Contributed By McDermott Will & Emery LLP
The US legal system is composed of several coexisting layers of laws that work in concert with each other. As a federation comprised of 50 states, the District of Columbia and several self-governing territories, the USA has two primary levels of governance and legal systems that exist in parallel: (i) the federal government that establishes laws for all of the USA and its people, and (ii) the state governments that govern their respective geographical area and residents. In other words, the USA has a federal government under which each state has the authority to autonomously enact and enforce laws that do not conflict with those of the federal government.
Additionally, these two levels of government often delegate their law-making or enforcing powers to specialised agencies that establish, adjudicate and enforce administrative regulations or to local governments like townships, counties and cities that promulgate local ordinances and regulations. Consequently, residents of large cities in the USA are often subject to five or more different layers of legal systems at the federal, state and municipal levels of government based on geographical location or conduct.
Sources of Law
There are many sources of law in the USA. At the federal level, there are five sources of law:
Although the sources of law for state governments can vary from state to state, most states have state-level equivalent sources of law. Federal sources of law tend to legislate national issues like immigration, national security, IP and cross-state crimes. State sources of law will address all other areas, ranging from business law and family law to contracts and tort.
The United States Constitution is the supreme law of the land in the USA and the Constitution limits the power of the federal government. Other sources of federal law such as those made by Congress or the administrative agencies under the executive branch are constrained by the limits of governmental authority as outlined in the Constitution. Furthermore, parts of the Constitution, like the Bill of Rights, have been expanded over the years to constrain even state governments. The Constitution, in short, authorises other sources of law and outlines their limits.
The USA is a common law jurisdiction; under common law principles, similar facts are expected to yield similar and predictable outcomes, so precedents establish persuasive and often binding principles and rules. Case law in the USA, like in other common law jurisdictions, is a set of decisions made by the courts that can be cited as precedent.
Courts in the USA
The court system in the USA has two parallel structures like the rest of the legal system. The US federal courts hear cases that involve the US government as a party, the Constitution or federal laws, or parties from multiple states. The state courts hear all other cases to adjudicate state law. In the USA, both civil and criminal cases are usually filed in the same trial courts that are each a court of law, equity and admiralty. Only a few state courts and federal courts, most notably Delaware and federal bankruptcy courts, maintain a distinction between law and equity.
The US federal court system has three levels: the district courts, the courts of appeals and the Supreme Court. Litigation begins in one of the 94 district trial courts. Each district court belongs to one of 11 geographical areas dubbed "circuits" and each circuit has an appellate court, the court of appeals, which oversees appeals from district courts, specialised trial courts and administrative agency decisions within the circuit. The court of appeals is the court of final appeal for its own circuit, except for the very limited cases that are selected for discretionary review by the Supreme Court.
The Supreme Court is the highest court in the USA that performs discretionary review of the lower courts’ decisions. In addition to its discretionary appellate jurisdiction, the Court also has original jurisdiction over suits between two or more states and the power of judicial review – the ability to invalidate government actions for being unconstitutional. Most cases before the Supreme Court arise as an appeal from a court of appeals, but certain decisions of the district courts are appealable directly to the Supreme Court.
The organisation of state courts can vary substantially between states, but most states have at least two levels of courts: the trial courts and the state supreme courts. The state court systems also often have specialised trial courts to treat subject matter areas like housing courts, traffic courts, probate courts, small-claims courts and family courts as well as intermediate appeals courts much like the US federal court system. Naturally, state supreme courts act as the final adjudicator on state law matters.
Although the USA generally maintains an open policy towards foreign direct investments, the government scrutinises incoming investments that may raise national security concerns. The interagency Committee on Foreign Investment in the United States (CFIUS) is the primary overseer of foreign investments in the USA, and the committee can review any investments or acquisitions that might give control of entities engaged in US interstate commerce to foreign investors or buyers. In addition, non-controlling foreign investments into US businesses that handle critical technology, infrastructure, or sensitive personal information of US citizens are subject to CFIUS review if the investment affords the foreign investor certain triggering investments.
The term "control" is used broadly by CFIUS and the committee considers any non-passive transactions exceeding 10% of the voting interests in a US company as potentially reviewable. However, CFIUS allows a safe harbour for passive investments with less than 10% of the voting interests in a US company as long as the investors do not intend to exercise control.
Companies usually file voluntarily for CFIUS review, but the committee can also exercise its own prerogative to initiate a review. In addition, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) has mandated CFIUS filing for certain critical technology transactions. Since CFIUS can conduct reviews retroactively and can modify or completely "unwind" investment deals, which is a draconian remedy, the best practice is often to complete CFIUS filing prior to closing an investment in a US company by a foreign investor.
Several legal regimes mandate disclosure or filing for foreign investors acquiring interest in the USA. The International Traffic in Arms Regulations (ITAR) requires that any person or company that engages in the USA in manufacturing or exporting defence articles, or furnishing defence services, register with the Department of State Directorate of Defense Trade Controls (DDTC). A foreign investment that results in foreign control of ITAR-registered entities is one of the cases in which FIRRMA mandates CFIUS filing. In addition, the ITAR may require notification filings to DDTC 60 days before and/or 5 days after the closing of the transaction. Similarly, US businesses must also file Form BE-13A whenever a foreign entity acquires a voting interest when (i) the total cost of the acquisition is greater than USD3 million, (ii) the US business will operate as a separate legal entity and (iii) the acquisition will result in at least 10% ownership of the US business by the foreign entity.
In addition to CFIUS, various international and US trade controls apply to cross-border transactions and investments. Economic sanctions administered by the Treasury Department, for example, may prohibit or restrict foreign investments originating from specific countries. Similarly, anti-boycott measures enforced by the Commerce Department can also impact foreign investments entering the USA.
CFIUS notifications, which, as previously mentioned, are usually voluntary, are typically filed jointly by the target and the investor, and the mandatory filing obligations, when applicable, likewise fall on both the investor and the target.
Once CFIUS begins its review, a US target must disclose information regarding its businesses and foreign investors must submit information about their corporate structure, management and significant shareholders. CFIUS can require additional information during the review process to facilitate its decision.
