Federal Register Vol. 81, No.209,

The Energy Policy and Conservation Act of 1975, as amended (“EPCA”) (Public Law 94-163 (December 22, 1975)) includes provisions covering the products addressed by this notice. EPCA addresses, among other things, the energy efficiency of certain types of consumer products. Relevant provisions of the Act specifically include definitions (42 U.S.C. 6291), energy conservation standards (42 U.S.C. 6295), test procedures (42 U.S.C. 6293), labeling provisions (42 U.S.C. 6294), and the authority to require information and reports from manufacturers (42 U.S.C. 6296).

Under 42 U.S.C. 6292(a)(20), DOE may extend coverage over a particular type of consumer product provided that DOE determines that classifying products of such type as covered products is necessary or appropriate to carry out the purposes of EPCA and that the average annual per-household energy use by products of such type is likely to exceed 100 kilowatt-hours (“kWh”) or its British thermal unit (“Btu”) equivalent per year. See 42 U.S.C. 6292(b)(1). EPCA sets out the following additional requirements to establish energy conservation standards for a newly covered product: (1) The average per household domestic energy use by such products exceeded 150 kWh or its Btu equivalent for any 12-month period ending before such determination; (2) the aggregate domestic household energy use by such products exceeded 4.2 million kWh or its Btu equivalent for any such 12-month period; (3) substantial energy efficiency of the products is technologically feasible; and (4) applying a labeling rule is unlikely to be sufficient to induce manufacturers to produce, and consumers and other persons to purchase, products of such type that achieve the maximum level of energy efficiency. See 42 U.S.C. 6295(l)(1).

Pursuant to EPCA, DOE's energy conservation program for covered products consists essentially of four parts: (1) Testing; (2) labeling; (3) the establishment of Federal energy conservation standards; and (4) certification and enforcement procedures. The Federal Trade Commission (“FTC”) is primarily responsible for labeling, and DOE implements the remainder of the program. Subject to certain criteria and conditions, DOE is required to develop test procedures to measure the energy efficiency, energy use, or estimated annual operating cost of each covered product. (42 U.S.C. 6295(o)(3)(A) and (r)) Manufacturers of covered products must use the prescribed DOE test procedure as the basis for certifying to DOE that their products comply with the applicable energy conservation standards adopted under EPCA and when making representations to the public regarding the energy use or efficiency of those products. (42 U.S.C. 6293(c) and 6295(s)) Similarly, DOE must use these test procedures to determine whether the products comply with standards adopted pursuant to EPCA. (42 U.S.C. 6295(s)) The DOE test procedure for MREFs currently appears at title 10 of the Code of Federal Regulations (“CFR”) part 430, subpart B, appendix A (appendix A).

DOE follows specific criteria when prescribing new or amended standards for covered products. As indicated above, any new or amended standard for a covered product must be designed to achieve the maximum improvement in energy efficiency that is technologically feasible and economically justified. (42 U.S.C. 6295(o)(2)(A) and (3)(B)) Furthermore, DOE may not adopt any standard that would not result in the significant conservation of energy. (42 U.S.C. 6295(o)(3)) Moreover, DOE may not prescribe a standard: (1) for certain products, including MREFs, if no test procedure has been established for the product, or (2) if DOE determines by rule that the new or amended standard is not technologically feasible or economically justified. (42 U.S.C. 6295(o)(3)(A)-(B)) In deciding whether a new or amended standard is economically justified, DOE must determine whether the benefits of the standard exceed its burdens. (42 U.S.C. 6295(o)(2)(B)(i)) DOE must make this determination after receiving comments on the proposed standard and considering, to the greatest extent practicable, the following seven factors:

1. The economic impact of the standard on manufacturers and consumers of the products subject to the standard;

2. The savings in operating costs throughout the estimated average life of the covered products in the type (or class) compared to any increase in the price, initial charges, or maintenance expenses for the covered products that are likely to result from the imposition of the standard;

3. The total projected amount of energy, or as applicable, water, savings likely to result directly from the imposition of the standard;

4. Any lessening of the utility or the performance of the covered products likely to result from the imposition of the standard;

5. The impact of any lessening of competition, as determined in writing by the Attorney General, that is likely to result from the imposition of the standard;

6. The need for national energy and water conservation; and

7. Other factors the Secretary of Energy (Secretary) considers relevant.

Further, EPCA, as codified, establishes a rebuttable presumption that a standard is economically justified if the Secretary finds that the additional cost to the consumer of purchasing a product complying with an energy conservation standard level will be less than three times the value of the energy savings during the first year that the consumer will receive as a result of the standard, as calculated under the applicable test procedure. (42 U.S.C. 6295(o)(2)(B)(iii))

EPCA also contains what is known as an “anti-backsliding” provision, which prevents the Secretary from prescribing any amended standard that either increases the maximum allowable energy use or decreases the minimum required energy efficiency of a covered product. (42 U.S.C. 6295(o)(1)) Also, the Secretary may not prescribe an amended or new standard if interested persons have established by a preponderance of the evidence that the standard is likely to result in the unavailability in the United States in any covered product type (or class) of performance characteristics (including reliability), features, sizes, capacities, and volumes that are substantially the same as those generally available in the United States. (42 U.S.C. 6295(o)(4))

Additionally, DOE may set energy conservation standards for a covered product that has two or more subcategories. In those instances, DOE must specify a different standard level for a type or class of products that has the same function or intended use if DOE determines that products within such group: (A) Consume a different kind of energy from that consumed by other covered products within such type (or class); or (B) have a capacity or other performance-related feature which other products within such type (or class) do not have and such feature justifies a higher or lower standard. (42 U.S.C. 6295(q)(1)) In determining whether a performance-related feature justifies a different standard for a group of products, DOE must consider such factors as the utility to the consumer of such a feature and other factors DOE deems appropriate. Id. Any rule prescribing such a standard must include an explanation of the basis on which such higher or lower level was established. (42 U.S.C. 6295(q)(2))

Federal energy conservation requirements generally supersede State laws or regulations concerning energy conservation testing, labeling, and standards. (42 U.S.C. 6297(a) through (c)) DOE may, however, grant waivers of Federal preemption for particular State laws or regulations, in accordance with the procedures and other provisions set forth under 42 U.S.C. 6297(d).

DOE is also required to address standby mode and off mode energy use. (42 U.S.C. 6295(gg)(3)) Specifically, when DOE adopts a standard for a covered product after that date, it must, if justified by the criteria for the adoption of standards under EPCA (42 U.S.C. 6295(o)), incorporate standby mode and off mode energy use into a single standard, or, if that is not feasible, adopt a separate standard for such energy use for that product. (42 U.S.C. 6295(gg)(3)(A) and (B)) DOE's test procedures for MREFs address standby mode and off mode energy use, as do the new standards adopted in this notice of proposed rulemaking.

With particular regard to direct final rules, the Energy Independence and Security Act of 2007 (“EISA 2007”), Public Law 110-140 (December 19, 2007), amended EPCA, in relevant part, to grant DOE authority to issue a type of final rule (i.e., a “direct final rule”) establishing an energy conservation standard for a product on receipt of a statement that is submitted jointly by interested persons that are fairly representative of relevant points of view (including representatives of manufacturers of covered products, States, and efficiency advocates), as determined by the Secretary, and that contains recommendations with respect to an energy or water conservation standard. In the context of consumer products, if the Secretary determines that the recommended standard contained in the statement is in accordance with 42 U.S.C. 6295(o), the Secretary may issue a final rule establishing the recommended standard. A notice of proposed rulemaking (“NOPR”) that proposes an identical energy efficiency standard is published simultaneously with the direct final rule. A public comment period of at least 110 days is provided. See 42 U.S.C. 6295(p)(4). Not later than 120 days after the date on which a direct final rule issued under this authority is published in the Federal Register, the Secretary shall withdraw the direct final rule if the Secretary receives one or more adverse public comments relating to the direct final rule or any alternative joint recommendation and based on the rulemaking record relating to the direct final rule, the Secretary determines that such adverse public comments or alternative joint recommendation may provide a reasonable basis for withdrawing the direct final rule under subsection 42 U.S.C. 6295(o) or any other applicable law. On withdrawal of a direct final rule, the Secretary shall proceed with the NOPR published simultaneously with the direct final rule and publish in the Federal Register the reasons why the direct final rule was withdrawn. This direct final rule provision applies to the products at issue in the direct final rule published simultaneously with this NOPR. See 42 U.S.C. 6295(p)(4).

DOE also notes that it typically finalizes its test procedures for a given regulated product or equipment prior to proposing new or amended energy conservation standards for that product or equipment, see 10 CFR part 430, subpart C, Appendix A, sec. 7(c) (“Procedures, Interpretations and Policies for Consideration of New or Revised Energy Conservation Standards for Consumer Products” or “Process Rule”). In this instance, although DOE has finalized its test procedure for MREFs, rather than issue a notice of proposed rulemaking to set standards for these products, DOE is moving forward with a direct final rule. As part of the negotiated rulemaking that led to the Term Sheet setting out the standards that DOE is proposing, Working Group members recommended (with ASRAC's approval) that DOE implement the test procedure that DOE recently finalized. See 81 FR 46768 (July 18, 2016). The approach laid out in that final rule is consistent with the approach agreed upon by the various Working Group members who participated in the negotiated rulemaking. Accordingly, in accordance with section 14 of the Process Rule, DOE tentatively concludes that deviation from the Process Rule is appropriate here.

DOE has not previously established energy conservation standards for MREFs. Consistent with its statutory obligations, DOE sought to establish regulatory coverage over these products prior to establishing energy conservation standards to regulate MREF efficiency. On November 8, 2011, DOE published a notice of proposed determination of coverage (“NOPD”) to address the potential coverage of those refrigeration products that do not use a compressor-based refrigeration system. 76 FR 69147. Rather than employing a compressor/condenser-based system typically installed in the refrigerators, refrigerator-freezers, and freezers found in most U.S. homes, these “non-compressor-based” refrigeration products use a variety of other means to introduce chilled air into the interior of the storage cabinet of the product. Two systems that DOE specifically examined were thermoelectric- and absorption-based systems.1 The former of these systems is used in some wine chiller applications. With respect to the latter group of products, DOE indicated its belief that these types of products were used primarily in mobile applications and would likely fall outside of DOE's scope of coverage. See 42 U.S.C. 6292(a) (excluding from coverage “those consumer products designed solely for use in recreational vehicles and other mobile equipment”).

On February 13, 2012, DOE published a notice announcing the availability of the framework document, “Energy Conservation Standards Rulemaking Framework Document for Wine Chillers and Miscellaneous Refrigeration Products,” and a public meeting to discuss the proposed analytical framework for the energy conservation standards rulemaking. 77 FR 7547. In the framework document, DOE described the procedural and analytical approaches it anticipated using to evaluate potential energy conservation standards for four types of consumer refrigeration products: Wine chillers, non-compressor refrigerators, hybrid refrigerators (i.e., a wine chiller combined with a refrigerator), and ice makers.

DOE held a public meeting on February 22, 2012, to present the framework document, describe the analyses DOE planned to conduct during the rulemaking, seek comments from interested parties on these subjects, and inform the public about, and facilitate public participation in, the rulemaking. At the public meeting and during the comment period, DOE received multiple comments that addressed issues raised in the framework document and identified additional issues relevant to the rulemaking.

On October 31, 2013, DOE published in the Federal Register a supplemental notice of proposed determination of coverage (the “October 2013 SNOPD”), in which it tentatively determined that the four categories of consumer products addressed in the framework document (wine chillers, non-compressor refrigeration products, hybrid refrigerators, and ice makers) satisfy the provisions of 42 U.S.C. 6292(b)(1). 78 FR 65223.

DOE published a notice announcing a public meeting and the availability of the preliminary technical support document (“TSD”) for the MREF energy conservation standards rulemaking on December 3, 2014. 79 FR 71705. The preliminary analysis considered potential standards for the products proposed for coverage in the October 2013 SNOPD. The preliminary TSD included the results of the following DOE preliminary analyses: (1) Market and technology assessment; (2) screening analysis; (3) engineering analysis; (4) markups analysis; (5) energy use analysis; (6) LCC and PBP analyses; (7) shipments analysis; (8) national impact analysis (“NIA”); and (9) preliminary manufacturer impact analysis (“MIA”).

DOE held a public meeting on January 9, 2015, during which it presented preliminary results for the engineering and downstream economic analyses and sought comments from interested parties on these subjects. At the public meeting and during the comment period, DOE received comments that addressed issues raised in the preliminary analysis and identified additional issues relevant to this rulemaking. After reviewing the comments received in response to both the preliminary analysis and a test procedure NOPR published on December 16, 2014 (the “December 2014 Test Procedure NOPR,” 79 FR 74894), DOE ultimately determined that the development of test procedures and potential energy conservation standards for MREFs would benefit from a negotiated rulemaking process.

On April 1, 2015, DOE published a notice of intent to establish an Appliance Standards and Rulemaking Federal Advisory Committee (“ASRAC”) negotiated rulemaking working group for MREFs (the “MREF Working Group” or in context, the “Working Group”) to discuss and, if possible, reach consensus on a recommended scope of coverage, definitions, test procedures, and energy conservation standards. 80 FR 17355. The MREF Working Group consisted of 15 members, including two members from ASRAC and one DOE representative. The MREF Working Group met in person during six sets of meetings in 2015: May 4-5, June 11-12, July 15-16, August 11-12, September 16-17, and October 20.

On August 11, 2015, the MREF Working Group reached consensus on a term sheet to recommend a scope of coverage, set of definitions, and test procedures for MREFs (“Term Sheet #1”).2 That document laid out the scope of products that the Working Group recommended that DOE adopt with respect to MREFs, the definitions that would apply to MREFs and certain other refrigeration products, and the test procedure that manufacturers of MREFs would need to use when evaluating the energy usage of these products. On October 20, 2015, the MREF Working Group reached consensus on a second term sheet embodying its recommended energy conservation standards for coolers and combination cooler refrigeration products (“Term Sheet #2”). ASRAC approved Term Sheet #1 during an open meeting on December 18, 2015, and Term Sheet #2 during an open meeting on January 20, 2016. ASRAC subsequently sent both term sheets to the Secretary for consideration.

In addition to these steps, DOE sought to ensure that it had obtained complete information and input regarding certain aspects related to manufacturers of thermoelectric refrigeration products. To this end, on December 15, 2015, DOE published a notice of data availability (the “December 2015 NODA”) in which it requested additional public feedback on the methods and information used in the development of the MREF Working Group Term Sheets. 80 FR 77589. DOE noted in particular its interest in information related to manufacturers of thermoelectric refrigeration products. Id. at 77590.

After considering the MREF Working Group recommendations and comments received in response to the December 2015 NODA, DOE published an SNOPD and notice of proposed rulemaking (the “March 2016 SNOPD”) on March 4, 2016. 81 FR 11454. The March 2016 SNOPD proposed establishing coverage, definitions, and terminology consistent with Term Sheet #1. It also proposed to determine that coolers and combination cooler refrigeration products—as defined under the proposal—would meet the requirements under EPCA to be considered covered products. Id. at 11456-11459.

On July 18, 2016, DOE published a final coverage determination and final rule (the “July 2016 Final Coverage Determination”) to establish coolers and combination cooler refrigeration products as covered products under EPCA. Because DOE did not receive any comments in response to the March 2016 SNOPD that would substantively alter its proposals, the findings of the final determination were unchanged from those presented in the March 2016 SNOPD. Moreover, DOE determined in the July 2016 Final Coverage Determination that MREFs, on average, consume more than 150 kWh/yr, and that the aggregate annual national energy use of these products exceeds 4.2 TWh. Accordingly, these data indicate that MREFs satisfy at least two of the four criteria required under EPCA in order for the Secretary to set standards for a product whose coverage is added pursuant to 42 U.S.C. 6292(b). See 42 U.S.C. 6295(l)(1)(A)-(D). 81 FR 46768. With respect to the remaining two criteria, as indicated in substantial detail in its accompanying direct final rule, DOE's analysis indicates that these two criteria are satisfied as well.

In addition to establishing coverage, the July 2016 Final Coverage Determination established definitions for “miscellaneous refrigeration products,” “coolers,” and “combination cooler refrigeration products” in title 10 of the Code of Federal Regulations (“CFR”) § 430.2. The July 2016 Final Coverage Determination also amended the existing definitions for “refrigerator,” “refrigerator-freezer,” and “freezer” for consistency with the newly established MREF definitions. These definitions were generally consistent with the March 2016 SNOPD. Id.

DOE has considered the recommended energy conservation standards from the MREF Working Group and believes that they meet the EPCA requirements for issuance of a direct final rule. As a result, DOE has published a direct final rule establishing energy conservation standards for MREFs elsewhere in this Federal Register. If DOE receives adverse comments that may provide a reasonable basis for withdrawal and withdraws the direct final rule, DOE will consider those comments and any other comments received in determining how to proceed with this proposed rule.

For further background information on these proposed standards and the supporting analyses, please see the direct final rule published elsewhere in this Federal Register. That document includes additional discussion on the EPCA requirements for promulgation of energy conservation standards, the history of the standards rulemakings establishing such standards, as well as information on the test procedures used to measure the energy efficiency of MREFs. The document also contains an in-depth discussion of the analyses conducted in support of this rulemaking, the methodologies DOE used in conducting those analyses, and the analytical results.

When considering proposed standards, the new or amended energy conservation standard that DOE adopts for any type (or class) of covered product shall be designed to achieve the maximum improvement in energy efficiency that DOE determines is technologically feasible and economically justified. (42 U.S.C. 6295(o)(2)(A)) In determining whether a standard is economically justified, DOE must determine whether the benefits of the standard exceed its burdens, considering to the greatest extent practicable the seven statutory factors set forth in EPCA. (42 U.S.C. 6295(o)(2)(B)(i)) The new or amended standard must also result in a significant conservation of energy. (42 U.S.C. 6295(o)(3)(B))

DOE considered the impacts of standards at each trial standard level (“TSL”) considered, beginning with maximum technologically feasible (max-tech) level, to determine whether that level was economically justified. Where the max-tech level was not economically justified, DOE then considered the next most efficient level and undertook the same evaluation until it reached the highest efficiency level that is both technologically feasible and economically justified and saves a significant amount of energy.

To aid the reader as DOE discusses the benefits and burdens of each TSL, DOE has included tables that present a summary of the results of DOE's quantitative analysis for each TSL. In addition to the quantitative results presented in the tables, DOE also considers other burdens and benefits that affect economic justification. These include the impacts on identifiable subgroups of consumers, such as low-income households and seniors, who may be disproportionately affected by a national standard. Section V.B.1.b of the direct final rule published elsewhere in this Federal Register presents the estimated impacts of each TSL for these subgroups.

Table II.1 and Table II.2 summarize the quantitative impacts estimated for each TSL for coolers. The national impacts are measured over the lifetime of coolers purchased in the 30-year period that begins in the anticipated year of compliance with new standards (2019-2048 for TSL 2, and 2021-2050 for the other TSLs). The energy savings, emissions reductions, and value of emissions reductions refer to full-fuel-cycle (“FFC”) results. The efficiency levels contained in each TSL are described in section V.A of the direct final rule published elsewhere in this Federal Register.

We previously proposed to revise the animal drug regulations regarding tolerances for residues of approved and conditionally approved new animal drugs in food. In addition to proposing to standardize, simplify, and clarify the standards of determination and codification style for tolerances, we proposed a new definition section. In this document, we are proposing to revise or remove some of the previously proposed definitions, taking into account comments we received that have led us to clarify our current thinking, and to more accurately reflect the rationale FDA relied on in the past to approve certain new animal drugs without a tolerance.

