Legal knowledge is worth its weight in gold, and rarely free. Legal Opinions has compiled a host of attorneys, experts in their field, to provide information and resources on a variety of topics. Nevada Business Magazine has been publishing this feature since 2014.
Articles in the 2023 edition of Legal Opinions cover a gamut of professional issues and provide business leaders with a glimpse into complex legal issues.
A New Day for the Nevada Cannabis Industry – 2023 Legislative Review
By Alicia R. Ashcraft, Partner and Las Vegas office Managing Attorney and Jeffrey F. Barr, Partner with Armstrong Teasdale
Cannabis operators in Nevada helped ensure the passage of industry-friendly bills in this years’ legislature that received bipartisan support and could potentially save operators thousands of dollars per year. Changes include eliminating or limiting certain fines or fees, implementing dual licensing for medical and adult-use cannabis, restructuring excise tax, increasing possession limits and placing the Nevada Cannabis Compliance Board (CCB) under the Nevada Administrative Procedure Act (APA).
Senate Bill 195
SB 195 took aim at the CCB’s costly and burdensome regulatory enforcement practices and the failure to consider mitigating factors. Effective in June 2023, SB 195 authorizes the CCB to settle an alleged violation, and requires the CCB to specifically state on the record which mitigating factors are present (including self-reporting an occurrence), the weight of those factors in the determination and what steps the licensee has taken to correct the alleged violation. Additionally, the maximum civil penalty the CCB can impose may not exceed $20,000 for a single violation, and violations may not be “stacked” for a single occurrence.
Significantly, SB 195 also eliminated the CCB practice of billing operators for time and effort charges for routine inspections, audits and reviews.
Senate Bill 277
Effective in January 2024, SB 277 increases the transactional and possession limits from 1 ounce of usable cannabis to 2.5 ounces and 1/8 ounce of concentrate to 1/4 ounce. This law additionally deems each adult-use establishment to be a dual licensee, effectively eliminating medical licenses, and reduces the fees the CCB is permitted to charge for license renewal.
Additionally, the bill provides a mechanism for individuals with excluded felony offenses who were previously prohibited from participation in the industry to petition the CCB for registration as an owner, employee or other participant. The CCB must still consider if doing so would pose a threat to public health or safety, or negatively impact the industry.
SB 277 allows for other operational efficiencies, such as permitting more than one entrance to an establishment, and eliminates the need for a person who holds ownership interest of less than 5 percent to submit to a background check and register for an agent card.
Senate Bill 328
The Nevada APA governs the process by which agencies develop and issue regulations (rulemaking) and adjudicate contested cases (judicial). Upon formation in 2019, the CCB was exempt from the APA. SB 328 removes that exemption, so that the CCB is subject to the same requirements as other Nevada agencies for these rulemaking and judicial functions.
SB 328 also provides for changes in the structure and make-up of the CCB, such as imposing a two-year term on the chair, staggering board member terms, transferring authority to appoint and remove the CCB executive director to the Governor, and providing additional considerations for appointing board members.
Further, this bill requires the CCB to address the illicit market by adopting regulations to provide for investigating unlicensed cannabis activities, imposing an enforcement and civil penalty system, and further referring such matters to law enforcement.
Assembly Bill 430
AB 430 restructured the wholesale cannabis excise tax and changed the application of the tax from “each” sale or transfer to only the “first.” Previously, the 15 percent excise tax was calculated on the “fair market value” (FMV) as determined by the Nevada Department of Taxation, which has long been considered typically inaccurate, delayed and over-inflated, resulting in many operators paying an effective rate of over 30 percent. As of Jan. 1, 2024, the improved FMV will only apply to transfers between affiliated companies, and the excise tax on all other third-party, arm’s length transfers will be on the actual sales price.
Proponents of these measures hope that these changes enable the industry to be more successful and lessen increasing financial burdens such as taxes and penalties.