CFIUS has 45 days to review the transaction (from the date of acceptance of the notice, which may be a few days or even weeks after the date of filing), and can extend the review for an additional 45 days with another 15-day extension available if any CFIUS agency has national security concerns about the transaction. Transactions that involve entities affiliated with foreign governments or critical US infrastructure almost always necessitate the second 45-day review. CFIUS can prolong the review in practice by delaying the acceptance of the formal filing. At the end of its review, CFIUS will clear the transaction, negotiate a mitigation agreement, permit refiling for additional review, or file a report to the President. Once CFIUS submits the report, the President can require conditions to force a mitigation agreement, clear the deal, or prohibit the deal.
Pursuant to FIRRMA, parties now have the option of filing a short-form declaration with CFIUS rather than a full notice. The timeline for CFIUS to take action on declarations is shorter than for notices, as CFIUS has up to 30 days (from the date of filing rather than the date of acceptance) to respond to a declaration. However, unlike in the case of a notice, CFIUS need not make a final determination with respect to a transaction on the basis of a declaration. Therefore, it is inadvisable for parties seeking speedy action by CFIUS to file a voluntary declaration unless they are confident CFIUS will grant approval.
As authorised by FIRRMA, CFIUS published on 29 April 2020 an interim rule establishing filing fees for parties filing a formal written notice of a transaction for review. There are no filing fees for parties filing a declaration. A consequence of investing without CFIUS review and approval is the risk of retroactive reversals or mandatory mitigations that may not only devalue the investment but also invalidate the investment.
CFIUS may condition clearance of a transaction on parties entering into mitigation agreements with the US government to neutralise national security concerns. The President may also condition approval on specific remedies. Mitigation conditions are fact and circumstance-dependent, with size and scope of mitigation varying widely on a case-by-case basis. Common remedies include:
On the one hand, parties generally cannot appeal the President’s determination or mitigation conditions and parties typically withdraw their CFIUS filings if they expect a negative CFIUS determination. The President and the executive branch are immunised from judicial review on numerous facets of the CFIUS review process.
On the other hand, parties may have due process rights during the CFIUS review. Among other things, these due process rights include access rights to information used during the review. Furthermore, many areas of CFIUS review that are not statutorily immunised from judicial review may also be open to judicial challenge.
Sole proprietorships are the simplest form of a business entity. A sole proprietorship is owned and operated by a single individual and there is no legal distinction between the business and the owner. It is unincorporated and requires no legal action or documentation to create one. Further, it provides no legal protection to the owner for any liabilities arising out of the business. Although a sole proprietorship gives its owner complete control and has no entity formation costs, sole proprietorships are not used as much as they used to be because of the significant disadvantages that they bring, such as unlimited personal liability, difficulties in raising capital and heavy burdens as far as ultimate responsibility for the sole owner.
A partnership is an association of two or more persons to carry on as co-owners a business for profit. Partnerships can be created formally through a contract, or they can even be found to exist where certain facts are present, such as two or more persons having involvement in management, carrying on the business, sharing property, or sharing profits. Partnerships are subject to formal governance requirements of state partnership laws and are typically governed by a partnership agreement. As a legal entity, a general partnership is not fully separate from its general partners; however, it may still own property, engage in contracts and sue or be sued. Also, a partnership may consist of individuals or any type of entity, and even consist of US and non-US persons (subject to certain restrictions for regulated industries).
In the USA, several types of partnerships can be established. A partnership may be created as a general partnership, a limited partnership, or a limited liability partnership.
A general partnership refers to a relationship where all partners contribute to the day-to-day management of the business and each partner has the authority to act on behalf of the company. However, general partnerships give rise to joint and several liability of each partner for the debts of the partnership. Typically, in general partnerships, the liabilities, responsibilities and contributions of each partner are equal to one another, unless the partnership agreement states otherwise.
On the other hand, a limited partnership is a type of relationship that consists of both general partners and one or more partners that are known as limited partners, who contribute solely as an investor in the business. Unlike a general partner, a limited partner’s liability extends only to the amount that he or she has contributed to the company because under a limited partnership, the general partners are liable for any and all of the company’s financial obligations, while limited partners have no liability with respect to company debts, obligations or actions. Additionally, except as negotiated in the limited partnership agreement, limited partners have no company involvement and no daily responsibilities. Lastly, in most states a general partnership may elect to register as a limited liability partnership. As a result, this allows general partners to have limited liability with respect to partnership debts and operations if state law requirements are met.
Limited partnerships are often used for real estate investments and some private equity investments, where the general partner is the one running the day-to-day business and management, and the limited partner acts as an investor to help fund the transaction or project. Additionally, limited liability partnerships are commonly used by professionals, such as accountants and lawyers.
A US corporation is a separate legal entity that is created under the laws of the jurisdiction of its incorporation (eg, one of the states or the District of Columbia). One of the most important features of a corporation is that there is limited liability for its owners. Corporations are owned through shares of stock and owners of a corporation are called "stockholders" or "shareholders". Provided that the corporation observes the required state corporate formalities, shareholders have limited liability. Because a corporation is a separate legal entity from its owner(s), a corporation is entitled to own property, enter into its own contracts and sue or be sued under its own name. Corporations may be owned by US persons or non-US persons (however, a non-US person cannot own an S-corporation). However, there are different rules with respect to C-corporations and S-corporations.
When a for-profit corporation is established, it is automatically considered a C-corporation. C-corporations are taxed at the entity level, meaning that the shareholders end up being "double taxed". Therefore, a company’s profit will be taxed first at the corporate level and then the shareholder, if they receive a dividend, will pay tax again in an amount determined by their personal tax bracket. Further, investors tend to prefer Delaware C-corporations because there are no restrictions on the type of entity that may own a C-corporation, no restrictions regarding foreign persons owning a C-corporation and no restrictions on the amount of shareholders allowed to own a C-corporation. Also, Delaware is a preferred jurisdiction for incorporation since the body of case law concerning corporate issues is very well developed, giving rise to certainty of resolution of issues without having to resort to a court proceeding.
In contrast, the profits of an S-corporation are distributed directly to its shareholders, who would then be taxed on a presumably larger amount. S-corporations and partnerships are, by definition, pass-through entities for tax purposes, so they have no entity-level tax. If a company wishes to be an S-corporation, this election would be made at the time of filing with the Internal Revenue Service. S-corporations do have restrictions, and their shareholders are limited to 100 natural persons and can only be formed by US citizens or US residents.