The previously proposed rule (2012 proposed rule) did not adequately explain our current view that methods other than the “regulatory method” derived from the method submitted by a sponsor as part of the new animal drug application can be used to determine the quantity of residue in edible tissues for surveillance and enforcement purposes. Therefore, we are removing the proposed definition for “regulatory method” and are reserving the term for use with carcinogenic compounds. We are also removing the use of this term from proposed § 556.5(d) (21 CFR 556.5(d)). We are proposing to revise portions of the 2012 proposed rule to better align the proposed rule with our current thinking and practice that an analytical method other than the practicable method(s) submitted by the sponsor as part of the new animal drug application can be used for surveillance and enforcement purposes for non-carcinogenic compounds, as long as the performance criteria of that method are comparable to those of the practicable method. However, as described in section II.C, we are not proposing similar changes to the regulations concerning carcinogenic compounds because our current interpretation of the relevant provisions in the Federal Food, Drug, and Cosmetic Act (the FD&C Act) is that, unlike for non-carcinogenic compounds, the regulatory method prescribed in the approval of the new animal drug must be used for surveillance and enforcement purposes for carcinogenic compounds.

We are also revising the proposed definitions for “marker residue”, “tolerance”, “not required”, and “zero”. We are removing the definition for “acceptable single-dose intake” and adding a definition for “acute reference dose”.

In the Federal Register of December 5, 2012 (77 FR 72254), we issued a document to revise part 556 (21 CFR part 556) by standardizing and simplifying the codification style, revising the general considerations section, adding a scope section, and adding a definition section to define key terms used in the part. The definition section was proposed to include the terms used by FDA in the determination of tolerances. Some of the terms had been used previously in part 556, but never defined, and some terminology that had been used was outdated or resulted in confusion to users of the part. We proposed a general considerations section (proposed § 556.5) to provide additional information and clarification for the tolerances listed in proposed subpart B. We are issuing this supplemental notice of proposed rulemaking to revise the proposed changes to part 556 to align with our current thinking.

We received several stakeholder comments to the proposed rule including a comment that requests clarification on the proposed definition for “regulatory method” and on the use of the term in proposed § 556.5(d), which stated that FDA requires that a drug sponsor develop a regulatory method to measure drug residues in edible tissues of approved target species. This comment notes that a regulatory method has historically been used to refer to the “required determinative and confirmatory procedures for regulatory surveillance of residue concentrations in meat products entering the food supply for comparison to the tolerance post-commercialization of the product.” The comment also states the context of the proposal appears to be the method(s) used to collect data to support the setting of the tolerances preapproval. The comment also asks if the proposal implies that tolerances may be established using analytical procedures other than the determinative procedure. In addition, the comment states it should be clarified if regulatory method is referring to method(s) used preapproval for setting the tolerance versus a finite method(s) used for determining post-commercialization residue to compare to the tolerance.

We realize that the term “regulatory method” proposed in § 556.3 and used in proposed § 556.5(d) has caused some confusion. As a result of the comments, we are taking this opportunity to better explain our current thinking about analytical methods used to determine residue levels in tissues for new animal drugs intended for use in food-producing animals.

An analytical method other than the practicable method can be used for surveillance and enforcement purposes for non-carcinogenic compounds, as long as the performance criteria (e.g., sensitivity, specificity, accuracy, and precision) of that method are comparable to those of the practicable method submitted by the sponsor as part of the new animal drug application. Such an analytical method would need to have the same capability as the practicable method to determine the quantity of the drug residues so that the tolerance, withdrawal period, or other use restrictions continue to ensure that the use of the drug will be safe. However, as described in section II.C, for carcinogenic compounds, the regulatory method prescribed in the approval of the new animal drug must be used for surveillance and enforcement purposes for carcinogenic compounds (see 21 CFR part 500, subpart E).

FDA establishes tolerances using the practicable method submitted by a sponsor as part of the new animal drug application as required by section 512(b)(1)(G) of the FD&C Act (21 U.S.C. 360b(b)(1)(G)). The practicable method has to meet certain performance criteria, including evaluation of accuracy, precision, and sensitivity. We use the practicable method submitted by the sponsor as part of the new animal drug application to determine the quantity of the drug residues that can safely remain in edible tissues (i.e., the tolerance), the withdrawal period, and any other use restrictions necessary to ensure that the proposed use of the drug will be safe, and make these use restrictions part of the conditions of approval. These conditions of use are designed to ensure that the proposed use of the drug will be safe § 514.1(b)(7) (21 CFR 514.1(b)(7)). In the past, the practicable method was often used for determining the quantity of residue in edible tissue when monitoring the food supply. However, as technologies have evolved, many of the older methods have become obsolete. In addition, there is an increased reliance on multiresidue methods in the monitoring of the food supply (i.e., methods that analyze for a number of different drug residues at the same time). As a result, we are clarifying that an analytical method other than the practicable method can be used for surveillance and enforcement purposes for non-carcinogenic compounds, provided it meets the same performance criteria as the practicable method to determine the quantity of the relevant drug residues. Therefore, we are proposing to revise some of the definitions in proposed § 556.3 of the 2012 proposed rule as well as revise some of the language under “General Considerations” in proposed § 556.5, to more accurately reflect our current thinking.

In the 2012 proposed rule, we included a section of definitions (proposed § 556.3). We propose to revise four of the definitions, remove two definitions, and add a new definition in proposed § 556.3.

In the definition of “marker residue”, we propose to delete “selected for assay by the regulatory method” because we are reserving the term “regulatory method” for use with carcinogenic compounds (see part 500, subpart E). Also, we propose to delete the explanatory text that follows the first sentence of the definition because an explanation of how the tolerance is used is not needed in this definition. In addition, we are removing the term “target tissue” in the definition and replacing it with “an edible tissue”.

In the definition of “not required”, we propose to more accurately reflect the rationale FDA relied on in the past to approve certain new animal drugs without a tolerance. Currently, our general practice is to establish a tolerance for all new animal drugs we approve.

In the definition of “tolerance”, we propose to delete the explanatory text that follows the first sentence of the definition because an explanation of how the tolerance is used is not needed in this definition.

In the definition of “zero”, we propose to delete “when using a method of detection prescribed or approved by FDA” because, as discussed previously, an analytical method other than the practicable method can be used for surveillance and enforcement purposes for non-carcinogenic compounds. The additional proposed revisions to this definition are intended to clarify the meaning of the term “zero” as used in part 556 so that “zero” means any residues detected in the tissue renders it unsafe.

We propose to remove the definition of “acceptable single-dose intake (ASDI)”. See discussion for “acute reference dose (ARfD)” further in this section for the explanation.

We propose to remove the definition of “regulatory method” because we are reserving the term “regulatory method” for use with carcinogenic compounds, consistent with our current interpretation of the FD&C Act (see part 500, subpart E).

We propose to add the definition of “acute reference dose (ARfD)” to mean “an estimate of the amount of residues expressed on a body weight basis that can be ingested in a period of 24 hours or less without adverse effects or harm to the health of the human consumer.” ARfD would be used in place of ASDI wherever this term is currently used in the tolerances listed in subpart B of part 556.

In the 2012 proposed rule, we explained that sometimes the concept of an ASDI was used to calculate tolerances. We proposed to define the ASDI as “the amount of total residue that may safely be consumed in a single meal. The ASDI may be used to derive the tolerance for residue of a drug at the injection site where the drug is administered according to the label.” The definition of the ASDI was based on the U.S. Environmental Protection Agency definition of ARfD and chosen, in part, to provide additional clarity for the veterinary drug health based guidance value. Since that time, the use of the term ARfD has been more broadly applied by scientific and regulatory authorities, as further discussed in this section.

The United States is an active member of the Codex Alimentarius and the Codex Committee for Residues of Veterinary Drugs in Food, which rely on the World Health Organization/Food and Agriculture Organization of the United Nations Joint Expert Committee on Food Additives (JECFA) for scientific advice. The JECFA uses the guidance Environmental Health Criteria (EHC) 240, Principles and Methods for the Risk Assessment of Chemicals in Food in its evaluations (Ref. 1). This guidance defines and discusses the term ARfD. More importantly for FDA, the International Cooperation on Harmonisation of Technical Requirements for Registration of Veterinary Medicinal Products (VICH) has also developed guidelines that discuss the ARfD. The United States is a member of VICH and adopts finalized VICH guidelines for technical requirements for new animal drug approvals in the United States. On June 1, 2015 (80 FR 31041), we announced a draft guidance (Guidance for Industry #232 (VICH GL54)) entitled “Studies to Evaluate the Safety of Residues of Veterinary Drugs in Human Food: General Approach to Establish an Acute Reference Dose (ARfD)”, in which the term “acute reference dose (ARfD)” is used to describe the same concept as the 2012 proposed definition of ASDI (Ref. 2). There are no fundamental differences between the meaning of ASDI and ARfD.

We consider it appropriate to propose using the VICH definition of ARfD to replace the 2012 proposed definition of ASDI. The ARfD may be used in the same manner as the ASDI, which is to derive the tolerance for residues of a drug at an injection site where the drug is administered according to the label, or to derive the tolerance for residues of a drug in other edible tissues as a result of concern for the acute toxicity of the residues of the veterinary drug.

We propose to revise proposed § 556.5(d) to align with our current thinking. In addition, we propose to remove the term “regulatory method” from this provision because we are reserving this term for use with carcinogenic compounds (part 500, subpart E).

Although the proposed revisions would clarify that an analytical method other than the practicable method may be used for surveillance and enforcement purposes for residue levels of non-carcinogenic animal drugs, with regard to approved carcinogenic compounds, our current interpretation of the relevant provisions of the FD&C Act is that it requires that a regulatory method be prescribed for such a compound and used for surveillance and enforcement purposes. Under the Delaney Clause, section 512(d)(1)(I) of the FD&C Act, FDA cannot approve an application for a new animal drug if it is found to induce cancer when ingested by humans or animals. An exception to this provision, referred to as the DES (diethylstilbestrol) Proviso, allows for the approval of a carcinogenic compound if FDA finds that, under the approved conditions of use, the drug will not adversely affect treated animals and no residue of the drug will be found (by methods of examination prescribed or approved by the Secretary by regulations) (emphasis added) in any food for human consumption derived from the treated animals (see section 512(d)(1)(I)(i) and (ii) of the FD&C Act). FDA has issued regulations defining the operational definition of no residue and regulatory method for purposes of measuring carcinogenic compounds (21 CFR 500.82 and 500.88).

We are proposing a conforming change to the language in the introductory text of § 514.1(b)(7) by removing the term “regulatory” in the last sentence to reflect the fact that we are reserving this term for use with carcinogenic compounds. (See discussion in section II.C.)

Our authority for issuing this proposed rule is provided by sections 512(b)(1)(G) and (H), 512(d)(1)(F), 512(d)(2), 512(i), 571(a)(2)(A), and 571(b)(1) of the FD&C Act (21 U.S.C. 360b(b)(1)(G) and (H), 360b(d)(1)(F), 360(d)(2), 360b(i), 360ccc(a)(2)(A), and 360ccc(b)(1)). These provisions relate to the information new animal drug and conditional approval applicants provide with respect to proposed tolerances, withdrawal periods, and practicable methods, and the process by which FDA establishes and publishes regulations setting tolerances for residues of approved and conditionally approved new animal drugs. In addition, section 701(a) of the FD&C Act (21 U.S.C. 371(a)) gives FDA general rulemaking authority to issue regulations for the efficient enforcement of the FD&C Act.

We have examined the impacts of the proposed rule under Executive Order 12866, Executive Order 13563, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). Executive Orders 12866 and 13563 direct us to assess all costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). We believe that this proposed rule is not a significant regulatory action as defined by Executive Order 12866.

The Regulatory Flexibility Act requires us to analyze regulatory options that would minimize any significant impact of a rule on small entities. Because this proposed rule would not impose compliance costs on the current or future sponsors of any approved and conditionally approved new animal drugs, we proposed to certify that the proposed rule would not have a significant economic impact on a substantial number of small entities.

The Unfunded Mandates Reform Act of 1995 (section 202(a)) requires us to prepare a written statement, which includes an assessment of anticipated costs and benefits, before proposing “any rule that includes any Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more (adjusted annually for inflation) in any one year.” The current threshold after adjustment for inflation is $146 million, using the most current (2015) Implicit Price Deflator for the Gross Domestic Product. This proposed rule would not result in an expenditure in any year that meets or exceeds this amount.

We tentatively conclude that this proposed rule contains no collection of information. Therefore, clearance by the Office of Management and Budget under the Paperwork Reduction Act of 1995 is not required.

The Agency has determined under 21 CFR 25.30(i) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required.

We have analyzed this proposed rule in accordance with the principles set forth in Executive Order 13132. We have determined that the proposed rule does not contain policies that have substantial direct effects on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. Accordingly, we conclude that the proposed rule does not contain policies that have federalism implications as defined in the Executive order and, consequently, a federalism summary impact statement is not required.

The following references are on display in the Division of Dockets Management (see ADDRESSES) and are available for viewing by interested persons between 9 a.m. and 4 p.m., Monday through Friday; they are also available electronically at http://www.regulations.gov. FDA has verified the Web site addresses, as of the date this document publishes in the Federal Register, but Web sites are subject to change over time.

Therefore, under the Federal Food, Drug, and Cosmetic Act and under authority delegated to the Commissioner of Food and Drugs, it is proposed that 21 CFR chapter I, subchapter E, be amended as follows:

The revisions and additions read as follows:

On September 8, 2016, the Department published a notice of Proposed rulemaking (NPRM), to amend requirements for accreditation of agencies and approval of persons to provide adoption services in intercountry adoption cases. (See 81 FR 62322.) The NPRM provided a comment period of 60 days, which expires on November 7, 2016.

In response to a request for extension, the Department extends the comment period until November 22, 2016. This will provide 75 days for the public to submit comments on this rule. Further information, including the text of the Proposed rule, can be found in the NPRM.

I. Background

In the United States, floods caused 4,586 deaths from 1959 to 2005.1 With climate change and associated sea-level rise, flooding risks have increased over time, and are anticipated to continue increasing. The National Climate Assessment (May 2014), for example, projects that extreme weather events, such as severe flooding, will persist throughout the 21st century. Severe flooding can cause significant damage to infrastructure, including buildings, roads, ports, industrial facilities, and even coastal military installations. With more than $260 billion in flood damages across the Nation since 1980, it is necessary to take action to responsibly use Federal funds, and HUD must ensure it does not wastefully make Federal investments in the same structures after repeated flooding events. In addition, the FFRMS will align with the thousands of communities across the country that have strengthened their local floodplain management codes and standards to ensure that buildings and infrastructure are resilient to flood risk. HUD recognizes that the need to make structures resilient also requires a flexible approach to adapt to the needs of the Federal agency, local community, and the circumstances surrounding each project or action.

In response to the threats that increasing flood risks pose to life and taxpayer funded property, on January 30, 2015, the President signed Executive Order 13690, Establishing a Federal Flood Risk Management Standard and a Process for Further Soliciting and Considering Stakeholder Input. Significantly, Executive Order 13690 amended Executive Order 11988, Floodplain Management, issued in 1977 2 by, among other things, revising Section 6(c) of Executive Order 11988 to provide new approaches to establish the floodplain. Executive Order 13690 provided, however, that prior to any actions implementing Executive Order 13690, additional input from stakeholders be solicited and considered. Consistent with this direction, the Federal Emergency Management Agency (FEMA), as Chair of the Mitigation Framework Leadership Group (MitFLG 3 ), published a notice in the Federal Register seeking comment on the proposed “Revised Guidelines for Implementing Executive Order 11988, Floodplain Management” to provide guidance to agencies on the implementation of Executive Orders 13690 and 11988 (80 FR 6530, February 5, 2015). On March 26, 2015 (80 FR 16018), FEMA on behalf of MitFLG published a document in the Federal Register extending the public comment period for 30 days until May 6, 2015. MitFLG held 9 public listening sessions across the country that were attended by over 700 participants from State and local governments and other stakeholder organizations to discuss the Guidelines.4 MitFLG considered stakeholder input and provided recommendations to the Water Resources Council.5

On October 8, 2015, the Water Resources Council issued updated “Guidelines for Implementing Executive Order 11988, Floodplain Management, and Executive Order 13690, Establishing a Federal Flood Risk Management Standard and a Process for Further Soliciting and Considering Stakeholder Input” (Guidelines). The Guidelines state that although the Guidelines describe various approaches for determining the higher vertical flood elevation and corresponding horizontal floodplain for federally funded projects, they are not meant to be an elevation standard, but are a resilience standard. Accordingly, roads, parking lots, and other horizontal infrastructure do not require elevation nor do acquisitions of structures that do not require substantial improvements. However, the new Guidelines require that all future actions where federal funds are used for new construction, substantial improvement or to address substantial damage meet the level of resilience established by the Guidelines. In implementing the Guidelines and establishing the Federal Flood Risk Management Standard (FFRMS), Federal agencies were to select among the following three approaches for establishing the flood elevation and hazard area in siting, design, and construction:

• Climate-Informed Science Approach (CISA): Utilizing best-available, actionable data and methods that integrate current and future changes in flooding based on science,

• Freeboard 6 Value Approach (FVA): Two or three feet of elevation, depending on the criticality of the building, above the 100-year, or 1 percent-annual-chance, flood elevation, or

• 500 Year Flood (0.2 Percent Flood) Approach: 500-year, or 0.2 percent-annual-chance, flood elevation.

The FVA and 0.2 Percent Flood approaches result in higher elevations with correspondingly larger horizontal floodplain areas. CISA will generally have a similar result, except that agencies using CISA may find the resulting elevation to be equal to or lower than the current elevation in some areas due to the nature of the specific climate change processes and physical factors affecting flood risk at the project site. However, as a matter of policy established in the Executive Order 11988 and 13690 Implementing Guidelines, CISA can only be used if the resulting flood elevation is equal to or higher than current base flood elevation. The higher elevations result in a larger horizontal floodplain as illustrated below:

Executive Order 11988, issued May 24, 1977 (published in the Federal Register on May 25, 1977 at 42 FR 26951), requires Federal agencies to avoid, to the extent possible, the long and short term adverse impacts associated with the occupancy and modification of floodplains and to avoid direct and indirect support of floodplain development wherever there is a practicable alternative. Floodplains are found both in coastal flood areas, where rising tides and storm surge are often responsible for flooding, and in riverine flood areas where moving water bodies may overrun their banks due to heavy rains or snow melt. Because flood risk can change over time, FEMA continually revises floodplain maps to incorporate new information and reflect current understanding of flood risk.

Prior to Executive Order 13690, a floodplain for Executive Order 11988 purposes referred to the lowland and relatively flat areas adjoining inland and coastal waters including flood-prone areas of offshore islands, including at a minimum, that area subject to a one percent or greater chance of flooding in any given year (often referred to as the “100-year” flood or “base flood”). Executive Order 13690 amended Executive Order 11988, to require agencies to update the FFRMS and the original Executive Order 11988 floodplain using one (or a combination) of the three approaches listed above, which are incorporated in the FFRMS.

Consistent with Executive Order 11988, when no practicable alternative exists to development in flood-prone areas, HUD requires the design or modification of the proposed action to minimize potential adverse impact to and from flooding. HUD has implemented Executive Order 11988 and its 8-step review process through regulations at 24 CFR part 55. HUD requires the 8-step review process for activities occurring in the floodplain such as new construction of infrastructure or substantial improvement of buildings and hospitals. HUD requires that all HUD assisted or financed construction and improvements (including mortgage insurance actions) undergo the 8-step review process unless they are subject to an exception or categorical exclusion under 24 CFR 50.19, 24 CFR 55.12, 24 CFR 58.34, or 24 CFR 58.35(b). For example, the 8-step review process in § 55.20 does not apply to non-critical7 mortgage insurance actions and other financial assistance for the purchasing, mortgaging or refinancing of existing one-to-four family properties in communities that are in the Regular Program of the National Flood Insurance Program (NFIP) and in good standing, where the property is not located in a floodway or coastal high hazard area, or to financial assistance for minor repairs or improvements on one-to-four family properties. While the 8-step review process may not apply to these activities, HUD's current Minimum Property Standards at 24 CFR 200.926d require that single-family housing newly constructed under HUD mortgage insurance and specific low-rent public housing programs have its lowest floor at or above the base flood elevation.

