NCUA's Office of General Counsel (OGC) recently issued its third formal legal opinion of 2017. Dated September 26, 2017, the opinion letter concludes that the "individual policy" requirement in NCUA's fidelity bond rule does not prohibit a credit union from purchasing a fidelity bond that covers both the credit union and its credit union service organization (CUSO), provided the credit union owns at least 50 percent of the CUSO or the CUSO qualifies as a "nominee," as defined in the letter. See, NCUA Legal Opinion 17-0959.
Notably, the opinion represents a reversal from OGC's previous interpretations of the rule. Opinion 17-0959 supersedes two previous legal opinions on this topic issued in 2004 and 2014, respectively. See, NCUA Legal Opinions 04-0744 and 14-0311.
The Federal Credit Union Act (FCU Act) directs NCUA to require fidelity bond coverage for credit union employees who handle funds or collateral. See, 12 U.S.C. §1766(h). Part 713 of NCUA's regulations, which implements that provision, describes the fidelity bond and insurance coverage required for federal credit unions (the provision is also applicable to federally insured state-chartered credit unions by §741.221).
"[One] commenter was concerned that in [joint fidelity bond policies] a loss suffered by one or two of the joint policy holders could reduce the amount of coverage available for the other joint policy holders below the required minimum amount, i.e. two losses equal to the single loss limit of liability would exhaust the coverage available for all credit unions to zero even though some of these credit unions would not have suffered a loss. This commenter also noted a concern with the joint purchase of fidelity bond policies even when the policy purchased does not have an aggregate limit of liability. While it is true that a loss suffered by one credit union would not reduce the amount of coverage available to the other credit unions purchasing the policy, this commenter suggested that, when several credit unions purchase a policy in a group, they may not give adequate attention to providing for the specific risks faced by individual credit unions. Compromises might be made in coverage amounts that would not be made if the policy were purchased individually. In addition, this commenter argued that the joint policy holders might not adjust coverages in a timely manner because of the difficulty of doing so in a group purchasing scenario." See, 64 Fed. Reg. 28718, 28719 (May 27, 1999).
Based on these and other concerns, the NCUA Board clarified the rule to provide that a fidelity bond must be individually purchased by each credit union, but it did not define "individual policy."
In 2004, OGC was asked if a CUSO that provided management services for several credit unions could purchase a single fidelity bond with all its credit unions named as insureds. In opinion 04-0744, the office found that the joint bond was not permissible under §713.3(a), noting that "the principal reason for not permitting a credit union’s bond to cover additional insureds is to ensure that the coverage of the other insureds does not conflict with or in any way dilute the individual credit union’s required coverage."
In 2014, the office was asked to consider whether a credit union could include one or more CUSOs as additional insureds under its fidelity bond. Again, OGC opined that a federally insured credit union is required to obtain fidelity bond coverage under an individual policy, and could not include one or more CUSOs or other parties as additional insureds under its fidelity bond. See, NCUA Legal Opinion 14-0311. Citing the 2004 opinion and its rationale, OGC further noted that the requirement "prevents a claim against one insured from depleting coverage limits for the credit union."
In a departure from its position since 1999, OGC has now changed its opinion of the permissibility of certain joint coverage fidelity bond provisions. The reversal was precipitated by the office's recent review of bond forms approved by NCUA pursuant to §713.3(b), and the realization that several already-approved bond forms included joint coverage provisions. For example, some of the approved forms, which NCUA approved before the 1999 rule change, included nominee provisions, joint insureds provisions, and definitions of "insured" that include subsidiaries that are more than 50 percent owned by the insured. Given the "inconsistency between NCUA's approvals and [OGC's] legal opinions," the office now says that the "individual policy" requirement does not prohibit a credit union from covering its majority owned CUSO under its fidelity bond. A CUSO may also be covered if it otherwise qualifies as a nominee. However, joint coverage of non-majority-owned CUSOs or other entities continues to be impermissible. See, NCUA Legal Opinion 17-0959.
This change in position may lead to formal amendments or other revisions to the fidelity bond rule. The opinion notes that NCUA recently published a proposed regulatory reform agenda, which includes a recommendation to consider revisions to Part 713. See, 82 Fed. Reg. 39702, 39707 (Aug. 21, 2017).
Programming Note. NAFCU's offices will close at noon today and also be closed on Thursday and Friday in observance of Thanksgiving. We wish you all a safe and wonderful holiday. We'll be open and back to blogging on Monday. Happy Thanksgiving!
NCUA recently announced that CUSOs may begin their required annual reaffirmation with NCUA’s online CUSO Registry beginning on February 1. CUSOs have until March 1 to complete this mandatory process. This will be the first round of reaffirmations—NCUA’s CUSO Registry was first launched a year ago to implement changes made to the agency’s CUSO rule in 2013.
To assist CUSOs in complying with this annual requirement, NCUA will host a free 90-minute training webinar on the annual reaffirmation process this Wednesday, January 25 at 2:30 p.m. ET. Those who wish to learn how to update their CUSO Registry information for the upcoming annual registration period can register for the webinar here. The webinar will offer registrants the opportunity to ask NCUA staff questions about the annual registration process. Questions can also be sent beforehand to NCUA at WebinarQuestions@ncua.gov.
Don’t forget that the annual registration requirement is a contractual obligation of the CUSO; credit unions are not obligated to complete this process for their CUSOs. NCUA’s CUSO rule provides, among other things, that a credit union may invest in or loan to a CUSO only if certain conditions are met. One of those conditions is that the credit union must obtain a written agreement from a CUSO, before making an investment or loan to that CUSO, that the CUSO will directly submit annual reports to NCUA on an annual basis (a newly formed CUSO must file a report within 60 days of its formation). See, 12 C.F.R. §712.3(d)(4). Nevertheless, NCUA has made it clear that it will examine credit unions for their CUSO’s adherence to its contract and “credit unions may not make additional investments or loans to the CUSO until the CUSO satisfies the annual registration requirement.” See, NCUA 16-CU-02 (January 2016). As such, credit unions are expected to monitor for its CUSO’s compliance with the registration requirement as part of its ongoing due diligence. This can be accomplished with relative ease, since NCUA added a search feature to its registry in June 2016.
Since this is an issue that continues to pop up from time to time, and is raised by CUSOs and credit unions alike, let’s take this opportunity to revisit what it means to “primarily serve” credit unions or their members.
Under the CUSO rule, a “CUSO” is defined as “any entity in which a FICU has an ownership interest or to which a FICU has extended a loan, and that entity is engaged primarily in providing products or services to credit unions or credit union members.” It also includes a CUSO subsidiary, or “any entity in which a CUSO has an ownership interest of any amount, if that entity is engaged primarily in providing products or services to credit unions or credit union members.” 12 C.F.R. §712.1(d) (Emphasis added).
In addition, the rule imposes a customer base requirement for CUSOs: “An FCU can invest in or loan to a CUSO only if the CUSO primarily serves credit unions, its membership, or the membership of credit unions contracting with the CUSO. . .” 12 C.F.R. §712.3(b) (Emphasis added).
But how do we determine if an entity “primarily serves” credit unions or their members?
50 Fed. Reg. 10353, 10355 (March 26, 1986) (Emphasis added).
While NCUA purposefully did not define the term “primarily” in the regulation, in the past, the agency has determined that a majority, or 50 percent or greater, may be sufficient to meet the “primarily serves” requirement. See NCUA OGC Ops. 96-0741 (September 20, 1996); 01-0746 (August 7, 2001); 11-0642 (August 3, 2011).
But as every good Compliance Officer knows: The rule is the rule, except when it isn’t.
NCUA OGC Op. 96-1214 (January 22, 1997).
Thus, while in some cases a “50% or greater” standard may meet the “primarily serves” test for CUSOs, this is not always true. A number of variables must be considered, as noted in 96-1214, to determine if an entity meets the customer base requirement to qualify as a CUSO for the purposes of NCUA’s rule.
Clear as mud? For more information on the CUSO annual reporting requirements, be sure to register for Wednesday’s training webinar, or visit NCUA’s CUSO Registry webpage.
Many credit unions have discovered, just in the past few years, that being recognized as a Low-Income Credit Union (LICU) provided new and untapped benefits, such as an exemption from the MBL cap. More recently, many LICUs are discovering another designation can provide even more opportunities for strategic growth: the Community Development Financial Institution (CDFI) certification. Obtaining a CDFI designation can provide benefits such as grant funding, awards, and exclusion from certain rules, like the QM/ATR rule. This webcast will provide you with an overview of the certification process and specific examples of CDFI designation benefits.
On January 19, the Financial Crimes Enforcement Network (FinCEN) issued an advisory, FIN-2016-A001, to provide guidance on the list of jurisdictions identified by the Financial Action Task Force (FATF). The release of this advisory comes in response to FATF updating its list of jurisdiction with strategic Anti-Money Laundering and Counter-Terrorist Financing (AML/CTF) deficiencies.
FATF is an inter-governmental policymaking body that proposes international standards and policies to combat money laundering and terrorist financing. Since the late 1980’s, FATF has issued several recommendations that aim to protect the international financial system from money laundering and financing of terrorism risks. Moreover, FATF encourages greater compliance with the anti-money laundering standards. Most recently, FATF published two statements identifying those jurisdictions that are deemed to have “strategic deficiencies” in their anti-money laundering and counter terrorist financing regimes.
FinCENs advisory acknowledges FATF’s update and provides guidance for financial institutions engaging with listed jurisdiction. These jurisdictions appear in two documents: (1) “FATF Public Statement”, which consists of jurisdictions that are subject to FATF’s call for countermeasures or are subject to Enhanced Due Diligence due to their Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) deficiencies; and, (2) “Improving Global AML/CFT Compliance: On-going Process,” which consists of jurisdictions identified by FATF to have AML/CFT deficiencies.