Limited Liability Companies (LLCs)
Limited liability companies have characteristics similar to both a partnership and a corporation. Similar to corporations, LLCs provide their owners with limited liability. However, similar to partnerships, an LLC is a pass-through entity for income tax purposes and provides owners with great flexibility regarding the governance and organisation of a company. Additionally, LLCs are separate legal entities and have the ability to enter into contracts, own property and to sue or be sued in their own name. LLCs encourage owners to invest capital into ventures where they have little control and allow investors to take bigger risks because the risk is capped to their contribution/investment. As a result, LLCs have become particularly popular as an entity choice for small US businesses. Further, there are no limitations on non-US membership in LLCs (except for certain regulated industries).
Corporations are created under state laws; therefore, a corporation is established by filing an articles (or certificate) of incorporation with the selected state of incorporation. Typically, it takes about two to three business days for a company to become incorporated. For larger corporations, Delaware is the most common state of incorporation. This is because Delaware has the most developed corporate law with respect to case law and as a result, courts give rapid and predictable responses to corporate legal disputes, which has created greater levels of certainty for businesses. Apart from filing the articles of incorporation, certain corporate documents need to be drafted as well, which include the corporation’s by-laws, a shareholders agreement and initial resolutions of the board of directors.
The initial board resolutions will commonly appoint officers, create accounts and hire professional advisers. The by-laws set out the basic ground rules regarding how a corporation will be operated and must conform to the various rules of state corporation law in areas such as corporate formalities regarding procedures for meetings of shareholders and of the board of directors, officers and their duties, and certain responsibilities pertaining to the board of directors. A shareholders agreement sets out the rights of a company’s shareholders with respect to important details such as transfer restrictions on company stock, decisions requiring unanimity of shareholders and mechanisms to resolve disputes between shareholders. Further, the initial resolutions of the board of directors completes the organisation of the company by appointing the officers, adopting the shareholders agreement and authorising the issuance of shares to the stockholders, among other things.
In general, there are three types of reporting and disclosure obligations: (i) state level, (ii) federal level and (iii) contractual. State-level requirements vary depending on the state and under federal law, specifically the Securities Exchange Act of 1934, if a company is either public or it is big enough (has more than 500 non-accredited shareholders and total assets exceeding USD10 million), it is required to disclose information to its shareholders in accordance with the SEC rules, which are more burdensome than state-level requirements.
Federal law requires annual, quarterly and specific event reporting. Further, when corporations make any changes to their articles of incorporation, the corporation must amend its articles of incorporation and file it with the state. An example of this is when a corporation seeks to authorise the issuance of additional shares. Additionally, contractual obligations, such as those found in debt or bond documents, may also require additional disclosures.
Management structures differ amongst partnerships and corporations. Typically, a corporation is managed by a board of directors who will at first be appointed by the sole incorporator of the corporation and later voted upon by the shareholders. The USA has a one-tier board system and all the directors of a company, both executive and non-executive, jointly form the board of directors. This board of directors usually holds the exclusive power to manage the corporation.
In practice, the board retains the power to appoint officers, declare and pay dividends, amend the by-laws, initiate and approve extraordinary corporate actions (eg, M&A decisions), and other major decisions, but delegate most day-to-day decisions to the officers. Officers like the president, vice-president, treasurer and secretary will implement the board’s broader decisions and make the day-to-day decisions to run the corporation.
In the USA, boards of directors often have committees composed of three or more directors established by by-laws to perform specialised functions. Committees typically address issues that are too complex or numerous to be handled by the entire board, and two committees, the compensation and audit committee, are especially commonplace in US corporations. The audit committee oversees financial statements, compliance with legal disclosure requirements and independent auditors, and an annual report for proxy statements and the compensation committee reviews HR policies, employee benefits and compensation structures.
The process of these appointments and elections will be governed by the company’s by-laws, and it is not uncommon for directors or officers to be owners of the company. Shareholders also have certain key management powers such as approval of major transactions, election of directors and dissolution of the corporation; however, the ultimate power of management and authority lies with the board of directors, as they have the responsibility to establish benchmarks and oversee the management of the business.
Partnerships, on the other hand, are typically managed by general partners, where each general partner is an agent for the partnership and thereby has the power to act on behalf of the partnership when dealing with third parties. General partners can enter into contracts on behalf of the partnership, deal with third parties, hire staff and even borrow money on behalf of the partnership. However, unlike the authority and agent relationship that general partners have, limited partners do not participate in the day-to-day management or operations of the business and have very limited authority.
A corporation acts as a "veil", shielding its shareholders from personal liability for judgments, debts and other liabilities of the corporation. Shareholders of a corporation have limited liability, thus, they are only liable for the amount of capital that they have contributed to the corporation. However, unlike shareholders, directors and officers of a corporation have common law fiduciary duties imposed on them that they owe to the company and therefore directors and officers can be held jointly and severally liable to the corporation (and, derivatively, to its shareholders and creditors), to the extent of any injury that was caused by them. These fiduciary duties consist of the duty of care, duty of loyalty, duty of good faith, duty to monitor and duty to act lawfully.
The doctrine of "piercing the corporate veil" is an exception to the general rule regarding limited liability for a corporation. Piercing the corporate veil occurs in very limited instances where a plaintiff can prove that two or more companies act as a single economic entity and that an overall element of injustice or unfairness is present. Essentially, this occurs where a "dummy" corporation is acting as a shell to deflect liability from the real corporation. If a claimant successfully proves this, a court will disregard the separate legal existence of an entity and instead hold one entity directly liable for the other’s obligations. While this is an extreme remedy that is not often granted, to minimise this risk, it is imperative that a corporation and its affiliates adhere to requisite formalities and generally treat each other as distinct entities.
Employment relationships in the USA are governed by a combination of federal, state and local laws, as well as by general principles of contract. Employers doing business in multiple states or municipalities within the USA must take into account not only federal laws, but also the laws of the state and local laws where the employees work and from which employment decisions emanate (eg, a corporate headquarters).
