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Nixon & Peabody, LLP

New York Issues Draft SPDES Multi-Sector General Permit for Stormwater Discharges
The New York State Department of Environmental Conservation (NYSDEC) has released its Draft Multi-Sector General Permit for Stormwater Discharges Associated with Industrial Activity (GP-06-01). This draft permit will, when final, replace the general permit issued in 1998 (GP-98-03) which will subsequently expire. It covers new and existing discharges of stormwater to waters of the United States from industrial activities, as defined under the Clean Water Act. One major difference between this draft permit and the current general permit for stormwater associated with industrial activities is that, in addition to the requirements that apply to all permittees (Parts I through VII of the draft permit), it will place additional industry-specific requirements on thirty specific types (“sectors”) of industries.

Coverage under the draft multi-sector general permit can be obtained even if the stormwater associated with industrial activities is mixed with: (i) construction stormwater discharges which are separately covered by their own SPDES permit; (ii) certain discharges covered by various other permits; and (iii) certain non-stormwater discharges, such as water from firefighting activities, hydrant flushings, potable waterline flushings, irrigation drainage, uncontaminated air conditioning or compressor condensate, landscape watering, building/pavement washdowns, and cooling mists, as further described in the draft permit. However, the proposed multi-sector general permit will not cover (i) mixed stormwaters not expressly described in the permit; (ii) facilities where a SPDES permit has been denied; (iii) discharges from industrial activities that are subject to existing effluent limitation guidelines under specific circumstances; (iv) stormwater discharges from construction activities, (v) discharges that affect adversely endangered species, critical habitat areas or historic buildings; or (vi) certain mining, landfill, and oil and gas operations.

New Burdens
Requirements for both obtaining coverage under and then maintaining compliance with the draft multi-sector permit will significantly increase as compared to the current general permit for stormwater discharges associated with industrial activities. Some of the new burdens include the following:

The requirement to be covered by a SPDES will no longer be based solely on a facility's primary Standard Industrial Code (SIC) classification. Instead, each separate industrial activity at a site is potentially covered.
To obtain coverage, a more detailed notice of intent or termination (NOIT) form must be filled out. Further, permit coverage will not commence until thirty calendar days from NYSDEC receipt of the NOIT form (not five days from postmark).
Many sector/industry-specific requirements are being imposed, including revised monitoring parameters for specific types of industrial facilities and annual testing frequency.
Quarterly visual examinations of stormwater discharges must be performed and documented. In addition, an annual dry weather flow inspection will have to be performed and annual certification reports will have to be submitted on specified forms.
“Benchmark cut-off concentrations” are being added. Stormwater monitoring results must be compared to these benchmarks. If a permittee measures a concentration above its established benchmark, this will not be a permit violation. It does “signal the need” for the permittee to address potential sources of the contamination and to “remedy” them as appropriate.
Requirements for facilities (i) subject to EPCRA 313 (SARA Title 3) reporting requirement and (ii) those that have secondary containment for storage and transfer areas will be revised.
Opportunities
During the comment period there are opportunities to recommend changes that may reduce the burden associated with permit compliance. In reviewing the draft permit, some possible areas for comments appear to be:

For some permit sectors, whose day-to-day “industrial activities” resemble construction, it may be worthwhile to request that the sector be exempt from obtaining a separate construction general permit.
Supporting the proposal that composite stormwater samples will no longer be required, and that all required sampling can be done through grab samples.
How Your Voice Can Be Heard:
The comment period closes September 11, 2006. A copy of the 175-page draft permit can be obtained by calling 518-402-8109 or downloading it from the following website:

http://www.dec.state.ny.us/website/dow/mainpage.htm (click on “Draft SPDES Multi-Sector General Permit for Stormwater Discharges Associated with Industrial Activity”).

A series of public informational meetings is planned during August in Rochester , Albany , and Bedford Hills, New York. Details on these meetings and the address to send comments can be found at http://www.dec.state.ny.us/website/dow/stormsheet.html.

08-17-2006

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Nixon & Peabody, LLP

Putative Class Action Against Dairy Producers Dismissed on Express Preemption Grounds
The U.S. District Court for the District of Columbia has dismissed a putative class action against various dairy producers in Mills v. Giant of Maryland.1 The court ruled that the plaintiffs’ claim that the producers failed to warn consumers about the potential dangers of lactose intolerance was preempted by federal law.