Based on FATF’s recent changes, FinCEN is recommending that financial institutions impose countermeasures or consider the risk arising due to a lack of sufficient progress in addressing AML/CFT deficiencies in the countries of Iran and the Democratic People’s Republic of Korea. FinCEN is also recommending that institutions apply enhanced due diligence for the country of Myanmar. FinCEN notes, however, that the country of Aleria has made progress in addressing its FATF action plan. As a result, Algeria has been removed from the “FATF Public Statement” and now includes this jurisdiction in its “Improving Global AML/CFT Compliance: On-going Process” document. The list of these countries in this document include Afghanistan, Algeria, Angola, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Panama, Papua New Guinea, Syria, Uganda, and Yemen.
FinCEN instructs financial institutions to continue to apply countermeasures to protect against AML/CFT risks. For more information, credit unions should consult the FinCEN Advisory.
Greetings compliance fans! Today begins the initial registration period for NCUA’s CUSO Registry. The CUSO Registry is the online system through which credit union service organizations (CUSOs) will report information directly to NCUA. Some of you may be wondering what impacts the CUSO Registry will have on federally insured credit unions and what resources are available for compliance officers. This blog post covers some of these issues, while providing some background for those of you who may be new to this issue.
For those of you who may be new to compliance or may need a refresher, prior to investing in or lending to a CUSO, federally insured credit unions must obtain an agreement from the CUSO that it will submit annual reports directly to NCUA and, if applicable, the appropriate state supervisory authority. See, 12 C.F.R. § 712.3(d)(4). Newly formed CUSOs must file a report within 60 days of formation. Starting today, these reports will be submitted through NCUA’s CUSO Registry.
CUSOs engaged in complex or high-risk activities such as lending, information technology, custody and safekeeping, or investment management services for credit unions must report additional information specified in NCUA’s CUSO Rule. See, 12 C.F.R. § 712.3(d)(4), (5). Credit unions are prohibited from making new loans to CUSOs that fail to satisfy the annual registration requirement and will be examined for compliance with the CUSO Rule.
The rule makes clear that the obligation for the credit union is to obtain an agreement from the CUSO that it will register with NCUA prior to investing in or lending to the CUSO. The rule does not require the credit union to register the CUSO with NCUA. Instead, the credit union is required to monitor the CUSO to ensure that it has fulfilled its contractual agreement to register on the CUSO Registry.
A reminder that the CUSO regulation applies to all levels, or tiers, of a CUSO’s structure. This means that any subsidiaries in which the CUSO has an ownership interest are treated as CUSOs if they are engaged primarily in providing products or services to credit unions or credit union members.
A notice that beginning today, CUSOs can access the CUSO Registry and related training materials at https://cusoregistry.ncua.gov. Credit unions and CUSOs can also find additional information, including FAQs, the CUSO Registry User Manual, and several quick guides on the CUSO Registry landing page here.
June 1, 2016 – CUSO Registry search function becomes available to all credit unions and the public.
The full text of the letter can be found here. Additional information on credit unions’ responsibilities when involved with CUSOs can be found here and here.
DMDC Extends MLA Database Deadline. In response to a letter sent by NAFCU and other financial trades, DMDC agreed to extend the deadline to seek direct access to the MLA database until February 15, 2016. If you have any questions about this deadline or the database, please email Brandy Bruyere, NAFCU’s Director of Regulatory Compliance, bbruyere@nafcu.org.
An extension, for consistency, of the CUSO rule to all federally insured credit unions. Prior to this change in November 2013, rules governing CUSOs only applied to federal credit unions.
Account for its transactions in accordance with generally accepted accounting principles.
Obtain an annual financial statement audit by a licensed certified public accountant.
Does the service provided by the CUSO benefit the existing members of the credit union?
Does the CUSO conform to the requirement of primarily serving credit union members and not other interests or parties?
Is a legal opinion needed to determine permissibility of the proposed structure of the CUSO?
Is the investment in or loan to the CUSO a suitable avenue for revenue growth or expanded services for members?
Introducing Nolan! I have been absent from blogging for a while because my husband and I welcomed baby Nolan in early October. Nolan was 9 pounds, 8 ounces at birth, good thing he came a few weeks early! Here are a few photos of our little guy, including one with his best dog buddy, Lemmy.
Over the last several months, NAFCU’s compliance team has received a number of questions from our members who have experienced some confusion with the CUSO rule. Today, I’d like to share a real-life question we’ve received over a dozen of times, the response we’ve been providing to our members, and the clarification provided late last week by the National Credit Union Administration (NCUA). The purpose of sharing our members’ question is to illustrate why the confusion arose. I’ve also provided the response from NAFCU’s compliance team to our members, and although it is accurate, you’ll want to use and rely on NCUA’s clarification which is located in NCUA Letter to Credit Unions 14-CU-07 (discussed further below).
We do not invest in or lend to a CUSO, but we do have a CUSO that we do other business with. Do we have to amend our written agreement with this CUSO? NCUA Letter to Credit Unions 13-CU-13 states that credit unions are required “to ensure that the CUSOs with which they do business agree to provide certain information directly to NCUA and the state supervisory authority, as applicable, on an annual basis.” This statement seems to include all CUSOs with which a credit union does business and not just those that the credit union invests in or lends to.
NCUA’s Letter to Credit Unions 13-CU-13 appears to have caused confusion amongst credit unions by including language that is broader than that required by the regulatory text. NAFCU has received a number of inquiries from our members on this issue and we are looking into it.
In the meantime, although 13-CU-13 seems to indicate broader coverage of the requirement to amend written agreements between credit unions and CUSOs, the regulatory text of the CUSO rule is limited to those CUSOs with which the credit union lends to or invests in. Usually, the regulatory text prevails which would mean that the requirement to amend agreements applies only to those CUSOs the credit union invests in or lends to; however, we hope to see further clarification from NCUA in the near future to clear up some of this confusion.
“[T]here has been some confusion as to which credit unions must enter into a written agreement requiring a CUSO to submit annual reports. This letter clarifies that only those FICUs investing in or lending to a CUSO are subject to this part of the CUSO rule.
NCUA further clarifies this issue in Legal Opinion Letter 14-0502.
“You have asked for clarification of a provision in NCUA’s newly amended credit union service organization (CUSO) regulation. Specifically, you have asked if a federally insured credit union (FICU) receiving products or services from a CUSO must enter into a written agreement in which the CUSO is obligated to submit an annual report to NCUA even if the FICU does not have an investment in or loan outstanding to the CUSO. The answer is no. The amended CUSO rule requires only those FICUs investing in or lending to a CUSO to obtain a written agreement requiring the CUSO to submit annual reports.
The NCUA Board amended the CUSO rule on November 21, 2013. The new rule requires, among other things, a FICU to contractually bind a CUSO to submit an annual report to NCUA. Specifically, new §712.3(d)(4) states: “A FICU must obtain a written agreement from a CUSO before investing in or lending to the CUSO” that the CUSO will “annually submit . . . a report directly to NCUA and the appropriate state supervisory authority, if applicable.” (Emphasis added).
In short, the confusion (regarding the above question) has come to an end. A credit union does not need to amend written agreements with all CUSOs with which it does business; rather, it must amend written agreements with those CUSOs it invests in or lends to.
First Vacation with the Family. Last weekend, my husband, children and I took our first vacation together as a family. We went to Virginia Beach and had a fabulous time. Here are some photos of the fun we had!
Recently, JiJi blogged about the NCUA’s adoption of a credit union service organization (CUSO) final rule. NCUA has issued Letter to Credit Unions 13-CU-13, outlining the primary changes to the CUSO-related rules, and providing an overview of what credit unions need to do as a result of the changes. These regulatory changes will become effective June 30, 2014. CUSOs will begin submitting reports to NCUA under new section 712.3(d)(4) when NCUA’s reporting system becomes fully operational by December 31, 2015.
For complete details, Letter 13-CU-13 is available in its entirety here. Also note, NAFCU’s Regulatory Affairs team will issue a Final Regulation summarizing the key aspects of this rule. Once it is available, it will be located here.
NAFCU Webcast – NCUA Update: Looking Ahead to 2014. On Tuesday, December 10th, from 2:00 – 3:30 p.m. ET, NAFCU’s Regulatory Affairs team will be discussing NCUA’s recent and expected actions for 2014, with a special focus on the newly-issued CUSO rule. Registration is still open - Sign Up Today! Remember, NAFCU's webcasts are available to anyone and everyone. On-demand webcasts are archived and available for up to 12 months after the live broadcast.
During last week’s open board meeting, the National Credit Union Administration (NCUA) took several important actions, including unanimously approving the final Credit Union Service Organization (CUSO) rule.
Effective June 30, 2014, the final CUSO rule will require CUSOs to annually provide basic profile information to the NCUA and the appropriate state supervisory authority. CUSOs engaging in certain complex or high-risk activities, such as credit lending, information technology and custody and investment management, will be required to report more detailed information, including audited financial statements and general customer information. The reporting burden is on the CUSO, not the credit union, but credit unions will need to update their written CUSO agreements to include the new requirements in the final rule.
- Obtain an annual financial statement audit by a licensed certified public accountant.
A new requirement that CUSOs must agree to report information directly to NCUA and to the state regulator, as applicable. CUSOs that offer complex or high-risk services—like credit and lending; information technology; and custody, safekeeping and investment management services—must report more detailed information, including financial statements and general customer information.
Any subsidiary in which a CUSO has an ownership interest in any amount will be subject to the rule if the subsidiary is primarily engaged in providing products or services to credit unions or their members.
CUSOs will begin submitting reports to NCUA under new section 712.3(d)(4) when NCUA’s reporting system becomes fully operational by December 31, 2015.
You can find the final CUSO rule here. Also note, NAFCU’s Regulatory Affairs staff will issue a Final Regulation summarizing the key aspects of this rule. Once it is available, it will be located here.
