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June 2017 edition

Changes to FDA policy under the Trump administration • Protecting design features in useful articles • Tax opinion closing conditions

Changes to FDA policy under the Trump administration

Companies should expect major shifts in Food and Drug Administration (FDA) policy due to the deregulation aims of the Trump administration and President Trump's appointee for the role of FDA Commissioner, Dr. Scott Gottlieb.

Recently, President Trump issued Executive Order No. 13771 on Reducing Regulation and Controlling Regulatory Costs, which directs:

  • Any government agency that proposes a new regulation to identify two regulations to be repealed.
  • Each agency to ensure that all new and repealed regulations finalized this year have a total incremental cost of zero.

This order could affect laws that were enacted during the previous administration but have not yet gone into effect, as well as the FDA's own rulemaking. Various rules might be subject to FDA policy shifts, including rules on:

  • Food safety. Dates by which some businesses must comply with the Food Safety Modernization Act (FSMA) extend into 2018 (or later), and regulations still need to be enacted for the FDA to enforce the law.
  • Generic drug labeling. Gottlieb is an outspoken critic of the FDA's proposed rule on generic drug labeling, which has not yet been finalized.
  • "Healthy" claims on food labels. The FDA issued guidance and accepted comments on changing the definition of healthy, but might not move forward on this issue.
  • Menu labeling. The FDA issued a final rule with a compliance date of May 5, 2017, as mandated by the Affordable Care Act (ACA). The fate of the ACA and the menu-labeling rule is in question.
  • E-cigarettes. Reinterpretation of the Family Smoking Prevention and Tobacco Control Act could remove the FDA's authority to regulate e-cigarettes and related products.

For more information on how the FDA regulates the production and supply of food sold in the U.S., including FSMA and labeling requirements, see Practice Note, FDA Food Regulations.

Protecting design features in useful articles

A recent U.S. Supreme Court decision clarifies the standard for copyrighting design features. Companies involved in the design or development of useful articles, including those in the fashion and apparel industries, should re-evaluate whether copyright law now offers broader protection for their designs.

In Star Athletica, L.L.C. v. Varsity Brands, Inc., the Supreme Court held that two-dimensional graphic designs on a cheerleading uniform's surface were eligible for copyright protection. The Supreme Court resolved a circuit split by establishing a two-part test for determining whether a design feature incorporated into a useful article is eligible for copyright protection. Under the new test, courts should evaluate whether the feature:

  • Can be perceived as a two- or three-dimensional work of art separate from the useful article.
  • Would qualify as a protectable pictorial, graphic, or sculptural work, either on its own or if fixed in some other tangible medium of expression, when imagined separately from the useful article.

Companies designing useful articles should consider filing for additional copyright protection for aesthetic features that are easily capable of separate perception from the underlying useful article. Companies should also proactively consider defensive actions to protect against potentially expanded copyright registrations and enforcement actions.

Companies should monitor developments on the applicability of the separability test from the U.S. Copyright Office and lower courts to assess the evolving parameters of copyright protection for useful articles. For more information on this decision, see Legal Update, US Supreme Court Clarifies Section 101 Standard for Copyrighting Design Features.

Tax opinion closing conditions

Merging parties should consider making changes to the traditional tax opinion closing conditions and preclosing covenants included in merger agreements, given a recent Delaware Supreme Court decision.

In The Williams Cos., Inc. v. Energy Transfer Equity, L.P., the Delaware Supreme Court affirmed the Delaware Court of Chancery's decision allowing Energy Transfer Equity, L.P. (ETE) to terminate its agreement to acquire the assets of The Williams Companies based on its tax counsel's inability to deliver a tax opinion. Failure of the tax opinion closing condition allowed ETE to back out of a deal that was no longer attractive to ETE because of the decline in the energy market.

Receipt of an opinion that the second step of the merger should be a tax-free exchange under Internal Revenue Code Section 721(a) was a condition to closing. The merger agreement required the parties to use commercially reasonable efforts to cause the transaction to qualify for tax-free treatment and to use reasonable best efforts to complete the merger and to cause all closing conditions to be satisfied. Although the Delaware Supreme Court found that there was sufficient evidence from which the lower court could have concluded that ETE breached these covenants, it ultimately deferred to the Court of Chancery's finding of fact that any alleged breach of the efforts covenants did not materially contribute to the failure of tax counsel to deliver its tax opinion.

Merging parties should consider making changes to M&A tax opinion closing conditions and preclosing covenants, including:

  • Eliminating tax opinion closing conditions.
  • Requiring the tax opinion to be delivered at signing, and including a closing condition that there have been no changes in tax rules between signing and closing that would affect the tax opinion.
  • Allowing tax opinion closing conditions to be satisfied by opinions of opposing counsel or alternate counsel if a party's counsel is unable to deliver the tax opinion.
  • Including a covenant to attempt to restructure the transaction to obtain tax-free treatment if the transaction is reasonably likely not to qualify for tax-free treatment (with no tax opinion closing condition).

For a form tax opinion to be used in a transaction intended to qualify as a reorganization under Internal Revenue Code Section 368(a), see Standard Document, Tax Opinion for Reorganization (Merger).

About Practical Law

This look at the major issues on the horizon for corporate counsel comes from Practical Law – an online legal know-how service. View all the looming issues now – compliments of Practical Law The Journal, which covers the latest transactional and compliance topics that impact your practice. To gain access to more related know-how resources, please visit us.practicallaw.com.

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