Alternatively, the plaintiffs’ claims (based on negligence and strict liability) were subject to dismissal for failure to state a claim. Because there was no duty to warn consumers about common food allergies, there was no duty to warn consumers about the potential dangers of lactose intolerance.

Food, Drug, and Cosmetic Act Expressly Preempts Claim
The defendants argued that the plaintiffs’ common law claims were precluded by the National Labeling & Education Act of 1990 (“NLEA”), which added Section 403A to the Federal Food, Drug, and Cosmetic Act (“FDCA”). Section 403A provides:

Except as provided in subsection (b), no State or political subdivision of a State may directly or indirectly establish under any authority or continue in effect as to any food in interstate commerce – (1) any requirement for a food which is the subject of a standard of identity established under section 341 of this title that is not identical to such standard of identity or that is not identical to the requirement of section 343(g) of this title...2

Under 21 CFR 131, milk and cream are subject to a “standard of identity.” Defendants contended that any common law claim “would have the effect of mandating particular cautionary statements on milk labels...”3 The defendants argued that this runs “afoul” of the statute.4 The district court agreed, dismissing the plaintiffs’ complaint based on the express preemption clause in the FDCA.

Court Rejects Plaintiffs’ Argument Based on Bates v. Dow Agrosciences
The court rejected the plaintiffs’ argument, based on Bates v. Dow Agrosciences,5 that their common law claims were not preempted by section 403A of the FDCA.

The court explained that Bates involved a different federal statute, the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), and a different set of facts and circumstances.

Nothing in Bates categorically defeats defendants’ argument that plaintiffs’ claims are precluded by FDCA’s preemption clause. Rather, Bates underscores the need to pay close attention to the scope of the FDCA’s preemption clause and assists the court in framing the questions to be addressed: first, whether the duty imposed by the relief which plaintiffs seek is “a requirement for a food which is the subject of a standard of identity,” and second, whether this duty “is identical” to the labeling requirements of the FDCA.6

Here, the court answered both questions in the affirmative. Milk is subject to a standard of identity and the label mandated by the standard of identity has a distinct list of information that must appear on the label—“conspicuously absent from this list is a warning against the dangers of lactose intolerance.”7

The court also rejected the plaintiffs’ attempt to save their claims by arguing that a “safety” exception applies in this circumstance. The FDA has concluded that the risk of gastrointestinal symptoms similar to those experienced by the lactose intolerant does not implicate “safety” concerns, as defined by 21 CFR 170.3(i).8 Thus, there is no need to invoke the safety exception to Section 403A of the FDCA.9

Lastly, although the defendants raised implied conflicts preemption, the court declined to address the issue, as it had reached a decision on express preemption grounds. And, even if the FDCA did not preempt the state law claims, “plaintiffs’ complaint would nevertheless be dismissed as it failed to state a claim under District of Columbia law.

08-17-2006

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Nixon & Peabody, LLP

SEC Adopts Amendments to Executive Compensation Disclosure; New Form 8-K Rules Effective This Fall
On August 11, 2006, the Securities and Exchange Commission released final rules regarding the disclosure requirements for executive and director compensation, related party transactions, director independence, and other corporate governance matters. The final rules are designed to provide shareholders with a clearer and more complete picture of director and officer compensation. They are also designed to add transparency to key financial relationships among companies and their executive officers, directors, significant shareholders, and their respective immediate family members. The final rules are available on the Commission’s website.1 We will be releasing a number of Securities Law Alerts that address the changes required by the new rules and highlight the actions you should consider taking now to prepare for next proxy season. This Securities Law Alert will review the amendments to the Form 8-K disclosure requirements, which will be effective sixty days from publication of these rules in the federal register, or approximately mid-October.