Among the bedrock norms of employment law in the USA is that of employment-at-will, meaning that, absent a contract or limitation imposed by law, the employer can fire employees without advance notice or cause and that employees can quit without advance notice or cause, and, in each case, without severance pay. Employment laws in the USA are best understood as limitations on the general doctrine of employment-at-will. These limitations, for example, are those imposed by contracts (including collective bargaining agreements), prohibitions on discrimination and retaliation, protections with respect to mass lay-offs and plant closings, and the like.
While all employment arrangements in the USA are contractual in nature (ie, a contract to provide compensation for services) and based on general principles of parties’ freedom to contract, contracts may not contain unlawful terms. While all employment relationships are contractual in nature, the term "Employment Contract" or "Employment Agreement" generally refers to an employment arrangement whereby the parties have agreed to certain terms altering the at-will nature of the relationship. Most commonly, this means some agreement that the employment will continue for a certain period of time, unless some cause or good reason exists for one party to end the employment. Under such agreements, if the employer terminates the employment, without cause, prior to the expiry of the agreed employment period, the employer would typically pay some agreed severance (typically in exchange for the employee’s release of claims against the employer and agreement not to sue the employer). Although such agreements are typically put in writing, there is generally no rule requiring it. This means that employers in the USA must be careful not to inadvertently create such contractual obligations (altering the at-will nature of the employment) by words or conduct.
Where the parties intend to enter into a written employment agreement for a period of time (often for executive-level employees or other key employees), it is typical that such an agreement will include terms relating to wages/salary, bonuses, benefits, circumstances under which the employment may be terminated, the consequences of a termination (eg, including severance pay), assignment of IP, confidentiality of the employer’s information, non-competition obligations, customer/client non-solicitation obligations, employee non-solicitation obligations and many additional potential terms.
It is important to note that non-competition and non-solicitation obligations are generally governed by state law and different states take radically different views on the permissibility and enforceability of such contractual obligations. It is also important to note that, in many states, written agreements containing confidentiality, non-competition, non-solicitation and IP covenants are not mutually exclusive with an at-will relationship. Thus, in such states, employees who are employed on an at-will basis may still be required, as a condition of their employment, to sign written agreements concerning such matters.
In contrast to executive employment agreements, which are typically negotiated individually, collective bargaining agreements are agreements typically entered into between an employer and a union representing a certain group of non-managerial employees. While collective bargaining agreements are materially different, in form and substance, from executive employment agreements, they typically have terms providing that employees may only be terminated for "just cause".
It cannot be stressed enough that where the employer desires to enter into a relationship other than an at-will relationship, best practices dictate that such agreements should be in writing and carefully drafted. Courts will generally view the specific language of a written employment contract as the clearest manifestation of the parties’ intent. By contrast, where the employer desires to maintain the at-will nature of the relationship, it should make clear that the relationship is on an at-will basis and that no contract altering the at-will nature of the relationship can be created or implied absent a written agreement signed by the parties.
The Fair Labor Standards Act (FLSA) is a federal statute that sets many standards with regard to wages and hours of workers. States and municipalities may bolster some protections with supplemental laws imposing higher standards, but the FLSA represents a floor protection for employees. With only limited exceptions, the FLSA sets the nationwide minimum wage at USD7.25 an hour, prohibits child labour and adds protections for employees under the age of 18. Importantly, it also requires that employees must be paid overtime at a rate not less than one and one-half times their regular hourly rate of pay, for all hours worked over 40 hours in a week, unless they are covered by a specific exemption. Those exemptions include the so-called white collar or EAP exemptions for employees in executive, administrative or professional roles. Generally, a threshold requirement for these exemptions to apply is that the employee is paid a salary (as opposed to on an hourly basis) at a certain minimum rate and that the employee’s duties meet certain specific requirements pertaining to the given exemption. "Salary" generally refers to paying an employee a fixed amount per week that is not dependent on the time worked (and which is not reduced for absences of less than a full day).
Several other exemptions from overtime pay exist, including exemptions for computer workers and outside sales employees. In each case, however, it is critical that employers carefully examine the exemption to make sure it applies prior to designating an employee as "exempt" from the overtime requirement.
While there is generally no law prohibiting non-exempt workers from being compensated on a salary basis, doing so does not absolve the employer from the responsibility to track hours and ensure the employee is paid "time-and-a-half" the regular rate of pay, calculated in accordance with applicable laws. Because the computation of overtime is more complicated for employees paid on a salary basis, most employers pay non-exempt employees on an hourly basis. Many states impose more stringent standards for classifying an employee as exempt, require overtime to be paid under different standards (eg, after eight hours of work in a given day, instead of merely after 40 hours in a given workweek), have higher minimum wages and otherwise have different requirements pertaining to the calculation and payment of wages.
The Department of Labor (or state equivalent) can investigate and initiate enforcement proceedings against an employer for not complying with the FLSA or state law requirements pertaining to wages and hours. Individuals can also sue for lost wages or overtime compensation on behalf of themselves or as part of a collective or class action.
Other labour requirements to consider include the Occupational Safety and Health Act (OSHA), which affords workers specific health and safety standards; workers compensation laws, which set up a mandatory no-fault system under which employees are compensated for medical expenses and lost wages for injuries or illnesses sustained in the scope of their employment (and, as a corollary, are barred by law from suing their employers for such on-the-job injuries and illnesses); the National Labor Relations Act (enforced by the National Labor Relations Board), which, among other things, prevents companies from interfering with the right of covered employers to engage in protected concerted activities (such as forming or joining unions, bargaining collectively and engaging in other activities for the purpose of “mutual aid and protection”); and the Family and Medical Leave Act (FMLA), which grants eligible employees temporary unpaid leave under certain circumstances, such as to care for a newborn or newly adopted/fostered child, to care for the employee’s own serious health condition, to care for a family member’s serious health condition or as a result of a “qualifying exigency” relating to a family member’s military service.
As discussed above, the USA is predominantly an employment-at-will jurisdiction, which means that, absent some legal or contractual limitation, employees can be fired without cause or notice and can quit without cause or notice (in each case, without the payment of severance pay). This tends to make the workforce more mobile and transitions between jobs more frequent than in other economies.