Las Vegas Mega Events Provide Mega Infrastructure Opportunities
By Angela T. Otto, Shareholder and Rebecca L. Miltenberger, Shareholder of Brownstein Hyatt Farber Schreck
If you have driven around Las Vegas Boulevard recently, you have most likely experienced firsthand the impact of one or more high-profile, large-scale events known as “mega events.” Examples of these mega events include the Formula One Las Vegas Grand Prix, NFL Draft, Pro Bowl and Super Bowl, Taylor Swift’s Eras Tour concert and the Consumer Electronics Show (CES). While these mega events boost the Las Vegas economy, they also highlight some of Las Vegas’ challenges and opportunities related to the valley’s infrastructure.
Roadways: In order for the Grand Prix to be conducted on portions of Las Vegas Boulevard and other streets and areas in the resort corridor or “racetrack” the organizer of the race must repave the racetrack to meet certain specifications. This repaving project has been the source of recent traffic delays on Las Vegas Boulevard as well as nearby roads. While this extensive repaving does not need to be completed every year of the race, Formula One will be completing some level of repaving of the racetrack prior to each year’s race. In addition, since the track will be closed and not open for use by the public for approximately seven hours each night during the race, the organizer intends to install temporary vehicular and pedestrian bridges to provide alternate access during the race.
Parking: Parking in connection with these mega events is difficult and, if you are able to park, you may not be able to enter or exit as you please. By way of example, prior to the 2024 NFL Super Bowl, a barricade will be installed around the perimeter of Allegiant Stadium limiting parking at the stadium. Most attendees will need to be shuttled to the stadium for the event. Mega events rely heavily on temporary forms of mass transportation, which will require coordination among event coordinators, hotel operators and private and public transportation providers.
Utilities: Certain events require utility expansions and/or upgrades, especially related to power and communications facilities. In some cases, these expansions or upgrades necessitate Clark County acquiring additional public right-of-way or easements from private landowners. Expansion of communication facilities and infrastructure may provide enhanced capabilities for future use. Further, the organizers of some of these events are considering incorporating sustainable practices. If successful, such innovative sustainability measures may provide alternatives for future Vegas developments.
Airport: To prepare for some of these events, Harry Reid International Airport (LAS) is working to complete all major projects as soon as possible. For example, the airport took one of its runways down for maintenance earlier this year and recently completed a multimillion-dollar improvement project to reconfigure certain taxiways and runways. LAS warned of delays due to these projects, but said they are especially important to complete before the large events coming to Las Vegas later this year and next year.
Permitting: In an effort to better prepare for all types of special events, including mega events, Clark County recently passed Ordinance 5041 to amend sections of the Clark County Code addressing special events. Such revisions require certain special events that anticipate attendance of more than 5,000 attendees per day to register such event with Clark County. The new registration system is intended to streamline the special event permit process and make it more user-friendly. This process will maintain consistency across large events, protect the health and safety of residents and visitors and better facilitate traffic protocols.
While some of these mega events bring temporary inconveniences, they may also bring long-term infrastructure improvements that will benefit residents and help attract new events to Clark County.
Maintaining the Corporate Veil: Covering Your (and Your Business’) Assets
By R. Duane Frizell, Attorney of Frizell Law Firm
Those in the business world strive to shield themselves personally from the debts of their companies. They also endeavor to keep each one of their companies from being responsible for the liabilities of any other. This shield is the well-known “corporate veil.”
The corporate veil may be pierced when a corporation’s insider (person or entity) acts as its “alter ego.” This occurs when “(a) The corporation is influenced and governed by the [insider]; (b) There is such unity of interest and ownership that the corporation and the [insider] are inseparable from each other; and (c) adherence to the notion of the corporation being an entity separate from the [insider] would sanction fraud or promote a manifest injustice.”1 In 2019, the Legislature made it clear that the alter-ego doctrine applies to LLCs.2
Influence: For alter ego, it is not enough that one insider owns 100 percent of the business. There must be more than an overlapping of officers between companies too. Nevertheless, sufficient influence and governance may arise when a corporation lacks discretion vis-à-vis the insider. It may also arise when the insider negotiates all corporate business, or the insider is not a shareholder but holds themselves out as the “primary owner.”
Unity: There are certain factors to be considered when determining whether an alter-ego unity exists. Such factors include “[1] commingling of funds, [2] undercapitalization, [3] unauthorized diversion of funds, [4] treatment of corporate assets as the [insider’s] own, and [5] failure to observe corporate formalities.”3
Commingling – Obvious instances of commingling include opening one company’s bank account in the name of another business or individual, depositing business funds into a personal account and vice versa, and using one account for more than one business. Commingling may also occur where there are no separate financial statements or tax returns.