The proposed revision to HUD's floodplain regulations uses the framework of Executive Order 11988 which HUD has implemented for almost 40 years and does not change which actions require elevation and floodproofing of structures. This proposed rule would require that non-critical actions be elevated 2 feet above the base flood elevation. In addition, the rule would require that critical actions be elevated above the greater of the 500-year floodplain or 3 feet above the base flood elevation. For structures subject to HUD's floodplain regulation, this proposed rule also would enlarge the horizontal area of interest commensurate with the vertical increase, but the rule does not change the scope of actions to which the floodplain review process or elevation requirements in the floodplains regulations apply. The proposed rule would also revise HUD's Minimum Property Standards for one-to-four-unit housing under HUD mortgage insurance and low-rent public housing programs to require that the lowest floor in both newly constructed and substantially improved structures located within the 100-year floodplain be built at least 2 feet above the base flood elevation as determined by best available information, but does not enlarge the horizontal area of interest.

As communities continue to recover from the devastating effects of Hurricane Sandy and other flood disasters, HUD has determined that their lessons cannot be ignored and point to the need for mitigation and resilience standards that ensure that structures located in flood-prone areas are built or rebuilt stronger, safer, and less vulnerable to future flooding events. As a result, consistent with the FVA described above for HUD assisted or financed actions, this proposed rule would require that structures involving new construction and substantial improvements and subject to 24 CFR part 55 be built to FFRMS and elevated at least 2 feet above the base flood elevation using best available information.8 For structures that meet the definition of critical actions as described in § 55.2(b)(3)(i), this proposed rule would require that structures in the FFRMS floodplain be elevated to the greater of the 500-year floodplain or 3 feet above the base flood elevation. For new or substantially improved non-residential structures in the FFRMS floodplain that are not critical actions, HUD is proposing that the structure either be elevated to the same level as residential structures, or, alternatively, be designed and constructed such that the structure is floodproofed to at least 2 feet above the base flood elevation.

This proposed rule would also apply a similar new elevation standard to one-to-four family residential structures, located in the 1 percent-annual-chance floodplain, that involve new construction or substantial improvement with mortgages insured by the Federal Housing Administration. This proposed rule would require elevation of these structures at least 2 feet above base flood elevation using the best available information. In order to meet the goal of improving the resilience of such properties while also aligning to the manner in which such programs already operate, the proposed rule excludes the horizontal extent of the FVA described above for such properties, as explained further in later in this preamble.

Elevation standards for manufactured housing receiving mortgage insurance are not covered in this rule change, but HUD expects to address this issue in future rulemaking. However, 24 CFR part 55, subject to exceptions and exclusions, will continue to apply to manufactured housing that receives assistance that is not in the form of mortgage insurance. This rule does not change the scope of activities that require compliance with the 8-step process, but rather it changes the vertical and horizontal extent of the floodplain for the purposes of 24 CFR part 55.

There are two primary purposes for this rulemaking. First, HUD's experience in the wake of Hurricane Sandy and other flood disasters is that unless structures in flood-prone areas are properly designed, constructed, and elevated, they may not withstand future severe flooding events. As recognized by MitFLG and required by the FFRMS and Executive Order 13690, requiring structures to be elevated an additional elevation above the base flood elevation will increase resiliency and reduce property damage, economic loss, and loss of life, and can also benefit homeowners by reducing flood insurance rates. These higher elevations provide an extra buffer of 2 to 3 feet above the base flood elevation based on the best available information to improve the long term resilience of communities. Second, the higher elevation standards help account for increased flood risk associated with projected sea level rise, which is not considered in current FEMA maps and flood insurance costs. As stated in “Global Sea Level Rise Scenarios for the United States National Climate Assessment” U.S. Department of Commerce, National Oceanic and Atmospheric Administration, December 2012,9 federal experts have a very high confidence (greater than a 9 in 10 chance) that global mean sea level will rise at least 0.2 meters (8 inches) and no more than 2.0 meters (6.6 feet) by the year 2100. The higher elevation standard will address the lower end of this projection, while also allowing for greater impacts to be addressed as well.

This proposed rule uses the framework of Executive Order 11988 which HUD has implemented for nearly forty years. The proposed rule in 24 CFR part 55 does not change the requirements and guidance specifying when elevation and floodproofing of structures is required. For instance, HUD currently requires that a single family property involving new construction or substantial improvement financed with a HUD grant and located in the 1 percent-annual-chance floodplain in the effective Flood Insurance Rate Map (FIRM) be elevated to the effective FIRM base flood elevation. This proposed rule would add two feet of additional elevation to the base flood elevation as a resilience standard. Similarly, the proposed rule would not change the requirements or guidance governing rowhomes or structures with basements except to add two feet of additional elevation. As in the past, projects involving substantial improvement to rowhomes would have several options: (1) Elevate the effected home or homes, either by raising the floor within the home or elevating the full block; (2) if the homes are possibly historic, take formal steps to have the home(s) listed on the National Register of Historical Places or on a State Inventory of Historic Places, as structures with historic status are not required to elevate; or (3) alter the design plans so that substantial improvement is not being performed, such that elevation is not required. Likewise, some structures with basements would continue to be affected under the proposed rule. In some cases, raising the floor or filling in basements altogether may be necessary. In non-residential structures, floodproofing could be an option to preserve basements. HUD does not anticipate significant impacts on basements from the proposed rule; since HUD began collecting data on single-family properties basements in 2014, no single-family property has been affected by HUD's current flood elevation requirements.

HUD chose the FVA over the CISA and the 0.2 Percent Flood approaches for a variety of reasons. First, the FVA can be applied consistently to any area participating in the NFIP. The FVA can be calculated using existing flood maps. This is not true for the CISA standard unless HUD were to establish criteria for every community regarding the application of particular climate and greenhouse gas scenarios and associated impacts (e.g., changes in precipitation patterns or relative sea-level rise rates). Rather than requiring this level of review and analysis, HUD chose the more direct FVA. Second, the two alternative approaches to FVA require expertise that may not be available to all communities. The 0.2 Percent Flood is not mapped in all communities, reflects in most coastal areas the stillwater (without storm surge) component of flooding and this is only appropriate for determining the horizontal floodplain extent. Local wave effects associated with the 0.2 percent stillwater flood elevation would need to be determined for the data to be used in establishing first floor or floodproofing elevation or any other engineering application. The 0.2 Percent Flood also requires a significant degree of expertise to map over an area or for an individual site. The same is also true for the CISA standard, which requires not just historical analysis but a greater anticipation of trends and future conditions. Third, HUD anticipates that it will not be cost effective to establish the CISA or the 0.2 Percent Flood for all projects. HUD funds or assists tens of thousands of small projects each year. For example, repaving a road or rehabilitating a single family home may not necessitate the extra amounts of cost required by the CISA and 0.2 Percent Flood approaches. Fourth, as stated earlier, many states and communities already have success applying a higher-elevation approach to floodplains. Due to the familiarity that many communities have with higher elevation standards, the FVA was seen as a very practical approach with documented history of application. For all of these reasons, HUD chose the FVA approach.

Requiring a higher elevation standard will also address increased risk that occurs when flood maps do not reflect the current development footprint. Additional development and impervious surface decrease floodplain capacity and increase flood risk to structures. As more of the floodplain is paved, the floodplain absorbs less water and the area subject to flooding is increased. For this reason and generalized uncertainty in flood modeling processes, two prominent building codes, the International Building Code and International Residential Code 10 both recommend the use of elevation of structures—also called “freeboard”—to mitigate flood hazards. Freeboard is defined by FEMA to mean a factor of safety usually expressed in feet above base flood elevation for purposes of floodplain management. Freeboard is currently required by 20 States (plus the District of Columbia and Puerto Rico) and 596 localities.11

A recent FEMA study also estimated that the size of floodplains and demand for flood insurance coverage will continue to increase.12 The study estimated that the total number of NFIP insurance policies was projected to increase by approximately 80 percent by 2100. The number of riverine policies may increase by about 100 percent and the number of coastal policies may increase by approximately 60 percent. The increase in the number of polices is due in part to development associated with normal population growth and in part to the effect of climate change on the amount of land in the floodplain within communities.

Requiring additional elevation above the base flood elevation also produces net savings in housing costs over time. HUD's mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. Flood insurance and rebuilding costs can have drastic adverse effects on the affordability of homes. By elevating additional feet above the base flood elevation, homeowners may benefit from flood insurance premium reductions that will increase long-term affordability. As stated in FEMA's “Home Builder's Guide To Coastal Construction, Designing for Flood Levels Above the BFE” Technical Bulletin No. 1.6,13 constructing or reconstructing structures 2 feet above base flood elevation at a modest cost can result in premium savings of 50 percent in V Zone structures and 48 percent in A Zones. Please see the discussion of other cost reductions and benefits of increasing elevation in the regulatory impact analysis that accompanies this rule.

HUD proposes to implement FFRMS by revising § 55.20, which is HUD's current 8-step process for evaluating HUD-assisted projects for flood risk and identifying steps to mitigate that risk. The 8-step process is currently triggered whenever a proposed non-critical action falls within the 100-year floodplain, as defined in § 55.2(b)(9), and whenever a critical action falls within the 500-year floodplain, as defined in § 55.2(b)(4). This proposed rule would expand the scope of § 55.20 by applying it to all projects situated at an elevation at or below the FFRMS floodplain.

HUD proposes to define FFRMS floodplain in § 55.2(b)(12) for non-critical actions as land that is less than two feet above the 100-year floodplain. For critical actions, the FFRMS floodplain would be defined to include land that is either within the 500-year floodplain or less than three feet above the 100-year floodplain. Section 55.20(e) of the proposed rule would provide that, in addition to the current mitigation and risk reduction requirements, all actions in the FFRMS floodplain must be elevated or, in certain cases, floodproofed above the FFRMS floodplain. If higher elevations, setbacks, or other floodplain management measures are required by state, tribal, or locally adopted code or standards, HUD would provide that those higher standards would apply.

For non-critical actions that are non-residential structures or multifamily residential structures that have no residential dwelling units below the FFRMS floodplain, HUD is proposing that projects may, as an alternative to being designed and built above the FFRMS floodplain, be designed and constructed such that, below the FFRMS floodplain, the structure is floodproofed. HUD would, except for changing “base flood level” to “FFRMS floodplain,” as defined in § 55.2(b)(12), adopt FEMA's requirements for floodproofing as provided in FEMA's regulations at 44 CFR 60.3(c)(3)(ii), which describes “floodproofing” as requiring that structures, “together with attendant utility and sanitary facilities, be designed so that below the base flood level the structure is watertight with walls substantially impermeable to the passage of water and with structural components having the capability of resisting hydrostatic and hydrodynamic loads and effects of buoyancy.” If higher standards are required by the NFIP or state, tribal, or locally adopted codes or standards, or if FEMA revises its NFIP regulation, those higher standards or later regulation would apply; except that notwithstanding any later, less stringent general standard, HUD will continue to require floodproofing to at least the FFRMS floodplain for those projects. In summary, all new construction or substantial rehabilitation of non-residential and certain mixed-use structures within the FFRMS floodplain that are not elevated must be floodproofed consistent with the latest FEMA standards above the level of the FFRMS floodplain. This provision would permit owners of non-residential and certain mixed-use buildings to construct structures in a way that is less expensive than elevation but allows the buildings to withstand flooding, thus appropriately balancing property protection with costs and reflecting the lower risk to human life and safety in non-residential structures or parts of structures.

In the case of multifamily buildings, HUD would provide that the term “lowest floor” must be applied consistent with FEMA's Elevation Certificate guidance or FEMA's current guidance that establishes lowest floor. Specifically, HUD would define “lowest floor” to mean the lowest floor of the lowest enclosed area (including basement), except that an unfinished or flood resistant enclosure, usable solely for parking of vehicles, building access or storage in an area other than a basement area is not considered a building's lowest floor, provided, that such enclosure is not built so as to render the structure in violation of the non-elevation design requirements of 44 CFR 60.3.

The definition of “substantial improvement,” codified at § 55.2(b)(10), would not change but continue to include any repair, reconstruction, modernization or improvement of a structure, the cost of which equals or exceeds 50 percent of the market value of the structure either: (1) Before the improvement or repair is started; or (2) if the structure has been damaged and is being restored, before the damage occurred. The definition of substantial improvement also includes repairs, reconstruction, modernization, or improvements that increase the average peak number of customers or employees likely to be on-site at any one time or the number of dwelling units in residential projects more than 20 percent. “Substantial improvement” does not include alterations to structures listed on the National Register of Historic Places or on a State Inventory of Historic Places or improvement of a structure to comply with existing state or local code specifications that is solely necessary to assure safe living conditions.

The provisions relating to Letters of Map Amendment (LOMAs) and Letters of Map Revision (LOMRs) at § 55.12(c)(8) as well as the provision at § 55.26 covering the adoption of other agency floodplain and wetland reviews would also be updated to reflect the FFRMS.

Under this proposed rule, the required data source and best available information under Executive Order 11988 remains the latest FEMA issued data or guidance, which includes advisory data (such as Advisory Base Flood Elevations (ABFE)) or preliminary and final Flood Insurance Rate Maps (FIRM). Executive Order 11988 on floodplain management requires that federal agencies use the best available information to determine the flood risk for locations of projects and activities. Section 55.2(b)(1) provides that when FEMA provides interim flood hazard data, such as ABFE or preliminary maps and studies, HUD or the responsible entity shall use the latest of these sources to establish the floodplain. If FEMA information is unavailable or insufficiently detailed, other federal, state, tribal, or local data may be used as “best available information” in accordance with Executive Order 11988. However, a base flood elevation from an interim or preliminary or non-FEMA source cannot be used if it is lower than the current FIRM and Flood Insurance Study. This proposed rule clarifies, however, that in addition to FIRMs or ABFEs, the use of sources, such as U.S. Global Change Research Program, National Oceanic and Atmospheric Administration, United States Army Corps of Engineers, U.S. Geological Survey, and other FEMA sources, regarding climate impacts and sea level rise may be considered and must be considered for Environmental Impact Statements (EIS). These agencies often offer analyses that are forward-looking and may be more robust than the data offered under NFIP, which does not currently analyze sea level rise in FIRMs. These sources cover subject areas such as estimated sea level rise or catastrophic failure of flood control projects that may lead the reviewer to determine that an elevation greater than the FFRMS floodplain is appropriate. These sources may supplement the FIRM or ABFE but cannot be used as a basis for a lower elevation than otherwise required under this part.

In addition to increasing the elevation requirement, the rule proposes several other changes to enhance efficiency and consistency. First, the rule would amend the public notice requirements in §§ 55.20(b)(1) and 58.43(a) to allow parties to provide the public with notice of potential actions using government Web sites in lieu of a “local printed news medium” or “newspaper of general circulation in the affected community” as required under the current regulations. Second, the proposed rule also adds the word “method” to § 55.20(c)(1) to make the sentence consistent with language that immediately follows in § 55.20(c)(1)(ii) stating that alternative flood protection method considerations are, in addition to alternative site considerations, required under this subpart. Third, the proposed rule updates the definition of Coastal High Hazard Area (V Zone) to match FEMA's more thorough definition at 44 CFR 59.1, which is used by the NFIP. The change will have no impact on the function of 24 CFR part 55, because FEMA FIRMs will remain the principal source of V Zone data. Finally, the proposed rule makes a technical correction to a citation located in table 1 in § 55.11(c).

This rulemaking also proposes to apply a new elevation standard to one-to-four-family residential structures with mortgages insured by the FHA. Generally, in HUD's single-family mortgage insurance programs, Direct Endorsement mortgagees submit applications for mortgage insurance to HUD, and Lender Insurance mortgagees endorse loans for insurance, after the structure has been built. Thus, there is no HUD review or approval before the completion of construction. In these instances, HUD is not undertaking, financing or assisting construction or improvements. Thus, the FHA single family mortgage insurance program is not subject to Executive Order 11988, NEPA (42 U.S.C. 4321 et seq.), or related environmental laws or authorities. However, newly constructed single-family properties in HUD's mortgage insurance programs are generally required to meet HUD's minimum property standards under 24 CFR 200.926 through 200.926e. These property standards require that when HUD insures a mortgage on a property, the property meets basic livability and safety standards and is code compliant. The section relating to construction in flood hazard areas, § 200.926d(c)(4), has long been included as a property standard.

In alignment with the proposals in this rulemaking that address FFRMS under Executive Order 11988, HUD is also proposing to amend its Minimum Property Standards on site design, and specifically the standards addressing drainage and flood hazard exposure at § 200.926d(c)(4). The purpose of the amendment of the property standard is to decrease potential damage from floods, increase the safety and soundness of the property for residents, and provide for more resilient communities in flood hazard areas. HUD would revise the section by requiring the lowest floor of newly constructed and substantially improved structures, within the 100-year floodplain, with and without basements to be at least 2 feet above the base flood elevation as determined by best available information. For one- to four-unit housing under HUD mortgage insurance and low-rent public housing programs, HUD's Minimum Property Standards in 24 CFR part 200 currently require that a one- to four-unit property involving new construction, located in the 1 percent-annual-chance floodplain in the effective Flood Insurance Rate Map (FIRM), be elevated to the effective FIRM base flood elevation. This proposed rule would add two feet of additional elevation to the base flood elevation as a resilience standard and would apply this standard to substantial improvement as well as new construction of such properties. This rule would not require consideration of the horizontally expanded FFRMS floodplain for single-family mortgage insurance projects governed by the requirements in the Minimum Property Standards.

HUD also proposes to amend § 50.20(a)(2)(i) to revise the categorical exclusion from environmental review under NEPA for minor rehabilitation of one- to four-unit residential properties. Specifically, HUD would remove the qualification that the footprint of the structure may not be increased in a floodplain or wetland when HUD performs the review. HUD recently removed the footprint trigger from the categorical exclusion at § 58.35(a)(3)(i) to allow rehabilitations reviewed by HUD responsible entities this ability to utilize this exclusion. This change will make the review standard the same regardless of whether HUD or a responsible entity is performing the review. Currently, when HUD performs a review under 24 CFR part 50, four units can be constructed in a floodplain or wetland as an individual action without an environmental assessment under the categorical exclusion in § 50.20(a)(3), but rehabilitated structures in a floodplain or wetland with an increased footprint would require a full environmental assessment. It is logically inconsistent to require a greater review for minor rehabilitations than new construction and to apply a higher level of review for HUD as opposed to grantees.

In addition to seeking comments on implementing FFRMS, HUD specifically seeks public comments on the impact of the proposed elevation requirement on the accessibility of covered multifamily dwellings under the Fair Housing Act, the Americans with Disabilities Act (ADA), the Architectural Barriers Act (ABA), and section 504 of the Rehabilitation Act of 1973. Elevating buildings as a flood damage mitigation strategy may have a negative impact on affected communities' disabled and elderly populations, unless those buildings are made accessible. As a result, HUD invites comments on strategies it could employ to increase the accessibility of properties so affected in the event the proposed increase in elevation is adopted. Additionally, HUD invites comment on the cost and benefits of such strategies, including data that supports the costs and benefits.

HUD is not including as part of this proposed rule, guidance to determine the horizontal extent of the FFRMS floodplain. In this regard, HUD believes that it is imperative to preserve the option to use new methodologies to determine horizontal extent as they become available. Nevertheless, HUD is seeking public comments on potential limits to the area and horizontal extent of the floodplain beyond the 100-year floodplain when using the FFRMS. Specifically, HUD is considering whether to use HUD's current areawide compliance process described at 24 CFR 55.25 to allow HUD to enter into allow voluntary agreements with communities to limit horizontal extent beyond the 100-year floodplain where: (1) Best-available and actionable climate data shows the area and horizontal extent of the two foot freeboard (or three foot for a Critical Action) FFRMS exceeds local, relative sea-level rise rates or other climate-related projections and the 500-year floodplain including wave heights; and

(2) There are limited or no safely or sustainably developable sites in a community outside of the two foot FVA (or three foot for a Critical Action).

HUD also invites comment on other approaches to limit the horizontal extent of the floodplain beyond the 100-year floodplain. Information regarding the cost and benefits of adopting any proposed limit is also requested.

