Legal Opinions is a compilation of expert knowledge on a variety of topics. Written by attorneys, all of whom are highly educated on their featured topic, this special report is a valuable resource for executives. Nevada Business Magazine has been publishing this special feature since 2014.
Articles in the 2021 edition of Legal Opinions cover a gamut of professional issues and each provides business leaders with a glimpse into complex legal issues.
Is this the Year Congress Legalizes Cannabis?
By: Alicia Ashcraft, Partner and Jeffrey Barr, Partner, Armstrong Teasdale
Cannabis has been federally illegal since 1970 when Congress placed marijuana on schedule I of the list of controlled substances. A schedule I substance has a “high potential for abuse,” has “no currently accepted medical use” and has “a lack of accepted safety for use.” Other schedule I substances include LSD and PCP. Despite a report as early as 1972 from
the National Commission on Marijuana and Drug Abuse recommending decriminalization, cannabis has remained on schedule I to this day. In the last decade, however, cannabis legalization has progressed rapidly in the states. Currently, 19 states have legalized the recreational use of cannabis, and 36 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands permit medical use. Despite the federal prohibition, a majority of Americans live in states where some form of legal cannabis use is permitted.
In the U.S. Congress, by contrast, cannabis legalization attempts have always stalled. Over the years, the U.S. House of Representatives proposed a few bills, which largely failed either to receive bipartisan support or to pass in the U.S. Senate. The U.S. Senate had never proposed a bill to end the federal prohibition—and that may be about to change.
On July 14, 2021, Senators Charles Schumer, Ron Wyden and Cory Booker released draft legislation entitled “The Cannabis Administration and Opportunity Act.” This comprehensive legislative proposal goes beyond simply legalizing cannabis in three, significant ways. First, the bill removes marijuana from schedule I. Second, it provides for expunging federal non-violent marijuana crimes and allows individuals currently serving time in federal prison for those crimes to petition for resentencing. Finally, it establishes a fund to reinvest in the communities injured by the War on Drugs and provides restorative justice to communities of color. Significant provisions include:
- Decriminalization and Recognition of State Law Controlling Cannabis – The legislation removes cannabis from the Controlled Substances Act and transfers jurisdiction from the Drug Enforcement Administration to the Food and Drug Administration, the Alcohol and Tobacco Tax and Trade Bureau and the Bureau of Alcohol, Tobacco, Firearms and Explosives. Additionally, the proposed law recognizes state law controlling cannabis, but retains federal criminal penalties for illegal diversion. Finally, it also authorizes regulations to track cannabis products and it establishes a minimum purchase age at 21 years old.
- Research, Training and Prevention – The bill directs the Comptroller General to evaluate the societal impact of state legalization. It directs the Department of Health and Human Services to research cannabis’ effects on health conditions and directs the Department of Transportation to collect data on cannabis-impaired driving.
- Availability of Small Business Administration (SBA) Programs and Loans – The legislation allows the SBA to guarantee loans to eligible small cannabis-related businesses.
- Restorative Justice and Opportunity Programs – The draft law requires expungement of certain federal cannabis convictions and requires resentencing. It encourages states to follow suit. It bars convictions from adversely affecting immigration and provides three grant programs to address the effects of the War on Drugs.
- Medical Cannabis Recommendations by the Department of Veteran Affairs (VA) – The proposed bill allows VA-employed physicians to recommend cannabis to their patients.
- Federal Taxation – The law imposes an excise tax on cannabis products, like taxes imposed on alcohol and tobacco, and requires a federal permit to sell wholesale cannabis products.
Thomas opined that federal laws against cannabis no longer make sense because of the scattered federal and state statutes: “A prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the Federal Government’s piecemeal approach.” Congress may heed Justice Thomas’s criticism, and if it passes, the sweeping Cannabis Administration and Opportunity Act ends the federal “piecemeal approach” to cannabis laws, ushering in the next iteration of this dynamic industry.
Considerations for Drafting Contractual Indemnification Provisions
By: Jamie Thalgott, Shareholder and Eric Walther, Associate, Brownstein Hyatt Farber Schreck
As many may attest following the last 18 months of COVID-19- related closures, contractual provisions labeled with legal terms like “force majeure” are often and unfortunately glossed over during deal negotiation as “standard” or “boilerplate.” In fact, these concepts require unique scrutiny as they directly impact big-ticket, future liabilities. This article highlights another such provision with arguably even greater importance: the indemnification clause.