Approval of a 2014 Overhead Transfer Rate of 69.2 percent to fund the Share Insurance Fund’s activities.
For detailed information on all actions taken during the open meeting, take a look at this message from NAFCU and NCUA’s Board Action Bulletin.
Earlier this month, FinCEN issued a notice and reminder to non-bank residential mortgage lenders and originators (RMLOs) to remind them of their new compliance obligations under FinCEN’s regulations. On February 14, 2012, FinCEN published a final rule requiring RMLOs to develop an anti-money laundering (AML) program and report suspicious activity. The effective date of this rule was April 16, 2012, and the compliance date was August 13, 2012.
(i) Residential mortgage lender. The person to whom the debt arising from a residential mortgage loan is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement, or to whom the obligation is initially assigned at or immediately after settlement. The term “residential mortgage lender” shall not include an individual who finances the sale of the individual's own dwelling or real property.
RMLOs are also required to file suspicious activity reports (SARs) but they are not required to comply with currency transaction reporting (CTR) requirements. (Note: these large currency transactions remain subject to reporting on FinCEN Form 8300).
In addition to the notice and reminder, FinCEN has created a page on its website with more information for RMLOs subject to the rule.
This extended delay (and, hopefully, complete rescission) of these proposals follows NAFCU's advice in our comment letters to NCUA (CUSO Comment Letter and Loan Participation Comment Letter).
NCUA Regulatory Review. NAFCU is still looking for comments for our Comment Letter to NCUA on their annual regulatory review of 1/3 of their regulations. NAFCU's Regulatory Alert (12-EA-12) has additional details. Feel free to send along any and all suggestions for changes to NCUA's regulations to reduce the regulatory burden on credit unions. Comments are due to NAFCU by July 6th and to NCUA directly by August 3rd.
Q&A with NAFCU's Compliance Team. The July/August issue of NAFCU's The Federal Credit Union magazine has a lengthy Q&A with JiJi, Bernadette, Mike, Shari and myself. If you always wanted to put a face to the folks writing the blog posts or helping with compliance questions - here is your chance! Enjoy!
NCUA will be discussing its final rule on credit union service organizations (CUSOs) at its next Board Meeting on June 21. As you may recall, the proposal has been around for about a year, but with the 290 or so comment letters received, including one from NAFCU, finalizing the proposal has required NCUA to take a look at some of its provisions as initially written in the proposal. The likelihood of potential changes to the original proposal stems from the fact that a large number of commenters opposed many of the agency’s proposed provisions.
Would extend NCUA’s regulatory reach over CUSOs by requiring CUSOs to submit financial reports annually to the NCUA and state regulators. The reports would provide the regulators with financial information, a list of services the CUSO provides, a customer list, and information about the CUSO’s board and management.
Would extend the CUSO rule, including the proposed financial reporting requirement, to CUSO subsidiaries.
Would extend a number of provisions in the CUSO rule that only apply to federal credit unions to federally-insured state chartered credit unions (FISCUs) as well.
In a recent Washington Post article, NCUA Chairwoman Debbie Matz stated that some items for consideration before the proposal is finalized is the frequency of the reporting requirements and also giving CUSOs 60 days, rather than the proposed 30, to register with the agency. Other considerations will relate to placing parameters or limitations on the investment cap.
For more details on what the original proposal entails, here is the proposal from last summer. Affected sections of NCUA’s rules and regulations include Parts 712 and 741.222.
Last week, the CFPB issued a proposed rule to define "larger participants" in two consumer financial services markets. The proposal targets the debt collection and consumer reporting markets. Earlier this year, the CFPB issued a Notice and Request for Comment on how best to define "larger participants" and on which markets to focus on.
The Notice and Request for Comment was issued when the CFPB did not have a Director. Without a Director, the CFPB had been unable to regulate nonbank institutions - including defining "larger participants." Now that the CFPB has a Director, it can move forward with its NonBank Supervision Program.
Dodd-Frank gave the CFPB authority to supervise any nonbank entity in three markets: (1) mortgage origination and servicing; (2) payday lending; and (3) private education lending. The CFPB has the ability to supervise entities operating in these markets regardless of their size.
For other consumer markets, the CFPB must define "larger participants" and their recent proposed rule for the debt collection and credit reporting markets was their first steps in that direction.
The CFPB still has the ability to define "larger participants" in these markets in the future. The CFPB would need to propose a separate proposed rule to cover these markets (or add new markets) in the nonbank supervision process.
March NAFCU Webcasts. NAFCU has a pair of webcasts coming up in March that might be of interest. Remember, NAFCU's webcasts are open to everyone. They are also available for viewing for a year after the original live webcast. Thus, if you and your colleagues can't make the live webcast - you can still view the content at a later date. This "on-demand" feature also works great for sharing the webcast with others at your credit union who could benefit from the information.
Wednesday, March 7, 2012: Preparing for the Heightened Scrutiny of CUSOs featuring Katherine Weber of The Weber Law Firm.
Thursday, March 15, 2012: Powers of Attorney and Subpoenas - The Risks, Abuses and Potential Liabilities of Credit Unions featuring Andy Keeney of Kaufman & Canoles.
The full listing of NAFCU's live and on-demand webcasts can be found here. Additionally, we are always looking for webcast ideas that would be useful to credit unions. If you have ideas or suggestions, please email us at compliance@nafcu.org.
NCUA recently published two legal opinion letters. One discusses a credit union service organization's (CUSO) ability to lease property to credit unions and the members of affiliated credit unions. The letter, NCUA Legal Opinion Letter 11-0642, is very detailed and fact specific so be sure to view the full letter.
"We do not consider IRS treatment of an expense to be determinative of whether a loan qualifies for MBL treatment under NCUA Part 723. Similarly, the fact that an item may be purchased for a non-business purpose is not controlling. For example, a $50,000 loan to purchase an automobile for use as a taxicab or package delivery truck is an MBL and not a personal loan. It is the loan’s actual purpose and amount, absent any applicable exemptions, that determine whether the loan is an MBL.
It is our view the instrument loan provides a means for your professional musician members to purchase a musical instrument for use in their trade as paid musicians. The musical instrument is a tool of the musician’s trade and is acquired for use in a business capacity. Therefore, where a loan to a member for this purpose totals $50,000 or more when aggregated with other such loans to the member, the loan is an MBL and subject to Part 723." (emphasis added).
Michigan Alert: Perhaps not the most scientific poll - but Good Morning America viewers did name Sleeping Bear Dunes on Lake Michigan the "Most Beautiful Place in America."
If you get a chance to visit northern Michigan, you will not be disappointed.
The CFPB now has authority for the consumer laws and regulations. This means they are the agency with authority to interpret Regulation Z; the Fair Credit Reporting Act; the SAFE Act regulations; Regulation B; Regulation E; Truth in Savings regulations and the list goes on.
Unfortunately, this is leaving financial institutions with a lot of uncertainty. Let's use a concrete example - the recent clarifications to the Credit CARD Act - implemented in Regulation Z.
Credit unions below $10 billion in assets will be examined by NCUA.
So, we have one agency finalizing a regulation but authority transfers to a new agency soon after and a third agency examines institutions.
I know the paint isn't even dry on the CFPB - but I guess I was hoping the CFPB would be providing some guidance to the industry. Currently, their webpage is completely consumer focused with three guidance documents (none clarifying existing requirements) tucked on the very bottom of the page.
NAFCU's issued Regulatory Alerts on the CFPB's Disclosure of Records and Information proposal as well as NCUA's Credit Union Service Organization (CUSO) proposal. Both can be found here.
We've also issued our Regulatory Final on NCUA's interim final rule for Remittances under 12 C.F.R. 701.30.
I may have missed the 100 day countdown to the wedding - but I didn't miss the 30 day countdown to college football - specifically Michigan football (YouTube) - yesterday. This doesn't reflect my priorities, however. I will continue to argue it is extremely difficult to track 100 days when months have different number of days.
My brothers and I at the 2006 Michigan-Wisconsin game.
If you are not a Michigan fan - you are still welcome at the Big House. You just might not have as good of seats (and you will be a bit outnumbered).
Proposed CUSO Rule. At last Thursday's Board meeting, NCUA introduced a proposed rule regarding CUSO's. If your credit union works with a CUSO (or CUSOs), this is an issue to follow. The proposed rule would require CUSOs to file financial reports directly with the NCUA and the appropriate state supervisory authority and it would require any CUSO subsidiaries to follow rules and regulations applicable to CUSOs. Additionally, it would implement investment limits for federally-insured state-chartered credit unions that are "less than adequately capitalized." The proposed rule can be found here.
CFPB Reform? The House passed HR 1315, The Consumer Financial Protection Safety And Soundness Improvement Act of 2011, late last Thursday. It would replace the CFPB director with a 5-person commission and allow the Financial Stability Oversight Council to challenge the CFPB with a majority vote rather than the 2/3 vote currently required. The bill would of course have to pass the Senate and be signed by the President. You can find more on this in this NAFCU News item.
Hot Dog. So, the members we've talked to this past week have been asking us just how hot is it in DC? Well, the picture below should give you a good idea (I cannot take credit for the picture - that came to us from our fearless leader Fred Becker, or rather, his better half). Some of you have been experiencing temperatures just as hot, if not hotter, so stay cool everyone.
NCUA LOL. NCUA has issued a legal opinion letter that discusses the CUSO customer base issue. For a credit union to be able to invest in a CUSO, that CUSO must primarily serve credit union members. As NCUA points out in the letter there is no bright line test for this "primarily serves" requirement. The letter notes some of the factors to be considered and expresses NCUA's stance that the requirement is ongoing throughout the credit union's investment.