Undercapitalization – For alter ego, undercapitalization results when the company’s capital is inadequate to meet the financial needs of its ongoing operations and obligations. A business may, however, validly borrow funds from its insiders, as long as the loans are made per fair market terms and in good faith.
Diversion – Unauthorized diversion of funds unequivocally occurs when insiders use corporate money to pay for their own debt. It may also occur when corporate property is assigned to insiders who later use the proceeds from such property for their own purposes.
Mistreatment – Insider dealings not made at arms-length can result in a mistreatment of assets. So too can shared office spaces, addresses and even contact information.
Adherence – Corporations must adhere to their legal formalities, such as issuing stock, electing directors, keeping corporate records, conducting shareholder and director meetings and keeping minutes. They need to keep their own accounting books and pay their own taxes.
Fraud/Injustice: For alter ego, there must be fraud or manifest injustice. This standard includes deceit. It may also include situations where the creditor reasonably believes it is dealing with some person or entity other than, or in addition to, the one legally signing for the debt.
A Note on Reverse Piercing. The Nevada Supreme Court has held that “it is particularly appropriate to apply the alter ego doctrine in ‘reverse’ when the controlling party uses the controlled entity to hide assets or secretly to conduct business to avoid the pre-existing liability of the controlling party.”4 Reverse piercing should give every business person pause. As the Court noted, “the rights of innocent shareholders or creditors [may be] harmed by the pierce.”5
Maintain the corporate veil. Cover your ass-ets. Consult with an attorney to guard against your business being deemed to be the alter ego of any other person or entity.
How Your Business Can Benefit From Intellectual Property Rights
By Steven M. Santisi, Shareholder with Holley Driggs
According to Ocean Tomo’s “Intangible Asset Market Value Study,” 90 percent of the total assets of US businesses listed on the S&P 500 are intangible assets which consist of intellectual property (IP) and goodwill. While there are only four Nevada companies listed in the S&P 500, it is fair to say that a significant percentage of the assets of most Nevada businesses comprise IP and goodwill.
What is IP and How are the Associated IP Rights Conventionally Used?
Intellectual property refers to creations of the mind, such as inventions, literary and artistic works, designs, symbols, names, and images used in commerce. Although some forms of IP include rights that immediately vest in their creators upon creation under US law, most forms of IP require some form of registration before the full set of IP rights can be enjoyed. For example, an inventor cannot stop others from practicing her invention until she secures a patent from the government granting her IP rights available under US patent laws. The four primary forms of IP rights include patents, trademarks, copyrights and trade secrets.
Patents grant inventors exclusive rights to new and useful inventions. By obtaining a patent, you gain the authority to prevent others from making, using or selling your invention without permission for a limited time, justifying investment in innovation.
Trademarks protect names, logos, symbols and phrases that identify and distinguish your products or services from others. Registering trademarks provides exclusive rights and safeguards your brand identity from being misused by competitors.
Copyrights safeguard original works of authorship, such as literary, artistic, musical and dramatic creations. These may include books, software, music, films, and website content. Registering copyrights protects your work from unauthorized reproduction or distribution, ensuring that you retain control over your creative expressions.
Trade secrets comprise confidential and proprietary business information that gives your company a competitive advantage. This may encompass customer lists, formulas, manufacturing processes and marketing strategies. By safeguarding trade secrets through non-disclosure agreements and internal security measures, you can maintain a valuable edge in the market.
How Can the Different Types of IP Rights Benefit My Business Beyond Protection?
Patents and trade secrets can be used as the basis for an increased valuation and thus can be used to attract investment or to serve as collateral for borrowing funds. Further, patents can be sold (while retaining a license), or licensed “out” to other companies in different regions or to those operating in different markets. Further, patents can be licensed “in” to support incorporating new product lines. Trade secrets can be used to build a valuable set of assets that allow businesses to practice an invention even if it later becomes patented by a competitor.