Updates to Items 1.01, 1.02 and 5.02 and the General Instructions of Form 8-K
The final rules amend Items 1.01 and 5.02 of Form 8-K (and by reference, Item 1.02 of Form 8-K). These significant changes concern disclosure of material compensation plans, contracts, or arrangements, including plans relating to options, warrants, or rights, retirement, or deferred compensation, or bonus, incentive, or profit sharing plans between a company and a named executive officer. The Commission adopted these modifications to Form 8-K in light of the increased frequency, since the effectiveness of the extensive Form 8-K reforms in August 2004, of disclosure under Item 1.01 and 1.02 of director and officer compensation that falls short of the “unquestionably or presumptively material” standard the Commission intended for the expanded Form 8-K disclosure items.2 The amendments to Form 8-K eliminate employment compensation agreements from the scope of Item 1.01, and instead expand the disclosure required by Item 5.02 to cover only those compensation agreements with named executive officers3 that are clearly unquestionably or presumptively material.

The amendments to Form 8-K:

Add a new Item 5.02(e) to Form 8-K that requires the disclosure of the adoption, material modification or amendment of, or material grant or award that is made or materially modified under any compensatory plan, contract or arrangement in which a principal executive officer, principal financial officer, or named executive officer participates. Disclosure under this new Item 5.02(e) is required whether or not the occurrence is in connection with a triggering event specified in Item 5.02 (the appointment, retirement, resignation or termination of a covered officer or director). However, grants or awards under or modifications made to these agreements do not have to be disclosed in a Form 8-K if the awards, grants, or modifications thereto are consistent with the original terms of the agreement, and the award or grant is disclosed the next time Item 402 reporting is required. For example, if a named executive officer enters into an employment agreement that contemplates future option grants, such grants would not have to be disclosed in a Form 8-K at the time of the grant so long as this information is provided the next time Item 402 information is required (i.e. a company’s annual proxy statement).
Add a new Item 5.02(f) to Form 8-K requiring disclosure of the payment, grant or award of a named executive officer’s salary or bonus for the most recently completed fiscal year, if that information was omitted from the Summary Compensation Table because it was not available at the time of filing the company’s Item 402 disclosure in its annual report or proxy. Such Form 8-K also must include a new total compensation figure for the named executive officer, based upon information that was previously provided in the Summary Compensation Table.4
Add an instruction to Item 5.02 of Form 8-K that clarifies that disclosure regarding compensatory arrangements is not required under Item 5.02 to the extent that such arrangements do not discriminate in favor of executive officers or directors and are generally available to all salaried employees.
Expand the persons to which the retirement, resignation or termination provisions of Item 5.02(b) apply to include all named executive officers for the company’s previous fiscal year in addition to the persons to whom Item 5.02(b) previously applied: principal executive officer, president, principal financial officer, principal account officer, principal operating officer or any person performing similar functions (referred to here as simply, “covered officers”), and directors.
Expand the disclosure presented in connection with the appointment of a covered officer or director (except by shareholder vote) under Items 5.02(c)(3) and new Item 5.02(d)(5) beyond a brief description of the material terms of any employment agreements to also require a brief description of any material plan, contract or agreement to which a covered officer or director is a party or participant that is entered into or materially amended in connection with their appointment.
Add an instruction to Form 8-K permitting companies to omit the currently required Item 1.01 heading in a Form 8-K that also discloses information under any other heading so long as the disclosure mandated by Item 1.01 is included within the form.
Extension of Limited Safe Harbor under Section 10(b) and Rule 10b-5 to Item 5.02(e) of Form 8-K and Exclusion of Item 5.02(e) from Form S-3 Eligibility Requirements
The Commission recognized that new Item 5.02(e) requires companies and their counsel to make rapid materiality judgments with respect to whether a particular compensation arrangement with a principal executive officer, principal financial officer, or named executive officer requires disclosure. As a result, the Commission expanded the safe harbors for Form S-3 eligibility and liability under Section 10(b) of the Exchange Act and Rule 10b-5 to new Item 5.02(e). Therefore, if a company does not timely file a Form 8-K to report a compensation arrangement under Item 5.02(e), it will not lose Form S-3 eligibility so long as it discloses this information in its next periodic report on Form 10-K or Form 10-Q.

1.http://www.sec.gov/rules/final/2006/33-8732.pdf.

2.Much of this increased disclosure is the result of the incorporation of the Item 601(b)(10)(iii) standards from Regulation S-K for filing employment compensation agreements into Form 8-K, Items 1.01 and 1.02. The final rules uncouple Item 601(b)(10)(iii) from the Form 8-K disclosure requirements.