Further information about best-available and actionable climate data and the Climate-Informed Science Approach of the FFRMS is available in Appendix H of the October 8, 2015 Guidelines for Executive Order 11988, Floodplain Management, and Executive Order 13690, Establishing a Federal Flood Risk Management Standard and a Process for Further Soliciting and Considering Stakeholder Input (Guidelines).

Finally, HUD invites comments on alternative approaches to define the FFRMS floodplain for critical actions. For structures that meet the definition of critical actions as described in § 55.2(b)(3)(i) (e.g., fire stations, police stations, and hospitals), this proposed rule would require that structures be elevated to the greater of the 500-year floodplain or 3 feet above the base flood elevation. HUD requests alternative suggestions for defining the floodplain for the purposes of these projects for which even a slight chance of flooding is too great.

Under Executive Order 12866 (Regulatory Planning and Review), a determination must be made whether a regulatory action is significant and, therefore, subject to review by the Office of Management and Budget (OMB) in accordance with the requirements of the order. Executive Order 13563 (Improving Regulations and Regulatory Review) directs executive agencies to analyze regulations that are “outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.” Executive Order 13563 also directs that, where relevant, feasible, and consistent with regulatory objectives, and to the extent permitted by law, agencies are to identify and consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public. This rule was determined to be a “significant regulatory action” as defined in section 3(f) of Executive Order 12866 (although not an economically significant regulatory action, as provided under section 3(f)(1) of the Executive Order).

As discussed in this preamble, the proposed regulatory amendments would, based on Executive Order 13690 and the Guidelines, require, as part of the decisionmaking process established to ensure compliance with Executive Order 11988 (Floodplain Management), that new construction or substantial improvement in a floodplain be elevated or floodproofed 2 feet above the base flood elevation for non-critical actions and above the greater of the 500-year floodplain or 3 feet above the base flood elevation for critical actions based on FEMA's best available data. This proposed rule would also apply a similar new elevation standard to one-to-four family residential structures, located in the 1 percent-annual-chance floodplain, that involve new construction or substantial improvement with mortgages insured by the Federal Housing Administration. This rulemaking also proposes to revise a categorical exclusion available when HUD performs the environmental review by making it consistent with changes to a similar categorical exclusion that is available to HUD grantees or other responsible entities when they perform the environmental review. The rulemaking is part of HUD's commitment under the President's Climate Action plan. Building to these standards would increase resiliency, reduce the risk of flood loss, minimize the impact of floods on human safety, health and welfare, and promote sound, sustainable, long-term planning informed by a more accurate evaluation of risk that takes into account possible sea level rise and increased development associated with population growth.

Increasing the required minimum elevation of HUD-assisted structures located in and around the floodplain will prevent damage caused by flooding and avoid relocation costs to tenants associated with temporary moves when HUD-assisted structures sustain flood damage and are temporarily uninhabitable. These benefits, which are realized throughout the life of HUD-assisted structures, are offset by the one-time increase in construction costs, borne only at the time of construction. Introducing a standard that requires additional freeboard above the base flood elevation takes into consideration FEMA's history of recommending freeboard as a tool for mitigation which extends several decades and provides, in HUD's view, the best assessment of risk to protect federal investments in flood zones.

In addition, the likelihood that floods in coastal areas will become more frequent and damaging due to rising sea levels in future decades necessitates a stricter standard than the one currently in place. As stated in “Global Sea Level Rise Scenarios for the United States National Climate Assessment” U.S. Department of Commerce, National Oceanic and Atmospheric Administration, December 2012,14 federal experts have a very high confidence (greater than a 9 in 10 chance) that global mean sea level will rise at least 0.2 meters (8 inches) and no more than 2.0 meters (6.6 feet) by the year 2100. The Intergovernmental Panel on Climate Change (2013) also confirms that the sea level will continue rising throughout the 21st century.15

As discussed in the regulatory impact analysis that accompanies this rule, HUD estimates that requiring developers to construct or floodproof HUD-funded or insured properties to two feet above base flood elevation will increase construction costs by $12.803 million to $47.525 million. These are one-time costs which occur at the time of construction. Benefits of the increased standard include avoided damage to buildings, as measured by decreased insurance premiums, and avoided costs associated with tenants being displaced. These benefits occur annually over the life of the structures. Over a 30-year period, the present value of aggregate benefits total $12.336 million to $50.657 million assuming a 3 percent discount rate and $8.192 million to $33.317 million assuming a 7 percent discount rate.

These estimates are based on the annual production of HUD-assisted and insured structures in the floodplain and accounts for the 20 states (in addition to the District of Columbia and Puerto Rico) 16 with existing freeboard requirements. Four of these states require residential structures to be constructed with the lowest floor at least two feet above the base flood elevation (Indiana, Montana, New York and Wisconsin) and 18 states and territories require residential structures to be built with the lowest floor at least one foot above the base flood elevation. The cost of compliance would be lower in these states than it would be in states that have no minimum elevation requirements above the base flood elevation. Further increase in the sea level rise or inland and riverine flooding would increase the benefits of this proposed rule. For a complete description of HUD's analysis, please see the accompanying Regulatory Impact Analysis for this rule on regulations.gov.

The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule would not have a significant economic impact on a substantial number of small entities. HUD's statistics on developers of FHA-insured properties do not precisely correlate with SBA's size standard of a small business for the category of “Real Estate Credit,” which size standard is less than $36.5 million in assets. HUD does have data on net worth and liquidity, however, and for the purposes of this discussion treats these as essentially similar to “assets” as meant in the SBA size standards.

With respect to all entities, including small entities, it is unlikely that the economic impact would be significant. As the Regulatory Impact Analysis (RIA) explains, the benefits of reduced damage offset the construction costs before taking further sea level rise into consideration. Further, small entities may benefit more since they are less likely to endure financial hardships caused by severe flooding.

Based on an engineering study conducted for FEMA,17 the construction cost of increasing the base of a new residential structure two additional feet of vertical elevation varies from 0.3 percent to 4.8 percent of the base building cost. This results in an increase of up to $5,074 per single family home and $70,769 per multi-family property located in states with no existing freeboard requirements. Consequently, this would not pose a significant burden to small entities in the single family housing development industry.

These costs are likely higher than would actually be caused by the increased standard because most HUD-assisted or insured substantial improvement projects already involve elevation to comply with the current standard, elevation to the base flood elevation (base flood elevation+0). Thus, elevating a structure an additional two feet would be marginal compared to the initial cost of elevation to the floodplain level.

For this reason, the undersigned certifies that there is no significant economic impact on small entities. Notwithstanding HUD's determination that this rule will not have a significant economic impact on a substantial number of small entities, HUD specifically invites comments regarding any less burdensome alternatives to this rule that would meet HUD's program responsibilities.

A Finding of No Significant Impact (FONSI) with respect to environment has been made in accordance with HUD regulations at 24 CFR part 50, which implement section 102(2)(C) of NEPA (42 U.S.C. 4332(2)(C)). The Finding of No Significant Impact is available for public inspection on regulations.gov and between the hours of 8 a.m. and 5 p.m. weekdays in the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 20410. Due to security measures at the HUD Headquarters building, please schedule an appointment to review the FONSI by calling the Regulations Division at 202-708-3055 (this is not a toll-free number). Individuals with speech or hearing impairments may access this number via TTY by calling the toll-free Federal Relay Service at 800-877-8339.

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial direct compliance costs on state and local governments and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This rulemaking does not have federalism implications and would not impose substantial direct compliance costs on state and local governments nor preempts state law within the meaning of the Executive order.

Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) (UMRA) establishes requirements for federal agencies to assess the effects of their regulatory actions on state, local, and tribal governments, and on the private sector. This proposed rule would not impose any federal mandates on any state, local, or tribal governments, or on the private sector, within the meaning of UMRA.

The information collection requirements contained in this rule were reviewed by OMB under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB Control Number 2506-0151. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information, unless the collection displays a valid control number.

Accordingly, for the reasons stated in the preamble above, HUD proposes to amend 24 CFR parts 50, 55, 58, and 200 as follows:

The revisions and additions read as follows:

The addition reads as follows:

The revisions read as follows:

Section 105(e) of the Federal Alcohol Administration Act (FAA Act), 27 U.S.C. 205(e), authorizes the Secretary of the Treasury to prescribe regulations for the labeling of wine, distilled spirits, and malt beverages. The FAA Act provides that these regulations should, among other things, prohibit consumer deception and the use of misleading statements on labels, and ensure that labels provide the consumer with adequate information as to the identity and quality of the product. The Alcohol and Tobacco Tax and Trade Bureau (TTB) administers the FAA Act pursuant to section 1111(d) of the Homeland Security Act of 2002, codified at 6 U.S.C. 531(d). The Secretary has delegated various authorities through Treasury Department Order 120-01, dated December 10, 2013 (superseding Treasury Order 120-01, dated January 24, 2003), to the TTB Administrator to perform the functions and duties in the administration and enforcement of these provisions.

Part 4 of the TTB regulations (27 CFR part 4) authorizes TTB to establish definitive viticultural areas and regulate the use of their names as appellations of origin on wine labels and in wine advertisements. Part 9 of the TTB regulations (27 CFR part 9) sets forth standards for the preparation and submission of petitions for the establishment or modification of American viticultural areas (AVAs) and lists the approved AVAs.

Section 4.25(e)(1)(i) of the TTB regulations (27 CFR 4.25(e)(1)(i)) defines a viticultural area for American wine as a delimited grape-growing region having distinguishing features, as described in part 9 of the regulations, and a name and a delineated boundary, as established in part 9 of the regulations. These designations allow vintners and consumers to attribute a given quality, reputation, or other characteristic of a wine made from grapes grown in an area to its geographic origin. The establishment of AVAs allows vintners to describe more accurately the origin of their wines to consumers and helps consumers to identify wines they may purchase. Establishment of an AVA is neither an approval nor an endorsement by TTB of the wine produced in that area.

Section 4.25(e)(2) of the TTB regulations (27 CFR 4.25(e)(2)) outlines the procedure for proposing an AVA and provides that any interested party may petition TTB to establish a grape-growing region as an AVA. Section 9.12 of the TTB regulations (27 CFR 9.12) prescribes standards for petitions for the establishment or modification of AVAs. Petitions to establish an AVA must include the following:

• Evidence that the area within the proposed AVA boundary is nationally or locally known by the AVA name specified in the petition;

• An explanation of the basis for defining the boundary of the proposed AVA;

• A narrative description of the features of the proposed AVA that affect viticulture, such as climate, geology, soils, physical features, and elevation, that make the proposed AVA distinctive and distinguish it from adjacent areas outside the proposed AVA boundary;

• The appropriate United States Geological Survey (USGS) map(s) showing the location of the proposed AVA, with the boundary of the proposed AVA clearly drawn thereon; and

• A detailed narrative description of the proposed AVA boundary based on USGS map markings.

TTB received a petition from the Petaluma Gap Winegrowers Alliance, proposing to establish the “Petaluma Gap” AVA and to modify the boundary of the existing multi-county North Coast AVA (27 CFR 9.30). The proposed AVA covers portions of Sonoma and Marin Counties, in California. There are 9 bonded wineries and 80 commercial vineyards, covering a total of approximately 4,000 acres, distributed throughout the 202,476-acre proposed AVA.

While the proposed Petaluma Gap AVA is largely located within the existing North Coast AVA, a small portion of the proposed Petaluma Gap AVA would, if established, extend outside the current southern boundary of the established North Coast AVA. To address the potential partial overlap of the two AVAs and account for viticultural similarities between the proposed Petaluma Gap AVA and the larger North Coast AVA, the petition also proposes to expand the boundary of the North Coast AVA so that the entire proposed Petaluma Gap AVA would be included within the North Coast AVA. The proposed expansion would increase the size of the 3 million-acre North Coast AVA boundary by 28,077 acres.

The proposed Petaluma Gap AVA, if established, would also partially overlap the southwestern boundary of the established Sonoma Coast AVA (27 CFR 9.116), but the Marin County portion of the proposed AVA, consisting of approximately 68,130 acres, would extend outside of the Sonoma Coast AVA. However, the petition does not propose to modify the boundary of the Sonoma Coast AVA for reasons which will be discussed later in this document, including the lack of use of the name “Sonoma Coast” outside of Sonoma County.

The distinguishing features of the proposed Petaluma Gap AVA are its topography and wind speeds. Unless otherwise noted, all information and data contained in the following sections are from the petition to establish the proposed AVA and its supporting exhibits.

The proposed Petaluma Gap AVA derives its name from the city of Petaluma and from the geographical feature known as the “Petaluma Gap,” both of which are located within the proposed AVA. The “Petaluma Gap” geographical feature is an area of low-lying hills which allows cool winds to flow inland from the Pacific Ocean. The Bay Area Air Quality Management District (BAAQMD) Web site states, “The region from the Estero Lowlands to the San Pablo Bay is known as the Petaluma Gap. * * * Wind patterns in the Petaluma and Cotati Valleys are strongly influenced by the Petaluma Gap.” 1 In a study on the climate of Sonoma County, Paul Vossen, a farm advisor for the University of California Cooperative Extension Service in Sonoma County, wrote that cool marine winds extend inland “through river canyons and the Petaluma gap [sic] to Sonoma Mountain.” 2

The name “Petaluma Gap” is also associated with the wine industry within the proposed AVA. The petitioner provided summaries of several wine-related articles that refer to the region of the proposed AVA as “Petaluma Gap.” In his blog “Fermentation: The Daily Wine Blog,” Tom Wark writes, “The `Petaluma Gap' might be a term you've heard of lately, particularly if you are an aficionado of Sonoma County wines.” 3 A 2007 article by Rusty Gaffney on his “The Prince of Pinot” blog says, “The Petaluma Gap possesses a very unique microclimate.” 4 A 2007 article in the magazine Wine and Spirits states, “You can practically smell the ocean, just a few miles away, in the wind that roars between the Sonoma mountains, through the hillside and valley floor vineyards, creating an inland pinot oasis called the Petaluma Gap.” 5 A 2008 article titled “Mind the (Petaluma) Gap” in the Tasting Panel magazine describes the region of the proposed AVA as follows: “Located at the lower end of the Sonoma Coast AVA and distinguished by its close proximity to the Pacific Ocean, the Petaluma Gap is influenced on a daily basis by misty fog in the mornings, warm afternoons and chilly maritime winds in the evenings.” 6 A 2012 article in Decanter magazine describes several regions in California that are “the state's most marginal sites,” including “the Petaluma Gap within the Sonoma Coast appellation * * * .” 7 A 2012 article in the Petaluma Post newspaper states, “The wind and fog are the Petaluma Gap's trademark.” 8 Finally, a 2014 article in the Santa Rosa Press Democrat newspaper states, “The Gap in Petaluma Gap is created by Pacific Ocean winds that flow between Tomales Bay and Bodega Bay through a 15-mile-wide gap in the coastal range mountains.” 9

The proposed Petaluma Gap AVA is located in southern Sonoma County and northern Marin County. The proposed AVA has a northwest-southeast orientation and extends from the Pacific Ocean to San Pablo Bay. The proposed western boundary follows the Pacific coastline from the point where Walker Creek enters Tomales Bay northward to the point where Salmon Creek enters the ocean, just north of Bodega Bay. The proposed northern boundary follows Salmon Creek, the 400-foot elevation contour, and a series of roads and lines drawn between marked elevation points in order to separate the lower elevations and rolling hills of the proposed AVA from the steeper, higher elevations to the north. The proposed eastern boundary follows a series of lines drawn between points on the USGS map, separating the proposed AVA from the higher elevations of Sonoma Mountain and the flatter terrain along Sonoma Creek and San Pablo Bay. The proposed southern boundary follows a series of lines drawn between marked elevation points in order to separate the proposed AVA from the higher elevations to the south.

According to the petition, the distinguishing features of the proposed Petaluma Gap AVA are its topography and wind speed.

Coastal highlands and mountain ranges are characteristic of the California coast. However, within the proposed Petaluma Gap AVA, the highlands are not as pronounced as they are north and south of the proposed AVA. Within the proposed AVA, the topography is characterized by low, rolling hills. Flat land is found along the Petaluma River, especially east of the City of Petaluma and near the mouth of San Pablo Bay. Small valleys and fluvial terraces are also present. Elevations within the proposed AVA do not exceed 600 feet, except in a few places within the ridgelines that form the proposed northern, eastern, and southern boundaries.

According to the petition, the low elevations and gently rolling terrain of the proposed Petaluma Gap create a corridor that allows marine winds to flow relatively unhindered from the Pacific Ocean to San Pablo Bay, particularly during the mid-to-late afternoon. As a result, cool air and marine fog enter the vineyards during the time of day when temperatures would normally be at their highest, bringing heat relief to the vines. The low elevations and rolling hills of the proposed AVA also allow the marine air to enter the proposed AVA at higher speeds than found in the surrounding areas, where higher, steeper mountains disrupt the flow of air. The effects of the high wind speeds on grapes are discussed in detail later in this document.

To the north of the proposed Petaluma Gap AVA, the elevations are much higher, with elevations over 1,000 feet not uncommon in northern Sonoma County. The broad Santa Rosa Plain is also located north of the proposed AVA and has a much flatter topography than the proposed AVA. East of the proposed AVA, the higher elevations of Sonoma Mountain prevent much of the marine airflow that enters the Petaluma Gap from travelling farther east. East of Sonoma Mountain is the Sonoma Valley, which has lower elevations and flatter terrain than the proposed AVA. To the south of the proposed AVA, the elevations can exceed 1,000 feet.

According to the petition, marine air enters the proposed Petaluma Gap AVA at the Pacific coastline, between Bodega Bay and Tomales Bay. The air then flows southeasterly through the proposed AVA and exits at San Pablo Bay. Although marine breezes are present within the proposed AVA during most of the day, the wind speeds increase significantly in the afternoon hours. The petition states that in the mid-to-late afternoon, inland temperatures increase, causing the hot air to rise and pull the cooler, heavier marine air in from the coast and create steady winds. The following table, which was created by TTB from information included in the petition, shows the hourly average wind speed between noon and 6:00 p.m. for locations within the proposed AVA and the surrounding areas during the April-October growing season. Map 5a, included in Addendum 2 to the petition, shows the locations of the weather stations. Because the Pacific Ocean forms the western boundary of the proposed AVA, comparison data is only included from the regions to the north, east, and south of the proposed AVA. The data in the table shows that average hourly afternoon wind speeds within the proposed AVA are consistently higher than those in the surrounding regions.

The petition also includes a table showing the frequency of hourly average afternoon wind speeds of at least 8 miles per hour for locations within the proposed Petaluma Gap AVA and the surrounding regions. The data is summarized in the following table. The period of record for each station is the same as used for Table 1.

The table shows that afternoon wind speeds for locations within the proposed AVA reach or exceed 8 miles per hour with greater frequency than for locations outside the proposed AVA. The petition states that when wind speeds reach 8 miles per hour, the stomata (or small pores) on the underside of the grape leaves close. When the stomata are closed, the rate of photosynthesis slows. The petition states that occasional periods of wind speeds of 8 miles per hour or higher typically have little effect on grape development. However, persistently high wind speeds, such as those found within the proposed Petaluma Gap AVA, reduce photosynthesis to the extent that the grapes have to remain on the vine longer in order to reach a given sugar level (a longer “hang time”), compared to the same grape varietal grown in a less windy location. Grapes grown in windy locations are also typically smaller and have thicker skins than the same varietal grown elsewhere. According to the petition, the smaller grape size, thicker skins, and longer hang time concentrate the flavor compounds in the fruit, allowing grapes that are harvested at lower sugar levels to still have the typical flavor characteristics of the grape varietal.

The North Coast AVA was established by T.D. ATF-145, which was published in the Federal Register on September 21, 1983 (48 FR 42973). The AVA includes all or portions of Napa, Sonoma, Mendocino, Solano, Lake, and Marin Counties in California and covers approximately 3 million acres. In the conclusion of the “Geographical Features” section of the preamble, T.D. ATF-145 states that “[d]ue to the enormous size of the North Coast viticultural area, variations exist in climatic features such as temperature, rainfall, and fog intrusion.”