The term “indemnity” simply means “compensation for harm or loss.” A contract may create an indemnity as an obligation to reimburse the other party for certain, enumerated liabilities. Once the parties execute the contract, Nevada courts must strictly construe the indemnification clause and enforce it in accordance with the terms of the contracting parties’ agreement. Therefore, planning, drafting and negotiating are paramount. Below is a list of 10 key points (in no particular order) to consider when your contract involves indemnification.
- Get your risk manager involved, as the indemnification and insurance provisions often interrelate. Consider whether your insurance covers any required indemnity.
- Consider which parties are implicated by the indemnity. For example, if the agreement is a lease, an indemnity benefitting the landlord might also indemnify its lenders and affiliates, while the scope of the obligation might cover acts not only of the tenant but also of the tenant’s agents and licensees. Nonetheless, keep in mind that only the parties, each of their assigns and enumerated third-party beneficiaries may enforce the contract.
- Understand the survival period of the indemnification obligation as compared to the statute of limitations for potential claims arising under the contract. For example, the clause might provide that the indemnification obligation lasts for one year following the expiration of the contract; however, the underlying action might have a five-year statute of limitations.
- Consider liability limitations, for example, a cap on total coverage or a carve-out for special or consequential damages. Some contracts might also include a threshold of damages that must be reached before triggering the indemnification obligation (i.e., a basket) in addition to a cap on the total amount recoverable.
- Understand Nevada law and its effect on your contract. For example, in Nevada, an indemnity will only extend to a party’s own negligence if doing so is explicitly expressed in the contract. In other words, a general provision indemnifying the indemnitee “against any and all claims,” standing alone, is not sufficient. Further, the parties should consider whether other Nevada law prohibits the contemplated indemnity by statute or case law.
- Consider whether to include the phrase “defend and hold harmless,” which goes beyond the simple indemnity. Specifically, the duty to defend is broader than the duty to indemnify, and may result in lability for costs of an action even if the indemnitor prevails. Similarly, an obligation to hold the other party harmless may include an obligation to reimburse the indemnitee for its attorneys’ fees and an agreement by the indemnitor not to seek any damages for its own losses.
- Consider carve-outs from the indemnity for the indemnitee’s own gross negligence or misconduct and for any indemnification obligations burdening the other party.
- If there is more than one indemnitor, consider making the indemnitors jointly and severally liable for the obligation. If your client is an indemnitor, consider a separate contribution agreement allocating liability as between the indemnitors.
- Understand how the indemnity functions in the context of the contract generally. For example, is there one indemnification provision generally governing breaches or have specific indemnities been carved out in various sections, and if so, are you covered where you need to be?
- Consider adding procedures to your indemnification provision to govern how a party provides notice triggering the indemnification obligation or rules governing defense of claims, if applicable (for example, does the party choose its own counsel).
Real Estate Legal Update
By: R. Duane Frizell, Attorney, Frizell Law Firm
In 2021, real estate has been hot. This article highlights a few of the related legal developments.
Landlord and Tenant. Landlords are undoubtedly pleased with the U.S. Supreme Court’s recent ruling that all residential evictions may now proceed. However, for evictions based on unpaid rent, notices must now include information relating to the availability of rental assistance programs and other statutory protections.
Mediations are no longer required for evictions not related to unpaid rent. Nevertheless, in nonpayment cases, they are still required, and tenants may further stay or even stop such cases with the affirmative defense that they have an application for rental assistance pending or that the landlord has been uncooperative in terms of such assistance. If raised, this defense stays an eviction until the assistance application has been determined. If assistance is granted, the case must be dismissed. A landlord facing foreclosure may avoid some stays, though.
A landlord may not sue for unpaid rent if rental assistance is received. In such a case, if eviction is sought, a landlord may face liability for civil penalties, damages, attorney fees, and costs. If a landlord has been uncooperative in terms of rental assistance, an eviction must be denied, and the landlord may have to pay damages. Most of these statutory provisions will expire on June 5, 2023.
Courts must now automatically seal all files for summary evictions granted during the ongoing COVID-19 emergency. There was an attempt to eliminate summary evictions altogether, but it was unsuccessful. For leases with rent paid monthly, a landlord may not charge a late fee until at least three days have passed since the rent was due. Landlords also must give more advance notice for rent increases.