3.The amendments define the term “named executive officers” in a revised Item 402(a)(3) of Regulation S-K to include the principal executive officer, the principal financial officer and the three most highly compensated executive officers other than the principal executive officer and principal financial officer.

4.Prior to the addition of new Item 5.02(f) to Form 8-K, if a named executive officer’s salary or bonus for the most recently completed fiscal year was not available at the time of filing a company’s annual report or proxy, then such amounts were generally not reported until the filing of the annual report or proxy for the following fiscal year.

08-17-2006

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Jackson Walker L.L.P.

Texas Attorney General Confirms Onerous Nature of Conflict of Interest Disclosure Requirements
"On August 2, 2006, the Texas Attorney General issued Opinion No. GA-0446 (Opinion) containing the much anticipated clarification of Chapter 176 of the Texas Local Government Code (Chapter 176). Chapter 176 was enacted by the Seventy-Ninth Legislature in House Bill 914 to provide a means by which potentially conflicting relationships between vendors and members of a local government body could be disclosed to the public. However, in the legislature’s effort to improve transparency by allowing taxpayers to be informed as to which local government officials have connections to vendors, it put in place broad and somewhat vague conflict of interest disclosure requirements that can be extremely cumbersome and problematic for public entities. If you received Jackson Walker’s Spring Edition of HealthBrief, which contained an article entitled Public (Hospital) Nuisance: New Conflict of Interest Disclosure Rules, you will recall that we outlined several areas of concern.

The recently released Opinion confirms our fears: A plain reading of Chapter 176 results in harsh and burdensome disclosure requirements for public entities and their vendors. With few exceptions, in the Opinion the Attorney General accepts the plain reading of Chapter 176. Some highlights of the Opinion are listed below:

Definition of “Contracts” and “Business Relationship”
Chapter 176 applies to a person who contracts or seeks to contract for the sale or purchase of property, goods, or services with a local government entity. The Opinion states that the threshold phrase “contracts or seeks to contract for the sale or purchase of property, goods, services with a local government entity” encompasses one who agrees to, makes, arranges or inquires for, asks for or requests from an entity a promise creating legal obligations concerning the sale or purchase of property, real or personal, and any goods or services.” The Attorney General further opined that “business relationship” as used in Chapter 176, “is the connection between two or more parties based on commercial activity of one of the parties.” The Opinion also states that an “affiliation” is “an association between persons or between a person and an organization outside of a business relationship.”

The plain reading of these definitions results in Chapter 176 encompassing most business and personal relationships. Consequently, these relationships are subject to the conflict of interest disclosure requirements. For example, the Opinion specifically states that the definition of contracts includes professional service contracts. Furthermore, despite several requestors pointing out the burden such a requirement would place on a local government authority doing business with any bank or financial institution, the Attorney General stated that personal or business savings accounts that generate taxable interest for an officer or family member of an officer are subject to the conflict of interest disclosure requirements.

Additionally, even though several of the requestors expressed that the disclosure requirements would be overly onerous if the statute applied to small and routine purchases, the Attorney General found that because Chapter 176 does not contain a minimum threshold contract amount nor any exclusions for de minimis transactions, even contracts involving small routine purchases are subject to Chapter 176.

Disclosure Requirements When No Conflict of Interest Exists
The Opinion also states that a plain reading of the statute requires that each vendor and public official fill out a conflict of interest disclosure questionnaire whether or not they have a conflict of interest. Moreover, the Opinion asserts that the public entity must post on its website every questionnaire completed by a vendor or public official with respect to every contract or transaction regardless of whether a conflict of interests exists.

Enforcement Responsibilities of Local Government Entities
Despite the Attorney General’s plain reading of Chapter 176, it did provide some relief to public entities by acknowledging a few limitations on the conflict of interest disclosure requirements imposed on public entities. Specifically, the Attorney General stated that a local government body does not have an affirmative duty to require vendors to comply with Chapter 176, nor does a local government entity have an affirmative responsibility to enforce Chapter 176, or even notify the vendors of its requirements.

