A Fair Question: I received the following question recently, and though loaded, I thought it merited some thought:
“I keep hearing that laws and contracts have changed, and that my business is at risk if I don’t do something to deal with it. But, honestly, I don’t know what changes everyone is talking about or why I should be concerned about them. Maybe you can tell me the short version of what they are and why I should care?
James Waite’s Answer: What you heard was correct. Having been in the equipment industry for almost 30 years myself, I can tell you I have never seen as many important changes to the laws applicable to equipment manufacturers, dealers and lessors as I have in the past five years. Adding to that is the fact that judicial interpretations (court rulings) have been changing the landscape considerably, especially since the onset of the Covid-19-generated business crisis.
So, although “short” probably isn’t in the cards (dozens of major changes have impacted equipment industry participants recently), here is a list of my “Top 10 and 10” along with some brief explanations:
1. Arbitration/Class Actions: In 2019, the U.S. Supreme Court ruled that, by including an arbitration clause in a contract, many businesses could avoid “class-action” lawsuits (suits filed by hundreds or thousands of plaintiffs in a single consolidated action seeking one, often enormous, sum, rather than pursuing tiny individual claims). Ultimately, although this won’t be applicable to every business operator (think of those who want to pursue Small Claims Court actions and/or mechanics’ liens), it should prompt many equipment sellers and lessors to include arbitration clauses in their contracts going forward.
2. Damage Waiver and Refueling Claims: One of the most extreme examples of this was the infamous Hertz Damage Waiver suit (“Miguel V. Pro., et al. v. Hertz Equipment Rental Corporation”), in which over 746,000 class action plaintiffs sued Hertz for allegedly mishandling its damage waiver. More recently, another large national rental company reportedly settled a multi-million-dollar class action alleging it overcharged for both refueling and for transportation. Among other things, the suit alleged that the rental operator had “breached its own rental contract” which only allowed it to recover “its own costs” for refueling and transportation, rather than the higher amounts it had been charging. Critically, in both of these cases (each of which cost the defendant rental company millions of dollars), the rental contract could have eliminated the problem but didn’t.
3. Right to Repair Laws: With Executive Order No. 14,036, the Biden Administration effectively expanded equipment owners’ rights to “repair their own equipment how they like” (White House Press Secretary, Jen Psaki, July 6, 2021), generating a flurry of controversy regarding the potential legal, mechanical and technological ramifications of doing so; among them: Does a customer who negligently repairs equipment waive legal claims against a seller or manufacturer if the customer’s repairs create safety issues that ultimately cause injury to the customer or others? (Note: Surprisingly enough, the answer appears to be “no” at least for some courts – see below).
4. Expansion of Products Liability: With its ruling in Sullivan v. Werner Co. and Lowe’s (J-A04035-21, PA. Super. Ct. 2021), the Pennsylvania Superior Court appears to have said that a customer who deals negligently with a piece of equipment (in this case, by improperly constructing a scaffold) can still sue the manufacturer and astonishingly, have his own negligence excluded from the evidence made available to the jury based on the court’s finding that such negligence “would not preclude the possibility that a product defect contributed to the accident.” This ruling, in combination with the newly (and vastly) expanded right-to-repair, poses an enormous potential hazard for everyone in the chain of distribution, from manufacturers through end-users and even resellers.
5. Force Majeure Clauses: Force majeure clauses are being litigated throughout the country. A force majeure clause typically permits a party to escape, or at least delay, contract obligations it would otherwise be deemed to have breached, based on the existence of a fact or circumstance beyond its control, such as an “Act of God” (fire, flood, storm, tsunami, earthquake, etc.). As a general proposition, courts have been limiting the application of such clauses more rigidly of late, saying effectively, that one cannot escape a contract obligation unless its force majeure clause “specifically identifies the potential hazard” which gave rise to the performance failure or delay. So, for example, if you can’t deliver a piece of equipment because it was buried in a landslide or fell into a sinkhole, your contract’s force majeure provision had better include references to “landslides and sinkholes” or you’re going to be out of luck in most jurisdictions nowadays. In the past, only a few contracts would have gone so far as to include these more obscure references, to say nothing of other events now coming to the fore, such as riots, strikes, Covid-19 (though some referenced “epidemics”) and the expanding supply chain issues discussed below. Note: For most lessors, a “one-way” force majeure clause is the preferred option. Make certain your contract entitles you to cancel or delay your performance of your contractual obligations as a result of force majeure events, but given the practical impossibility of proving a customer does not have Covid (remember HIPAA), why give your customers a blanket cancellation right?
6. Supply Chain Issues: Surprising to no one, the cost of a shipping container has risen by between 500% and 700% (depending on the route) in the past 18 months, due largely to a spike in commercial traffic and congestion at ports complicated by labor, trucking and other shortages. Prior to 2021, few equipment industry contracts included “supply chain delays” (to say nothing of “costs”) in their force majeure clauses. That is now changing as suppliers zero in on transportation as a more significant issue with respect to both timing and cost. And not to be forgotten, Incoterms (the set of eleven International Commercial Terms for shippers) were updated in 2020, among other things, increasing the levels of security, as well as the insurance for which shippers are responsible in some cases.