Trademarks provide a tangible brand label for associating goodwill so that every dime spent by a business increases the recognition and reputation of the brand (whether by advertising, providing good service, contributing to the community, selling quality products at fair prices, etc.) and can increase the value of the business’s trademarks. Valuable trademarks become licensable or saleable assets themselves that can be used, for example, to create a licensing revenue stream, to create a franchise, to expand product lines, or to expand into adjacent markets.
Copyrights can be leveraged to convert mere commodities into unique, highly marketable products and services. People love stories. If you can create product lines or services that allow your customers to experience a story, you can significantly enhance the effectiveness of your marketing. Copyrights owned by others can be licensed to help you market your products.
Understanding IP’s value as a business expansion tool and not merely as a defensive weapon can provide your business with the advantage you need to grow. By securing IP rights, you can not only protect your investments and bolster your market position, but also gain valuable options to expand your business.
The Risks of Agreeing to Become a Trustee of a Trust and How to Mitigate Them
By Jonathan J. Tew, Partner at Hutchison & Steffen
By agreeing to serve as a trustee of a trust, an individual – whether an attorney, CPA, family member or friend – assumes significant legal obligations and potentially serious personal liabilities. The same holds true for corporate trustees.
Trustees owe fiduciary duties to the trust’s beneficiaries. A fiduciary duty is the highest standard of care you can legally owe someone, and trustees are judged by that high standard regardless of their expertise in legal or financial matters. Accordingly, any prospective trustee should be mindful of his or her obligations before agreeing to serve as a trustee.
Indeed, beneficiaries have significant rights under the Nevada Revised Statutes, whereas trustees have significant obligations. As a trustee, you can be held accountable not only for what actions you perform, but for what actions you do not perform that are required under the trust documents and the Nevada law.
As just one example, under NRS 153.031(3)(a), a court has the discretion to, “order a reduction in the trustee’s compensation” to “redress or avoid an injustice.” Under NRS 153.031(3)(b), a court has the discretion to order a trustee to personally pay for another party’s reasonable attorney fees and costs to adjudicate an action if the trustee breached his or her fiduciary duties. In December 2022, the Nevada Supreme Court upheld a district court order under these specific statutes to disgorge the trustee of his fees due to poor accountings provided to the beneficiary and require the trustee to personally reimburse the trust for a significant percentage of the trustee’s attorney fees paid by the trust due to various fiduciary breaches. (SSJ’s Issue Trust, Docket No. 81470, 2022 WL 2256918, Nev. June 22, 2022, Order of Affirmance)
Accordingly, anyone considering whether to accept an appointment as a trustee must carefully consider and understand their obligations and potential liabilities before agreeing to say “yes” to a request to serve as trustee.
Strategies to Prevent Litigation and Avoid Trustee Liability
Should one agree to serve as a trustee, below are some of the more important (yet non-exhaustive) suggestions to prevent conflict and litigation that might implicate the trustee.
1. Understand Your Obligations: A trustee must review the trust document and Nevada Revised Statutes to ensure that he or she fully understands the trustee’s obligations. The trustee must also understand a trustee’s fiduciary duties under Nevada law. Understanding the above obligations and duties can be extremely difficult. As such, it is best practice to consult legal counsel early on to mitigate the risks of mistakes.
2. Regularly Communicate with Trust Beneficiaries: Litigation can often be avoided by early and regular communication with the beneficiaries. While this can be a stressful task due to beneficiary expectations, demands and oftentimes difficult personalities, neglecting to communicate with beneficiaries frequently leads to frustration and suspicion that the trustee is not doing his or her job or is engaging in favoritism.
3. Record-Keeping and Accounting: Trustees have a duty to keep interested parties reasonably informed about the administration of the trust or estate. Trustees must also keep sufficient records to explain and track all transactions under the trust and as required by law. It is important to consult an attorney and accountant to ensure that any accountings required to be provided are done properly.
4. Tax Matters and Investments: A trustee must also be aware of certain mandatory tax filings in addition to investment requirements – including the Nevada Prudent Investor Act – when administering the estate.
In summation, any prospective trustee should carefully consider agreeing to serve as a trustee and, should he or she agree to serve as trustee, take early steps to help prevent litigation and potential trustee liability.
