certain U.S. Maritime Administration sealift programs
Restrictions on Foreign-Built Vehicle Carriers and LNG Exports. Non-U.S.-built vehicle carriers will face fees based on Car Equivalent Unit (“CEU”) capacity, starting at $0 for the first 180 days and rising to $150 per CEU capacity thereafter. Beginning April 17, 2028, phased restrictions will require a growing percentage of U.S. LNG exports to be transported on U.S.-built, U.S.-flagged, and U.S.-operated vessels. This percentage will increase gradually over 22 years.
Proposed Tariffs on Ship-to-Shore Cranes and Cargo Handling Equipment. The notice proposes additional duties of up to 100 percent on cranes manufactured, assembled, or made with components of Chinese origin. Certain cargo handling equipment, including specific containers, chassis, and chassis parts from China, will also face tariffs ranging from 20 percent to 100 percent.
Significant Takeaways from the Proposed Actions
No Cumulative Fees. The Notice of Action clarified that the fees are not cumulative or stacked. A vessel will only be charged one fee per voyage/string of voyages and is limited to five charges per year.
Phased Tonnage-Based Fee on Chinese Vessel Operators and Owners. The February Proposed Action proposed a flat rate fee of up to U.S. $1,000,000 per vessel entrance to a U.S. port or up to U.S. $1,000 per net tonnage (“NT”) of the vessel’s capacity. The Notice of Action contains a fee of U.S. $50 per NT (after the first 180 days), which will increase incrementally. While the burden on smaller ships is reduced, under the new formula fees on large tankers and containerships could be more than double the flat fees proposed in February.
No Fees Based on Chinese Fleet Composition. The Notice of Action did away with one of the most controversial aspects of the February proposal, i.e., fees based on fleet composition for maritime transport operators with fleets comprised of Chinese-built vessels or maritime transport operators with prospective orders for Chinese vessels.
Expansive Definition of Chinese Owners and Operators, Including Minority Shareholding Test. The Notice of Action includes multiple alternative tests for determining if a vessel owner or operator is Chinese for the purpose of the fee schedule. Chinese owner or operator status can be triggered by country of citizenship or organization, ownership, control, headquarters location, principal place of business, and other factors. An entity will be deemed a Chinese owner or operator even if only 25 percent of the entity’s outstanding voting interest, board seats, or equity interest is held directly or indirectly by an entity that is a national or resident of China, Hong Kong, or Macau, or organized under the laws of those jurisdictions, or has its principal place of business there. The 25 percent threshold may pose new challenges for publicly traded and widely held companies and funds outside China that have some China-linked investor participation.
Lack of Clarity Regarding Other Key Definitions. “Owner” and “Operator” are defined in the notice by reference to Customs and Border Protection (“CBP”) Form 1300 (Vessel Entrance or Clearance Statement); however, those terms are not actually defined in that CBP form or any accompanying rules. Accordingly, uncertainty about these key terms remains—regarding, for example, the “owner” status of lease-finance title holders and owners pro hac vice (i.e., bareboat charterers); and the “operator” status of technical managers, commercial managers, document of compliance holders, and others that share responsibility for vessel activities and compliance.
Fees on Vessel Operators of All Foreign Vehicle Carriers (not just Chinese-Built Ships). These fees are imposed any non-U.S. built vehicle carrier and are not limited to those vehicle carriers built in China. Like the cargo reservation provisions for LNG, this action is likely to draw protests and challenges that it exceeds USTR’s authority, as new fees on European, Korean, and Japanese car carriers have no apparent nexus to alleged Chinese shipbuilding and maritime practices.
Cargo Reservation Requirements for LNG Exports. While USTR previously proposed a requirement that a mandatory percentage (increasing over time) of all U.S. exports be carried on U.S.-flagged, U.S.-built vessels, the current notice limits this cargo reservation requirement to LNG cargo only. Also, some exporters favor expanding the notice’s special treatment of LNG to other types of liquified gas and natural gas liquids exports.
Public Participation and Deadlines.
The comment period to the proposed tariff action opened on April 17, 2025. While USTR only solicited feedback on the tariff proposal, the docket is likely to attract commentary on the broader range of new remedies and issues introduced in the notice. USTR also will hold a public hearing on this proposed action on May 19, 2025, at the U.S. International Trade Commission in Washington, D.C. Requests to appear at the public hearing must be submitted by May 8, 2025, with written comments due by May 19, 2025. Rebuttal comments to the public hearing must be submitted within seven calendar days after the last day of the hearing.