The proposed Petaluma Gap AVA shares the basic viticultural feature of the North Coast AVA—the marine influence that moderates growing season temperatures in the area. However, the proposed AVA is much more uniform in its topography and its climate, as defined by wind speeds, than the diverse, multicounty North Coast AVA. In this regard, TTB notes that in the “Overlapping Viticultural Areas” section, T.D. ATF-145 specifically states that “approval of this viticultural area does not preclude approval of additional areas, either wholly contained within the North Coast, or partially overlapping the North Coast,” and that “smaller viticultural areas tend to be more uniform in their geographical and climatic characteristics, while very large areas such as the North Coast tend to exhibit generally similar characteristics, in this case the influence of maritime air off of the Pacific Ocean and San Pablo Bay.” Thus, the proposal to establish the Petaluma Gap AVA is consistent with what was envisaged when the North Coast AVA was established.

As previously noted, the petition to establish the proposed Petaluma Gap AVA also requests an expansion of the established North Coast AVA. The proposed Petaluma Gap AVA is located in the southwestern portion of the North Coast AVA, along the Sonoma-Marin County line. Most of the proposed Petaluma Gap AVA would, if established, be located within the current boundary of the North Coast AVA. However, unless the boundary of the North Coast AVA is modified, the southwestern portion of the proposed Petaluma Gap AVA in northwestern Marin County would be outside the North Coast AVA. This portion of the proposed Petaluma Gap AVA is roughly defined by the Pacific coastline on the western edge, the Sonoma-Marin County line on the northern edge, State Highway 1 on the eastern edge, and the mouth of Walker Creek on the southern edge. The proposed North Coast AVA boundary modification would increase the size of the established AVA by 28,077 acres and would result in the entire proposed Petaluma Gap AVA being within the North Coast AVA.

According to T.D. ATF-145, the North Coast AVA is characterized by a cool climate with growing degree day (GDD) totals that range from Region I to Region III on the Winkler scale.22 T.D. ATF-145 states that the western portion of Marin County, which includes the southwestern portion of the proposed Petaluma Gap AVA, was excluded from the North Coast AVA because evidence submitted during the comment period showed that this portion of the county was significantly cooler than the rest of the North Coast AVA. The evidence included data from several Marin County weather stations, including a weather station on Point Reyes, which is southwest of both the North Coast AVA and the proposed Petaluma Gap AVA. In examining the public comment to T.D. ATF-145, TTB has found that the GDD total provided for Point Reyes was 759.

Although the original determination to exclude western Marin County from the North Coast AVA was based on data from a Point Reyes weather station, which is southwest of the proposed Petaluma Gap AVA, TTB believes that GDD totals from that location are not an accurate basis for determining whether to include the southwestern corner of the proposed Petaluma Gap AVA within the North Coast AVA. The proposed Petaluma Gap AVA petition includes 2013 GDD data from a weather station located in Valley Ford, which is in the southwestern portion of the proposed AVA but outside of the current North Coast AVA boundary, as well as from weather stations within the proposed AVA, including one located two miles north of the town of Bodega Bay, that are within the current boundaries of the North Coast AVA.

The 2013 GDD total for the Valley Ford station was 1,102, which falls into the Region I category on the Winkler scale. For comparison, the 2013 GDD total for the Bodega Bay station was 1,194, which also falls into the Region I category on the Winkler scale. TTB believes, therefore, that this data shows that the climate of the southwestern portion of the proposed Petaluma Gap AVA is within the range of Winkler scale regions that characterizes the current North Coast AVA.

Additionally, in response to a question from TTB, the petitioners confirmed that there is at least one active vineyard growing Pinot Noir grapes in the southwest portion of the proposed Petaluma Gap AVA near Valley Ford, indicating that the GDD total for that region of the proposed AVA is not too low for commercial viticulture. Therefore, because the GDD total of the southwest portion of the proposed Petaluma Gap AVA is within the range of GDD totals that characterize the North Coast AVA and is high enough to support viticulture, TTB believes the petitioner's proposal to expand the North Coast AVA to include the southwest portion of the proposed Petaluma Gap AVA merits consideration and public comment.

The Sonoma Coast AVA was established by T.D. ATF-253, which was published in the Federal Register on June 11, 1987 (52 FR 22302). The Sonoma Coast AVA covers approximately 750 square miles within the western portion of Sonoma County. According to T.D. ATF-253, the AVA encompasses the portion of Sonoma County that is under “very strong marine climate influence,” including “persistent fog.” T.D. ATF-253 also states that temperatures within the AVA are classified as “Coastal Cool” under the temperature classification system developed by Robert L. Sisson. “Coastal Cool” areas are defined as having a cumulative duration of less than 1,000 hours between 70 and 90 degrees Fahrenheit during the months of April through October. Temperatures within the Sonoma Coast AVA are described as significantly cooler than temperatures in the eastern portion of Sonoma County, which are classified as “Coastal Warm.” According to T.D. ATF-253, the average maximum July temperature for the Sonoma Coast AVA is 84 degrees Fahrenheit. T.D. ATF-253 did not distinguish the climate of the Sonoma Coast AVA from that of Marin County, located south of the AVA.

The proposed Petaluma Gap AVA is located in the southern portion of the Sonoma Coast AVA and shares the marine-influenced climate and coastal fog of the established AVA. Additionally, according to the climate data provided in the petition, the average maximum July temperature for the city of Petaluma, at the center of the proposed AVA, is 82 degrees Fahrenheit 23 , which is similar to that of the Sonoma Coast AVA. However, TTB notes that temperature is not a distinguishing feature of the proposed Petaluma Gap AVA, and that consistently high wind speeds and a topography of gently rolling hills are what distinguish the proposed AVA from the surrounding established AVA.

As previously noted, if established, the proposed Petaluma Gap AVA would partially overlap the Sonoma Coast AVA, but also would leave the 68,130-acre Marin County portion of the proposed AVA outside of the established Sonoma Coast AVA. However, the petition requests that TTB allow the partial overlap to remain, primarily because the name “Sonoma Coast” is associated only with the coastal region of Sonoma County and does not extend into Marin County.

Although TTB generally discourages partial overlaps of AVAs because of the potential for consumer confusion, TTB agrees with the petitioners that the Sonoma Coast AVA should not be expanded to include the Marin County portion of the proposed Petaluma Gap AVA. TTB believes that extending the Sonoma Coast AVA would likely cause consumer confusion because the name “Sonoma Coast” is associated with Sonoma County and use of the name does not extend into Marin County. TTB does not believe the potential partial overlap should be resolved by limiting the proposed Petaluma Gap AVA to Sonoma County because the evidence in the petition demonstrates that both the Sonoma County and the Marin County portions of the proposed AVA share similar topographic characteristics and similar wind speeds. TTB also does not believe the proposed AVA should be removed entirely from the Sonoma Coast AVA because the proposed AVA and the established AVA share similar marine-influenced climates. Additionally, TTB notes that removing the proposed AVA from the Sonoma Coast AVA would potentially affect current label holders who use the “Sonoma Coast” appellation on their wines because wines made primarily from grapes grown in the removed region would no longer be eligible to be labeled with that AVA as an appellation of origin. For these reasons, TTB is proposing to leave the current boundaries of the Sonoma Coast AVA unchanged and to allow the partial overlap with the proposed Petaluma Gap AVA.

TTB concludes that the petition to establish the 202,476-acre “Petaluma Gap” AVA and to concurrently modify the boundary of the existing North Coast AVA merits consideration and public comment, as invited in this document.

TTB is proposing the establishment of the new AVA and the modification of the existing AVA as one action. Accordingly, if TTB establishes the proposed Petaluma Gap AVA, then the proposed boundary modification of the North Coast would be approved concurrently. If TTB does not establish the proposed Petaluma Gap AVA, then the present North Coast AVA boundary would not be modified as proposed in this document.

See the narrative boundary descriptions of the petitioned-for AVA and the boundary modification of the established AVA in the proposed regulatory text published at the end of this document.

The petitioner provided the required maps, and they are listed below in the proposed regulatory text.

Part 4 of the TTB regulations prohibits any label reference on a wine that indicates or implies an origin other than the wine's true place of origin. For a wine to be labeled with an AVA name or with a brand name that includes an AVA name, at least 85 percent of the wine must be derived from grapes grown within the area represented by that name, and the wine must meet the other conditions listed in 27 CFR 4.25(e)(3). If the wine is not eligible for labeling with an AVA name and that name appears in the brand name, then the label is not in compliance and the bottler must change the brand name and obtain approval of a new label. Similarly, if the AVA name appears in another reference on the label in a misleading manner, the bottler would have to obtain approval of a new label. Different rules apply if a wine has a brand name containing an AVA name that was used as a brand name on a label approved before July 7, 1986. See 27 CFR 4.39(i)(2) for details.

If this proposed regulatory text is adopted as a final rule, wine bottlers using “Petaluma Gap” in a brand name, including a trademark, or in another label reference as to the origin of the wine, would have to ensure that the product is eligible to use the viticultural area's full name “Petaluma Gap” as an appellation of origin.

If approved, the establishment of the proposed Petaluma Gap AVA and the proposed modification of the North Coast AVA boundary would allow vintners to use “Petaluma Gap” or “North Coast” as appellations of origin for wines made from grapes grown within the Petaluma Gap AVA, if the wines meet the eligibility requirements for the appellation. Additionally, vintners would be able to use “Sonoma Coast” as an appellation of origin on wines made primarily from grapes grown within the Sonoma County portion of the Petaluma Gap AVA, if the wines meet the eligibility requirements for the appellation.

TTB invites comments from interested members of the public on whether TTB should establish the proposed Petaluma Gap AVA and concurrently modify the boundary of the established North Coast AVA. TTB is interested in receiving comments on the sufficiency and accuracy of the name, boundary, climate, topography, and other required information submitted in support of the Petaluma Gap AVA petition. In addition, given the proposed Petaluma Gap AVA's location within the existing North Coast AVA and Sonoma Coast AVA, TTB is interested in comments on whether the evidence submitted in the petition regarding the distinguishing features of the proposed AVA sufficiently differentiates it from the existing AVAs. TTB is also interested in comments on whether the geographic features of the proposed AVA are so distinguishable from either the North Coast AVA or the Sonoma Coast AVA that the proposed Petaluma Gap AVA should not be part of one or either established AVA. Please provide any available specific information in support of your comments.

TTB also invites comments on the proposed expansion of the existing North Coast AVA. TTB is especially interested in comments on whether the evidence provided in the petition sufficiently demonstrates that the proposed expansion area is similar enough to the North Coast AVA to be included in the established AVA. Additionally, TTB is interested in comments on whether or not TTB should allow the Marin County portion of the proposed Petaluma Gap AVA to remain outside of the Sonoma Coast AVA. Comments should address the boundaries, climate, topography, soils, and any other pertinent information that supports or opposes the proposed North Coast AVA boundary expansion and/or the partial overlap of the proposed Petaluma Gap AVA with the Sonoma Coast AVA.

Because of the potential impact of the establishment of the proposed Petaluma Gap AVA on wine labels that include the term “Petaluma Gap” as discussed above under Impact on Current Wine Labels, TTB is particularly interested in comments regarding whether there will be a conflict between the proposed area name and currently used brand names. If a commenter believes that a conflict will arise, the comment should describe the nature of that conflict, including any anticipated negative economic impact that approval of the proposed AVA will have on an existing viticultural enterprise. TTB is also interested in receiving suggestions for ways to avoid conflicts, for example, by adopting a modified or different name for the proposed AVA.

You may submit comments on this proposal by using one of the following three methods:

• Federal e-Rulemaking Portal: You may send comments via the online comment form posted with this document within Docket No. TTB-2016-0009 on “Regulations.gov,” the Federal e-rulemaking portal, at https://www.regulations.gov. A direct link to that docket is available under Notice No. 163 on the TTB Web site at https://www.ttb.gov/wine/wine-rulemaking.shtml. Supplemental files may be attached to comments submitted via Regulations.gov. For complete instructions on how to use Regulations.gov, visit the site and click on the “Help” tab at the top of the page.

• U.S. Mail: You may send comments via postal mail to the Director, Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street NW., Box 12, Washington, DC 20005.

• Hand Delivery/Courier: You may hand-carry your comments or have them hand-carried to the Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street NW., Suite 400, Washington, DC 20005.

Please submit your comments by the closing date shown above in this document. Your comments must reference Notice No. 163 and include your name and mailing address. Your comments also must be made in English, be legible, and be written in language acceptable for public disclosure. We do not acknowledge receipt of comments, and we consider all comments as originals.

Your comment must clearly state if you are commenting on your own behalf or on behalf of an organization, business, or other entity. If you are commenting on behalf of an organization, business, or other entity, your comment must include the entity's name as well as your name and position title. If you comment via Regulations.gov, please enter the entity's name in the “Organization” blank of the online comment form. If you comment via postal mail, please submit your entity's comment on letterhead.

You may also write to the Administrator before the comment closing date to ask for a public hearing. The Administrator reserves the right to determine whether to hold a public hearing.

All submitted comments and attachments are part of the public record and subject to disclosure. Do not enclose any material in your comments that you consider to be confidential or inappropriate for public disclosure.

TTB will post, and you may view, copies of this document, selected supporting materials, and any online or mailed comments received about this proposal within Docket No. TTB-2016-0009 on the Federal e-rulemaking portal, Regulations.gov, at https://www.regulations.gov. A direct link to that docket is available on the TTB Web site at https://www.ttb.gov/wine/wine-rulemaking.shtml under Notice No. 163. You may also reach the relevant docket through the Regulations.gov search page at https://www.regulations.gov. For instructions on how to use Regulations.gov, visit the site and click on the “Help” tab at the top of the page.

All posted comments will display the commenter's name, organization (if any), city, and State, and, in the case of mailed comments, all address information, including email addresses. TTB may omit voluminous attachments or material that it considers unsuitable for posting.

You also may view copies of this document, all related petitions, maps and other supporting materials, and any electronic or mailed comments we receive about this proposal by appointment at the TTB Information Resource Center, 1310 G Street NW., Washington, DC 20005. You may also obtain copies at 20 cents per 8.5- x 11-inch page. Contact our information specialist at the above address or by telephone at 202-453-2265 to schedule an appointment or to request copies of comments or other materials.

TTB certifies that this proposed regulation, if adopted, would not have a significant economic impact on a substantial number of small entities. The proposed regulation imposes no new reporting, recordkeeping, or other administrative requirement. Any benefit derived from the use of a viticultural area name would be the result of a proprietor's efforts and consumer acceptance of wines from that area. Therefore, no regulatory flexibility analysis is required.

This proposed rule is not a significant regulatory action as defined by Executive Order 12866. Therefore, it requires no regulatory assessment.

Karen A. Thornton of the Regulations and Rulings Division drafted this document.

For the reasons discussed in the preamble, we propose to amend title 27, chapter I, part 9, Code of Federal Regulations, as follows:

The revisions and additions read as follows:

Advanced Meeting Registration: OSHA requests that attendees pre-register for this meeting by completing the form at https://www.surveymonkey.com/r/CRPK2YY. Please note if you are attending in person MSHA, who is hosting this meeting, requires pre-registration seven days before the meeting. Failure to pre-register for this event will prevent your access into the MSHA Headquarters building. Additionally, if you are attending in-person, OSHA suggests you plan to arrive early to allow time for the security checks necessary to access the building. Conference call-in and WebEx capability will be provided for this meeting. Specific information on the MSHA Headquarters building access, and call-in and WebEx meeting access will be posted when available in the Highlights box on OSHA's Hazard Communication Web site at: https://www.osha.gov/dsg/hazcom/index.html. OSHA is beginning its rulemaking efforts to maintain alignment of the Hazard Communication Standard (HCS) with the most recent revision of the United Nations Globally Harmonized system of Classification and Labelling of chemicals (GHS). The purpose of this meeting is to request feedback from stakeholders and informally discuss potential topics or issues that OSHA should consider during a rulemaking to update the HCS. OSHA will also solicit suggestions about the types of publications stakeholders might find helpful in complying with the standard and which topics on which they would like OSHA to prepare additional compliance materials in the future.

Authority and Signature: This document was prepared under the direction of David Michaels, Ph.D., MPH, Assistant Secretary of Labor for Occupational Safety and Health, U.S. Department of Labor, pursuant to sections 4, 6, and 8 of the Occupational Safety and Health Act of 1970 (29 U.S.C. 653, 655, 657), and Secretary's Order 1-2012 (77 FR 3912), (Jan. 25, 2012).

Purpose: This notice proposes changes to the relevant rules of practice to harmonize the materiality standard for the duty of disclosure before the Office with the but-for materiality standard for establishing inequitable conduct before the courts in light of the Federal Circuit's decision in Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276 (Fed. Cir. 2011) (en banc).

Summary of Major Provisions: The Office proposes to revise the rules of practice to adopt the but-for standard for materiality required to establish inequitable conduct set forth in the Federal Circuit's decision in Therasense as the standard for materiality for the duty to disclose information in patent applications and reexamination proceedings. The Office also proposes to revise the rules of practice to explicitly reference “affirmative egregious misconduct” as set forth in the Federal Circuit's decision in Therasense.

Costs and Benefits: This rulemaking is not economically significant as that term is defined in Executive Order 12866 (Sept. 30, 1993).

On May 25, 2011, the Federal Circuit issued the en banc Therasense decision, modifying the standard for materiality required to establish inequitable conduct before the courts. The Federal Circuit tightened the materiality standard to “reduce the number of inequitable conduct cases before the courts and . . . cure the problem of overdisclosure of marginally relevant prior art to the PTO.” Therasense, 649 F.3d at 1291. In Therasense, the Federal Circuit held that “the materiality required to establish inequitable conduct is but-for materiality.” Id. The Federal Circuit explained that “[w]hen an applicant fails to disclose prior art to the PTO, that prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art.” Id. The Federal Circuit further explained that “in assessing the materiality of a withheld reference, the court must determine whether the PTO would have allowed the claim if it had been aware of the undisclosed reference[,] . . . apply[ing] the preponderance of the evidence standard and giv[ing] claims their broadest reasonable construction.” Id. at 1291-92. Examples of where the Federal Circuit found information to be but-for material include Transweb, LLC v. 3M Innovative Properties Co., 812 F.3d 1295 (Fed. Cir. 2016), and Apotex, Inc. v. UCB Inc., 763 F.3d 1354 (Fed. Cir. 2014).

In addition, the Federal Circuit recognized that the materiality prong of inequitable conduct may also be satisfied in cases of affirmative egregious misconduct. Id. at 1292. See also The Ohio Willow Wood Co. v. Alps South, LLC, 735 F.3d 1333, 1351 (Fed. Cir. 2013); Intellect Wireless, Inc. v. HTC Corp., 732 F.3d 1339, 1344 (Fed. Cir. 2013). The Federal Circuit explained that “[t]his exception to the general rule of requiring but-for proof incorporates elements of the early unclean hands cases before the Supreme Court, which dealt with `deliberately planned and carefully executed scheme[s]' to defraud the PTO and the courts.” Therasense, 649 F.3d at 1292. The Federal Circuit reasoned that “a patentee is unlikely to go to great lengths to deceive the PTO with a falsehood unless it believes that the falsehood will affect issuance of the patent.” Id. Further, the Federal Circuit clarified that while the filing of an unmistakably false affidavit would constitute affirmative egregious misconduct, “neither mere nondisclosure of prior art references to the PTO nor failure to mention prior art references in an affidavit constitutes affirmative egregious misconduct.” Id. at 1292-93. Rather, “claims of inequitable conduct that are based on such omissions require proof of but-for materiality.” Id. at 1293.

A notice of proposed rulemaking was previously published in the Federal Register (76 FR 43631) on July 21, 2011. Comments were due on September 19, 2011. The Office received 24 written comments in response to the notice. In addition to considering the public comments, the Office monitored further Federal Circuit decisions regarding the application of the inequitable conduct standard. Based upon the passage of time since the end of the comment period and the significant changes to patent law as a result of the successful implementation of the Leahy-Smith America Invents Act, the Office considered it appropriate to obtain public comment on the proposed changes to the rules of practice regarding the duty of disclosure. Therefore, the Office is publishing the current notice of proposed rulemaking to provide the public with an opportunity to comment on the proposed revisions, which take into account the comments received in response to the 2011 notice of proposed rulemaking.