I-Robot: EEOC Issues AI Guidance
By Sarah Ferguson, Shareholder of Parsons Behle & Latimer
More employers are using artificial intelligence (AI) in employee selection procedures. Such use may include, for example, culling through applications for a given job, using video interviewing software and selecting the preliminary round of interviewees. However, few employers realize their potential Title VII exposure for relying on AI for these types of employment decisions. Though cost efficient, employers should carefully evaluate the methodologies employed by AI vendors before using them in selection procedures.
Stepping into the AI fray, the Equal Employment Opportunity Commission (EEOC) issued guidance on the use of AI for employers’ selection procedures (hiring, promotions and firing) earlier this summer. Specifically, the EEOC assessed whether employers may be liable if the AI they use causes a disparate impact on a particular protected group. Title VII prohibits (among other things) discriminatory actions by employers against applicants and employees on the basis of race, color, sex, national origin, pregnancy, sexual orientation, gender identity, disability, age and genetic information. Employers’ policies or practices may be found to have a disparate impact if they appear to be neutral but disproportionately adversely affect a protected class of people more than another group.
Potential Title VII Liability for AI
According to the EEOC, an employer may be liable for the disparate impact caused by AI in this context, even if the AI was developed by an outside vendor. Employers will be best served to inquire of any AI vendors “whether steps have been taken to evaluate whether use of the tool causes a substantially lower selection rate for individuals who are protected by Title VII.” The employer also has a responsibility to independently assess whether use of the software results in a selection rate for a class of protected individuals that is “substantially less” than other individuals.
Four-fifths Rule Applied to AI
To illustrate the selection rate bias, the EEOC explained the Four-fifths “rule of thumb” via the following hypothetical:
For example, suppose that 80 White individuals and 40 Black individuals take a personality test that is scored using an algorithm as part of a job application, and 48 of the White applicants and 12 of the Black applicants advance to the next round of the selection process. Based on these results, the selection rate for Whites is 48/80 (equivalent to 60 percent), and the selection rate for Blacks is 12/40 (equivalent to 30 percent).
The Four-fifths Rule says that the selection rates for Black applicants in this hypothetical is “substantially different” than the selection rates for White applicants, which could be evidence of discrimination.
Importantly, the EEOC was careful to emphasize that compliance with the Four-fifths Rule was not itself dispositive of compliance with Title VII. Though the Four-fifths test is “easy to administer” and may be used to draw an “initial inference” about selection rates, courts have agreed that there may be situations where the Four-fifths test is not appropriate, “especially where it is not a reasonable substitute for a test of statistical significance.”
Given this context and the possible implications for employers, the EEOC encouraged “employers to conduct self-analyses on an ongoing basis to determine whether their employment practices have a disproportionately large negative effect on a basis prohibited under Title VII or treat protected groups differently.”
The message from the EEOC is clear – employers must be vigilant in using AI to assist with any HR functions and should take affirmative steps to ensure such AI is compliant with Title VII.
Investing in an Appeal
By Jordan Smith, Partner with Pisanelli Bice
Launching an appeal is an important investment of time and money. In the financial arena, the conventional wisdom from successful businesspeople like Warren Buffet says that people should diversify their investments through an index fund instead of “stock-picking” individual holdings. Index funds provide exposure to many stocks so investors are not placing all their eggs in one basket. Applying this usual financial advice to litigation, parties often intuitively think it wise to similarly diversify by presenting a long list of errors or spreading out their arguments to increase the chances of success. But even though diversification may be a successful investment plan, it is not always a winning strategy for an appeal.
Before investing in an appeal, litigants and advocates must carefully analyze all possible appellate issues to find the most valuable. Unlike an index fund, where good stocks are mixed with bad, it is generally not profitable to attach many weaker arguments to better ones. As one federal appellate court observed, “[w]hen a party comes to us with nine grounds for reversing the district court, that usually means there are none.”1
The Nevada Supreme Court agrees. It has explained that “[l]egal contentions, like the currency, depreciate through over-issue. . . . [M]ultiplying assignments of error will dilute and weaken a good case and will not save a bad one.”2 In other words, advancing an “index fund” of appellate issues devalues the stronger positions and costs credibility with the court.