FRB. Yesterday, the Federal Reserve released two press releases regarding annual dollar amount adjustments. The first is in relation to HOEPA loans (also known as high-cost loans or section 32 loans). The Fed is required on an annual basis to adjust the dollar amount of the fee-based trigger. For 2012 that dollar amount will be $611. As the press release notes, this does not affect higher-priced mortgage loans, which are determined using a different rate-based trigger.
Second, the Federal Reserve has announced the exemption threshold for Regulations M and Z. For 2012, the threshold will be $51,800, meaning that leases/loans at or below $51,800 will be subject to Regs M/Z (note that private education loans and mortgage loans are subject to Reg Z regardless of amount).
Maybe it's all of that compliance training, but our blog readers sure do notice the small details. A couple of weeks ago I quietly changed my name, but it didn't get past you guys. Yes I did get married and I truly thank you all for your well wishes! We were actully married this past October in my home state of Ohio. We took a chance on the weather for an outdoor ceremony and got lucky with a gorgeous sunny weekend. I've had many requests for pictures over the last few months so here we go - I had a hard time picking just a couple to capture the day but here's my best shot.
Each morning, there is a green coating of pollen on my car.
It is very hard to find nasal decongestant at the local pharmacy.
Now, on to the compliance stuff.
A 2009 FDIC financial institution letter that outlines exactly what should be on the ATM.
(d) Exception for damaged notices. If the notice required to be posted pursuant to section 1693b(d)(3)(B)(i) of this title by an automated teller machine operator has been posted by such operator in compliance with such section and the notice is subsequently removed, damaged, or altered by any person other than the operator of the automated teller machine, the operator shall have no liability under this section for failure to comply with section 1693b(d)(3)(B)(i) of this title.
I always forget about that one. Hat tip to Bill, for reminding me of that restriction. Mahalo, Bill.
CUSOs. There's been a good deal of compliance "internet chatter" about NCUA examinations and CUSOs. If your credit union has a CUSO, does that CUSO have its own business plan? Its own BSA risk assessment and anti-money laundering program? Does your credit union's board have a clear picture of the various risks involved with the CUSO's activities? These questions appear to be popping up during exams. To be honest, the questions don't appear to be all that unreasonable.
Editor's Note: NAFCU follows the Federal Government's operating schedule. Due to an ice storm, Los Federales are under a "2 hours delay." NAFCU will do the same, opening at 11 a.m. (EST) today.
Many credit unions are rethinking how they do their business and who they do their business with. Many credit unions have found out that a credit union service organization, or CUSO, might be just the thing. CUSOs can be a great way to better serve a credit union's membership, either as a business partner or the credit union's affiliate.
The credit union and CUSO must be held out to the public as a separate enterprise.
The federal credit union may not dominate the CUSO to the extent that the CUSO is no more than a department of the credit union.
In addition, before a credit union may invest in a CUSO, the federal credit union must obtain written legal advice as to whether the CUSO is structured in a way that preserves legal separateness.
The section isn't that long, so if your credit union is interested in establishing or investing in a CUSO, it is well worth a read.
Not too long ago, I shared my general outlook for 2011. That post dealt more with general trends. But we do expect some specific things. Regarding NCUA, look out for the following in 2011.
Regulations on interest rate and concentration risks. If you've been keeping up with the Material Loss Reviews issued by NCUA's Office of Inspector General, you already know that concentration risk has played a huge role in credit union failures. And that risk affects more than just credit unions. I was at a meeting recently where an OTS and OCC official both agreed that concentration risks played a role in every major bank failure as well.
Member business lending. Rather than a major overhaul, look for NCUA to incorporate guidance documents into the regulation.
CUSOs. NCUA will ramp up its focus on CUSOs, and they may seek examination authority.
Examinations. NCUA will overhaul its examiner's manual. This is one process to track closely. In my view, the examiner's manual is a massive guidance document that can affect your operations and NCUA examinations. For that reason, it is very important to see how they change it.
This and That. NCUA may also overhaul its investment rule (Part 703) and it may direct examiners to review new credit union products/services at each exam.
Keep in mind that we can't say for certain that NCUA will act on any one of these issues. But based on our conversations with NCUA officials, these are some of the areas of interest. Stay tuned!
Earlier this week, the Federal Reserve issued a proposed rule designed to (in my own words) shut down a few loopholes found within Regulation Z's rules for credit cards. The rule does three main things.
If you waive interest charges, such a practice is deemed to be a promotion and will need to follow promotion requirements. Some credit card issuers were planning to manage credit risk by charging a member, for example, a 16 percent APR. But as long as the member would pay on time, the issuer would waive 3 percent of the APR. So, the member would have, in effect, a 13 percent APR credit card. If the member slips up, the issuer would revoke the benefit. This proposal says that such a practice is a promotion, so you have to give them a firm time, not less than six months, for how long the "interest waiver" will be in place, and what the rate will be after that. You won't be able to end promotions simply because a card holder makes one late payment, for example. In addition, the proposal clarifies that existing balances earned under a waiver promotional program are protected at the lower balance, unless the borrower becomes more than 60 days delinquent.
Under the proposal, application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same limitations as fees charged during the first year after the account is opened. The Fed gives a good example: "Because the total amount of these fees cannot exceed 25 percent of the account's initial credit limit, a card issuer that, for example, charges a $75 fee to apply for a credit card with a $400 credit limit generally would not be permitted to charge more than $25 in additional fees during the first year after account opening." I don't think that this is necessarily bad for credit unions. This clarification makes it much harder for credit card "sharks" to offer these fee-heavy credit cards. That makes our credit cards more attractive.
Finally, if the proposal goes final in its current form, when you evaluate a consumer's ability to make the required payments before opening a new credit card account or increase the credit limit on an existing account, you'll have to consider information regarding the member's independent, individual income, rather than his or her household income. That shouldn't be a big deal, but it could trigger a change to your policy and procedures.
This is a proposal, so these proposals may be tweaked when the Fed issues a final rule.
While the proposal tackles the three main issues noted above, it addresses quite a few other issues as well. It clarifies what would be considered a credit card and charge card, and it addresses employee preferential rates. If your shop offers credit cards, you'll need to work through the whole rule. NAFCU is preparing a Regulatory Alert on the Fed's proposal, so stay tuned.
NCUA holds its NCUA Board Meeting today. They're addressing their RegFlex regulation and its Merger Partner Registry, among other things. The draft board items will be available this morning here.
The Fed's Outlook Live seminar series will be offering a free webinar on HMDA and CRA reporting, to be held November 17th. Hopefully, they'll hit the HMDA stuff first.
NCUA has issued Legal Opinion Letter 10-0856 to clarify that, for purposes of NCUA's rules and regulations, a CUSO may serve as a loan broker for loans used to finance the purchase of New York City tax cab medallions. NCUA stresses, though, that other laws and regulations may apply.
Last week, NCUA issued Legal Opinion Letter 08-0302 (May 1, 2008). You may access it here. In the guidance, NCUA clarified how a CUSO may provide the "direct experience" needed under NCUA's member business lending regulation and further discussed "conflict of interest issues" surrounding member business lending.
In the legal opinion letter, NCUA clarified that a credit union may use the services of a CUSO to satisfy the direct experience even though the CUSO may not be independent of the transaction. That being said, NCUA appeared to find issues with a specific fee arrangement between a credit union and its CUSO.
As always, I recommend that you read the letter in its entirety, especially if your credit union does member business lending.
The Official Advertising Statement. NCUA is looking at proposed changes to Part 740 of its rules and regs. From our sources, the change doesn't sound major, but it might affect credit union advertising.
NCUA is looking at proposed changes to Parts 712 and 741, which will affect credit unions with CUSOs.
NCUA will also look at proposed changes to Parts 701 and 705 of its rules and regs to clarify the definition of "low-income."
There are other minor items on the agenda, which you can access here.
As I noted last week, NAFCU recently held its annual Regulatory Compliance School in Alexandria, Virginia. 123 attended. 76 sat for exams. Hats off to them all! Here are a few photos from the event.
NCUA reviews all regulations every three years to “update, clarify and simplify existing regulations and eliminate redundant or unnecessary provisions,” in compliance with IRPS 87-2, Developing and Reviewing Government Regulations. The Office of General Counsel reviews one-third of the regulations each year, identifying those we think should be amended.
Those are fairly meaty regulations. Stay tuned.
The First Annual NAFCU Compliance Blog Holiday Decoration Contest winner is "Blue Christmas." First of all, you have to appreciate people that decorate themselves. Also, how can you argue against the King? For all of you who participated, thank you. Thank you very much.
For those who are calling me today, here's a good barometer of my mood: the score of Saturday's Steelers-Jags game. Hint: I'm a Steelers fan.


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A. This data privacy statement informs you about the nature, scope, and purpose of the processing of personal data within our online presence and the websites, functions, and contents connected with it (hereinafter jointly referred to as "online presence" or "website"). The data privacy statement applies regardless of the used domains, systems, platforms, and devices (e.g., desktop or mobile) on which the online presence is presented.
B. For the terms used such as "personal data" or their "processing" we refer to the definitions in Art. 4 General Data Protection Regulation (GDPR).
The terms used such as "user" are to be understood as gender-neutral.
E. We process personal user data only in accordance with the relevant data protection provisions. This means that the user data are only processed if this is permitted by law. That is, in particular, if data processing is necessary to perform our contractual services (e.g., processing of orders) or online services or is required by law, the user consented to it, and due to our legitimate interests (i.e., interest in the analysis, optimisation, and economic operation and security of our online presence within the meaning of Art. 6 para. 1 lit. f. GDPR, especially in the case of reach measurement, the creation of profiles for advertising and marketing purposes, as well as the collection of access data and the use of third-party services).