Like the previously proposed rule, the currently proposed rule would harmonize the materiality standard for the duty of disclosure before the Office with the but-for materiality standard set forth in Therasense for establishing inequitable conduct before the courts. Specifically, the currently proposed rule would modify 37 CFR 1.56(a) and 37 CFR 1.555(a) to recite that the materiality standard for the duty of disclosure is but-for materiality, and would modify 37 CFR 1.56(b) and 37 CFR 1.555(b) to define the but-for materiality standard as set forth in Therasense. Further, in view of the Federal Circuit's recognition that affirmative egregious misconduct satisfies the materiality prong of inequitable conduct, the currently proposed rule would amend 37 CFR 1.56(a) and 37 CFR 1.555(a) to explicitly incorporate affirmative egregious misconduct.

In the previous notice of proposed rulemaking, the Office proposed only to amend 37 CFR 1.56(b) and 37 CFR 1.555(b) by combining in the same provision both an explicit reference to the Therasense materiality standard and a definition of the materiality standard, which included an explicit recitation of affirmative egregious misconduct. See Revision of the Materiality to Patentability Standard for the Duty to Disclose Information in Patent Applications, 76 FR 43631, 43634 (July 21, 2011). Prior to making a final decision on whether to modify the previously proposed rule, the Office considered all public comments and monitored the petition for certiorari to the Supreme Court in 1st Media, LLC v. Electronic Arts, Inc., 694 F.3d 1367 (Fed. Cir. 2012), cert. denied, 134 S.Ct. 418 (2013) and the further developments regarding the application of the inequitable conduct standard by the Federal Circuit. Accordingly, the Office has decided to modify the previously proposed rule language to avoid potential confusion by moving the language regarding affirmative egregious misconduct from the definition of the materiality standard for disclosure of information in 37 CFR 1.56(b)(2) and 37 CFR 1.555(b)(2), as previously proposed, to 37 CFR 1.56(a) and 37 CFR 1.555(a), respectively. Therefore, in the currently proposed rule, 37 CFR 1.56(b) and 37 CFR 1.555(b) would define the but-for materiality standard as set forth in Therasense, while 37 CFR 1.56(a) and 37 CFR 1.555(a) would incorporate affirmative egregious misconduct.

In the previous notice of proposed rulemaking, the Office also proposed to amend 37 CFR 1.56(b) and 37 CFR 1.555(b) to explicitly reference the Therasense ruling. Comments received in response to the previous notice of proposed rulemaking questioned explicitly referencing the Therasense decision directly in the rules out of concern that the rules could be affected as the Therasense ruling is interpreted and applied, or if Therasense is overruled. While the currently proposed rule removes the explicit reference to the Therasense decision, explicitly referencing the court decision is not necessary to link the materiality standard for the duty of disclosure before the Office with the but-for materiality standard set forth in Therasense for establishing inequitable conduct before the courts. The recitation of but-for materiality in 37 CFR 1.56(a) and 1.555(a) and the definition of but-for materiality in 37 CFR 1.56(b) and 1.555(b) would establish that the materiality standard for the duty of disclosure in this currently proposed rule is the same as the but-for materiality standard set forth in Therasense and its interpretations and applications.

As discussed previously, Therasense was decided by the Federal Circuit en banc. This precedential decision can only be overturned by another en banc decision of the Federal Circuit or by a decision of the Supreme Court. See, e.g., Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059, 1068 n.5 (Fed. Cir. 1998) (Federal Circuit precedent may not be changed by a panel.). The Office's explicit reference to and definition of the but-for materiality standard set forth in Therasense in currently proposed 37 CFR 1.56 and 37 CFR 1.555 would avoid divergence between the Office's materiality standard for the duty of disclosure and the but-for inequitable conduct materiality standard set forth in Therasense. This approach should benefit the public by providing a consistent materiality standard without the need for continuous revisions to the rules as the Therasense standard is interpreted or applied. In the event the Supreme Court, or Federal Circuit acting en banc, chooses to revise the but-for materiality standard in Therasense, the Office will reconsider the rules at that time. Further, the Office will keep the public informed of its understanding of how the Federal Circuit interprets the standard through future revisions to the Manual of Patent Examining Procedure (MPEP).

Historically, the Federal Circuit connected the materiality standard for inequitable conduct with the Office's materiality standard for the duty of disclosure. That is, the Federal Circuit has invoked the materiality standard for the duty of disclosure to measure materiality in cases raising claims of inequitable conduct. In doing so, the Federal Circuit has utilized both the “reasonable examiner” standard set forth in the 1977 version of 37 CFR 1.56(b) and the prima facie case of unpatentability standard set forth in the 1992 version of 37 CFR 1.56(b). See, e.g., Am. Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.2d 1350, 1363 (Fed. Cir. 1984); Bruno Indep. Living Aids, Inc. v. Acorn Mobility Servs., Ltd., 394 F.3d 1348, 1352-53 (Fed. Cir. 2005). In Therasense, the Federal Circuit eliminated what existed of the historical connection between the two materiality standards and did not indicate that the Office must apply the but-for standard for materiality required to establish inequitable conduct under Therasense as the standard for determining materiality under 37 CFR 1.56 or 37 CFR 1.555. Thus, while Therasense does not require the Office to harmonize its materiality standard underlying the duty of disclosure and the Federal Circuit's but-for materiality standard underlying the inequitable conduct doctrine, there are important reasons to amend 37 CFR 1.56 and 37 CFR 1.555 to do so.

A unitary materiality standard is simpler for the patent system as a whole. Under the single but-for standard of materiality, patent applicants will not be put in the position of having to meet one standard of materiality as set forth in Therasense in defending against inequitable conduct allegations and a second, different materiality standard when complying with the duty of disclosure before the Office. Also, the Office expects that by adopting the Therasense but-for standard for materiality in this currently proposed rule, the frequency with which charges of inequitable conduct are raised against applicants and practitioners for failing to disclosure material information to the Office will be reduced.

Similarly, the Office expects that adopting the but-for materiality standard would reduce the incentive to submit marginally relevant information in information disclosure statements (IDSs). As such, this currently proposed rule would further the Office's goal of enhancing patent quality. The adoption of the but-for standard for materiality should lead to more focused prior art submissions by applicants, which in turn will assist examiners in more readily recognizing the most relevant prior art.

At the same time, the Office also expects this currently proposed rule would continue to encourage applicants to comply with their duty of candor and good faith. The Office recognizes that it previously considered, and rejected, a but-for standard for the duty of disclosure in 1992 when it promulgated the prima facie case of unpatentability standard that would be replaced under this proposed rule. Duty of Disclosure, 57 FR 2021, 2024 (Jan. 17, 1992). The Office was concerned about the types of potential misconduct that could occur unchecked under a pure but-for standard. By including a provision for affirmative egregious misconduct in the currently proposed rule, the Office's long-standing concern would be mitigated. In Therasense, the Federal Circuit stated, “creating an exception to punish affirmative egregious acts without penalizing the failure to disclose information that would not have changed the issuance decision . . . strikes a necessary balance between encouraging honesty before the PTO and preventing unfounded accusations of inequitable conduct.” Id. at 1293.

The following is a description of the amendments PTO is proposing:

Section 1.56: Section 1.56(a) as proposed to be amended would provide that the materiality standard for the duty of disclosure is but-for materiality. Further, § 1.56(a) as proposed would provide that a patent will not be granted on an application in which affirmative egregious misconduct was engaged in.

Section 1.56(b) as proposed to be amended would replace the prima facie case of unpatentability materiality standard with the definition of the but-for materiality standard. As proposed, § 1.56(b) would provide that information is but-for material to patentability if the Office would not find a claim patentable if the Office were aware of the information, applying the preponderance of the evidence standard and giving the claim its broadest reasonable construction consistent with the specification.

Previously proposed § 1.56(b) included two discrete sentences. The first sentence stated information is material to patentability if it is material under the standard set forth in Therasense, and the second sentence stated information is material to patentability under Therasense if (1) the Office would not allow a claim if it were aware of the information, or (2) the applicant engages in affirmative egregious misconduct before the Office as to the information. See Revision of the Materiality to Patentability Standard for the Duty to Disclose Information in Patent Applications, 76 FR at 43634. The explicit reference to the Therasense decision and the recitation of affirmative egregious misconduct in previously proposed § 1.56(b) have not been retained in this currently proposed rule in view of public comments received. Currently proposed § 1.56(a) now recites that the materiality standard for the duty of disclosure is but-for materiality. Currently proposed § 1.56(b) defines the but-for materiality standard as set forth in Therasense.

As set forth above, an explicit reference to the Therasense decision is not necessary to link the materiality standard for the duty of disclosure to the but-for materiality standard for inequitable conduct set forth in Therasense. The Office has determined that reciting “but-for material[ity]” and its definition as it is recited in Therasense makes clear that the standard for materiality is the but-for standard set forth in Therasense and its interpretations and applications. Also, by moving the language regarding affirmative egregious misconduct from previously proposed § 1.56(b)(2) to § 1.56(a), the Office has separated the definition of the materiality standard for the duty to disclose information from the recitation of affirmative egregious misconduct.

Additionally, the Office has modified the previously proposed rule language to state that a claim is given its broadest reasonable construction “consistent with the specification.” The Office did not intend the previously proposed omission of this language that is present in existing §§ 1.56(b) and 1.555(b) as an indication that claims would no longer be given their broadest reasonable construction consistent the specification. While the Federal Circuit in Therasense did not specifically state that the broadest reasonable construction is a construction that is consistent with the specification, the Federal Circuit referenced MPEP § 2111 (8th ed. 2001) (Rev. 9, Aug. 2012) in establishing that a claim is given its broadest reasonable construction. Therasense, 649 F.3d at 1292. MPEP § 2111 states that “(d)uring patent examination, the pending claims must be `given their broadest reasonable interpretation consistent with the specification.'” See also Phillips v. AWH Corp., 415 F.3d 1303, 1316 (Fed. Cir. 2005) (“The Patent and Trademark Office (`PTO') determines the scope of claims in patent applications not solely on the basis of the claim language, but upon giving claims their broadest reasonable construction `in light of the specification as it would be interpreted by one of ordinary skill in the art.' ”). In addition, the Federal Circuit has indicated that the phrases “broadest reasonable interpretation” and “broadest reasonable interpretation consistent with the specification” have the same meaning as it would be unreasonable to ignore any interpretive guidance afforded by the written description. See In re Morris, 127 F.3d 1048, 1054 (Fed. Cir. 1997). Nevertheless, in order to make clear that any construction made by the Office in the application of § 1.56 must be consistent with the specification, the currently proposed rules have been amended accordingly.

Section 1.555: Section 1.555(a) as proposed to be amended would provide that the materiality standard for the duty of disclosure in a reexamination proceeding is but-for materiality. Further, § 1.555(a) as proposed to be amended would provide that the duties of candor, good faith, and disclosure have not been complied with if affirmative egregious misconduct was engaged in by, or on behalf of, the patent owner in the reexamination proceeding.

Section 1.555(b) as proposed to be amended would provide that information is but-for material to patentability if, for any matter proper for consideration in reexamination, the Office would not find a claim patentable if the Office were aware of the information, applying the preponderance of the evidence standard and giving the claim its broadest reasonable construction consistent with the specification. The explicit reference to the Therasense decision and recitation of affirmative egregious misconduct in previously proposed § 1.555(b) have not been retained in this currently proposed rule in view of public comments received. Currently proposed § 1.555(a) now recites that the materiality standard for the duty of disclosure in a reexamination proceeding is but-for materiality. Currently proposed § 1.555(b) defines the but-for materiality standard as set forth in Therasense.

Additionally, § 1.555(b) as proposed would provide that the but-for materiality standard covers the disclosure of information as to any matter that is proper for consideration in a reexamination proceeding. Previously proposed § 1.555(b) was silent as to the types of information that are appropriate for consideration in a reexamination proceeding, and existing § 1.555(b) limits the types of information that could be considered in reexamination to patents and printed publications. In view of public comments received, this currently proposed rule would amend § 1.555(b) to again recite the types of information that are appropriate for consideration in a reexamination proceeding but, unlike the existing rule, this currently proposed rule encompasses disclosure of information as to any matter that is appropriate for consideration in a reexamination proceeding (e.g., admissions by patent owner), as opposed to being limited to patents and printed publications.

It is noted that § 1.933 is also directed to the duty of disclosure in inter partes reexamination proceedings; however, the statement as to materiality of information in § 1.933 incorporates § 1.555. Thus, § 1.933 has not been amended in this currently proposed rule.

The Office published a notice on July 21, 2011, proposing to change the rules of practice to revise the standard for materiality of the duty to disclose information in patent applications and reexamination proceedings in light of the decision of the Federal Circuit in Therasense. See Revision of the Materiality to Patentability Standard for the Duty to Disclose Information in Patent Applications, 76 FR at 43631. The Office received 24 written comments (from intellectual property organizations, academic and research institutions, companies, and individuals) in response to that notice. The comments and the Office's responses to the comments follow:

Comment 1: Several comments suggested amending previously proposed §§ 1.56(b)(1) and 1.555(b)(1) to add the phrase “consistent with the specification” following the phrase “broadest reasonable construction” to ensure the Office would be giving a claim its broadest reasonable construction consistent with the specification.

Response: As discussed in the preamble, the Office has modified the previously proposed rule language to add “consistent with the specification” after “broadest reasonable construction.”

Comment 2: One comment suggested amending previously proposed §§ 1.56(b)(1) and 1.555(b)(1) to change the perspective from the present to the time when information was withheld from the Office. In particular, this comment suggested changing the phrase “would not allow a claim if it were aware of the information” in proposed § 1.56(b)(1) to “would not have allowed a claim if it were aware of the information,” and changing the phrase “would not find a claim patentable if it were aware of the information” in proposed § 1.555(b)(1) to “would not have found a claim patentable if it were aware of the information.” Another comment requested clarification regarding whether proposed §§ 1.56(b)(1) and 1.555(b)(1) would apply to any application pending on, or applications filed after, the effective date of any final rule.

Response: While the first comment suggested specific language found in the Therasense holding be added to the rules, the Therasense holding pertains to inequitable conduct analysis by the courts, which is applied from a different perspective than the duty of disclosure analysis by applicants. The duty of disclosure is a prospective analysis, while inequitable conduct is a retrospective analysis. In other words, an applicant determines materiality in the present, not retroactively as a court would determine inequitable conduct. Additionally, with respect to Office proceedings, §§ 1.56(b) and 1.555(b) as proposed in this rule would apply to any application or reexamination proceeding pending on, filed on, or filed after the effective date of any final rule.

Comment 3: Several comments requested clarification regarding whether “a claim” in proposed §§ 1.56(b)(1) and 1.555(b)(1) is the finally allowed claim or any claim pending during prosecution, such as restricted claims, withdrawn claims, amended claims, etc.

Response: Currently proposed § 1.56(a) explicitly states “[t]he duty to disclose information exists with respect to each pending claim until the claim is cancelled or withdrawn from consideration, or the application becomes abandoned.” Similarly, § 1.555(a) states “[t]he duty to disclose the information exists with respect to each claim pending in the reexamination proceeding until the claim is cancelled.” Therefore, the duty of disclosure pertains to all claims while they are pending. The duty does not pertain to information that is only material to claims that have been cancelled or withdrawn.

Comment 4: Several comments suggested the rules maintain the language from existing §§ 1.56(b) and 1.555(b), which provide that information is material to patentability “when it is not cumulative to information already of record or being made of record.”

Response: Sections 1.56 and 1.555 in this currently proposed rule do not include the language regarding cumulative information set forth in existing §§ 1.56 and 1.555. The Office, however, is not requesting that applicants submit cumulative information. Information that is merely cumulative to information already on the record would not be material under the but-for standard.

Comment 5: One comment stated that non-disclosed cumulative information may meet the but-for test in the situation where the Office erred in allowing a claim over the originally cited art and the applicant is in possession of art that is cumulative to the originally cited art.

Response: The applicant is under a duty to refrain from filing and prosecuting claims that are known to be unpatentable whether based on information already of record and not recognized by the examiner or cumulative information not submitted. See §§ 11.18, 11.301, and 11.303. In such an instance, the applicant should amend the claims accordingly.

Comment 6: Several comments stated that combining the but-for test of §§ 1.56(b)(1) and 1.555(b)(1) and the affirmative egregious misconduct test of §§ 1.56(b)(2) and 1.555(b)(2) in the previously proposed rules will lead to confusion because the but-for test involves the materiality of information while the “affirmative egregious misconduct” test is related to the nature of the conduct. Several comments, in particular, suggested moving the “affirmative egregious misconduct” exception into §§ 1.56(a) and 1.555(a).

Response: In order to alleviate any potential confusion by including affirmative egregious misconduct in §§ 1.56(b) and 1.555(b), this currently proposed rule amends §§ 1.56 and 1.555 by moving the language regarding affirmative egregious misconduct from previously proposed §§ 1.56(b)(2) and 1.555(b)(2) to §§ 1.56(a) and 1.555(a), respectively. In particular, § 1.56(a) as currently proposed would provide that a patent will not be granted on an application where any individual associated with the filing or prosecution of the application engages in affirmative egregious misconduct. Section 1.555(a) as currently proposed would provide that the duties of candor, good faith, and disclosure have not been complied with if any individual associated with the patent owner in a reexamination proceeding engages in affirmative egregious misconduct. Thus, §§ 1.56(b) and 1.555(b), as currently proposed, are limited to defining the but-for materiality standard for the duty to disclose information.

Comment 7: Several comments stated that the phrase “affirmative egregious misconduct” in previously proposed rules §§ 1.56(b)(2) and 1.555(b)(2) is a vague and undefined term and, therefore, should not be included in the rules. In addition, several comments requested that the Office incorporate the definition of affirmative egregious misconduct from Therasense directly into the rule. Several comments requested guidance, such as examples, on what sort of conduct constitutes affirmative egregious misconduct in previously proposed §§ 1.56(b) and 1.555(b). One other comment suggested clarifying affirmative egregious misconduct to prevent affirmative egregious misconduct from “swallowing” the but-for rule and requiring affirmative egregious misconduct to have a realistic potential to impact patentability. Several comments also stated that it is unclear how affirmative egregious misconduct relates to the Office's other rules such as §§ 1.56(a) and 10.23. (While § 10.23 was in effect at the time the comment was made, it has since been removed and § 11.804 was adopted. See Changes to Representation of Others Before The United States Patent and Trademark Office, 78 FR 20188 (Apr. 3, 2013).) These comments are applicable to the currently proposed rules as well.

Response: As discussed previously, the Office has retained and moved the recitation of affirmative egregious misconduct to currently proposed §§ 1.56(a) and 1.555(a). Affirmative egregious misconduct is recited in currently proposed § 1.56(a) in addition to the other forms of misconduct that would preclude a patent from being granted. Similarly, affirmative egregious misconduct is recited in currently proposed § 1.555(a) in addition to the other forms of misconduct engaged in by, or on behalf of, the patent owner in the reexamination proceeding that would cause a violation of the duties of candor, good faith, and disclosure. The discussion of affirmative egregious misconduct in Therasense and subsequent cases, as well as the lengthy jurisprudence of the unclean hands doctrine, offers guidance as to the boundaries of affirmative egregious misconduct. Specifically, in Therasense, the Federal Circuit likened affirmative egregious misconduct to the doctrine of unclean hands that “dealt with `deliberately planned and carefully executed scheme[s]' to defraud the PTO and the courts.” Therasense, 649 F.3d at 1292. The Federal Circuit also described several examples of behavior that would constitute affirmative egregious misconduct including “perjury, the manufacture of false evidence, and the suppression of evidence,” as well as filing an “unmistakably false affidavit.” Id. at 1287, 1292. See also The Ohio Willow Wood Co. v. Alps South, LLC, 735 F.3d at 1351 (finding that misrepresenting evidence to the Board of Patent Appeals and Interferences was “tantamount to filing an unmistakably false affidavit”); Intellect Wireless, Inc. v. HTC Corp., 732 F.3d at 1344 (stating “the materiality prong of inequitable conduct is met when an applicant files a false affidavit and fails to cure the misconduct”). The Federal Circuit clarified, however, that “neither mere nondisclosure of prior art references to the PTO nor failure to mention prior art references in an affidavit constitutes affirmative egregious misconduct.” Therasense, 649 F.3d at 1292-93. Further, the Federal Circuit has provided additional guidance on the type of activity that would not constitute affirmative egregious misconduct. See, e.g., Powell v. Home Depot U.S.A., Inc., 663 F.3d 1221, 1235 (Fed. Cir. 2011) (failing to update a Petition to Make Special “is not the type of unequivocal act, `such as filing an unmistakably false affidavit,' that would rise to the level of `affirmative egregious misconduct.' ”).