An appellate advocate need not – and should not – assert every conceivable assignment of error. ‘“[I]ndeed, the weeding out of weaker issues is widely recognized as one of the hallmarks of effective appellate advocacy,’ and counsel must keep in mind that ‘appellate judges have a finite supply of time and trust.”’3 Depending on the circumstances, the rule of thumb is to brief no more than three to four errors.4 Counsel must find the best issues worth pursuing.
Yet, just like corporate stocks, not all appellate issues have the same prospects. Appellate courts review different issues through different lenses (called the “standard of review”) depending on the nature of the error claimed. The standard of review is an important filter.
Fact-bound appeals are frequently more difficult because higher courts generally must employ a deferential view toward the lower court’s or the jury’s interpretation of the evidence. On the contrary, appeals raising purely legal issues often have better chances because the appellate courts review them with fresh eyes or “de novo.” The difference between an appeal with a de novo review and an appeal with a deferential review is like the difference between a blue-chip stock and a penny stock.
While past results are not always indicative of future performance, litigants who carefully pick a few well-positioned appellate issues usually will see a better return on their investment.
M&A Transactions: Sandbagging Provisions Explained
By Krisanne S. Cunningham, Managing Partner and Hailey C. Nicklin, Associate with Rice Reuther Sullivan & Carroll
In the mergers & acquisitions (M&A) context, a buyer “sandbags” a seller when the buyer is aware that a representation or warranty made by the seller in a purchase agreement1 is untrue at the time of closing, but closes anyway, only to later pursue a claim against the seller for damages resulting from the seller’s breach of such representation or warranty.
In the past, states have held that the buyer must have relied on the representation or warranty, without knowledge of the seller’s breach, to prevail (i.e., an “anti-sandbagging” approach). A recent trend in some states, however, is that the buyer’s knowledge of the seller’s breach at closing is immaterial to the ability of buyer to prevail on its claims (i.e., a “pro-sandbagging” approach).
For certainty, parties to purchase agreements may choose to clarify the approach by including either a “pro-sandbagging” or “anti-sandbagging” provision in the purchase agreement.
A “pro-sandbagging” provision provides that the buyer is entitled to recover for damages resulting from the seller’s breach of a representation or warranty, without regard to the buyer’s pre-closing knowledge of such breach. A buyer may negotiate this buyer-friendly provision for several reasons, including eliminating the need to litigate whether buyer had pre-closing “knowledge” of such breach, potentially saving the parties from costly discovery.
An “anti-sandbagging” provision, on the other hand, prohibits the buyer from recovering damages resulting from the seller’s breach of a representation or warranty if the buyer was aware that a representation or warranty was untrue at closing. This seller-friendly provision promotes transparency in the negotiation process.
That said, the parties may also choose to remain silent in the purchase agreement. In that case, the buyer’s ability to recover damages, where buyer was aware that a representation or warranty was untrue at closing, will depend on the law of the state whose law governs the merger/purchase agreement.2 Below are just a few examples of where states stand on the issue:
California: Where a purchase agreement is silent, California courts generally do not permit sandbagging (i.e., California takes an anti-sandbagging approach), and the buyer must prove that it did not have knowledge that the seller’s representation or warranty was untrue in order to recover damages.3
Delaware: In the past, Delaware courts have allowed sandbagging (i.e., Delaware takes a pro-sandbagging approach) by the buyer where the purchase agreement was silent.4 However, in 2018, the Delaware Supreme Court cast doubt on this approach, stating in dicta, that Delaware’s sandbagging default rule remains “unsettled.”5
New York: Typically, New York courts have allowed sandbagging (i.e., New York takes a pro-sandbagging approach), in certain circumstances, based on the source of the buyer’s knowledge. If the buyer’s knowledge comes from a seller disclosure, though, New York courts have generally held that the buyer cannot recover from the seller.6
In Nevada, though, the law is unsettled, and it is not clear whether Nevada courts would apply either an “anti-sandbagging” or “pro-sandbagging” approach where the purchase agreement is silent. Therefore, in Nevada, sellers and buyers must make a strategic decision whether to remain silent in the purchase agreement, given this uncertainty, or negotiate for a specific “pro-sandbagging” or “anti-sandbagging” in the purchase agreement.