Conclusion and Next Steps
The USTR’s notice introduces significant measures targeting China’s position in the maritime, logistics, and shipbuilding sectors. Key actions include the imposition of fees on Chinese maritime transport services, restrictions on U.S. LNG exports, fees on all non-U.S. car carriers, and proposed tariffs on vital shipping equipment. Stakeholders are encouraged to review the proposed measures and submit comments or requests to appear at the hearing by the specified deadlines. Companies involved in maritime transportation should begin preparing for the phased implementation of fees and restrictions.
For additional information, stakeholders can contact the USTR Section 301 support line at (202) 395-5725.
Comments on Minnesota’s Proposed Rule for Reporting Products Containing Intentionally Added PFAS Are Due May 21, 2025
With the January 1, 2026, reporting deadline fast approaching for reporting on products containing intentionally added per- and polyfluoroalkyl substances (PFAS), on April 21, 2025, the Minnesota Pollution Control Agency (MPCA) published a proposed rule intended to clarify the reporting requirements, specify how and what to report, and establish fees. Written comments on the proposed rule are due May 21, 2025, at 4:30 p.m. (CDT). On May 22, 2025, at 2:00 p.m. (CDT), MPCA will hold a public hearing during which it will accept oral comments on the proposed rule. The hearing will end at 5:00 p.m. (CDT), but additional days of hearings may be scheduled if necessary. The procedural rulemaking documents available include:
Proposed Permanent Rules Relating to PFAS in Products; Reporting and Fees (c-pfas-rule1-06) (proposed rule);
Statement of Need and Reasonableness for PFAS in products reporting and fees rulemaking (c-pfas-rule1-07) (SONAR); and
Notice of intent to adopt rules with a hearing (c-pfas-rule1-05).
Definitions
The proposed rule includes definitions not included in Minnesota’s statute, including:
Component: A distinct and identifiable element or constituent of a product. Component includes packaging only when the packaging is inseparable or integral to the final product’s containment, dispensing, or preservation.
Distribute for sale: To ship or otherwise transport a product with the intent or understanding that the product will be sold or offered for sale by a receiving party after the product is delivered.
Function: The explicit purpose or role served by PFAS when intentionally incorporated at any stage in the process of preparing a product or its constituent components for sale, offer for sale, or distribution for sale.
Homogenous material: One material of uniform composition throughout or a material, consisting of a combination of materials, that cannot be disjointed or separated into different materials by mechanical actions.
Packaging: The meaning given under Minnesota Statutes, Section 115A.03 — “‘Packaging’ means a container and any appurtenant material that provide a means of transporting, marketing, protecting, or handling a product. ‘Packaging’ includes pallets and packing such as blocking, bracing, cushioning, weatherproofing, strapping, coatings, closures, inks, dyes, pigments, and labels.”
Significant change: A change in the composition of a product that results in the addition of a specific PFAS not previously reported in a product or component or a measurable change in the amount of a specific PFAS from the initial amount reported that would move the product into a different concentration range.
Substantially equivalent information: Information that the MPCA commissioner can identify as conveying the same information required under Part 7026.0030 and Minnesota Statutes, Section 116.943, Subdivision 2. Substantially equivalent information includes an existing notification by a person who manufactures a product or component when the same product or component is offered for sale under multiple brands.
For some definitions, the proposed rule expands on definitions that are included in the statute. The statute defines manufacturer, but MPCA proposes additional language to clarify the definition (new language is italicized):
Manufacturer: The person that creates or produces a product, that has a product created or produced, or whose brand name is legally affixed to the product. In the case of a product that is imported into the United States when the person that created or produced the product or whose brand name is affixed to the product does not have a presence in the United States, manufacturer means either the importer or the first domestic distributor of the product, whichever is first to sell, offer for sale, or distribute for sale the product in the state.
According to the SONAR, MPCA inserted the phrase “has a product created or produced” to clarify the parties responsible for reporting. MPCA states that “[s]imilarly, the definition encompasses parties that either import or are the first domestic distributor of the product, whichever is first to sell, offer for sale, or distribute the product for sale in the state.” MPCA intends the revisions to clarify that companies that do not manufacture their own products are subject to the reporting and fee requirements.