Comment 8: Several comments suggested that acts of “affirmative egregious misconduct” in previously proposed §§ 1.56(b) and 1.555(b) should not be limited solely to “the applicant.”

Response: The Office does not interpret the Federal Circuit's use of “patentee” in Therasense when describing affirmative egregious misconduct as limiting the misconduct to only the applicant or patent owner. All of the parties identified in §§ 1.56(c) and 1.555(a) are subject to the affirmative egregious misconduct provisions of currently proposed §§ 1.56(a) and 1.555(a), respectively.

Comment 9: One comment suggested striking previously proposed § 1.555(b)(2), which was directed to affirmative egregious misconduct, as unnecessary. The comment asserts that the previously proposed rule invites potential third party abuse and confusion during reexamination since third parties will see the rule as a license to argue a lack of candor with respect to previous patent holder submissions to the Office.

Response: While the currently proposed rule no longer includes § 1.555(b)(2), the recitation of affirmative egregious misconduct has been moved to currently proposed § 1.555(a). As proposed, this rule would address a patent owner's duty of candor and good faith in dealing with the Office, including the patent owner's duty of disclosure. It would not establish an opportunity in a reexamination proceeding for a third party to challenge the duty of candor and good faith of a patentee. Conduct is not grounds on which reexamination may be requested and is not appropriate to be raised during a reexamination proceeding. See MPEP § 2616. The conduct of the patent owner may be raised by the patent owner during a supplemental examination proceeding. If the conduct of the patent owner is raised by the patent owner in the supplemental examination proceeding, it may be addressed by the Office in the supplemental examination proceeding and in any reexamination proceeding resulting from that supplemental examination proceeding.

Comment 10: Several comments stated that the previously proposed rules should not explicitly reference Therasense. The comments questioned whether an explicit reference would allow the rules to change as the Therasense standard changes or lock the Office into the standard set forth in the decision even if the standard is later changed. Further, the comments asserted that an explicit reference creates uncertainty in the rules since the rules will become a moving target not subject to interpretation on their face and that a rule cannot be understood on its face without need to interpret the Therasense decision. The comments also asserted that tying the rule to an evolving standard will cause currently pending applications to stand as test cases until the standard is fully articulated. Finally, the comments asserted that the incorporation by reference sets a standard based on private litigation where the Office is not a party and grants an administrative agency's rulemaking authority to the judicial branch, which has different goals than the Office.

Response: The currently proposed rules no longer include the language addressed by the comment. Notwithstanding the removal of an explicit reference to Therasense in currently proposed §§ 1.56(b) and 1.555(b), the recitation of the but-for materiality standard for the duty to disclose information in currently proposed §§ 1.56(b) and 1.555(b) accomplishes what a reference to the court decision would accomplish in adopting the but-for standard set forth in Therasense. As discussed previously, the Office has determined that to adopt the but-for standard of materiality set forth in Therasense, § 1.56 need not incorporate a specific reference to the court decision that has created that standard. Accordingly, the reference to the Therasense court decision in § 1.56, as previously proposed, has not been retained in the currently proposed rule.

The reference to the but-for standard should benefit the public by providing a consistent materiality standard for the duty to disclose information without the need for continuous revisions to the rules as the but-for standard in Therasense is interpreted or applied. As discussed previously, Therasense was decided by the Federal Circuit en banc and can only be overturned by another en banc decision of the Federal Circuit or by a decision of the Supreme Court. In the event that the Supreme Court, or Federal Circuit acting en banc, chooses to revise the but-for materiality standard set forth in Therasense, the Office will reconsider the rules at that time.

Finally, the Office is not conveying its rulemaking authority to the judicial branch. Instead, the Office is exercising its rulemaking authority to adopt a standard used by the Federal Circuit. By using its rulemaking authority to adopt a common standard, the Office is providing the public with a uniform materiality standard for the duty to disclose information. If the Office should determine the uniform standard no longer provides a benefit to the public, the Office retains the ability to invoke its rulemaking authority and change the rules at any time.

Comment 11: One comment stated that the previously proposed rules incorporate two alternative statements within the rules. Specifically, the previously proposed rules include a first sentence that states that information is material to patentability if it is material under the standard set forth in Therasense and a second sentence that states information is material to patentability under Therasense if (1) the Office would not allow a claim if it were aware of the information, or (2) the applicant engages in affirmative egregious misconduct before the Office as to the information. The comment questioned whether these two sentences were equivalent and, if they were, whether they would remain equivalent as the Therasense decision evolves in the Federal Circuit.

Response: As discussed previously, this currently proposed rule modifies previously proposed §§ 1.56(b) and 1.555(b) to remove the sentence that explicitly references the Therasense decision. Sections 1.56(b) and 1.555(b) in this currently proposed rule would define the but-for materiality standard for the duty to disclose information as set forth in Therasense.

Comment 12: One comment suggested that previously proposed rule § 1.555(b) should preserve the language that patents and printed publications are the appropriate types of information for consideration in reexamination.

Response: As discussed previously, unlike existing § 1.555(b), which limits the types of information that could be considered in reexamination to patents and printed publications, the currently proposed rule broadly recites that it is applicable to any matter proper for consideration in a reexamination (e.g., admissions by patent owner as well as patents and printed publications).

Comment 13: Several comments asserted the previously proposed rules are difficult for applicants to apply and interpret prospectively. Specifically, the comments assert that the proposed rules require the applicant to make legal conclusions in determining how to comply with the rule.

Response: As stated in the previous notice of proposed rulemaking, the Office recognizes the tension in basing the disclosure requirement on unpatentability. See Revision of the Materiality to Patentability Standard for the Duty to Disclose Information in Patent Applications, 76 FR at 43633. However, since the existing provisions of §§ 1.56(b) and 1.555(b) require applicants to determine if there is a prima facie case of unpatentability, applicants are accustomed to making such determinations when complying with the duty of disclosure. Further, the but-for standard set forth in this currently proposed rule should not be any more difficult for applicants to apply during prosecution than the prima facie case of unpatentability standard that would be replaced by this currently proposed rule. Both standards require the applicant to reassess materiality as claims are amended, cancelled, and added. Lastly, the Office believes the but-for standard, as articulated by the Federal Circuit in Therasense, would also provide applicants with guidance on what information the applicant is required to submit to the Office.

Comment 14: Several comments addressed the scope of evidence to be considered when materiality or egregious misconduct determinations are made by the Office during application of these proposed rules, including whether the Office would take into account rebuttal evidence or whether the scope would be limited to the record before the Office.

Response: The Office would utilize all available evidence when making determinations of materiality or affirmative egregious misconduct, including rebuttal evidence. Limiting determinations of materiality or affirmative egregious misconduct to the record before the Office might promote fraud and bad faith in practicing before the Office and may lead to erroneous decisions.

Comment 15: Several comments requested the Office to stay Office of Enrollment and Discipline (OED) proceedings until a final court resolution regarding inequitable conduct is obtained in the courts.

Response: This currently proposed rule would only modify the materiality standard for the duty of disclosure required in §§ 1.56 and 1.555. OED proceedings are governed by procedures outlined in 37 CFR part 11, and the timeline under which the OED must commence disciplinary proceedings is subject to 35 U.S.C. 32 as amended by the America Invents Act (AIA). See Public Law 112-29, section 3(k), 125 Stat. 340, section 3(k) (2011).

Comment 16: One comment proposed the Office tailor the discipline for failing to comply with the duty of disclosure to sanctions other than rendering patents unenforceable.

Response: The Office does not render a patent unenforceable for an applicant's failure to comply with the duty of disclosure. Rather, a court may hold a patent unenforceable due to inequitable conduct.

Comment 17: Several comments suggested proposing rules for materiality for each new post-issuance proceeding under the America Invents Act (AIA), such as post grant review, inter partes review, and covered business method patents review. The comment suggested that, since each post-issuance proceeding is different, separate materiality standards may be necessary.

Response: This comment is outside the scope of this rulemaking. The Office, however, has adopted § 42.11 to govern the duty of candor owed to the Office in the new post-issuance proceedings under the AIA. Additionally, the existing regulations at § 42.51 require a party to serve relevant information that is inconsistent with a position advanced during the proceedings.

Comment 18: Several comments asserted the Office should not require applicants to explain or clarify the relationship of the prior art to the claimed invention as suggested by the Office in the previous notice of proposed rulemaking. See Revision of the Materiality to Patentability Standard for the Duty to Disclose Information in Patent Applications, 76 FR at 43632. In addition, several comments suggested that, if the Office requires such an explanation, applicants should be given a safe harbor so that such explanation would not be regarded as an act of affirmative egregious misconduct.

Response: The contemplated required explanation from the previous notice of proposed rulemaking addressed by the comment is not included in this currently proposed rulemaking.

Comment 19: Several comments stated that the proposed but-for standard for materiality will not reduce the incentive to submit marginally relevant information to the Office. In addition, one comment asserted that the stated rationale for the but-for standard does not justify the rule change since the 1992 version of the rule, which contained a prima facie case of unpatentability standard, did not contribute to the over-disclosure to the Office or the overuse of inequitable conduct in litigation. This comment stated that, as long as the penalty for inequitable conduct is the loss of enforceability of the patent, applicants will continue to submit voluminous amounts of information to the Office to avoid a finding of inequitable conduct.

Response: The Office appreciates that a patent may be found unenforceable due to a finding of inequitable conduct. However, the Office's proposed adoption of the but-for standard of materiality articulated by the Federal Circuit in the Therasense decision, as well as the Therasense decision itself, should incentivize applicants not to submit marginally relevant information to the Office as this information would not meet the articulated standard.

Comment 20: Several comments requested that the Office no longer require the cross-citation of prior art found in related applications. The comments also requested the Office to provide a safe harbor provision under which information from related applications is not material and need not be submitted or, in the alternative, the definition of a related application is limited to “family cases” (i.e., those cases for which there is some chain of priority claim), “similar claims cases” (i.e., those cases under a common obligation of assignment for which the claims are not patentably distinct), and “team exception cases” (i.e., those cases for which the provisions of 35 U.S.C. 102(b)(2)(c) apply (35 U.S.C. 103(c) for pre-AIA applications)).

Response: An applicant is under a duty of disclosure to provide all known material information to the Office no matter how the applicant becomes aware of the information. An applicant is in the best position to know of any material information, especially when an applicant learns about the information from prosecution in related applications such as in applications for which priority or benefit is claimed. Having all material information in front of the examiner as early as possible will expedite prosecution and improve examination quality. But under the standard in this currently proposed rule, an applicant would be under no duty to provide information from related applications unless that information is but-for material.

Comment 21: Several comments requested the Office provide a standard method of cross-citation for information in related cases so examiners will automatically review the information in the corresponding application without the applicant having to submit the information in an IDS.

Response: The Office is currently exploring an initiative to provide examiners with information (e.g., prior art, search reports, etc.) from applicant's related applications as early as possible to increase patent examination quality and efficiency. In the interim, applicants must comply with the requirements of §§ 1.97 and 1.98.

Comment 22: Several comments suggested incentivizing the filing of non-material disclosures. Essentially, the comments believed that the submission of a reference will be interpreted as an admission that it meets that materiality standard and, therefore, applicants will not submit non-material information. As an incentive to submit non-material information, the comments suggested relaxing or eliminating any burdens, such as waiving fees.

Response: The Office does not construe any submission of information as an admission of materiality. Section 1.97(h) specifically states, “[t]he filing of an information disclosure statement shall not be construed to be an admission that the information cited in the statement is, or is considered to be, material to patentability as defined in § 1.56(b).” Therefore, the proposal to incentivize the submission of non-material information is not necessary.

Comment 23: One comment stated that, while the Office will not regard information disclosures as admissions of unpatentability for any claims in the application under § 1.97(h), the Office does not have the authority to make this promise on behalf of the courts. The comment asserted that the courts will inevitably hold that any disclosure of prior art is an admission that some pending claim is unpatentable.

Response: The comment did not provide any support for the asserted proposition that the courts treat the disclosure of prior art as an admission that at least one pending claim is unpatentable, and the Office is not aware of any court decision with such a holding.

Comment 24: Several comments requested the duty of disclosure end upon payment of the issue fee rather than the patent grant.

Response: It is in the applicant's and the public's best interest to have all material information known to the applicant considered by the examiner before a patent is granted. This will result in a stronger patent and avoid unnecessary post-grant proceedings and litigation. Section 1.97(d) thus provides for information to be submitted to the Office after a final action, notice of allowance, or action that otherwise closes prosecution is mailed, provided the IDS is filed on or before payment of the issue fee and is accompanied by the appropriate fee and statement under § 1.97(e). If the conditions of § 1.97(d) cannot be met, an applicant must file a request for continued examination (RCE) to have information considered by the examiner. Further, once the issue fee has been paid, the applicant must comply with § 1.313(c) (i.e., file a petition to withdraw from issue for consideration of an RCE) in order to have information considered by the examiner. In order to alleviate the burden on applicants in this situation, the Office has instituted the Quick Path Information Disclosure Statement (QPIDS) pilot program. The QPIDS pilot program eliminates the requirement for processing an RCE with an IDS after payment of the issue fee where the IDS is accompanied by the appropriate fee and statement under § 1.97(e) and the examiner determines that no item of information in the IDS necessitates reopening prosecution. For more information visit the QPIDS Web site at www.uspto.gov/patents/init_events/qpids.jsp.

Comment 25: Several comments proposed giving an applicant a “safe harbor” so the duty of disclosure for the applicant ends when the applicant provides the information to counsel.

Response: The purpose of the duty of disclosure requirement is to ensure that all material information known by the applicant is provided to the Office in the manner prescribed by §§ 1.97(b)-(d) and 1.98. Ending that duty upon the submission of the documents to counsel could potentially delay or prevent material information from being filed with the Office, resulting in, for example, a reduction in patent quality or a delay in the patent grant.

Comment 26: Several comments requested the Office abrogate the duty of disclosure. The comments provided numerous reasons, such as harmonization with the patent offices that do not have such a duty. In the alternative, several comments suggested modifying the materiality standard to include only information that is not available to the public because most of the information submitted is readily searchable public information.

Response: The public interest is best served, and the most effective and highest quality patent examination occurs, when the Office is aware of, and evaluates the teachings of, all information material to patentability during examination. Since the applicant is in the best position to be aware of material information in the art, it serves the public interest to require that the applicant submit this information to the Office during examination. Even if this information is publicly available, there is no guarantee that the examiner will find the information. Further, requiring the examiner to locate this information when the applicant is already aware of it unnecessarily expends government resources, increases search time, and could reduce examination quality. It is also noted that limiting materiality to information that is not available to the public would essentially abrogate the duty of disclosure because most information that is not available to the public is unlikely to meet the prior art requirements of 35 U.S.C. 102, hence preventing pertinent prior art from being seen by the examiner.

Comment 27: One comment asked the Office to clarify whether the new rules create any duty to investigate.

Response: Sections 1.56 and 1.555 in the currently proposed rule would not create any new or additional duty to investigate. However, practitioners and non-practitioners are reminded of the duty under § 11.18(b)(2) to make an “inquiry reasonable under the circumstances” when presenting any paper to the Office.

This currently proposed rule would harmonize the rules of practice concerning the materiality standard for the duty of disclosure with the but-for materiality standard for inequitable conduct set forth in Therasense. The changes in this currently proposed rule would not alter the substantive criteria of patentability. Therefore, the changes in this currently proposed rule involve rules of agency practice and procedure and/or interpretive rules. See Bachow Commc'ns, Inc. v. F.C.C., 237 F.3d 683, 690 (D.C. Cir. 2001) (Rules governing an application process are procedural under the Administrative Procedure Act.); Inova Alexandria Hosp. v. Shalala, 244 F.3d 342, 350 (4th Cir. 2001) (Rules for handling appeals were procedural where they did not change the substantive standard for reviewing claims.); Nat'l Org. of Veterans' Advocates, Inc. v. Sec'y of Veterans Affairs, 260 F.3d 1365, 1375 (Fed. Cir. 2001) (Rule that clarifies interpretation of a statute is interpretive.).

Accordingly, prior notice and opportunity for public comment are not required pursuant to 5 U.S.C. 553(b) or (c) (or any other law). See Cooper Techs. Co. v. Dudas, 536 F.3d 1330, 1336-37 (Fed. Cir. 2008) (stating that 5 U.S.C. 553, and thus 35 U.S.C. 2(b)(2)(B), does not require notice and comment rulemaking for “`interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice'” (quoting 5 U.S.C. 553(b)(3)(A))). The Office, however, is publishing the currently proposed rule for comment to seek the benefit of the public's views on the Office's proposed revision of the materiality standard for the duty to disclose information to the Office.

For the reasons set forth herein, the Deputy General Counsel for General Law of the United States Patent and Trademark Office has certified to the Chief Counsel for Advocacy of the Small Business Administration that changes proposed in this notice will not have a significant economic impact on a substantial number of small entities. See 5 U.S.C. 605(b).

This notice proposes to harmonize the standard for materiality under §§ 1.56 and 1.555 for the duty of disclosure with the but-for materiality standard for inequitable conduct set forth in Therasense. The harmonized materiality standard should reduce the incentives to submit marginally relevant information in information disclosure statements (IDSs). The changes in this currently proposed rule involve rules of agency practice and procedure and/or interpretive rules and would not result in any additional fees or requirements on patent applicants or patentees. Therefore, the changes proposed in this rulemaking will not have a significant economic impact on a substantial number of small entities.

This rulemaking has been determined to be not significant for purposes of Executive Order 12866 (Sept. 30, 1993).

The Office has complied with Executive Order 13563. Specifically, the Office has, to the extent feasible: (1) Used the best available techniques to quantify costs and benefits and considered values such as equity, fairness, and distributive impacts; (2) involved the public in an open exchange of information and perspectives among experts in relevant disciplines, affected stakeholders in the private sector, and the public as a whole, and provided on-line access to the rulemaking docket; (3) attempted to promote coordination, simplification, and harmonization across government agencies and identified goals designed to promote innovation; (4) considered approaches that reduce burdens and maintain flexibility and freedom of choice for the public; and (5) ensured the objectivity of scientific and technological information and processes.

This rulemaking does not contain policies with federalism implications sufficient to warrant preparation of a Federalism Assessment under Executive Order 13132 (Aug. 4, 1999).

This rulemaking will not: (1) Have substantial direct effects on one or more Indian tribes; (2) impose substantial direct compliance costs on Indian tribal governments; or (3) preempt tribal law. Therefore, a tribal summary impact statement is not required under Executive Order 13175 (Nov. 6, 2000).

This rulemaking is not a significant energy action under Executive Order 13211 because this rulemaking is not likely to have a significant adverse effect on the supply, distribution, or use of energy. Therefore, a Statement of Energy Effects is not required under Executive Order 13211 (May 18, 2001).

This rulemaking meets applicable standards to minimize litigation, eliminate ambiguity, and reduce burden as set forth in sections 3(a) and 3(b)(2) of Executive Order 12988 (Feb. 5, 1996).