F. We point out that the legal basis of the consents is Art. 6 para. 1 lit. a. and Art. 7 GDPR, the legal basis for the processing to perform our services and to implement contractual measures is Art. 6 para. 1 lit. b. GDPR, the legal basis for the processing to comply with our legal obligations is Art. 6 para. 1 lit. c. GDPR, and the legal basis for the processing to safeguard our legitimate interests is Art. 6 para. 1 lit. f. GDPR.
A. in accordance with Art. 15 GDPR to obtain access to your personal data processed by us. In particular, you may request information about the purposes of the processing, the category of the personal data, the categories of recipients to whom your data have been or will be disclosed, the planned storage period, the existence of the right to request rectification, erasure, restriction of processing or to object, the existence of the right to lodge a complaint, the source of your data provided they have not been obtained from us, and the existence of automated decision-making, including profiling and meaningful information about the particulars if applicable.
B. in accordance with Art. 16 GDPR to obtain without undue delay the rectification of inaccurate personal data or completion of incomplete personal data stored by us.
C. in accordance with Art. 17 GDPR to obtain the erasure of your personal data stored by us, provided the processing is not necessary for exercising the right of freedom of expression and information, for compliance with a legal obligation, for reasons of public interest, or for the establishment, exercise, or defence of legal claims.
D. in accordance with Art. 18 GDPR to request restriction of the processing of your personal data if you contest the accuracy of the data, the processing is unlawful but you oppose their erasure and we do not require the data any longer but you require them for the establishment, exercise, or defence of legal claims or you have objected to processing in accordance with Art. 21 GDPR.
E. in accordance with Art. 20 GDPR to receive the personal data that you have provided to us in a structured, commonly used, and machine-readable format or to request transmission to another controller.
F. in accordance with Art. 7 para. 3 GDPR to withdraw your consent given to us at any time. As a result, we must not continue the data processing based on this consent in the future. G. in accordance with Art. 77 GDPR to lodge a complaint with a supervisory authority. Usually, you may approach the supervisory authority at your habitual residence or place of work or law office for this.
If your personal data are processed on the basis of legitimate interests in accordance with Art. 6 para. 1 s. 1 lit. f. GDPR, you have the right to object to the processing of your personal data pursuant to Art. 21 GDPR on grounds relating to your particular situation or to the extent that it is related to direct marketing. In the latter case, you have a general right to object, which we will implement without you having to state a particular situation.
A. We take organisational, contractual, and technical security measures taking into account the state of the art to ensure that the data protection provisions are adhered to and to thus protect the data processed by us against accidental or intentional manipulation, loss, destruction, or access by unauthorised persons.
B. The security measures include, in particular, the encrypted transmission of data between your browser and our server.
A. Data are transferred to third parties only in accordance with the statutory provisions. We only transfer user data to third parties if this is necessary, for example, on the basis of Art. 6 para. 1 lit. b. GDPR for contractual purposes or on the basis of legitimate interests pursuant to Art. 6 para. 1 lit. f. GDPR in the economic and effective operation of our business.
B. If we use subcontractors to provide our services, we take suitable legal precautions as well as corresponding technical and organisational measures to ensure protection of the personal data in accordance with the relevant statutory regulations.
C. If any contents, tools, or other means by other suppliers (hereinafter jointly referred to as "third-party suppliers") are used within the scope of this data privacy statement and their office referred to is located in a third country, it is to be assumed that data transfer to the third countries of the third-party suppliers takes place. To be understood as third countries are countries in which the GDPR is no directly applicable law, i.e., basically countries outside the EU or the European Economic Area. Data are transferred to third countries if either an adequate level of data protection exists, the users consented to it or this is permitted by any other law.
A. We process master data (e.g., names and addresses as well as contact data of users), contract data (e.g., services used, names of contact persons, payment information) to fulfil our contractual obligations and render our services in accordance with Art. 6 para. 1 lit b. GDPR.
A. When contacting us (via the contact form or by e-mail), the user's data are processed in order to process and handle the contact inquiry in accordance with Art. 6 Abs. 1 lit. b. GDPR.
B. The users' data can be stored in our Customer Relationship Management System ("CRM System") or in a comparable inquiries organisation.
A. On the basis of our legitimate interests within the meaning of Art. 6 para. 1 lit. f. GDPR, we collect data relating to every access to the server on which this service is located (so-called server log files). The access data include the name of the called website, file, date and time of the call, transferred amount of data, report on successful retrieval, browser type incl. the version, the user's operating system, referral URL (previously visited page), IP address, and accessing provider.
B. Log file information is stored for 14 days maximum for security reasons (e.g., to investigate acts of abuse or fraud) and then erased. Data the further storage of which is necessary for evidence purposes are excluded from erasure until final clarification of the respective incident.
A. Cookies are information that is transferred by our web server or third-party web servers to the users' web browsers and stored there for later retrieval. Cookies can be small files or other kinds of information storage.
B. We use "session cookies", which are created on our online presence for the duration of the current visit only (e.g., to allow storage of your login status or the shopping cart function and thus the use of our online presence in the first place). In a session cookie, a randomly generated unique identification number is stored, a so-called session ID. Moreover, a cookie contains information on its source and the storage period. These cookies cannot store any other data. Session cookies are deleted once you have ended using our online presence and, for example, logged off or closed the browser.
D. If the users do not want any cookies be stored on their computers, they are asked to deactivate the corresponding option in the system settings of their browser. Stored cookies can be deleted in the system settings of the browser. If cookies are deactivated, this might lead to function restrictions of this online presence.
B. Google is certified under the Privacy Shield agreement and thus guarantees compliance with the European data privacy laws (https://www.privacyshield.gov/participant?id=a2zt000000001L5AAI&status=Active).
C. Google will use this information on our account to analyse the use of our online presence by the users, to prepare reports on the activities within this online presence and to render to us further services connected with the use of this online presence and the Internet. In doing so, pseudonymous usage profiles of the users can be generated from the processed data.
D. We use Google Analytics with activated IP anonymisation only. This means that the users' IP addresses are truncated by Google within EU member states or other EEA states. Only in exceptional cases will the full IP address be transmitted to a Google server in the USA and truncated there.
E. The IP address transmitted by the user's browser will not be associated with any other data held by Google. Users can prevent the storage of cookies by making corresponding settings in their browser software; moreover, users can prevent the transmission to and processing by Google of these data generated by the cookie and referring to their use of the online presence by downloading and installing the browser plug-in available at the following link: https://tools.google.com/dlpage/gaoptout?hl=en-GB.
F. Further information on how Google uses data, setting and objection options is available at Google's websites: https://policies.google.com/technologies/partner-sites?hl=en-GB ("How Google uses information from sites or apps that use our services"), https://policies.google.com/technologies/ads?hl=en-GB ("Advertising"), http://www.google.com/settings/ads ("Control the information Google uses to show you ads").
A. With the following notes we inform you about the contents of our newsletter and the subscription, dispatch, and statistical evaluation procedures as well as your right to object. By subscribing our newsletter, you agree with the receipt and the described procedures.
B. Content of the newsletter: We send newsletters, e-mails, and other electronic notifications with advertising information (hereinafter referred to as "newsletter") with the recipients' consent or with legal permission only. If the contents of the newsletter are concretely described within the scope of its subscription, they are relevant to the users' consent. Other than that, our newsletters contain information on our products, offers, campaigns, and our company.
C. Double opt-in and logging: Subscription of our newsletter takes place with a so-called double opt-in procedure. That is, after subscription you will receive an e-mail in which you are asked to confirm your subscription. This confirmation is required to make sure that nobody can subscribe with someone else's e-mail address. Subscriptions of the newsletter are logged in order to be able to prove the subscription process pursuant to the legal requirements. This includes storage of the time of subscription and confirmation as well as the IP address. Any changes of your data stored with the dispatch service provider will be stored, too.
D. Furthermore, according to own information, the dispatch service provider may use these data in a pseudonymous form, i.e., without allocation to a user, to optimise or improve its own services, e.g., for technical optimisation of the dispatch and representation of the newsletter or for statistical purposes, to determine from which countries the recipients are. However, the dispatch service provider does not use the data of our newsletter recipients to write to them itself or to transfer them to third parties.
E. Subscription data: To subscribe our newsletter, it is sufficient that you state your e-mail address. We optionally ask you to state a name so we can address you personally in the newsletter.
F. Statistical survey and analyses - The newsletters contain a so-called web beacon, i.e., a pixel-sized file that is retrieved from the dispatch service provider's server when the newsletter is opened. Within this retrieval, technical information is collected first of all, e.g., on the browser and your system, as well as your IP address and the time of retrieval. This information is used for technical improvement of the services by means of the technical data or the target groups and their reading behaviour by means of their retrieval locations (which can be determined by means of the IP address) or the access times. Statistical surveys also include the determination whether the newsletters are opened, when they are opened and which links are clicked.
This information can, indeed, be allocated to the individual newsletter recipients for technical reasons. However, we do not aim to monitor individual users and neither does our dispatch service provider. The evaluations rather serve to recognise our users' reading habits and adapt our contents to that or to send different contents corresponding to our users' interests.
G. The deployment of the dispatch service provider, implementation of statistical surveys and analyses as well as logging of the subscription procedure take place on the basis of our legitimate interests in accordance with Art. 6 para. 1 lit. f. GDPR. Our interest is aimed at the application of a user-friendly and secure newsletter system, which serves our commercial interests and meets our users' expectations.
H. Unsubscription/revocation - You may unsubscribe our newsletter, i.e., revoke your consents, at any time. Thus, your consents to its dispatch through the dispatch service provider and the statistical analyses are revoked as well. Separate revocation of the dispatch through the dispatch service provider or the statistical evaluation is unfortunately impossible. A link for unsubscribing the newsletter can be found at the end of every newsletter. If users only subscribed the newsletter and have unsubscribed it again, their personal data will be erased.