Airbnb, Vrbo, and Similar Rentals. Clark County, Henderson, Las Vegas and North Las Vegas must now tax and regulate vacation rentals. They must also regulate any person, except for an owner, occupant, or manager, who arranges vacation rentals for a fee. Every person who makes such rentals available must have local government authorization as well as a state business license. Exempt from these regulations are residential units owned or operated by non-restricted gaming licensees and affiliates that are located on land not zoned exclusively residential.
“Tiny Houses.” Large counties and cities8 must now designate at least one zoning district for tiny houses to be classified as accessory dwelling units, one where they are classified as single-family residential units, and one for tiny house parks. Other counties and cities need only have one zoning district for one such classification. Each local government shall provide their own definition of “tiny house,” but units of 400 square feet or less should qualify.
HOAs. With respect to HOA super-priority liens, regardless of when assessments become due, an HOA may not require more than nine months’ worth for full satisfaction of its lien. Moreover, if the holder of the first deed of trust tenders the amount due prior to an HOA foreclosure sale, then that deed of trust is not extinguished, and the purchaser at the sale takes the property subject to it. There was an attempt to extinguish HOA non-judicial foreclosures, but it failed.
Developing an Effective Employee Conflict Management System
By: David M. Doto, Partner, Hutchison & Steffen Attorneys
Conflict is ubiquitous – it permeates our lives. We all have unique perceptions, needs and desires that are not always consistent with those of our colleagues, yet we live in a finite world with finite resources. It is thus not surprising that conflicts occur on a daily basis at work – at and between all levels and areas of an organization.
The Cost: The cost of workplace conflict is staggering. Billions of dollars are lost each year for sick days, absenteeism, grievances and litigation. Moreover, the “hidden” cost of workplace conflict is equally devastating, yet often difficult to calculate: A hostile work environment, unmotivated employees, lost productivity, project avoidance, employee turnover, workers’ compensation claims, theft and vandalism.
The Nature of Conflict: Conflict itself is neither “good” nor “bad”– it depends how it is managed. If managed well, it can be a creative force for organizational change and growth. If managed poorly, it can be very harmful and costly. Most organizational leaders know that improperly managed conflict can explode into catastrophic legal disputes that consume organizational resources and strain public relations.
Acknowledgement: Organizational leadership must acknowledge that a problem exists. Proactive conflict management is always more efficient than reacting after a dispute has arisen, or an organization’s culture has become toxic. Leadership buy-in is critical to the development of a successful conflict management system, as well as to its ability to evolve with the organization.
Conflict Audit: Just as in medicine, the remediation of destructive organizational conflict requires a proper diagnosis of the problem(s) before solutions are prescribed. A “conflict audit” should be performed by a specially trained conflict management system designer working with organizational personnel to pinpoint the genesis of any ongoing problems. The conflict audit may include tailored surveys, interviews and facilitated group discussions.
Metrics: The systems designer will help organizational personnel develop metrics to define and measure a success outcome. Without well-defined metrics, there is no objective way for an organization to define success, or make informed decisions as to the efficacy of the system.
Processes: The systems designer will also help the organization develop new or modify existing processes to improve the organization’s culture, and restore employee stability and productivity. The designer should work with organizational personnel, and serve as a bench-marking researcher, information resource, idea generator, project coordinator, cheerleader and facilitative communicator which helps an organization design and implement a conflict management system by and for itself.
Autonomy & Confidentiality: Aggrieved personnel must have the freedom to maintain confidentiality and choose among multiple system entry options without fear of reprisal. System entry points can include an effective open-door policy, human resources designee, peer coordinator and/or ombudsmen.
Prevention: The hallmark of any good conflict management system design is the deployment of interventions at the earliest possible time, at the lowest possible levels and for the least possible cost. Successful conflict management systems focus on prevention.
Training: The cornerstones of prevention include a comprehensive on-boarding program that explains how the system works, together with conflict management and de-escalation training properly tailored and implemented for all levels of the organization. Developing the ability of all members of an organization to listen, hear, process and communicate effectively in a high conflict environment will improve a toxic organizational culture, as well as de-escalate conflict so that it can lead to transformative individual and organizational growth.
Conflicts and disputes in the workplace are inevitable. The question for most organizations isn’t whether they should have an integrated conflict management system, but whether they can afford not to have one.
Amicus Briefs – A Friend of the Court and Industry
By: Jordan T. Smith, Partner, Pisanelli Bice
Each day, state and federal appellate courts release opinions with significant effects on industries across the country. Often, business owners are stunned to find an adverse case involving their industry that did not consider important legal arguments or other relevant facts. Worse, business owners are sometimes shocked to discover a case involving an entirely different industry that had collateral consequences to their own, even though they did not have a chance to highlight the potential ramifications for the court.
