Even before we flipped our calendars to 2021, we knew it would be a year unlike any other. Kutak Rock attorneys have put together their best legal insights in the hottest sectors to guide you in the year ahead. Read below for key predictions.
The shortage of rental homes and apartments for low-income households remains at a crisis level.
Compounding the problem of low rental inventory, there is a dearth of affordable for-sale homes in the marketplace. The omnibus fiscal year 2021 spending bill, the COVID-19 relief bill and a set of tax proposals include new incentives for the development of affordable housing. Affordable housing shortages create unique opportunities for developers, investors and lenders in 2021.
The current value of most real estate in the hospitality and brick and mortar retail sectors is depressed as a result of the COVID-19 pandemic.
In COVID-19-induced Chapter 11 bankruptcies filed by hospitality and retail operators, the valuation of real estate is of critical importance and will directly affect the recoveries available to mortgage lenders.
The Bankruptcy Code generally results in the lender’s secured mortgage claim being “crammed-down” to the current value of the real estate. If the COVID-19 vaccine and other health measures result in a spring-back of real estate values, the owner of hospitality or retail real estate may use bankruptcy to capture the value recovery when the real estate value recovers post-bankruptcy.
Section 1111(b) was included in the Bankruptcy Code to protect real estate lenders from this very scenario. Section 1111(b), if timely elected by a mortgage lender, results in the lender preventing the value cram-down and allowing the lender to retain a lien on the real estate as it recovers its value.
While a Section 1111(b) election imposes certain burdens upon the electing lender, the COVID-19-induced real estate declines will incentivize lenders to carefully evaluate making a Section 1111(b) election in current real estate bankruptcies.
Data Privacy: loT Devices
Smart and connected devices continue to be pervasive.
Alexa, Google Assistant, and Siri are watching and listening to everything happening in our homes and at work. Smart home systems automate our lights, room temperatures, the locks on our doors, and more. Many of us have also adopted wearables that track how and where we go, our heartbeat, our EKG, and even our blood oxygen levels. Our connected devices know more about our private lives than even our closest friends and family.
Society is waking up to this new reality and will ultimately force vendors to take privacy and consumer Internet of Things (IoT) devices more seriously. We have already seen legislative action on IoT security in California and at the federal level. We expect to see consumers push back against IoT devices that collect personal data, and pressure government representatives to regulate the capabilities of these devices to protect user privacy in 2021.
The European Union’s (EU) General Data Protection Regulation (GDPR), California’s Consumer Protection Act (CCPA) and Consumer Privacy Rights Act (CPRA), the Illinois Biometric Information Privacy Act (BIPA), and other legislation have all had major impacts on the data privacy landscape. Legislation of this type will continue at the state and international levels in 2021, but federal legislation will struggle to find consensus.
The United Kingdom’s (UK) departure from the EU (Brexit) has created uncertainty regarding how their data privacy laws may change. As of this writing, GDPR rules are no longer directly binding in the UK, although the temporary “bridge” means data transfer rules will not change until sometime between May and October 2021. This will likely result in conflict between EU nations and the UK over internationally shared data services. Companies that have not already put alternative safeguards in place to protect their data flows should do so in the first four months of 2021.
We will likely see a rise in privacy lawsuits in 2021 as actors violate privacy laws that create actionable private rights of action under such legislation as BIPA or CCPA. Individuals are becoming more aware of privacy laws and lawyers are becoming more adept at prosecuting privacy cases.
Companies interested in guarding their reputation and avoiding lawsuits should get consent from users, customers, and data subjects and provide data privacy controls, or take other steps to mitigate the fallout when—not if—privacy breaches occur.
Employee data privacy and security will also come into focus in 2021. Companies must implement privacy by design when processing employee personal data, as the failure to do so will leave them vulnerable to class action lawsuits, while balancing the security tradeoffs that come with privacy-protective technical measures.
Data Security: WFH Vulnerabilities
In this pandemic, work-from-home workforces have made our networks less secure.
Both external and internal malicious actors are more easily able to exploit protected data. Employees who feel that their job security is in jeopardy may see company data as an asset to negotiate with or, alternatively, as a way to make some easy illicit cash. At the same time, external malicious actors have ramped up their operations to exploit vulnerabilities resulting from the work-from-home environment.
A failure to adequately support remote workers without exposing sensitive information has led to many organizations paying unexpected costs to address cybersecurity breaches and malware infections in 2020. If organizations do not address their approaches to security in 2021, cybercrime will continue to evolve and exploit remote workers as the ideal entry points into corporate ecosystems.
COVID-19, EEOC Guidance & OSHA Enforcement
The U.S. Equal Employment Opportunity Commission (EEOC) has issued new guidance about the COVID-19 vaccine and employment discrimination. We expect further EEOC guidance in the first few months of 2021. The federal Occupational Safety and Health Administration (OSHA) will also likely issue vaccine guidance, enact an emergency COVID-19 temporary standard and adopt a permanent infectious disease standard. Employers should also expect OSHA’s scrutiny of workplace safety to escalate as it increases its number of field agents and enforcement actions focused on regulations and guidelines concerning COVID-19. OSHA citations issued under federal safety standards, the General Duty Clause, and state-specific pandemic plans are likewise expected to increase in 2021.
After Bostock v. Clayton County, employers will see more claims of sexual orientation or transgender discrimination, and the U.S. EEOC will focus enforcement and issue guidance related to Bostock. President Biden also is expected to promptly withdraw former President Trump’s executive order limiting sensitivity training for federal contractors.
