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2023 legal outlook–Turning risks into opportunities

Wednesday, December 07, 2022 — 15:20:49 (EST)

DENVER, Colo. (Dec. 7, 2022) -- Intensifying concerns about inflation and an economic downturn are shaping the 2023 legal landscape. Warren Buffett stated, “It’s only when the tide goes out that you see who has been swimming naked,” and many companies that haven’t prepared for potential risks may find themselves swimming naked, so to speak, when the metaphorical tide rolls out in 2023. Below, partners at Denver-based firm Fortis Law Partners share their 2023 outlooks, highlighting the most prominent legal issues they expect to bubble to the surface next year.

Post-Pandemic Remote Work Policies and Increased Mental Health Concerns Create Ripples in Employment Law

Legal issues stemming from post-pandemic workforce changes continue to make waves in employment law. “With a vast number of employees settling into permanent remote work around the country, and layoffs looming large if the economy continues to contract, several potential problems can arise for employers,” said Christine Lamb, head of the firm’s employment practice. These include greater potential for wage & hour and overtime violations; independent contractor misclassification as companies turn to contractors to replace employees; and increased challenges to employers’ ability to protect trade secrets, as employees rely almost exclusively on electronic communication channels.

Lamb also notes that a rise in national awareness of mental health concerns has led to a considerable increase in employee disability claims under the Americans with Disabilities Act. The ADA defines disability as a physical or mental impairment that substantially limits one or more major life activities. Therefore, employers must ensure they are making appropriate workplace accommodations that protect the rights of employees with “invisible” disabilities such as anxiety disorders, depression, attention-deficit/hyperactivity disorder (ADHD), etc.—or face potentially costly litigation. Not-So-Secret Trade Secrets, Corporate Fraud and Celebrity Spokespeople Spark Litigation

As Lamb highlighted above, the increase in remote work has inevitably led to an uptick in electronic communications within companies. Now, instead of walking down the hall or picking up the phone, employees are communicating almost entirely over email, text, Slack, and other online channels. “It becomes exponentially more difficult for companies to protect their trade secrets when employees are pinging them back and forth,” said Cara Thornton, a partner in Fortis’ litigation practice group.

“If these entities ever face litigation, not only will all of their employee’s electronic communications be fair game for discovery, but the scope and breadth of the electronic discovery process will increase in complexity. That, in turn, increases litigation costs and can have a big impact on a company’s ability to prosecute and defend certain claims,” Thornton said. Fortis Partner David Olsky regularly pursues complex commercial litigation cases. In the wake of Elon Musk’s disastrous Twitter takeover, and the sudden collapse of FTX and cryptocurrency more generally, Olsky expects to see greater scrutiny of corporate governance practices and an uptick in fraud and misrepresentation litigation in 2023.

“The year 2022 reinforced that corporate executives cannot stand above the rules for long. Crypto failures have resulted in litigation being filed against not only the usual suspects (such as an issuer’s officers and directors) but also against celebrities allegedly promoting securities without a license,” Olsky said. “I expect such suits to continue in 2023. I also believe that fraud, in general, is much more likely to be discovered during economic downturns when there is less access to capital.”

Environmental, Social & Governance Present Big Risks and Rewards for Businesses

Roxane Peyser, head of Fortis’ ESG practice area, points out that the data of more than 2,000 studies show that ESG is the number one area of risk and opportunity for companies in 2023, due to its enormous impact on almost every aspect of operations and newly changing SEC requirements.

“Companies face real financial risks if they do not walk their ESG talk,” Peyser stated. “Some companies profess to have fantastic ESG policies. However, when they aren’t designed properly and don’t go beyond window dressing, they can leave themselves open to reputational risk, loss of clientele and employees, and sometimes enforcement actions and litigation.”

Peyser recommends that businesses focus 2023 ESG improvement efforts on improving Diversity, Equity and Inclusion. “Attracting and retaining top-tier talent and securing access to capital will require intentional planning and effort, as well as the development of transparent, outcome-based metrics,” she said.

Finally, Peyser advises companies to hone in on improving corporate governance, an overlooked area of opportunity due to its perceived complexity. “Businesses must appropriately navigate the choppy waters of competing shareholders and stakeholders such as employees and customers, proxy advisory firms, and non-governmental organizations with differing opinions and concerns. Accordingly, I recommend companies pay strict attention to changing requirements from the SEC, U.S. stock exchanges and other relevant bodies, the design and implementation of board governance policies, committee charters, internal controls, disclosure policies and procedures, whistleblower policies, succession planning, and attorney reporting procedures.”

M&A Market Expected to Slow Down Despite Continued Consolidation

Partners in Fortis’s mergers and acquisitions group aren’t anticipating a total timeout in M&A activity in 2023, instead forecasting some bright spots. Partner Roxane Peyser sees an acceleration in the M&A market for healthcare-related fields, particularly in the specialty pharmaceutical space. Astute market watchers with an appetite for healthy risk –mostly small-caps–see strong opportunities in specialty medications, a category predicted to grow at roughly 8% annually for the next two to three years.