Among the limitations on employment-at-will are laws prohibiting employment decisions made because of an employee’s protected status. Chief among such laws, at the federal level, is Title VII of the Civil Rights Act of 1964, which makes it impermissible for most employers to discriminate based on race, colour, sex, religion, or national origin. Some jurisdictions (as well as the Equal Employment Opportunity Commission, charged with enforcing Title VII) interpret “sex” to include sexual orientation. Similarly, the Age Discrimination in Employment Act (ADEA) prohibits employers from discriminating against people over the age of 40 and the Americans with Disabilities Act prohibits employers from discriminating against people on account of disability. Importantly, as in other areas, state laws may offer significantly greater protections and expand such protections to additional protected groups.
There are relatively few protections pertaining to mass terminations. The Worker Adjustment and Retaining Notification Act (WARN) requires that an employer give 60 days’ notice of a plant closing or mass lay-off that will result in significant job terminations at a single site of employment and sometimes of a reduction of work hours. WARN only applies to companies with over 100 employees and to events that affect more than 50 employees. A few states have their own plant closure laws in addition to WARN that must also be complied with.
As stated above, except as provided for in a bargained-for contract, employees are not entitled to severance. Pursuant to the Consolidated Omnibus Reconciliation Act (COBRA), where an employer provides its employees the opportunity to participate in a group healthcare insurance plan, upon separation, covered employees are entitled to continue health insurance, at their own expense, for a period of time. The employer or the employer’s benefits provider is required to provide covered employees with notice of their rights under COBRA.
Many employment-related contracts in the USA include provisions requiring the parties to arbitrate future disputes. In January 2019, the Supreme Court addressed the question of whether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes that the claim of arbitrability is “wholly groundless.” In a unanimous opinion, the Court reiterated its prior decisions that parties to a contract have the ultimate say in whether to have an arbitrator or a court resolve disputes between them. This includes not only the merits of such disputes, but also the question of whether a particular dispute is arbitrable. The Court found that, in the parties’ contract, the parties had delegated to an arbitrator the question of arbitrability. As a result, the Court was not permitted to override the contract and resolve the arbitrability question even if the Court believed that the claim of arbitrability was wholly groundless (139 S. Ct. 524 (2019)).
It is not mandatory for employees to be represented. Employees may be represented by a union or similar labour organisation if a majority of eligible workers in the bargaining unit vote in favour of such representation in a secret ballot election supervised by the NLRB. If a union is certified through such an election as the bargaining representative of employees in the bargaining unit, such representation is on an exclusive basis. The employees in the bargaining unit will generally be required to join the union and pay union dues (even if they personally voted against the union). Further, the employer will be required to enter into good faith negotiations with the union or risk action (known as an "unfair labour practice charge") being filed with the NLRB.
Special Measures to Address COVID-19
There are two pieces of labour and employment-related federal legislation meant to address COVID-19: the Families First Coronavirus Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The FFCRA was signed into law on 18 March 2020, and became effective 1 April 2020. The FFCRA requires most employers with fewer than 500 employees to provide two work weeks of emergency paid sick leave for six covered reasons related to COVID-19, including if the employee has tested positive for COVID-19, if the employee has symptoms of COVID-19, or if the employee needs to stay at home to care for a child whose school or childcare provider has closed because of COVID-19. It also requires employers to provide an additional ten work weeks of leave at a reduced rate (two-thirds pay) for just those employees who need to stay at home to care for a child whose school or childcare provider has closed because of COVID-19. The costs of providing this leave is reimbursable by the federal government through payroll tax.
The CARES Act was signed into law on 27 March 2020. Among other things, the CARES Act greatly expands unemployment benefits for those unemployed as a result of COVID-19 by limiting certain eligibility requirements, increasing the unemployment benefit and increasing the length of unemployment availability. The CARES Act also provides an “employee retention” tax credit for employers who keep employees on payroll despite loss of revenues or business suspension due to COVID-19.
In the USA, the tax system mirrors the federal structure of government, so tax law is promulgated and enforced separately at the federal, state and local level. This section reviews federal tax law relevant to entities interested in doing business in the US as enforced by the Internal Revenue Service (IRS), the revenue service of the US federal government. Any entity interested in doing business in the USA should also review applicable state tax laws and state taxing authorities, as well as municipal tax laws.
US citizens and resident aliens generally are subject to federal, state and local taxes on their worldwide income. The top marginal rate of federal income tax for the 2020 tax year is 37%. State and local taxes vary depending on location. Non-resident aliens generally are subject to net income tax on their US-source income that is “effectively connected” with a US trade or business, which generally includes wages received for the performance of services within the USA.
Wages generally are subject to income tax withholding and reporting by the employer. In addition, employers and employees in the USA must pay social security and Medicare payroll taxes. Generally, an employer is required to withhold its employees’ share of these taxes from the employees’ wages and pay an employer’s share of these taxes. For 2020, the social security tax rate is 6.2% each for the employer and employee (12.4% total). The maximum amount of wages subject to social security tax is USD137,700. The tax rate for Medicare is 1.45% each for the employer and employer (2.9% total). There is no wage limit for the Medicare tax. An additional Medicare tax of 0.9% is withheld on wages paid to an employee in excess of USD200,000.
Employers also generally must pay unemployment taxes for their employees under the Federal Unemployment Tax Act (FUTA). Only the employer pays FUTA tax; it is not withheld from the employee’s wages. For 2020, the FUTA tax rate is 6.0%. The tax applies to the first USD7,000 paid to each employee as wages during the year. Employers may also be subject to state and local unemployment taxes.
Special rules apply in the case of persons that are employed by foreign employers and applicable tax treaties can modify the above treatment.
Taxation of Investment Income
In general, a foreign person that is not engaged in a US trade or business is subject to a US withholding tax of 30% on its gross investment income from US sources (for example, interest and dividends). The tax is generally withheld at source by the payor and if the tax is properly withheld and remitted, the foreign person is generally not required to file a US tax return solely by reason of such income. The withholding tax requirement is subject to certain exceptions. For example, the "portfolio interest" exemption, if applicable, eliminates the US withholding tax on US-source interest earned by a qualified foreign person. An applicable tax treaty may also reduce or eliminate US withholding tax.