Employers should expect independent contractor misclassification to be a focus of enforcement under a Biden administration. President Biden also supports California’s ABC test, which assumes workers are employees until proven otherwise and makes it more difficult to properly classify workers as employees.
The Department of Labor’s (DOL) January 2020 rule narrowing the joint-employer standard under the Fair Labor Standards Act (FLSA) was struck down by a New York federal judge in September 2020. A Biden DOL will likely drop the DOL’s appeal of that decision.
President Biden will support legislation and make National Labor Relations Board (NLRB) appointments that are pro-union, making it easier for employees to organize, including the Protecting the Right to Organize Act, which the House passed in 2020.
ERISA litigation has been active and robust in the past several years. Moving into 2021, important trends and developments include:
Excessive Fee Litigation
- Cases claim a breach of fiduciary duty in failing to properly monitor and manage plan investments and related plan expenses.
- A broader range of plans is being targeted, including plans sponsored by smaller companies and tax-exempt entities.
- 2020 saw large settlements of excessive fee litigation brought against Fidelity Investments, Oracle and Emory University.
Conflict of Interest
- Conflict of interest challenges, including cross-plan offsetting, favorable pricing or prohibited transactions.
- ERISA fiduciary rules require plan assets be used solely in the interest of a plan’s participants and to defray reasonable costs.
- Litigation challenges fiduciary vendor selection or payment of costs, especially where costs are spread across several plans of the same plan sponsor, fiduciary or service provider.
Improper Actuarial Assumptions for Defined Benefit Pension Plans
- Cases challenging the use of certain mortality tables, claiming that the tables used unreasonably reduce a participant’s pension payment.
- Cases seek higher pension benefits and claim breach of fiduciary duty.
Plan Notice and Disclosure violations
- Challenges that an ERISA plan fails to provide or implement proper notices and disclosure, including COBRA notices and life insurance notices.
Cyber-enabled Fraud and Other Participant Data Claims
- Participants sue to recover funds lost due to a cyber-enabled fraud of their account.
- Cases claim participant data is a plan asset that plan fiduciaries did not properly protect or improperly allowed access to the information.
- Cases also allege violations of privacy.
Withdrawal Liability from a Multiemployer Pension Plan
- Underfunded multi-employer pension plans assess withdrawal liability for withdrawing employers, which may be challenged in arbitration.
Employment Law: Immigration/VISA
Employers should expect progressive changes to be made with regard to employment verification, I-9 compliance, and work authorization under a Biden administration.
President Biden also supports the use of the visa system to attract and recruit a talented workforce from abroad and we anticipate a wholesale retraction of the executive orders issued by former President Trump over the last four years in an effort to restrict the issuance of immigrant and non-immigrant visas to foreign born workers.
Employment Law: Immigration/VISA>>
COVID-19 will have a major impact on real estate in 2021. As we abandon old habits and adopt new ones, the virus has and will continue to alter priorities within and demand for real estate.
This will result in diverging effects on real estate markets—including the need for either more space or less space. Answers to some key questions will gradually be revealed starting this year:
- Will real estate demand be reduced by the virtual office and a preference for home-officing and at-home entertainment?
- Will social-distancing habits persist and require reduced density in shared spaces?
The virus will also impact the design and use of real estate for the foreseeable future. The use, location, mechanical infrastructure, and interior configuration of commercial buildings was tested in new ways during the pandemic. Going forward, new focus will be placed on the health of building occupants. The competing values of social connectedness and distancing will impact density, social services and healthcare, cultural, sports and recreational activities. Retail space formats may forever change and will require creative redevelopment. Governmental requirements will also reflect this new environment and developers will need to adapt accordingly.
Tax and Finance
Significant segments of the economy are still lagging.
Leisure and hospitality, retail, travel, and construction are likely to start rebounding in earnest during 2021. However, the impact of the economic lockdown on state and local tax revenues may reduce normal funding sources for infrastructure projects even though the underlying need for these projects remains high. Public financing and public-private-partnerships in infrastructure development, may solve governmental budget funding shortfalls.
Accelerated Move to the Cloud
Cloud adoption accelerated significantly in 2020. This migration trend, fueled by COVID-19, is likely to continue. Cloud transactions involve an increasing number of legal issues including redundancy, tax, data, and compliance issues that must be addressed through increasingly complex and significant contractual relationships between companies and cloud providers.
Data Analytics and Monetization
Continued pressure to identify new revenue streams is causing more companies to identify data as a core asset. Companies are faced with legal challenges including data ownership and use rights, and privacy issues, which impact data monetization initiatives. Data monetization issues are finding their way into more technology transactions across a growing number of industries including healthcare, retail, and financial services. Agreements need to address data security, compliance, and adequate use rights.
AI is becoming commonplace in many industries, presenting a multitude of evolving legal issues including Intellectual Property protection for AI; ownership rights to compiled data; algorithms and improvements; as well as employment and discrimination issues.
Legal TrendWatch 2021 is a publication of Kutak Rock LLP. This publication is intended to notify our clients and friends of current events and provide general information about various legal insights. Legal TrendWatch 2021 is not intended, nor should it be used, as specific legal advice, and it does not create an attorney-client relationship. This communication could be considered advertising in some jurisdictions. The choice of a lawyer is an important decision and should not be based solely upon advertisements.