A. The data stored with us will be erased as soon as they are no longer required for their purpose and the erasure does not oppose to any legal obligation to retain data. If the users' data are not erased because they are required for other and legal purposes, their processing will be restricted. That is, the data will be made unavailable and not processed for other purposes. This applies, e.g., for user data that have to be retained on grounds of commercial or tax law.
B. In accordance with statutory provisions, data have to be retained for 6 years pursuant to Section 257 Subsection 1 HGB (German Commercial Code – account books, inventories, opening balances, annual financial statements, commercial letters, accounting records, etc.) and for 10 years pursuant to Section 147 Subsection 1 AO (German Fiscal Code – accounts, records, management reports, accounting records, commercial and business letters, documents relevant to taxation, etc.).
A. We reserve the right to change the data privacy statement in order to adapt it to changed legal situations or if the service or data processing is changed. However, this only applies with regard to statements relating to data processing. If consents by the users are required or parts of the data privacy statement contain regulations of the contractual relationship with the users, changes will only be implemented with the users' consent.
B. The users are kindly asked to inform themselves regularly about the content of the data privacy statement.

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EDiscovery services provider CloudNine is offering a free webinar on Wednesday, May 30, 2018 at 1 pm ET called “EDiscovery for the Rest of Us,” which will cover such topics as the effect of automation on eDiscovery, challenges from various sources of ESI data, ethical duties and rules for managing eDiscovery, getting data through the process efficiently and key components for an eDiscovery solution. Register here.
EDiscovery provider Catalyst has outlined four areas to enable practitioners to reduce legal hold and collection expenditures. The article addresses cost savings with in-person custodian interviews, third party data collection fees, vendor processing fees and software licenses.
The first focus should be on the software’s ability to accomplish required tasks, after which it is reasonable to consider its integration and automation.
A combination of software solutions may be required to accomplish complex task requirements satisfactorily and may include both on-premise and off-premise offerings.
A general clawback agreement does not necessarily prevent waiver of the attorney-client privilege, according to the U.S. District Court for the Southern District of Ohio and as discussed in this ABA article in its Litigation News publication by Candice Garcia-Rodrigo, a contributing editor. The article discusses the case and makes the point that clawback agreements need to be carefully and specifically drafted to address the specific elements of Rule 502(b).
The Association of EDiscovery Specialists (ACEDS) is hosting a free webinar on “Preventing Wasted Costs in eDiscovery” on Tuesday, May 22, 2018 at 1 pm ET. Speakers are Brian Schrader, President & CEO, and Barry Schwartz, VP of Advisory Services, both of BIA. Register here.
This article by Ralph Losey on his eDiscovery blog posits that project cost estimation is key to opposing ESI discovery as disproportionately burdensome under Rule 26(b)(1). Losey uses Mann v. City of Chicago, no. 15-9197 (N.D. Ill. 2017), a highly visible civil rights case in which the City did not attempt to estimate the costs of the review it opposed, to illustrate his points.
This blog post by eDiscovery expert Bill Dimm discusses his challenge to an audience to create keyword searches that would work better than TAR for two topics. One half of the room was tasked with finding articles about biology and the other half searched for articles about current law. Read his blog post to learn the results.
In Exxon Mobil Corp. v. Attorney General, the Massachusetts Supreme Court rejected Exxon’s claim that the CID was overbroad and unduly burdensome and affirmed the order granting the Attorney General’s cross motion to compel Exxon’s compliance with the CID. Assistant Attorney General Richard Johnston represented the Attorney General.
In Document Technologies, Inc. v. LDiscovery, LLC, a lawsuit filed between eDiscovery providers in which plaintiffs alleged breach of contract, interference with client relationships and misappropriation of trade secrets, the Second Circuit affirmed a district court ruling, finding there was no basis to infer that the defendant engaged in any wrongdoing.
In Cen Com, Inc. v. Numerex Corp., the U.S. District Court for the Western District of Washington found plaintiff’s refusal to comply with defendant’s request for discovery using specific search terms was not justified, and ordered plaintiff to fully comply with the subpoenas served by defendant and produce all responsive documents.
In BankDirect Capital Finance, LLC v. Capital Premium Financing, Inc., a magistrate of the U.S. District Court for the Northern District of Illinois recommended that the court allow the evidence to be presented to the jury to enable it to determine the impact, if any, the non-production of challenged emails has on the merits of the parties’ claims. If the court was not inclined to go to the jury, then the magistrate recommended a permissive spoliation instruction be given to the jury about the destruction of the emails, advising them that they could consider the deletion of the emails to be evidence in considering claims and counter-claims.
In Davis v. Electronic Arts Inc., the U.S. District Court for the Northern District of California ruled that the plaintiff’s failure to fully comply with defendant’s discovery requests were sanctionable under Rule 37, finding a monetary sanction of $25,000 was justified in addition to evidentiary sanctions.

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Workers' compensation — Slip and fall injury in parking lot while leaving work — Special hazard rule — Forces of nature must be combined with a defect or condition already present.
O.Jur 2d Workmen's Compensation §§ 61, 65.
In determining whether a claimant is entitled to participate in the Workers' Compensation Fund because of an injury she sustained when she slipped on a patch of ice in a parking lot as she was leaving work, the issue to be determined is whether the risk encountered by the claimant was distinctive in nature or quantitatively greater than the risk common to the public and whether a defect or condition combined with the forces of nature to create the hazard in the parking lot.
APPEAL: Court of Appeals for Cuyahoga County.
Harold Ticktin and Sam Handelman, for appellant.
Joel A. Makee and Walter C. Kelley, for appellee Case Western Reserve University.
Anthony J. Celebrezze, Jr., attorney general, and Mitchell A. Stern, for appellee Industrial Commission.
Alice M. Sloss seeks reversal of the summary judgment granted for defendants-appellees Case Western Reserve University (hereafter "University") and the Industrial Commission of Ohio (hereafter "commission"). The judgment had the effect of denying her workers' compensation for injuries she suffered in a fall in a parking lot as she left her job at the university.
For the reasons given below, the judgment of the trial court is reversed and remanded.
Appellant left work at the medical school of the university at about 5:00 p.m. on February 4, 1982. The school is located on Adelbert Road. She walked several blocks to reach her car parked in Lot No. 23 at Mayfield Road and Circle Drive.
The parking lot is owned and operated by University Circle, Inc. (hereafter "UCI"), a non-profit corporate entity of which the university is a founding and participating member. The members sit on the board which determines policy and are committed to making up any UCI deficits, including mortgage indebtedness, that may occur. UCI provides parking and other services to the university and other member institutions in the University Circle area.
As an employee of the university, Sloss was given a choice by the university of a number of parking lots with varying rates that are set by UCI. She selected Lot No. 23 in which she has parked since 1967. She pays for parking through a deduction from her pay check from the university. In turn, the university forwards parking fees it has collected to UCI.
Climatological data from the National Climatic Center of the National Oceanic and Atmospheric Administration, submitted with plaintiff's motion for summary judgment, shows that at 7:00 a.m. on the day of the fall there were six inches of snow on the ground, although only two inches had fallen on the previous three days, 1.8 of those inches on the day before the fall; only a trace of precipitation fell during the day; the temperature that day ranged between twelve and twenty-three degrees Fahrenheit, with an average for the day of eighteen degrees; and the sun shone for three hundred twenty-five minutes or for fifty-three percent of the total time that sunshine was possible.
Appellant's claim for workers' compensation was either denied or refused at all levels before the Industrial Commission of Ohio. She appealed to the court of common pleas.
The court denied appellant's motion for summary judgment and granted appellees' cross-motions for summary judgment.
"1. The risk that Ms. Sloss encountered was neither distinctive in nature nor quantitatively greater than the risk common to the public.
"2. The lot is not owned, controlled, or supervised by defendant university. Rather, the lot is owned and operated by University Circle, Inc., an entity which provides parking and other services to over thirty organizations in the University Circle area.
"3. The parking lot is several blocks away from the building in which Sloss works. Therefore, the argument cannot be made by Sloss that the parking lot where she was injured was the sole means of ingress and egress to her place of employment.
"4. Sloss was injured while leaving work on February 4, 1982. Thus, she was injured after her time of employment, while presumably on her way to a destination totally unconnected with her employment."
In appealing the trial court's judgment, appellant assigns three errors.
"I. The trial court erred in ruling that plaintiff Alice Sloss, was not injured in the course of her employment on a parking lot operated on behalf of her employer, because the lot on which she was injured was not the sole means of ingress and egress to her place of employment and because her injury occurred after leaving her immediate place of employment on February 4, 1982. Otherwise stated the trial court erred in ruling that plaintiff Alice Sloss', admitted injury did not occur in the `zone' of her employment."
Appellant takes issue with the trial court's ruling that her injury did not occur in the "zone" of her employment. Critical to the analysis that led the court to its ruling is its determination that the parking lot is not owned, controlled, or supervised by the university, that the parking lot was several blocks away, that the parking lot was not the sole means of ingress and egress to her place of employment, and that appellant was injured while leaving work.
Neither ownership nor control is necessary to bring a parking lot within the zone of employment. We concluded fourteen years ago that it would be impractical and illogical in a workers' compensation case to apply a principle requiring that there be actual ownership and control of a parking lot in a shopping center consisting of multiple independent businesses. Frishkorn v. Flowers (1971), 26 Ohio App.2d 165, 167 [55 O.O.2d 310].
It would be equally impractical and illogical to apply the outmoded control-ownership requirement where, as here, the university participates as described above in a multiple member organization (a non-profit corporate entity) which provides parking for university employees and where that university member gave its employees a choice of lots and collected parking fees through payroll deductions. Even public streets and sidewalks — clearly neither owned nor controlled by any private employer — have been found to be within the zone of employment. Littlefield v. Pillsbury Co. (1983), 6 Ohio St.3d 389; Croft v. Krause (Aug. 9, 1979), Cuyahoga App. No. 38733, unreported, affirmed (Apr. 30, 1980), No. 79-1376, on authority of Baughman v. Eaton Corp. (1980), 62 Ohio St.2d 62 [16 O.O.3d 45].