7. Cyber-Liability Claims: Cyber-liability claims have skyrocketed since 2020, due largely to cybersecurity lapses coupled with an increased use of ransomware (which now accounts for roughly 75% of all cyber insurance claims), and the enormous growth in the value of data being stored, the cost of business interruptions, and most importantly, the apparent willingness of many companies to pay ransoms. This has driven an increase of roughly 50% in cyber-security premiums over the past year, with further increases projected. Given the expanding levels of technology installed in/on equipment, not to mention the value of the data they now generate, cyber-liability insurance is becoming an important cost component for equipment providers at all levels. Consequently, requiring cyber-liability insurance of customers and lessees has gone from a semi-paranoid contractual oddity to the “new normal” (whatever that is).
8. Loss of Use: The value of the time required to repair and/or replace equipment has now been recognized by a number of courts around the country. This is good news for equipment lessors, who in prior years, were often forced to shoulder this indirect cost without compensation from recalcitrant lessees, even where the lessees’ gross negligence or sometimes intentional misuse resulted in significant damage and downtime. In states that have recognized the concept of “loss of use,” lessors are now able to recover for this lost time in many cases. Nonetheless, including in your contract a right to recover for “loss of use” is now important even in states that have not yet embraced the concept legislatively, because even where courts are not able to look to their own states’ laws to “imply” such a right, they often rely on private party contracts (particularly in business-to-business transactions) for remedies that aren’t expressly available under existing state laws.
9. Telematics: In December 2017, Oklahoma State Rep. Mark McBride, found a tracking device had been installed on his vehicle without his knowledge. He suspected the device was installed at the direction of an industry group that sought to discredit him after he criticized the group’s tax incentives. He filed a lawsuit and introduced new privacy legislation making “using GPS or [any] other monitoring device to track a person’s movement without the person’s consent” a criminal offense. The bill was signed into law in May 2018. Notably, the law excludes dealers and lenders who obtain a customer’s consent to have a GPS tracker installed. Predictably, states throughout the country have begun enacting similar laws prohibiting the use of geolocation, monitoring and other “Orwellian devices” without the consent of customers. Therefore, if you rent equipment with installed GPS and/or other telematics devices, make sure your contract includes this consent, or you may be surprised to learn that you have actually committed a crime.
10. AWPs/MEWPs: New rules for aerial work platforms (now called “Mobile Elevating Work Platforms,” or “MEWPs”) went into effect on June 1, 2020, after extensive delays. The new rules address a wide range of issues, including design (ANSI 92.20), safe use (ANSI 92.22), and training (ANSI 92.24) requirements. These replaced the old ANSI A92.3, 92.5, 92.6, and 92.8 standards and effectively changed everything from equipment classifications to how, when, where, and by whom they can be used. For manufacturers, the new rules require several important modifications to designs and manufacturing processes, not to mention manuals. For Dealers and Rental Operators, new safe-use and training requirements now make provision (whether by the lessor or a referred third party, such as a manufacturer) of proper familiarization, training and warnings, as well as other safety enhancements, critical.
And for those who might be interested, following is an abbreviated list of 10 additional changes that should be considered:
11. Federal Tax Laws: Changes (existing and proposed) to 100% expensing, interest limits, NOL carries, and the corporate tax rate are either now effective or being negotiated;
12. State and Local Tax Laws: At least 11 states have made major changes to their sales and use tax regimes. None have relaxed them (See the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc.);
13. Operating vs. Finance Leases: Under ASC 842, accounting standards for determining whether a lease is a “capital” or “operating” lease have changed significantly;
14. Credit Card Rules: The rules that relate to credit card chargebacks were substantially modified by Visa in 2018;
15. Silica Dust and Beryllium: OSHA promulgated new regulations dramatically reducing permissible exposure limits for exposure to silica dust and beryllium; requiring a range of protective measures and warnings; and increasing fines for violations;
16. Marijuana Legalization: Most states have now legalized or “decriminalized” marijuana and/or CBD use; it remains fully illegal in only four states. Importantly, however, your contract can still prohibit its use while operating your equipment;
17. Tier 4 (Maybe Tier 5?): The European Union has already adopted Stage V requirements, and some heavily regulated states such as California and Oregon, not shockingly, have already commenced efforts to enhance their air quality standards (marijuana legalization aside), and don’t forget EPA-designated “non-attainment” areas, where stricter standards already apply;
18. New Website Laws: A host of new laws applicable to websites and data collection have been enacted, including the European Union’s General Data Protection Regulation (“GDPR”) and some would argue its U.S. equivalent, the California Consumer Privacy Act (“CCPA”). Questions regarding applicability and enforceability continue to swirl around such laws, motivating many businesses to simply attempt to comply with the most rigid of such standards;
19. New Training and Licensing Requirements: States have also been busy establishing new safety regulations and requirements, including special training and licensing requirements for certain types of equipment such as cranes and other “hoisting equipment;” and
20. Coronavirus: Lest we forget, Covid-19, and recent revelations regarding the “Delta” and “Omicron” variants have been motivating legislative and judicial efforts at all levels aimed at everything from additional sanitation to expanded leave policies to mandated masks and/or vaccinations. For equipment lessors, this has underscored the need for including in their contracts enhanced warnings, cleaning and sanitation obligations, return requirements, liability waivers, and as noted above, expanded force majeure provisions.
A lot has changed in the equipment industry in the past few years. Looking forward, as technology continues its inevitable march forward, we are sure to see more, and probably accelerating, changes, driven by advancements in systems, software, data, robotics, remote monitoring and control devices, battery technologies, hydraulics and more. If Albert Einstein was right in saying “the measure of intelligence is the ability to change,” then the equipment industry is perhaps one of the smartest in the world.