In general, a foreign taxpayer is not taxed on gains from the disposition of a US investment unless the investment directly or indirectly involves US real property or constitutes an interest in a partnership (or LLC or other entity treated as a partnership for federal income tax purposes) through which “effectively connected” income is earned.
Taxation of Business Income
A foreign business wishing to establish a presence in the USA can generally establish a branch or choose to form a US partnership, limited liability company or corporation through which it will conduct its operations. US partnerships and LLCs can elect their tax treatment for federal tax purposes. For example, a partnership may elect to be treated as a corporation for federal tax purposes and an LLC may be classified either as a flow-through entity (a "disregarded entity" (effectively a branch) of its owner if it is a single-member LLC, or a partnership, if it has multiple members) or a corporation for federal tax purposes.
A foreign taxpayer operating a US trade or business through a branch will be subject to regular US income tax on a net basis on income that is effectively connected with the US trade or business. If the foreign taxpayer is eligible for the benefits of an income tax treaty, the taxpayer generally must also have a “permanent establishment” in the USA in order to be subject to tax on its US business profits. A foreign corporation conducting a US trade or business through a US branch also may be subject to a branch profits tax in certain circumstances.
An entity classified as a partnership for US federal tax purposes is not generally subject to entity-level US federal income taxes. Instead, the members of the entity are taxed on their respective shares of any income of the entity that is subject to US tax.
A US corporation generally will be subject to tax on its worldwide income. As a separate entity for tax purposes, the corporation (and not its shareholders) will report all its income, losses, deductions and credits on a corporate income tax return, and pay tax at the prescribed corporate rate (the federal corporate tax rate currently is 21%). Dividends paid by a US corporation to foreign shareholders generally will be subject to US withholding taxes at a 30% rate, except as otherwise provided under an applicable income tax treaty.
The US does not have a federal sales tax or value-added tax, but import tariffs and excise taxes may apply under certain circumstances. However, sales and use taxes are imposed by many state and local taxing jurisdictions in addition to state and local income, excise or other taxes.
US taxpayers are generally entitled to claim a credit (or a deduction) against their US tax liability for income taxes paid to a foreign country, subject to certain limitations.
Numerous federal, state and local business tax credits are available to taxpayers that engage in specified activities or make specified investments. Among other credits, taxpayers that meet applicable criteria are eligible to claim energy credits, low-income housing credits, new markets tax credits and work opportunity credits. In addition, a research tax credit is available for companies that incur R&D costs in the USA. Finally, state taxing authorities sometimes offer certain tax incentives in connection with operations in their jurisdictions.
In March 2020, the US government enacted the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which responds to economic challenges faced by US taxpayers and businesses in light of the COVID-19 pandemic. The CARES Act includes various relief provisions for businesses and individuals, including certain tax credits
An affiliated group of US corporations may elect to file a federal tax return on a consolidated basis. Filing a consolidated return allows the affiliated group to combine the income and losses of its members, with gain or loss on intercompany transactions among the members generally deferred until a member leaves the group or until there is a transaction outside of the group. For this purpose, an “affiliated group” generally consists of a common parent corporation and domestic corporate subsidiaries that are connected by common ownership representing 80% of the voting power and value of each member. Many states allow combined reporting by affiliated entities in specified circumstances.
For federal tax purposes, the amount of a taxpayer’s deductible business interest expense in a taxable year generally cannot exceed the sum of the taxpayer’s business interest income for the year plus 30% of the taxpayer’s taxable income for the year (50% for 2019 and 2020, pursuant to the CARES Act), subject to complex adjustments and exceptions. Amounts disallowed may be carried forward.
In general, transactions between a US entity and its foreign affiliates must be at arm’s length. If the IRS determines that the US entity either is overpaying for property or services being provided to it by foreign affiliates or is being inadequately compensated for the provision of property or services to foreign affiliates, the IRS may reallocate income accordingly. The establishment of arm’s-length prices and the substantiation of those prices can be highly complex.
The US tax law and regulations thereunder contain numerous "anti-abuse" rules that are intended to prevent taxpayers from claiming inappropriate tax benefits. In addition, US courts have developed common law rules pursuant to which tax benefits can be denied if the taxpayer in substance has not satisfied applicable requirements.
US taxpayers are also subject to numerous reporting requirements, including with respect to interests in foreign assets and certain transactions that have the potential for tax avoidance or evasion. In addition, the Foreign Account Tax Compliance Act (FATCA) generally imposes a 30% withholding tax on certain payments to foreign entities unless the foreign entity collects and reports information on its US owners or account holders, or otherwise qualifies for an exemption and provides appropriate documentation to the withholding agent.
Section 7 of the Clayton Act prohibits acquisitions of assets or stock where “the effect of such acquisition[s] may be substantially to lessen competition, or to tend to create a monopoly.” The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) gives the Department of Justice (DOJ) and the Federal Trade Commission (FTC) the power to review M&A that might substantially impact competition.
The HSR Act requires parties to notify the FTC and DOJ of certain acquisitions of voting securities, non-corporate interests (eg, interests in partnerships or LLCs), or assets, as well as the creation of certain joint ventures.
Transactions must be reported, unless an exemption applies, if they meet three tests: the Commerce Test, the Size of Transaction Test and the Size of Person Test. The Commerce Test asks whether either the acquiring or acquired party is engaged in US commerce. The Size of Transaction Test looks to the value of the transaction. Transactions valued at more than USD94 million must in general be reported under the HSR Act. The Size of Person Test only applies if the transaction is valued at more than USD94 million but less than USD376 million. The test looks at the acquiring and the acquired “persons.” The transaction must be notified under the HSR Act if at least one of the persons has USD18.8 million or more in total sales or assets and the other person has at least USD188 million or more in total sales or assets. A “person” includes the entire group that is controlled by the party’s ultimate parent entity. The Size of Transaction and Size of Person thresholds are revised every year.
Parties are free to submit HSR Act required filings any time after a letter of intent or definitive agreement is executed. Both the buyer and the seller are required to submit HSR filings to the FTC and DOJ. The parties must also pay mandatory filing fees. Once filings are made, there is a 30-day waiting period during which the FTC and DOJ review the transaction. The parties are not entitled to close the transaction during this time. If the agencies take no action at the end of this waiting period, the parties are free to close their transaction. The agencies can issue a “Second Request” before the end of this time period if they wish to obtain additional information from the parties.