"* * * The point appears to be illogical. If an employer provides two accesses and the employee has his choice, an injury on either may not be compensable because the other was available for use."
We reject that view as did that court. Equally illogical is the contention that to be compensable an injury must occur at or immediately adjacent to the place of employment. Had appellant selected another parking lot from the choice offered by the university and one that was adjacent to the medical school, would her injury be any more compensable under the circumstances of this case? We do not believe that the proximity of the parking lot to the medical school is a relevant consideration in this instance. The appellees cite Littlefield, supra, Indus. Comm. v. Henry (1932), 124 Ohio St. 616, and Bralley v. Daugherty (1980), 61 Ohio St.2d 302 [15 O.O.3d 359], for their contention that the parking lot was too far away to be in the zone of employment. However, those cases involve injuries in automobiles on roadways, not a parking lot in which the employer had a membership interest.
Nor is it any more relevant that appellant was leaving work rather than arriving there. In Kasari v. Indus. Comm. (1932), 125 Ohio St. 410, the Supreme Court approvingly cited Erie RR. Co. v. Winfield (1917), 244 U.S. 170, to the effect that an employee leaving his employment at the end of a day's work is discharging a duty of his employment as "a necessary incident to his day's work." See Croft v. Krause, supra. The early rule which barred compensation for injuries sustained by workers on their way to work or while leaving work is no longer strictly applied so long as the employee is within the zone of employment. Littlefield, supra.
Accordingly, we find the first assignment of error has merit.
"III. The court below erred in granting summary judgment to defendant because there was an issue of fact in dispute, the proof for which redounded entirely in plaintiff's favor."
"1. An employee will be entitled to workers' compensation benefits when the employment creates a special hazard and the injuries are sustained because of that hazard.
"2. The special hazard rule applies where: (1) `but for' the employment, the employee would not have been at the location where the injury occurred, and (2) the risk is distinctive in nature or quantitatively greater than the risk common to the public."
Littlefield involved an injury to an employee whose automobile was struck as it waited on a public road to turn left into the employer's property. The employee was returning from a lunch break. It was found the injury occurred in the course of and arose out of the injured employee's employment.
The test for participation in the Workers' Compensation Fund is whether a causal connection exists between an employee's injury and his employment, either through the activities, conditions or the environment of the employment. Id. at 391.
"Young's treatise on Ohio workers' compensation law states that `the theme of the decisions which have considered the geography aspects of course of employment are uniform in noting that the environment of the employment may extend out beyond the premises of the employer and that the additional territory is described as being within the zone of employment. Environment means the capability of producing injury and it is usually described as the existence of hazards that are peculiar to the employment as contrasted with hazards that are likely to exist anywhere and bear no relationship to the employment.' Young, Workmen's Compensation Law of Ohio (2 Ed. 1971) 83, Section 5.7." Id. at 393.
The Littlefield court adopted the special hazards rule to allow compensation for injuries occurring off the work premises, before or after work, if the injury occurs because of a hazard created by employment.
As quoted above, the special hazard rule is to apply if but for the employment the employee would not have been at the location where the injury occurred and if the risk encountered is distinctive in nature or quantitatively greater than risks common to the public.
In applying the test in Littlefield, the court concluded that but for his employment the injured employee would not have been making a left turn into the plant. And although the risk attendant to the busy road was a risk common to the general public, the risk of the injured worker was "`quantitatively greater' than that to which other motorists occasionally driving down the road are subjected." Id. at 394.
"* * * The regular exposure to the common risk plus the risk of making a left turn creates a greater degree of risk and sustains the causal relationship between the employment and the accident resulting from the risk." Id. at 394.
Applying the same rationale to this case, we conclude that but for her employment, appellant would not have been in the parking lot where the injury occurred.
While turning our attention to the second prong of the Supreme Court's special hazard rule, we also must consider the special rules which have been applied where the forces of nature are involved, as here.
Both appellant and appellees refer us to Walborn v. General Fireproofing Co. (1947), 147 Ohio St. 507 [34 O.O. 413]. It dealt with an employee who fell on ice in his employer's parking lot, collected insurance benefits based on his claim that his injury was not work-related and then tried to qualify for workers' compensation on the ground that his injury was work-related. The court concluded that the ice and snow which resulted from a general storm the preceding day and night produced a hazard which was not different from that experienced in the whole city. Thus, the Walborn court said, the injury was not suffered in the course of and did not arise out of the employment.
Commenting on the Walborn case, the Supreme Court suggested that in view of later cases, "it may be that Walborn rests upon a ground no more secure than that which caused the claimant's unfortunate injury in that case." Marlow, supra at 24. Since 1947 when Walborn was decided, it has been distinguished by its reference to the storm that prevailed generally in the community the day and night before Walborn's fall and factors that combined with weather conditions.
Appellant and appellees agree that the rule now applied generally where the forces of nature are implicated is that those forces must be combined with a defect or condition already present. In Marlow, supra, at 24, the Supreme Court noted "that a heavy snow is no more a hazard of the zone of employment than a tornado * * * unless the act of nature operates `upon the property and the facilities of the industry, and the injury results from the fact that the hazards of the employment are made active by the forces of nature.'" An example cited by the court was Barrett Division v. Owens (1960), 110 Ohio App. 316 [13 O.O.2d 84], where compensation was granted to an employee who slipped on a layer of snow-covered ice in a depression in the sidewalk leading to a parking lot. In Roberts v. Inland Div., General Motors Corp. (Aug. 17, 1983), Montgomery App. No. 7871, unreported, the court, in reversing a summary judgment in a case in which an employee fell on ice in a parking lot, concluded that depressions which had to exist for liquid to collect and freeze constituted physical deformities in the zone of employment and were thus hazards of the employment.
Here, the case was submitted to the court on the pleadings, cross-motions for summary judgment, answers to interrogatories posed to the university by appellant, affidavits from appellant and university Vice President Arthur P. Leary, the official weather report and a map of the area of the fall.
Appellant contends there was no evidence of a general storm. The weather data indicates that there were six inches of snow on the ground the morning of the fall and that two of those inches had fallen over three prior days. Only trace precipitation was recorded the day of the accident. But the temperatures were twelve to twenty-three degrees Fahrenheit. The parties contest whether the weather caused a general hazard of ice prevalent in the city on the day of the accident. Appellant averred that as she walked to her car no snow or sleet was falling, no ice or storm was occurring and that the streets and surrounding area had been cleaned and were reasonably clear of snow. She said she fell on an invisible patch of "black ice" that was approximately four by five feet in size. The parking lot, she averred, had been cleared of snow which had been pushed to the sides of the lot.
On the other hand, the university contends there was no difference between the ice conditions on Lot No. 23 and the conditions in the general area. The appellant and appellees differ in their averments as to which UCI members had access to Lot No. 23. Further, the university's affidavit does not address the question of whether the general public was permitted to park in Lot No. 23, although its response to an interrogatory suggests visitors had access to UCI lots. The university asserts that there was nothing unique or distinctive about the patch of ice upon which appellant fell. But appellant's affidavit implies that there were individual differences between the iced area of the parking lot and the rest of the community, and that, therefore, by inference a condition peculiar to the area caused the ice to form where it did in Lot No. 23.
Summary judgment is a procedural device used to terminate litigation where there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Civ. R. 56 provides that summary judgment shall not be rendered unless it appears from the pleading, depositions, answers to interrogatories, written admissions, affidavits, etc., that reasonable minds can come to but one conclusion and that conclusion is adverse to the party against whom the motion for summary judgment is made. "The moving party carries the burden of proving that no genuine issue of fact exists, and all reasonable inferences shall be resolved in favor of the opposing party." Dupler v. Mansfield Journal (1980), 64 Ohio St.2d 116, 120 [18 O.O.3d 354].
Construing the evidence and reasonable inferences in favor of the non-moving party, we conclude there is a genuine issue of material fact as to the second prong of the Littlefield test and the forces-of-nature test: Whether the risk encountered by appellant was distinctive in nature or quantitatively greater than the risk common to the public and whether a defect or condition combined with the forces of nature to create the hazard in Lot No. 23.
We reverse and remand for further proceedings consistent with this opinion.
CORRIGAN, C.J., and PATTON, J., concur.

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Plaintiff Design Basics, LLC (DB), creates, markets, and licenses architectural plans for single-family homes. (Doc. 58 at ¶1). It contends that defendants - Forrester Wehrle Homes, Inc.; Wehrle Development, Ltd.; and their principals Jeffrey, Richard, and Joseph Wehrle (collectively, FWH) - infringed DB's copyrights in twenty-three architectural plans. (Id. at ¶¶35-36). The defendants allegedly did so by copying DB's plans, marketing the copied plans, creating unauthorized derivative works, and using DB's plans to build homes. (Id. at ¶¶44-59).
Pending are, inter alia, the defendants' motions for summary judgment on the issue of substantial similarity (Doc. 82) and to exclude the declaration of Carl Cuozzo. (Doc. 97). Because FWH has not shown that no reasonable jury could find that its designs are substantially similar to DB's works at the protected level of expression, I deny the motion for summary judgment. I also deny the motion to strike.
DB is an architectural-design firm based in Omaha, Nebraska. (Doc. 58 at ¶¶1, 10). Since the 1980s, DB has “marketed its original custom and ready-made home plans for single and multi-family homes through plan catalogs, home building industry publications . . . client-specific publications, and the internet.” (Doc. 83-1 at 2). DB holds copyrights in roughly 2, 000 home designs. (Doc. 82-1 at 8); see also Design Basics, LLC v. Lexington Homes, Inc., 858 F.3d 1093, 1096 (7th Cir. 2017) (“[DB] and their affiliates claim rights to some 2700 home designs.”).