Document Retention
Further, the Opinion clarifies that the questionnaires filed with the local government entity’s record administrator should be retained in accordance with the entity’s record retention schedule, but Chapter 176 does not impose any additional document retention requirements.

Requirements for Existing Vendors and Contracts
Another important limitation the Opinion places on the disclosure requirements of Chapter 176 is that vendors who have existing contracts with a local government entity are not required to file a conflict of interest questionnaire with respect to these existing contracts. However, the Opinion does state that if an existing contract is amended or if the public entity enters into an additional contract with the same vendor, then the vendor and public officials do need to complete a conflict of interest of disclosure questionnaire.

Opinion GA-0446 contains several additional clarifications of Chapter 176 which are important for local government entities to know and understand as they will have a significant impact on the way public entities transact business. To see a copy of Attorney General Opinion GA-0446 please visit: http://www.oag.state.tx.us/opinions/ga/ga0446.pdf.

08-17-2006

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Jackson Walker L.L.P.

CMS Issues Final Report on Specialty Hospitals: Moratorium Lifted; Skepticism Continued
As required by the Deficit Reduction Act of 2005 (DRA), the Centers for Medicare & Medicaid Services (CMS) has issued its final report to Congress regarding physician owned specialty hospitals. The report is a mixed bag for these providers. Although CMS was unable to uncover any inefficiencies or investor irregularities in the industry, the recommendations contained in the report make it clear that curtailment and containment remain the major objectives of the federal government when it comes to physician ownership of such facilities. Among the strategies in the report that drive that point home are refinement of reimbursement methodologies to eliminate incentives for the creation and existence of specialty hospitals; mandated disclosure by these hospitals to CMS of physician investments and compensation arrangements, coupled with stiff fines for failure to do so; required disclosure to patients of such physician investment; and ongoing Stark and Anti-Kickback investigations of such facilities. On a more positive note, the moratorium on the creation or expansion of specialty hospitals has finally been lifted, and CMS plans to promote cooperation and collaboration between physicians and hospitals on cost-saving measures, such as gainsharing plans.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 defined “specialty hospitals” as those exclusively or primarily offering cardiac, orthopedic and surgical services. The federal government has long been concerned that physician investment in such facilities creates unfair competition for community hospitals, and implicates the Stark and Anti-Kickback Rules for improper investments. In answer to these concerns, Congress placed an eighteen month moratorium on the construction of physician-owned specialty hospitals, beginning December 8, 2005 and ending June 7, 2006. When this moratorium expired, CMS instituted a suspension on enrollment of new specialty hospitals which was legislatively adopted by DRA until such time as CMS submitted its final report to Congress. Consequently, the suspension lapsed on August 8, 2006.

The report outlines five action plans for CMS. Each is summarized below:

1.Improved DRG Payment System. CMS continues to believe that the most effective way to deal with perceived unfair competition by specialty hospitals in the form of selecting more profitable diagnosis related groups (DRGs) and more profitable patients (i.e., less severely ill) within those DRGs is to refine the DRG payment system to eliminate these incentives. Such refinements could include factoring into the DRGs the severity of illness of patients and the adoption of a system of cost weights over a three-year transition period beginning in FY 2007. Once fully implemented, this will result in a 5% reduction in the relative rates for cardiac specialty hospitals.

2.Alignment of Physician and Hospital Incentives. CMS believes that the alignment of physician and hospital incentives will reduce physician motivation for creating specialty hospitals. As such, CMS plans to implement demonstration projects to explore ways for physicians to participate in the governance and management of non-specialty hospitals in a meaningful way while benefiting financially from resultant efficiencies. One such project will involve gainsharing, in which participating hospitals and their medical staffs will be allowed to participate in savings from agreed-upon efficiency measures, such as standardizing products, substituting generic drugs, or re-engineering clinical practice protocols.

3.Mandated Emergency Service. CMS will mandate that whether a specialty hospital operates an emergency room or not, it will be required to provide emergency services to patients regardless of their ability to pay, if it has the ability to provide appropriate care. Additionally, specialty hospitals will be required under EMTALA to accept appropriate transfers of unstable patients.