Fortunately, the Nevada and federal rules of appellate procedure provide a mechanism for interested third parties to present their views in pending cases. Both sets of appellate rules allow non-participants to file a “brief of amicus curiae” or “friend of the court” brief. To file an amicus brief, private non-parties must file a motion seeking the court’s permission to submit an amicus brief within seven days of the brief filed by the party being supported. If the amicus brief is not supporting either party, the motion and attached brief must be filed within seven days of the opening brief. The motion requesting permission to file an amicus brief must attach a copy of the proposed amicus brief and describe the non-party’s interest in the pending appeal along with the reasons why the amicus brief is desirable.
The most effective amicus briefs present a well-written, unique perspective from industry groups, trade associations, or individual business owners. The best briefs do not merely regurgitate the arguments of the parties. A “yeah-what-they-said-brief” does not help the court. The Tenth Circuit has explained that courts will consider an amicus brief’s contentions when they “illuminate the contours of the parties’ respective positions or explicate the real-world, industry and regulatory implications of the legal issues before [the court].”
Useful amicus briefs can offer different legal arguments or industry-specific information like statistics. At times, the existing parties to the case overlook certain arguments or facts, or they cannot raise them for tactical reasons. An amicus brief can fill any legal or factual gaps. As one advocate has stated, “a good idea is a good idea, whether it is contained in an amicus brief or in the brief of a party.”
An amicus may even file a motion to participate in oral argument. However, appellate courts only grant these requests for extraordinary reasons.
Understandably, industry participants are reluctant to incur extra litigation expenses for cases in which they are not a party — particularly with no guarantee that a court will consider their arguments. But recent data shows that courts are increasingly citing amicus briefs in opinions and referencing the briefs in oral arguments. A citation or mention is proof that the amicus brief had an influence. Even if an amicus brief is not cited or discussed, from time to time, opinions silently reflect the reasoning of an amicus brief.
To avoid unpleasant surprises from others’ court decisions, industry participants should monitor appellate dockets for important cases that might affect their interests. Retaining appellate counsel at an early stage will help identify potentially significant cases and assist with analyzing the record for missing arguments or factual information. If done correctly, a well-crafted amicus brief can be a friend to the court and to the industry.
M&A Deals: Tax Considerations for Equity vs. Asset Sales
By: Krisanne S. Cunningham, Partner, Rice Reuther Sullivan & Carroll
In Mergers & Acquisitions (M&A) deals, an initial gating question is whether the deal will be structured as a sale of the equity of the entity or a sale of the business assets of the entity. Generally, sellers tend to prefer the sale of equity, and buyers tend to prefer a purchase of the assets. And, although there are nontax reasons that may drive the structure, the decision can have significant federal and state tax consequences to both the seller and the buyer. Therefore, the structure of the deal is something to consider carefully … and before the execution of a letter of intent (LOI).
For example, an equity deal can be very favorable to the seller from a tax perspective. Assuming the seller/owner has owned the equity for at least one year, its gain is taxed at long-term capital gains rates. Also, generally no state taxes are due on the gain if the seller/owner is resident of a state without a personal income tax such as Nevada. And, if the seller uses an investment bank or broker, the business will generally receive an ordinary income tax deduction on those fees (which can currently be assumed to be worth roughly $14 for every $100 of fees). In addition, if part of the purchase price is paid with equity of the buyer – called “rollover equity” – often taxes on this portion of the purchase price can be deferred if structured correctly, and an equity sale structure can generally accommodate a tax-deferred rollover, even if each seller/owner does not elect to receive the same proportion of rollover equity vs. cash.
On the other hand, an asset sale can be very favorable to the buyer from a tax perspective. The buyer will generally receive a step-up in the basis of the assets purchased for tax purposes, allowing the buyer to (i) potentially depreciate or amortize those assets from a higher starting point (resulting in higher depreciation deductions), and/or (ii) recognize less gain on a future sale of those same assets. But, on the flip side, with an asset sale, the seller may (A) pay taxes on some portion of their gain at ordinary income rates2 to the extent the purchase price is allocated to certain “hot” assets (e.g., inventory, depreciated property and accounts receivable), (B) lose its ordinary income tax deduction for investment banking fees, and (C) pay state taxes based on the location of the assets vs. the state of residence of the owners. And, the taxes on any “rollover equity” may not be deferred—or each seller may be required to receive a proportionate amount of rollover equity vs. cash for such receipt to be tax-deferred. Worse yet, if the seller is a C corporation, the appreciation in the assets may be subject to two levels of taxes, both at the corporate level and the individual level. In other words, structuring the deal as an asset sale can result in hundreds of thousands, if not millions, of additional taxes due from the seller’s owners.