Parties Responsible for Reporting
Under the proposed rule, a manufacturer or a group of manufacturers must submit a report for each product or component that contains intentionally added PFAS. Manufacturers in the same supply chain may enter into an agreement to establish their reporting responsibilities. The proposed rule allows a manufacturer to submit information on behalf of another manufacturer if the following requirements are met:
The reporting manufacturer must notify any other manufacturer that is a party to the agreement that the reporting manufacturer has fulfilled the reporting requirements;
All manufacturers must maintain documentation of a reporting responsibility agreement and must provide the documentation to MPCA upon request;
All manufacturers must verify that the data submitted on their behalf are accurate and complete; and
For the verification to be considered complete, all manufacturers must submit the required fee, as applicable.
MPCA states in the SONAR that “[i]t is reasonable to allow a manufacturer to submit the reporting requirements for another manufacturer because of the large overlap in common components used throughout the manufacturing of complex products.” According to MPCA, it will provide detailed guidance on how reporting entities can submit on behalf of multiple manufacturers in the reporting system instructions or in supplemental guidance.
Information Required
Under the statute, the following information must be reported:
(1) A brief description of the product, including a universal product code (UPC), stock keeping unit (SKU), or other numeric code assigned to the product;
(2) The purpose for which PFAS are used in the product, including in any product components;
(3) The amount of each PFAS, identified by its Chemical Abstracts Service Registry Number® (CAS RN®), in the product, reported as an exact quantity determined using commercially available analytical methods or as falling within a range approved for reporting purposes;
(4) The name and address of the manufacturer and the name, address, and phone number of a contact person for the manufacturer; and
(5) Any additional information requested by the commissioner as necessary to implement the requirements of this section.
Rather than requiring information regarding the purpose for which PFAS are used in the product, the proposed rule would require that manufacturers provide “the function that each PFAS chemical provides to the product or its components.” Under the proposed rule’s definition of function (“the explicit purpose or role served by PFAS when intentionally incorporated at any stage in the process of preparing a product or its constituent components for sale, offer for sale, or distribution for sale”), manufacturers would be required to report not only any PFAS intentionally added to the product, but PFAS used during the manufacturing process even if the PFAS are not present in the final product.
A manufacturer would be allowed to group similar products compromised of homogenous materials if the following criteria are met:
The PFAS chemical composition is the same;
The PFAS chemicals fall into the same reporting concentration ranges;
The PFAS chemicals provide the same function; and
The products have the same basic form and function and only differ in size, color, or other superficial qualities that do not impact the composition of the intentionally added PFAS.
If the product consists of multiple PFAS-containing components, the manufacturer would be required to report each component under the product name provided in the brief description of the product. Similar components listed within a product could be grouped together if the components meet the criteria listed above.
The proposed rule will allow manufacturers to report the concentration of PFAS using the following ranges:
Practical detection limit to less than (
Missouri Enacts Significant Utility/Regulatory Omnibus Bill
On April 9, 2025, Missouri Governor Mike Kehoe signed into law a comprehensive Utility Omnibus Bill – Senate Bill 4 (SB 4 or the Bill). Among other things, the Bill significantly changes the regulated electric utility landscape. SB 4 establishes a statutory integrated resource planning framework, requires electrical corporations to add schedules governing large load customers to their tariffs, authorizes recovery of construction work in progress for the development of new natural gas generation facilities and establishes new standards for decommissioning large thermal generation assets.
Integrated Resource Planning
The last section of SB 4 modifies the integrated resource planning (IRP) process under what will become Section 393.1900 RSMo. The Bill makes filing an IRP a statutory requirement, rather than the current IRP process, which is codified by regulations administered by the Missouri Public Service Commission (MPSC). Under the current regulations, utilities file a new IRP every three years with an informational-only “Preferred Plan.” Every year between the triennial filings, utilities provide annual updates. The MPSC does not “approve” the Preferred Plan, and the utility can deviate from the Preferred Plan as long as it provides notice within 60 days of the utility’s determination of the need to deviate. Under the current regulations, adherence to the Preferred Plan does not meaningfully streamline the utility’s need to file for a certificate of convenience and necessity (CCN) prior to beginning construction on a new generation facility.
By contrast, under SB 4, utilities will file its IRP every four years, and CCN approvals will be streamlined if the utility can show consistency with their Preferred Plan. After holding a public hearing, the MPSC is specifically required to determine if the Preferred Plan “represents a reasonable and prudent means of meeting the electrical corporation’s load serving obligations at just and reasonable rates.” If such a finding is made, it “shall constitute the commission’s permission for the electrical corporation to construct or acquire the specified supply-side resources.” Before issuing a CCN, the MPSC will still assess the utility’s qualifications to construct and operate the resources, their ability to finance construction or acquisition of the resources, and siting consideration. The CCN process will be vastly expedited, requiring Commission action in 120-180 days. The IRP requirements of SB 4 begin in August 2027. The MPSC is directed to promulgate rules to implement the new IRP requirements, and such rules will need to be in place prior to August 2027.