Characterizing itself as “a leader in the residential home plan industry” (Doc. 83-2 at ¶19), DB observes that, each year between 1998 and 2005, it generated an average of $4 million by licensing its design plans. (Id. at ¶20). After the housing-market collapse of 2008, however, DB's licensing revenues shrank by seventy-five percent. (Id. at ¶¶20). DB's owners started looking for someone to take over the business, and, in 2009, Myles Sherman and Patrick Carmichael purchased DB. (Id. at ¶¶4, 7).
Since the change in ownership, DB has “authored approximately 350 new original architectural works[.]” (Id. at ¶22).
The company also began undertaking copyright litigation in federal courts across the country. Lexington, supra, 858 F.3d 1096-97 (noting Carmichael's testimony that “proceeds from litigation have become a principal revenue stream for [DB]”). Based on a search of the Public Access to Court Electronic Records (PACER) database, it appears that DB has filed at least 103 copyright infringement lawsuits since June, 2009, with the vast majority of the filings coming in or after 2013. As the Seventh Circuit recognized, the flood of litigation is a product of the company's internal and acknowledged “bounty program.” According to Sherman, “[t]heft of DB's readily available copyrighted works is rampant and has been for nearly two decades - since the rise of the internet and the ready availability of its plans.” (Doc. 83-2 at ¶10). Accordingly, DB “offers its employees incentives to scout out potential copyright infringement cases, paying its employees a finder's fee in the form of a percentage of the net recovery relating to any home plans that they located” on the Internet. Lexington, supra, 858 F.3d at 1097.
FWH is a family-run business located in Maumee, Ohio, that builds homes in Northwest Ohio and Southeastern Michigan. (Doc. 81-1 at 4-10; Doc. 87-2 at ¶¶1-2).
The relationship between DB and FWH dates back to 1993, when DB licensed two of its architectural plans - the Ashton and the Albany - to FWH. (Doc. 58 at ¶37). Since then, DB, whether on its own initiative or at the request of FWH, mailed at least fifteen of its catalogs containing additional architectural designs to FWH. (Id.; Doc. 83-3 at ¶29).
In March, 2013, while DB was preparing “marketing efforts” in Ohio, the company “became aware that [FWH] had violated its copyrights in one or more distinct ways.” (Doc. 58 at ¶35). DB acquired this information when its “senior designer, ” Carl Cuozzo, visited FWH's website and concluded that FWH's designs infringed DB's copyrighted plans. (Doc. 83-3 at ¶4).
DB filed this suit in April, 2015, alleging that FWH's designs infringed DB's copyright in fifteen copyright works. (Doc. 1 at ¶26).
In November, 2016, DB filed its second amended complaint. This complaint alleged that twenty-nine of FWH's plans infringed DB's copyright in twenty-three of its own designs. (Doc. 58 at ¶¶35-36). It also alleged that FWH used either DB's plans, or plans FWH made by copying DB's plans, to build more than three hundred homes in Northwest Ohio.
• Count One: Infringement of DB's copyrighted works by “scanning, copying, and/or reproducing unauthorized copies thereof, ” in violation of 17 U.S.C. § 106(1).
• Count Two: Infringement of DB's copyrighted works by “publicly displaying on [FWH's] website(s) and elsewhere, for purposes of advertising and marketing, unauthorized copies or derivatives thereof, ” in violation of 17 U.S.C. § 106(5).
• Count Three: Infringement of DB's copyrighted works by “creating derivatives therefrom in the form of two dimensional plans and fully constructed residences, ” in violation of 17 U.S.C. § 106(2).
• Count Four: Infringement of DB's copyrighted works by “advertising, marketing, and/or selling one or more houses based upon copies or derivatives of said works, ” in violation of 17 U.S.C. § 106(3).
• Counts Five through Eight: Infringement as described in Counts One through Four committed “willfully.” • Count Nine: Violation of the Digital Millennium Copyright Act, 17 U.S.C. § 1202, et seq., by “remov[ing] and omitt[ing] DB's copyright management information from copies of DB's works, ” and distributing copies or derivatives of such works with the knowledge that distributing them without DB's copyright management information would induce and facilitate further infringement of DB's copyrights.
(Doc. 58 at ¶¶45, 47, 49, 51, 53, 55, 57, 59, 61-64).
FWH originally asserted an “independent creation” defense to DB's claims, but it later withdrew the defense “with prejudice” as to all of the allegedly infringing works except FWH's Franklin design. (Doc. 49 at 18-19).
Discovery closed in mid-April, 2017, and, after I denied FWH's belated, eleventh-hour motion to extend fact discovery (Docs. 73, 77), summary-judgment practice got underway in July, 2017. The defendants filed: 1) a motion for partial summary judgment on statute-of-limitations grounds (Doc. 81); 2) a motion for summary judgment on the issue of the substantial similarity of the parties' works (Doc. 82); and 3) the motion to strike Cuozzo's declaration (Doc. 97).
DB filed its own motion for partial summary on the issues of FWH's access to its designs and the validity of DB's copyrights. (Doc. 83). It also filed motions to strike and exclude the reports of defendants' experts John D. Gugliotta and Richard Kraly. (Docs. 84, 89).
By order entered November 14, 2017, I granted in part and denied in part FWH's motion to exclude Kraly's original report and granted in full the motion to exclude Kraly's supplemental report. Design Basics, LLC v. Forrester Wehrle Homes, Inc., 2017 WL 5467152 (N.D. Ohio) (Design Basics I).
In a separate order issued that day, I concluded that the parties' briefs were insufficient to allow me to determine “whether there is a triable issue on the question of the works' substantial similarity.” Design Basics, LLC v. Forrester Wehrle Homes, Inc., 2017 WL 5444569, *1 (N.D. Ohio) (Design Basics II).
[T]he first step requires identifying which aspects of the artist's work, if any, are protectible by copyright; the second involves determining whether the allegedly infringing work is substantially similar to protectible elements of the artist's work. We approve this method and adopt it.
The essence of the first step is to filter out the unoriginal, unprotectible elements - elements that were not independently created by the inventor, and that possess no minimal degree of creativity - through a variety of analyses.
Design Basics II, supra, 2017 WL 5444569 at *2 (quoting Kohus v. Mariol, 328 F.3d 848, 853 (6th Cir. 2003)).
Contrary to DB's representation, the Circuit had applied this two-step filtration test to architectural works specifically in Tiseo Architects, Inc. v. B & B Pools Serv. & Supply Co., 495 F.3d 344, 345 (6th Cir. 2007) (“Because the district court properly analyzed the similarity of the works after filtering out the unprotectable elements of Tiseo Architects' drawings, the judgment of the district court is affirmed.”).
For its part, FWH focused on explaining “why certain constituent elements of DB's plans . . . are not themselves original or copyrightable.” Design Basics II, supra, 2017 WL 5444569 at *3.
I do not understand DB to be claiming a copyright in these kinds of standard features or elements, which the Copyright Act in any event excludes from protection. See 17 U.S.C. § 101. Rather, DB seems to claim copyright protection in the allegedly unique way in which it has arranged these kinds of elements in each of its home designs. Yet the defendants' briefs and supporting materials devote less attention to that question.
Accordingly, I directed the parties to file supplemental briefs on the question whether, “viewing the evidence in the light most favorable to DB, a reasonable jury could find that FWH's design plans are substantially similar to DB's plans at the protected level of expression.” Id. at *3.
More specifically, I ordered FWH to identify “what parts of DB's architectural work - the overall look and feel, the selection, composition, and arrangement of standard or unprotected elements, or other design choices and elements - amount to unprotected expression and to protected expression.” Id. at *5. In doing so, I directed FWH to “support such claims by citing to the record, ” with all citations in compliance with Fed.R.Civ.P. 56(c)(1). Id. As to DB, I ordered it to “identify, with as much specificity as the record permits - and by citing to the record in accordance with Fed.R.Civ.P. 56(c)(1) - what parts of its architectural works amount to protected expression.” Id. at *6.
The plaintiff can prove copying “with either direct evidence of copying, ” or, as DB attempts to do here, “through an inference of copying.” Robert L. Stark Enterprises, Inc. v. Neptune Designs Grp., LLC, 2017 WL 1345195, *5 (N.D. Ohio) (Gaughan, J.).
To generate an inference of copying, the copyright owner must show “(1) access to the allegedly-infringed work by the [infringer] and (2) a substantial similarity between the two works at issue.'” Id. (quoting Kohus, supra, 328 F.3d at 853-54).
Because “[n]ot all copying . . . is copyright infringement, ” Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 348 (1991), the plaintiff must establish that “the defendant's work is ‘substantially similar' to protectible elements of the plaintiff's work, ” Sturdza v. United Arab Emirates, 281 F.3d 1287, 1295 (D.C. Cir. 2002). Thus “the term substantial similarity is properly reserved for similarity that exists between the protected elements of a work and another work.” Zalewski [v. Cicero Builder Dev., Inc., ] 754 F.3d , 101 [(2d Cir. 2014)].
“To determine whether an instance of copying is legally actionable, a side-by-side comparison must be made between the original and the copy to determine whether a layman would view the two works as substantially similar.” Lennar Homes of Tex. Sales & Marketing, Ltd. v. Perry Homes, LLC, 117 F.Supp.3d 913, 933 (S.D. Tex. 2015); see Kohus, supra, 328 F.3d at 857 (“the inquiry in the second prong of the substantial similarity test should focus on the intended audience, ” which “will ordinarily be the lay public”) (internal emphasis omitted).
An architectural work” is “the design of a building as embodied in any tangible medium of expression, including a building, architectural plans, or drawings.” 17 U.S.C. § 101.