Julie Herzog, head of Fortis’ corporate/securities practice, sees the cannabis consolidation feeding frenzy continuing next year. “Multi-state operators are racing to consolidate and capture enough market share so that they stand a fighting chance of survival against Big Pharma when federal legalization finally arrives,” she explained.

However, she notes that only well-prepared companies should expect to have a profitable exit. “I’m continually driving home the point that cannabis businesses face exponentially more legal challenges and complexities during M&A than the average company,” Herzog said. “Especially during an economic downturn, as we could see in 2023, I advise businesses to use their time wisely and hone in on getting their 3 P's–people, paper and profits–in order. If they do, they will be a much more attractive target and far more likely to land top dollar when buyers come knocking.” The Year of the Earndown

“Any small business owner hoping to sell their company in 2023 should know that we are about to enter what I’ve coined ‘the year of the earndown,’” said Fortis partner Julian Izbiky.

As an expert in small business purchases and sales who has closed over 1,000 deals, Izbiky has seen earndowns used many times to bridge the gap between a buyer’s and a seller’s expectations, particularly relevant in a post-pandemic world.

“Some businesses, such as those in the home renovation industry, did particularly well during the pandemic,” Izbiky continued. “As a result, they now have three years of financials showing better numbers than their previous three years. While sellers want a sales price reflecting their performance during this timeframe, potential buyers are concerned about the sustainability of these numbers.”

With Small Business Administration rules prohibiting the usual solution to this situation—an earnout provision—in deals financed by SBA-guaranteed loans, an earndown provision can be just what the doctor ordered. In this scenario, a buyer can make an offer that includes a promissory note with terms causing the amount paid under the note to be reduced to zero if the business’s post-closing performance does not exceed 2019 levels. Izbiky expects it to be used frequently in 2023 to help assuage buyer and seller concerns about a fair sale price.

A Potentially Mind-Bending Outlook for the Psychedelic Industry

With estimates that the psychedelic drug market will hit nearly $11 billion by 2027, psychedelics are shaping up to be one of the hottest and most lucrative new industries for investors and entrepreneurs. However, there is still significant uncertainty about the industry's future and how different laws, such as the ballot measure that Colorado voters just approved, will shape it.

Henry Baskerville, head of Fortis’ cannabis practice, brings his decades-long expertise to the psychedelics industry, where the landscape mirrors cannabis’ growth trajectory. “With the movement towards decriminalization and medical usage on the horizon, I foresee an increase in entrepreneurs and even large biotech companies conducting R&D on medical therapies, raising capital and laying the groundwork that will allow them to capitalize on this new market,” Baskerville observed.

Given that, like cannabis, psychedelics are still illegal under federal law, and state laws involving their manufacture, sale and consumption vary widely, Fortis recently established a psychedelics practice group led by Cara Thornton to assist clients in navigating the industry's complex legal and regulatory requirements.

“We believe 2023 is just the beginning of other states starting to follow Oregon and Colorado’s lead, moving towards the legalization and decriminalization of psychedelics use,” said Thornton.

Prepare for Extensive Delays in Trademark Application Review and Processing

The United States Patent and Trademark Office (USPTO) received a record-high number of trademark applications in 2022. Unfortunately, they are also experiencing a shortage of staff to process and review submissions. As a result, current expected wait times for review and registration range from 8-14 months. Andrew Comer, head of Fortis’ trademark practice group, expects these delays to persist and increase in 2023.

“Companies invested in their brands should apply for trademarks as soon as possible,” he advises. “There’s no time to delay. Using a simple trademark symbol provides very minimal common law protections; registration with the USPTO is the most important step companies can take towards protecting their company’s most valuable assets.”

To schedule an interview with any of the partners at Fortis, please contact Shawna Seldon McGregor at 917-971-7852 or shawna@themaverickpr.com.

About Fortis Law Partners

Fortis Law Partners offers broad expertise to help clients achieve effective legal solutions, from the simplest matters to the most challenging business problems. Whether a successful outcome means winning at trial, dismissing a lawsuit, negotiating a settlement, closing a transaction, or just getting thoughtful legal advice, Fortis lawyers get results. Our business-minded problem-solving approach, coupled with a persistent dedication to client service, enables us to create unmatched value. Practices include Cannabis; Commercial Litigation, Compliance Programs and Internal Investigations; Construction; Corporate / Securities / M&A; Employment Law; Environmental, Social & Corporate Governance; Psychedelics; Real Estate & Development; Tax; Trademark and Trusts & Estates. For more information, visit FortisLawPartners.com. Continue the conversation on LinkedIn and Facebook.

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Source: Company press release.