Large Load Tariff Schedules
SB 4 requires electric utilities to submit schedules that govern large load customers to the MPSC for inclusion in the utility’s service tariffs. This provision will be codified at Section 393.130(7) RSMo. Utilities with over 250,000 customers must submit schedules for customers who are reasonably projected to exceed 100 megawatts (MW) of annual peak demand. Utilities with fewer than 250,000 customers must submit schedules for customers reasonably projected to exceed 50 MW of annual peak demand. The schedules should be designed to reflect these customers’ representative share of the costs incurred to serve them, to prevent other customer classes’ rates from reflecting any unjust or unreasonable costs arising from service to such customers.
Recovery of Construction Work in Progress for New Natural Gas Generation Facilities
While Missouri law has prohibited electric utilities from charging customers for the costs of construction of new facilities prior to their becoming operational, SB 4 allows electric utilities to recover construction work in progress (CWIP) in its rate base for new natural gas generation units. This provision is codified in new Section393.135(2) RSMo. The amount of CWIP that a utility may recover is limited by the estimated cost of the project and project expenditures made during the estimated construction period for the project. Any recovery of CWIP is subject to refund with interest if the MPSC determines that construction costs were imprudently incurred or if the project is not placed in service within a reasonable amount of time.
Furthermore, the CWIP recovery provision replaces other allowances for recovery of funds used during construction that may have otherwise been recoverable in the rate base for an electric utility. The rate base used to determine a deferred return under Section 393.1400.3(2) RSMo. will now include an offset for the amount of CWIP included in the rate base under Section 393.135.2.
The CWIP recovery provision will sunset in 2035 unless, in a hearing conducted in 2035, the MPSC chooses to extend the provision through 2045 based upon a submission from an electric utility demonstrating good cause for such an extension.
Decommissioning & Replacement of Generation Facilities
SB 4 prescribes a new practice for decommissioning and replacing thermal generation assets. This will be codified in Section 393.401 RSMo. Before closing an existing electric generating power plant on or after January 1, 2025, the electric utility must certify to the MPSC that it has secured and placed an equal or greater amount of reliable electric generation on the grid as accredited power resources based on the relevant regional transmission organization’s resource accreditation for the technology at issue and any loss of load expected by the utility. An “existing electric generating power plant” is defined as a thermal power plant (or generating unit/combination of generating units within a thermal power plant) with over 100 MW of nameplate capacity. Concurrent with the closure of the existing generation asset, the electric utility must have adequate electric transmission lines in place and the replacement reliable electric generation shall be fully operational, unless the new facility uses some or all of the interconnection facilities of the existing asset or the existing asset is closed due to an “unexpected or unplanned event.”
Under SB 4, “dispatchable power resources” shall comprise at least 80 percent of the average of the summer and winter accredited capacity of the replacement reliable electric generation. Section 393.401.2 RSMo. Furthermore, if “existing electric generating power plant” capacity is replaced pursuant to Section 393.401, its capacity shall not be replaced by “replacement resources” as defined in Section 393.1705 RSMo., which includes wind and solar energy. It is unclear from the statute to what extent, if any, renewable energy resources may comprise up to 20 percent of the replacement reliable electric generation.
Renewable Portfolio Standards
SB 4 amended Missouri’s Renewable Portfolio Standard (RPS) statute: Section 393.1030 RSMo. Renewable energy generated by an electric utility with between 250,000 and 1,000,000 retail customers in Missouri and contracted for by an “accelerated renewable buyer” cannot have its renewable energy certificates (RECs) used to meet the utility’s RPS requirements, and the RECs shall be retired by the accelerated renewable buyer. Evergy is the only electric utility that will be affected by this provision. An “accelerated renewable buyer” is an electric utility customer with an aggregate load over 80 MW that contracts to obtain RECs — as defined in Section 393.1025 RSMo. — or energy and RECs from solar or wind generation located within the Southwest Power Pool and placed into service after January 1, 2020. SB 4 exempts “accelerated renewable buyers” from any RPS compliance costs established by utilities regulated by this section and approved by the MPSC associated with the amount of credits retired pursuant to new Section 393.1030.2.
Navigating the Rise of Accommodation Requests in Life Sciences [Podcast]
Accommodation requests are evolving, and life sciences employers are witnessing a surge in diverse and creative requests.