To make matters more complex, in certain circumstances, an election may be made to treat an equity sale as an asset sale for tax purposes only. Sellers should be on the lookout for language in the LOI that provides that a transaction otherwise structured as an equity sale (1) will be structured to provide for a basis step-up for the buyer, (2) will be structured in a tax efficient manner for the buyer, or (3) that the valuation assumes that the transaction will be structured in order to allow a step up in the tax basis of the assets of seller. Accordingly, sellers should push for their LOI to solely indicate an equity sale, so that sellers are well-positioned to then ask for a make-whole (so-called “gross-up”) payment due to the extra costs of an asset sale.
Beyond COVID-19: Important Developments that will Impact Nevada Employers
By: Swen Prior, Partner, Snell & Wilmer
While the coronavirus (and the delta variant) continue to dominate employer policy decisions, there are significant changes to workplace rules and regulations that Nevada employers should prepare for.
One of the most impactful changes to employment law stems from the outcome of the 2020 presidential election. With a new administration and change of party affiliation, there is a shift in employment law; however, this change is seismic. As a presidential candidate, Joe Biden promised organized labor that he would be the, “strongest labor president you’ve ever had.” His recent actions show that he is fulfilling his promise.
As the agency primarily responsible for enforcing federal labor laws, President Biden has naturally focused much attention on the National Labor Relations Board (“NLRB“). One of his first acts as President was to fire the then-General Counsel of the NLRB and nominate an individual to this position that shares his ideology and vision. The new General Counsel to the NLRB, Jennifer Abruzzo, took control just over a month ago and has already released a pro-labor agenda for the NLRB in her recent Memorandum GC 21-04, released August 12, 2021. This dense memorandum looks to roll back the prior administration’s rules and sets forth directives that will impact both unionized and nonunionized private sector employers. Among numerous other things, the NLRB will seek to revise the prior administration’s test for the legality of an employer’s handbook and policies. The NLRB also plans to review rulings permitting employers to include in separation agreements confidentiality clauses, non-disparagement clauses, and waivers prohibiting employees from participation in third-party claims against an employer. The memo is a heavily laden declaration that the NLRB is charting a new and aggressive course in a pro-labor direction for at least the next four years. Employers should take heed.
President Biden has also made other changes dealing with the workplace. From issuing multiple Executive Orders including allowing collective bargaining rights for federal employees; establishing a $15-an-hour minimum wage for federal workers and countless federal contract employees; to supporting various legislative bills such as the Protecting the Right to Organize (“PRO”) Act. If signed into law, the PRO Act would be the most expansive labor relations legislation in nearly 85 years. The PRO Act, among other things, seeks to weaken right-to-work laws and expand the definition of “employee,” making it even more difficult to classify a worker as an Independent Contractor.
President Biden also recently issued a broad Executive Order on promoting competition in the American economy, which “includes 72 initiatives by more than a dozen federal agencies” with the stated goal of promptly tackling “some of the most pressing competition problems across our economy.” One of these initiatives “encouraged” the Federal Trade Commission (“FTC”) “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Traditionally, enforcement of non-compete agreements have been left up to the states, and it remains unclear if or how the FTC will issue a ban on non-competes. Regardless, many states, like Nevada, already place restrictions on the enforceability of non-compete and non-solicitation agreements.
For example, Assembly Bill 47 was recently signed into law. Under this new law, as of October 1, 2021, a non-compete covenant in Nevada can no longer “apply to an employee who is paid solely on an hourly wage basis, exclusive of any tips or gratuities.” While non-compete agreements are technically still applicable in Nevada, the erosion of their enforceability makes them much less attractive to employers—even without the federal government’s intrusion into this area.
Federal and state agencies and leaders have, and may continue to make, dramatic changes to the laws governing the employer and employee relationship. Nevada employers should be prepared for these changes. Nevada employers with concerns about the impact of these changes and initiatives on their business operations should consider contacting their legal counsel.
Disclaimer: Nothing contained herein is to be considered as the rendering of legal advice for specific cases or circumstances. The materials herein are intended for educational and informational purposes only, and they solely reflect the views of the individuals who prepared and compiled them.