Non-compliance with the HSR Act can result in a maximum civil penalty of up to USD43,280 per day.
Section 1 of the Sherman Act prohibits agreements between competitors in restraint of trade. The Federal Trade Commission Act prohibits “unfair methods of competition” and “unfair or deceptive acts or practices.” There are also laws at the state level that prohibit essentially the same type of conduct as the federal laws.
Among others, antitrust laws prohibit hardcore cartels; ie, agreements between competitors to fix prices, restrict output, rig bids, or allocate customers, or geographic territories. These agreements are "per se" illegal, meaning that they are presumed to have anti-competitive effects. They can be prosecuted criminally.
Foreign conduct that involves US “import trade or import commerce” or that has a “direct, substantial, and reasonably foreseeable effect” on US domestic or import commerce, or on export commerce of a US company may fall under the reach of US antitrust laws.
Section 2 of the Sherman Act prohibits unilateral conduct within an industry, otherwise known as monopolisation. It is not illegal to possess a monopoly, but it is unlawful for firms to engage in anti-competitive conduct to acquire or maintain monopoly power. Regulators first look to whether a corporation has monopoly power. A large market share is an indicator of monopoly power. Regulators also look to other factors, including barriers to entry, size and strength of competitors, industry pricing, ability of customers to switch companies and the strength of demand.
Once regulators have assessed that a firm has monopoly power, they look at whether the company has engaged in exclusionary or predatory conduct. The Sherman Act targets companies that engage in predatory pricing, boycotts, tying, disparaging competitors and exclusive dealings, among others.
Section 2 of the Sherman Act also prohibits attempted monopolisation. Agencies must show that a company has engaged in anti-competitive behaviour with the specific intent to acquire a monopoly and that there is a dangerous probability that it will indeed obtain monopoly power.
A patent is a grant by the US government to a patent applicant of the exclusive rights to make, use, sell, or import an invention. Patent rights, absent a written agreement to the contrary (eg, with the inventor’s employer) vest in the inventor of the invention. An invention encompasses a new and non-obvious composition of matter, article of manufacture, or process. A patent allows the inventor to exclude others from making, using and selling the invention within the USA, and importing the invention into the USA. Patent exclusivity rights generally last for a 20-year period beginning when an application for a patent is filed; however, the patent is not enforceable until after the application is examined and granted by the US Patent and Trademark Office (USPTO). In exchange for exclusivity, the US government requires full disclosure of the invention so the public can use and benefit from the invention after expiry of the patent.
In order to obtain a patent, an inventor must file a patent application with the US Patent and Trademark Office. The USPTO will review the application in order to determine whether the invention meets several conditions to be considered a patent. It must be of practical use and show an element of novelty, meaning the invention has new characteristics outside existing knowledge in its particular technical field. The invention must also not be a modification or improvement to a known product or process that would have been obvious to a person with average knowledge in the particular field. Last, the subject matter must be "patentable" under law. Certain types of innovations and scientific discoveries are not considered patentable, such as laws of nature, natural phenomena and abstract ideas. It typically takes between three and five years in order for the USPTO to complete its examination of a patent application.
US federal law governs patent enforcement. Thus, a patent owner can enforce its patent rights against an infringer in the USA in a legal proceeding in US federal court. If the court finds infringement, it may issue an order such as an injunction to prevent further use of the patented invention and award financial compensation to the owner for infringement. In addition, a patent holder can enforce its patent rights against entities importing infringing products into the USA through the International Trade Commission (ITC). If a patent holder is successful, the ITC can issue an exclusion order prohibiting importation of the infringing product. Patent infringement is a "strict liability" offence. That is, the infringer need not act with any bad intent and does not even need to know about the patent in order to infringe it; however, wilful infringement of a patent can lead to an infringer owing enhanced damages in an infringement suit.
A trade mark is a word, phrase, symbol, or design that identifies and distinguishes a source of goods of one individual or company from another. Trade mark protection ensures that owners of the marks have the exclusive right to use them to identify goods or services, or to authorise others to use the trade mark. Generally, trade marks are protected for ten-year periods and are renewable upon expiry.
Trade mark protection in the USA is available for marks that are distinctive (not descriptive or generic for the goods and/or services associated with the trade mark). In order to register a trade mark, it is possible to file an application for registration with the USPTO, which may reject a trade mark application on several grounds, the most common of which are (i) the mark is not distinctive and/or (ii) the mark is likely to cause confusion with the mark in a prior registration or pending application. To qualify for federal registration with the USPTO, an applicant must also show that the trade mark will be used in interstate commerce.
Trade mark owners must remain vigilant in protecting their marks by taking appropriate action to enforce their rights. If an entity is using a trade mark without authorisation, the trade mark owner has several options to enforce its rights, including sending a demand letter, filing a lawsuit asserting trade mark infringement and/or unfair competition, or entering into opposition or cancellation proceedings before the Trademark Trial and Appeal Board. Available remedies in a trade mark infringement matter include injunctive relief as well as monetary damages.
Design patents give their owner exclusive rights to an industrial design, allowing them to prevent third parties from making or selling products that share design features that closely resemble those protected by the design patent. Industrial designs apply to a wide variety of products ranging from medical devices, household appliances, consumer electronics and even graphical user interfaces. Design patents have a term of 15 years from the date of issuance.
Design patents only protect the ornamental features of the registered industrial design. Any functional feature is not protected by design registration and the owner must seek a traditional (or "utility") patent (described above) to protect the functionality.
Similar to utility patents, design patents are governed by US federal law and a patent owner can enforce its patent rights against an infringer in a legal proceeding in US federal court seeking an injunction or financial compensation.
Copyright law in the USA protects all original works of authorship that are fixed in a tangible form of expression. These categories of works include literary works, musical works, dramatic works, choreographic works, pictorial works, graphic works, sculptural works, audiovisual works, sound recordings and architectural works. In the USA, copyright law protects the expression of ideas, rather than the ideas themselves, and it applies to both published and unpublished works. The term of copyright protection is the life of the author plus an additional 70 years. For works that qualify as a "work-for-hire" and anonymous or pseudonymous works, the duration of copyright is 95 years from publication or 120 years from creation, whichever is shorter.