4.Transparency of Investments. CMS will require hospitals to report physician investment and compensation arrangements on a periodic basis. Failure to do so can result in fines up to $10,000 for each day that the response is late. Additionally, specialty hospitals will be required to disclose to patients whether they are physician-owned, and if so, the names of the physician-owners.

5.Enforcement. CMS will continue to scrutinize specialty hospitals and actively pursue Anti-Kickback Statute and Stark violations.

08-17-2006

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Greenberg Traurig, LLP

Transfer Pricing: What All Multinationals Need to Know
High-profile, high-dollar transfer pricing adjustments by the Japanese taxing authority, the National Tax Agency (NTA) and the Internal Revenue Service (IRS) remind companies that governments take transfer pricing seriously.

08-17-2006

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Gordon & Rees, LLP

"Inquiry Notice" Sufficient to Trigger the Statute of Limitations Under California Securities Law
A recent decision of the California Court of Appeal holds that the one-year statute of limitations on claims of securities fraud under California Corporations Code § 25506 begins to run from the time plaintiffs gain ""inquiry notice"" of the facts underlying their claims -- or, in other words, discover facts that would lead a reasonably prudent person to ""suspect"" fraud. The decision also makes clear that disclosures on a corporation's website may not be sufficient to put investors on inquiry notice of possible securities fraud.

In Deveny v. Entropin, Inc. (2006) 139 Cal. App. 4th 408, a plaintiff class of some 1,000 investors alleged securities fraud by Entropin, a pharmaceutical company whose sole business was to develop and market Esterom, a topical solution meant to treat impaired range of motion associated with shoulder and back injuries. Testing of the product began in 1997 and continued during Entropin's lucrative initial public offering in 2000. In 2002 Entropin announced that clinical trials had been a failure, the drug was ineffective and Entropin was abandoning the drug. The stock price then collapsed. Plaintiffs subsequently brought suit alleging that they had purchased shares in reliance on misrepresentations of the outcomes of clinical trials.

When Entropin moved for summary judgment on a statute of limitations defense, the trial court ruled that plaintiffs' claims were time-barred under Corporations Code § 25506 because plaintiffs had reason to suspect securities fraud more than a year before filing their complaint. According to the lower court, inquiry notice arose by virtue of several 1999 disclosures on Entropin's website to the effect that the product was not absorbed in test subjects' bloodstreams. Entropin had referred potential investors to the site for general information. During the same time period Entropin had issued a series of press releases stating that the drug was safe and effective.

On appeal, plaintiffs contended that only actual notice, and not inquiry notice, could trigger the limitations period. The statute as written refers only to the ""discovery by the plaintiff of the facts constituting the violation…"" In resolving the ambiguity of § 25506, the appellate court took notice that no other published California case had yet addressed the matter, but that several federal courts applying California law had found inquiry notice sufficient to commence the § 25506 limitation period. The court followed the federal cases, explaining that the inquiry notice standard strikes the proper balance ""between the public policy favoring extinction of stale claims and [the competing policy] favoring resolution of disputes on their merits.""

In the securities context, the court wrote, inquiry notice arises when circumstances suggest to an investor of ordinary intelligence the possibility that he or she has been defrauded. In most cases, these suspicions are aroused by ""storm warnings,"" or public disclosures about the corporation's condition that would tend to alert a reasonable person to the likelihood of fraud. If the investor makes no investigation once given reason to suspect fraud, the limitation period begins running on the date the investor was put on alert. If the investor does make an inquiry, the clock starts whenever a reasonable person would have discovered the fraud.

Applying these standards to the facts before it, the appellate court held the evidence was insufficient to find as a matter of law that the plaintiff investors had been put on notice of possible fraud by the internet website. Entropin's mere posting of the test data on its website did not place investors on notice of the company's difficulties, particularly in view of Entropin's ""rosy"" press releases in a concurrent timeframe. The court noted that the information on the website may have been obscure and that there was no evidence that plaintiffs even had access to the internet. In any event, the court considered the absorption data scientifically ""ambiguous"" as to whether the drug trials were successful.

Thus, the internet disclosure did not constitute the sort of ""storm warning"" necessary to convey inquiry notice to investors and start the clock running on plaintiff's claims. Summary judgment for Entropin was reversed.

08-17-2006

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