Under US copyright law, the owner of a copyright has the exclusive right to do the following.
Copyright also provides the owner of copyright the right to authorise others to exercise these exclusive rights, subject to certain statutory limitations. If an individual violates the rights of a copyright owner, the owner may file a copyright infringement lawsuit in federal court. The Copyright Act allows for monetary damages, including statutory damages.
Trade secrets are confidential information that may include formulas, methods, techniques, or processes that provide their owner an economic advantage over competing firms who do not know the secret. The confidential nature of trade secrets gives the owner protection for as long as the secrets are kept private. However, once a trade secret becomes available to the public, protection ends. Trade secrets are not governed by federal law but by individual states.
The owner of a trade secret can enforce their rights through various lawsuits such as theft or improper disclosure of trade secrets. In order to win a trade secret lawsuit, the owner must show that the information qualifies as a trade secret and confers a competitive advantage over competition, and the owner must show that reasonable efforts were made to maintain its secrecy in accordance with the applicable state law. Unlike patent infringement, liability related to trade secrets requires an improper act. The owner must show the trade secret was obtained through improper methods such as fraud, theft, or bribery. Courts may order parties that misappropriated trade secrets to maintain the secrecy and provide financial compensation to the owner.
In the USA, there is no one uniform law governing all of data privacy and data security, and no one entity responsible for its enforcement. Instead, a patchwork of federal, state and local law convenes to form a body of protections. Therefore, the level of privacy and data security afforded to consumers and required by corporations will vary greatly by jurisdiction and by industry.
Federal Trade Commission Act
The most central federal regulation of data protection is Section 5 of the Federal Trade Commission Act, a wide-scoped consumer protection law that prohibits “unfair or deceptive” commercial practices and is enforced by the FTC, a federal agency. The FTC has interpreted the act such that it extends to mandate examination of data protection, despite no specific language on the topic. The FTC Act applies to most companies and individuals conducting business in the USA, but companies in industries that are regulated primarily by other federal agencies – including certain communication, transportation and financial institutions, as well as non-profits – may not be subject to the FTC Act.
There are, however, three primary reasons the FTC might bring an action against an entity. First, entities must comply with statements in their posted privacy policies. If a company makes assurances to its consumer and then they are not followed, that would constitute a "deceptive" practice under Section 5. Second, entities may not make material changes to their privacy policies without sufficient notice to those affected. This gives the initial policy value and allows consumers to make informed decisions about who they are sharing data with. Third, and most broad, entities must provide reasonable and appropriate protections for sensitive consumer information they hold. This element varies greatly by the type of information stored, industry and the context in which it was obtained, so it is advised that companies seek counsel on the necessary practices in their specific position. There are a plethora of ways the FTC has determined that companies failed to provide reasonable or appropriate protections, certainly more than can be adequately analysed in this overview.
The FTC has an assortment of avenues of enforcement for violations of any acts for which it is the regulatory agency. It can start an investigation, file a complaint in court for an injunction or damages to be paid to customers, issue a cease and desist, or enforce sanctions. Usually, the FTC enters into settlements or "consent orders" with companies that set forth the actions that the FTC believes were in violation of Section 5 and the steps the company must follow in the future. Companies that violate these consent orders are subject to high monetary penalties.
Other Key Federal Laws
Leaving the umbrella of the FTC but remaining at the federal level, it is worth mentioning a handful of other laws that regulate privacy and data security within specific industries. The Graham-Leach-Bliley Act (GLBA) regulates collection, use, protection and disclosure of non-public personal information (NPI) by financial firms. The GLBA requires institutions to provide a policy of their sharing practices and enables the customer to opt out if they do not wish to have their information shared with third parties. The type of data that is considered protected by this act is any information specific enough to identify an individual personally. The Dodd-Frank Act adds additional data security action within this industry and is enforced by the Consumer Financial Protection Bureau (CFPB). Once again, actions required for compliance vary greatly by circumstance and it is suggested that companies entering the USA seek counsel with regard to GLBA and Dodd-Frank compliance.
HIPAA, the Health Insurance Portability and Accountability Act, governs in the area of protected health data, which again is any data related to health that may be personally identifiable. HIPAA is enforced by the Department of Health and Human Services Office for Civil Rights.
There are a myriad of other federal laws that govern aspects of data protection in a specific industry or for a type of data, including FRCA (credit cards), TCPA (telecommunications), VPPA (video) and CFAA (hacking protection).
Another vital component in the tapestry of American data protection law is state law, where many states add additional requirements to any of the acts discussed above. As there is not space to discuss laws in all 50 states, companies should research the appropriate laws before conducting business in new territories. For the purpose of sampling, two states that have unique data security laws are Massachusetts and California. Massachusetts requires any company that stores protected information on one of their residents to have heightened security requirements and an articulated security policy.
California has one of the most protective privacy and data security laws in the USA. California enacted the California Consumer Privacy Act of 2018 (CCPA) and became the first state to pass a comprehensive consumer privacy law. The CCPA provides new consumer rights for personal information protection and imposes stringent data protection obligations on numerous entities conducting business in California. These entities must, among other things, update privacy notices, provide choices to consumers on selling personal data, and allow consumers to access and delete their data. The CCPA also contains a private right of action that allows consumers to seek monetary damages from companies for data breaches involving certain sensitive categories of personal information. The CCPA became effective on 1 January 2020.
Just as there is no comprehensive uniform data protection law domestically, there is no single law against information that leaves the USA. This is unlike many other countries, particularly in the EU, where privacy is a protected right and there is a uniform law against sharing to external nations. As such, there are relatively few limits on transfers outside the US. The FTC, however, asserts that data protection laws still ought to be enforced when protected information crosses the border. One such method of enforcement is sanctioning companies doing business in the USA and collecting data on US citizens who do not comply with regulations.
As stated in 8.1 Applicable Regulations, there is no central agency in charge of enforcing all data protection. Of the various regulators within this space, the FTC has the broadest authority despite having no specific guidelines on data storage or privacy. Congress has frequently considered the formulation of a new agency with a comprehensive and uniform law, but none has gained significant traction and those proposals have failed to this point.