This rulemaking does not concern an environmental risk to health or safety that may disproportionately affect children under Executive Order 13045 (Apr. 21, 1997).

This rulemaking will not effect a taking of private property or otherwise have taking implications under Executive Order 12630 (Mar. 15, 1988).

Under the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.), prior to issuing any final rule, the PTO will submit a report containing this final rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the Government Accountability Office. The changes in this notice do not result in an annual effect on the economy of 100 million dollars or more, a major increase in costs or prices, or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets. Therefore, this notice is not expected to result in a “major rule” as defined in 5 U.S.C. 804(2).

The changes in this notice do not involve a Federal intergovernmental mandate that will result in the expenditure by State, local, and tribal governments, in the aggregate, of 100 million dollars (as adjusted) or more in any one year or a Federal private sector mandate that will result in the expenditure by the private sector of 100 million dollars (as adjusted) or more in any one year and will not significantly or uniquely affect small governments. Therefore, no actions are necessary under the provisions of the Unfunded Mandates Reform Act of 1995. See 2 U.S.C. 1501 et seq.

This rulemaking will not have any effect on the quality of environment and is thus categorically excluded from review under the National Environmental Policy Act of 1969. See 42 U.S.C. 4321 et seq.

The requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) are not applicable because this rulemaking does not contain provisions which involve the use of technical standards.

The changes in this rulemaking involve information collection requirements which are subject to review by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). The collection of information involved in this final rule has been reviewed and approved by OMB under OMB control number 0651-0031. This rulemaking proposes to harmonize the standard for materiality under §§ 1.56 and 1.555 for the duty of disclosure with the but-for standard for materiality for inequitable conduct set forth in Therasense. This notice does not adopt any additional fees or information collection requirements on patent applicants or patentees.

Notwithstanding any other provision of law, no person is required to respond to, nor shall a person be subject to a penalty for failure to comply with, a collection of information subject to the requirements of the Paperwork Reduction Act unless that collection of information displays a currently valid OMB control number.

For the reasons set forth in the preamble, 37 CFR part 1 is proposed to be amended as follows:

Purpose: The USPTO proposes to revise the rules in part 2 of title 37 of the Code of Federal Regulations to provide more detailed procedures regarding the deadlines and requirements for petitions to revive an abandoned application under 37 CFR 2.66 and petitions to the Director under 37 CFR 2.146. The proposed changes also codify USPTO practice regarding requests for reinstatement of applications that were abandoned, and registrations that were cancelled or expired, due to Office error. By providing more detailed procedures regarding requesting revival, reinstatement, or other action by the Director, the proposed rule will benefit applicants, registrants, and the public because it will promote the integrity of application/registration information in the trademark electronic records system as an accurate reflection of the status of live applications and registrations, clarify the time periods in which applications or registrations can be revived or reinstated after abandonment or cancellation as well as inform of the related filing requirements, clarify the deadline for requesting that the Director take action regarding other matters, and facilitate the efficient and consistent handling of such requests.

The public relies on the trademark electronic records system to determine whether a chosen mark is available for use or registration. Applicants are encouraged to utilize the trademark electronic search system, which provides access to text and images of marks, to determine whether a mark in any pending application or current registration is similar to their mark and used on the same or related products or for the same or related services. The search system also indicates the status of an application or registration, that is, whether the application or registration is live or dead. A “live” status indicates the application or registration is active and may bar the registration of a similar mark in a new application. A “dead” status indicates the application has become abandoned or the registration is cancelled or expired, and does not serve as a bar to registration of a similar mark in a new application unless it is restored to a live status pursuant to a corresponding rule.

When a party's search discloses a potentially confusingly similar mark, that party may incur a variety of resulting costs and burdens, such as those associated with investigating the actual use of the disclosed mark to assess any conflict, proceedings to cancel the registration or oppose the application of the disclosed mark, civil litigation to resolve a dispute over the mark, or changing plans to avoid use of the party's chosen mark. In order to determine whether to undertake one or more of these actions, the party would refer to the status of the conflicting application/registration and would need to consult the relevant rule to determine whether the application or registration is within the time period in which the applicant or registrant may request revival, reinstatement, or other action by the Director. Thus, the effective notice provided by the USPTO's records plays a critical role in a party's decision-making to clearly distinguish between the “dead” marks that are no longer candidates for, or protected by, a federal registration and those that are still able to be restored to active status.

The USPTO estimates that it receives annually approximately 20,000 petitions to revive an application under § 2.66 abandoned for failure to respond to an Office action or a notice of allowance, 1,200 petitions to the Director under § 2.146, and 300 requests for reinstatement of applications and registrations. If the trademark electronic records system indicates that an application or registration is dead because it is abandoned, cancelled, or expired, and there is any doubt as to whether the application or registration might be eligible for revival, reinstatement, or other action by the Director, the costs and burdens discussed above may be incurred unnecessarily. By providing more detailed procedures as to the deadlines and requirements for requesting revival, reinstatement, or other action by the Director, the proposed rules will help the public avoid such needless costs and burdens and promote the efficient and consistent processing of such requests by the Office.

Petition to Revive: The statutory period for responding to an examining attorney's Office action is six months from the Office action's date of issuance. 15 U.S.C. 1062(b); 37 CFR 2.62(a). If no response is received by the USPTO within the statutory period, and the Office action was sent to the correspondence address in the USPTO's records, the application is then abandoned in full or in part, as appropriate. 37 CFR 2.65(a); Trademark Manual of Examining Procedure (TMEP) § 718.06.

The statutory period for filing a statement of use, or a request for an extension of time to file a statement of use, in response to a notice of allowance issued under section 1063(b)(2) of the Trademark Act (Act), is also six months. 15 U.S.C. 1051(d)(1), (2); 37 CFR 2.88(a), 2.89(a). Thus, an application is abandoned if the applicant fails to file a statement of use or request for an extension of time to file a statement of use within the statutory period or within a previously granted extension period. 37 CFR 2.88(k); TMEP § 718.04.

An application is considered to be abandoned as of the day after the date on which a response to an Office action or notice of allowance is due. However, to accommodate timely mailed paper submissions and to ensure that the required response was not received and placed in the record of another application (e.g., if the applicant enters the incorrect serial number on its response), the USPTO generally waits one month after the due date to update the trademark electronic records system to reflect the abandonment. TMEP § 718.06. When the trademark electronic records system is updated, the USPTO sends a computer-generated notice of abandonment to the correspondence address listed in the application. Id. If an application becomes abandoned for failure to respond to an Office action or notice of allowance within the statutory period, and the delay in responding was unintentional, the application may be revived upon proper submission of a petition under 37 CFR 2.66. Currently, the deadlines for filing the petition are within two months after the date of issuance of the notice of abandonment or within two months of actual knowledge of the abandonment, if the applicant did not receive the notice of abandonment and the applicant was diligent in checking the status of the application every six months. 37 CFR 2.66(a).

Request for Reinstatement: Under current practice, if an applicant has proof that an application was inadvertently abandoned due to a USPTO error, an applicant may file a request to reinstate the application, instead of a petition to revive. TMEP § 1712.01. The following is a non-exhaustive list of examples of situations in which the USPTO may reinstate an application held abandoned for failure to respond to an Office action or notice of allowance: (1) The applicant presents proof that a response to an Office action, statement of use, or request for extension of time to file a statement of use was timely filed through the Trademark Electronic Application System (TEAS); (2) there is an image of the timely filed response, statement of use, or extension request in the trademark electronic records system; or (3) the applicant supplies a copy of the document and proof that it was timely mailed to the USPTO in accordance with the requirements of 37 CFR 2.197. Id. Under current practice, a request for reinstatement must be filed within two months of the issuance date of the notice of abandonment. Id. If the applicant asserts that it did not receive a notice of abandonment, the request must be filed within two months of the date the applicant had actual knowledge that the application was abandoned, and the applicant must have been duly diligent in monitoring the status of the application every six months. Id.

Similarly, under current practice, a registrant may file a request to reinstate a cancelled or expired registration if the registrant has proof that a required document was timely filed and that USPTO error caused the registration to be cancelled or expired. TMEP § 1712.02. The following is a non-exhaustive list of examples of situations in which the USPTO may reinstate a cancelled or expired registration: (1) The registrant presents proof that a required document was timely filed through TEAS; (2) the registrant presents proof of actual receipt of the required document in the USPTO in the form of a return postcard showing a timely USPTO date stamp or label, on which the registrant specifically refers to the document; or (3) the USPTO sent an Office action to the wrong address due to a USPTO error, i.e., the USPTO either entered the correspondence address incorrectly or failed to enter a proper notice of change of address filed before the issuance date of the action. Id. There is currently no deadline for filing a request to reinstate a cancelled/expired registration and the USPTO has generally not invoked the requirement for due diligence when there is proof that a registration was cancelled or expired solely due to USPTO error. TMEP § 1712.02(a).

Petition to the Director Under 37 CFR 2.146: Applicants, registrants, and parties to inter partes proceedings before the Trademark Trial and Appeal Board (TTAB) who believe they have been injured by certain adverse actions of the USPTO, or who believe that they cannot comply with the requirements of the Trademark Rules of Practice (37 CFR parts 2, 3, 6, and 7) because of an extraordinary situation, may seek equitable relief by filing a petition under 37 CFR 2.146. A variety of issues may be reviewed on petition under this section. Some of the more common examples are when a party petitions the Director to: (1) Review an examining attorney's formal requirement, if the requirement is repeated or made final and the subject matter is appropriate for petition; (2) review the action of the Post Registration Unit refusing an affidavit of use or excusable nonuse under section 8 or section 71 of the Act, 15 U.S.C. 1058, 1141k, a renewal application under section 9 of the Act, 15 U.S.C. 1059, or a proposed amendment to a registration under section 7 of the Act, 15 U.S.C. 1057; or (3) review the refusal of the Madrid Processing Unit to certify an application for international registration. See TMEP § 1703. Generally, unless a specific deadline is specified elsewhere in the rules or within this section, such as the deadlines for petitions regarding actions of the TTAB under § 2.146(e), a petition must be filed within two months of the date of issuance of the action from which relief is requested and no later than two months from the date when Office records are updated to show that a registration has been cancelled or has expired under § 2.146(d). However, under current § 2.146(i), if a petitioner seeks to reactivate an application or registration that was abandoned, cancelled, or expired because documents not received by the Office were lost or mishandled, the petitioner is also required to be duly diligent in checking the status of the application or registration. The section has traditionally been invoked when papers submitted pursuant to the mailing rules in § 2.197 and § 2.198 were lost. However, the occurrence of such incidents is minimal. Further, the USPTO believes that if an applicant or registrant has proof that documents mailed in accordance with the requirements of § 2.197 or § 2.198 were lost or mishandled by the USPTO, thereby causing the abandonment of an application or cancellation/expiration of a registration, the proper recourse will be to seek relief under the proposed rule for requesting reinstatement.

Establishing Due Diligence: As noted above, if an applicant or registrant does not receive a notice from the USPTO regarding the abandonment of its application, cancellation/expiration of its registration, or denial of some other request, but otherwise learns of the abandonment, cancellation/expiration, or denial, the applicant or registrant must have been duly diligent in tracking the status of its application or registration in order to be granted revival, reinstatement, or other action by the Director. Section 2.146(i) sets out the standard of due diligence for petitions to revive and to reactivate an application or registration that was abandoned, cancelled, or expired because documents were lost or mishandled. To be considered duly diligent, an applicant must check the status of the application at least every six months between the filing date of the application and issuance of a registration. 37 CFR 2.146(i)(1). After filing an affidavit of use or excusable nonuse under section 8 or section 71 of the Act or a renewal application under section 9 of the Act, a registrant must check the status of the registration every six months until the registrant receives notice that the affidavit or renewal application has been accepted. 37 CFR 2.146(i)(2). Section 2.146(d) sets out the standard currently followed for requests to reinstate an application abandoned due to Office error. TMEP § 1712.01. When a party seeks to revive an application that was abandoned or reinstate a registration that was cancelled or expired, either due to the failure of the applicant or registrant to file a required document or to the loss or mishandling of documents sent to or from the USPTO, or asks the Director to take some other action, the USPTO may deny the request if the petitioner was not diligent in checking the status of the application or registration, even if the petitioner can show that the USPTO actually received documents, or declares that a notice from the USPTO was never received by the petitioner. 37 CFR 2.146(i).

The USPTO generally processes applications, responses, and other documents in the order in which they are received, and it is reasonable to expect some notice or acknowledgement from the USPTO regarding action on a pending matter within six months of the filing or receipt of a document. A party who has not received a notice or acknowledgement from the USPTO within that time frame has the burden of inquiring as to the status of action on its filing, and requesting in writing that corrective action be taken when necessary, to protect third parties who may be harmed by reliance on inaccurate information regarding the status of an application or registration in the trademark electronic records system. See TMEP § 1705.05. For example, a third party may have searched USPTO records and begun using a mark because the search showed that an earlier-filed application, or prior registration, for a conflicting mark had been abandoned or cancelled. In other cases, an examining attorney may have searched USPTO records and approved for publication a later-filed application for a conflicting mark because the earlier-filed application was shown as abandoned or a prior registration was shown as cancelled.

The due-diligence requirement means that any petition filed more than two months after the notice of abandonment or cancellation was issued, or no later than two months after Office records are updated, is likely to be dismissed as untimely because the applicant or registrant will be unable to establish that it was duly diligent. For example, if an applicant files an application in July 1, 2016 and an Office action is issued on October 15, 2016, a response must be filed on or before April 15, 2017. If the applicant does not respond, the trademark electronic records system will be updated to show the application as abandoned and a notice of abandonment will be sent to the applicant on or about May 15, 2017. If the applicant does not receive the notice of abandonment, and only checks the trademark electronic records system in August 2017 (i.e., more than two months after the issue date of the notice of abandonment and more than a year after filing), and thereafter files a petition to revive, that petition would be denied as untimely. Even if the applicant asserts that it only became aware of the issuance of the Office action and the notice of abandonment on, for example, July 18, 2017 (actual notice), the petition would be denied as untimely because the applicant could not prove that it was duly diligent in monitoring the status of the application by checking the status every six months.

Moreover, in some situations when an applicant or owner of a registration asserts that it did not receive a notice of abandonment or cancellation, it is often difficult for the USPTO to determine when the party had actual notice of the abandonment/cancellation and whether the party was duly diligent in prosecuting the application or maintaining the registration. By effectively mandating that applicants and registrants conduct the requisite status checks of Office records every six months from the filing of a document, whether an application or a submission requesting action by the Office, parties would be aware of the acceptance or refusal of their submission with enough notice to timely respond in the vast majority of circumstances. For example, if a document is filed on January 2, and an Office action requiring a response within six months is issued on February 2, if the submitting party is duly diligent and reviews the trademark electronic records system on July 2, it would learn of the issuance of the action, even if the party did not receive it. In that situation, the party would still have one month in which to timely respond.

Establish Certainty Regarding Timeliness: The goals of the proposed changes are to harmonize the deadlines for requesting revival, reinstatement, or other action by the Director and remove any uncertainty for applicants, registrants, third parties, and the Office as to whether a request is timely.

Under this proposed rule, the USPTO adds §§ 2.64(a)(1)(i) and (b)(1)(i) and amends §§ 2.66(a)(1) and 2.146(d)(1) to clarify that applicants and registrants would be on notice that if they receive an official document from the USPTO, such as a notice of abandonment or cancellation, a post-registration Office action, or a denial of certification of an international registration, they must file a petition to revive, request for reinstatement, or petition to the Director to take another action, by not later than two months after the issue date of the notice. The proposed addition of §§ 2.64(a)(1)(i) and (b)(1)(i) codifies this deadline for parties seeking reinstatement of an application or registration abandoned or cancelled due to Office error and makes it consistent with the deadline in § 2.66(a)(1). The proposed amendment to § 2.66(a) clarifies that the deadline applies to abandonments in full or in part. Finally, the proposed change to § 2.146(d)(1) deletes the requirement that a petition be filed no later than two months from the date when Office records are updated to show that a registration is cancelled or expired. As noted below, this deadline is extended to not later than six months after the date the trademark electronic records system indicates that the registration is cancelled/expired to harmonize the deadlines across the relevant sections.

To establish certainty and ensure consistency, the proposed rule also adds §§ 2.64(a)(1)(ii) and (b)(1)(ii) to codify the deadline for all applicants and registrants who assert that they did not receive an abandonment notice from the Office and thereafter seek reinstatement. This deadline is identical to the deadlines proposed in §§ 2.66(a)(2) and 2.146(d)(2) for applicants and registrants who assert that they did not receive a notice from the Office and thereafter seek relief. Under proposed §§ 2.64(a)(1)(ii) and (b)(1)(ii), if the applicant or registrant did not receive the notice, or no notice was issued, a petition must be filed by not later than two months of actual knowledge that a notice was issued or that an action was taken by the Office, and not later than six months after the date the trademark electronic records system is updated to indicate the action taken by the Office. Thus, this proposed rule makes clear that applicants and registrants must check the status of their applications and registrations every six months and thereby remove any uncertainty in the Office's assessment of whether an applicant or registrant was duly diligent.

Balance Duties of USPTO to Registrants and Third Parties: Under this proposed rule, the USPTO would add § 2.64(b)(2)(ii) and amend § 2.146(d)(2)(ii) to include the requirement for due diligence in tracking the status of a registration. Registrants who seek reinstatement of a registration cancelled due to Office error, but who assert that they did not receive a notice of cancellation/expiration, must file the request by not later than two months of actual knowledge of the cancellation and not later than six months after the date the trademark electronic records system indicates that the registration is cancelled/expired.

As noted above, the USPTO has generally not invoked the requirement for due diligence when there is proof that a registration was cancelled or expired solely due to Office error. Although the USPTO has a duty to correct its errors, the USPTO has a concurrent duty toward third parties to ensure that the trademark electronic records system accurately reflects the status of applications and registrations, especially given that the USPTO encourages such third parties to search the trademark electronic records system prior to adopting or seeking to register a mark. Therefore, the USPTO must balance its duty to third parties who rely on the accuracy of the trademark electronic records system and to registrants whose registration may have been cancelled as a result of Office error. The USPTO believes that, in order to fulfill its duty to all parties, the requirement for due diligence should apply equally to registrants who did not receive a notice of cancellation/expiration and who request reinstatement of their registrations, as it does to all other applicants and registrants who do not receive notice of any other action taken by the Office. As noted above, it is reasonable to expect some notice or acknowledgement from the USPTO regarding action on a pending matter within six months of the filing of a document. A registrant who has not received a notice or acknowledgement from the USPTO regarding a post-registration maintenance, renewal, or amendment document within that time frame has the burden of inquiring as to the status of the USPTO's action on the filing, and requesting in writing that corrective action be taken when necessary, to protect third parties who may be harmed by reliance on inaccurate information regarding the status of its registration in the trademark electronic records system.

Maintain Pendency: The USPTO proposes changes to § 2.66 to prevent applicants from utilizing the revival process to delay prosecution by repeatedly asserting non-receipt of an Office action or notice of allowance. Specifically, the regulations at § 2.66(b) are amended to clarify that a response to the outstanding Office action is required or, if the applicant asserts it did not receive the Office action, that the applicant may not assert more than once that the unintentional delay is based on non-receipt of the same Office action. The USPTO also adds § 2.66(b)(3)(i)-(ii) to clarify the requirements for requesting revival when the abandonment occurred after a final Office action.

An application is considered to be abandoned as of the day after the date on which a response to the Office action or notice of allowance is due. However, to accommodate timely mailed paper submissions and to ensure that the required response was not received and placed in the record of another application (e.g., if the applicant enters the incorrect serial number on its response), the USPTO generally waits until one month after the due date to send the notice of abandonment and update the trademark electronic records system to indicate that the application is abandoned.

In some situations, an application will become abandoned multiple times for failure to respond to an Office action or notice of allowance and the applicant will assert that it did not receive the same Office action or the notice of allowance each time that it petitions to revive the application. Under the proposed regulations at § 2.66(b), the Office would limit the applicant's ability to assert more than once that the unintentional delay is based on non-receipt of the same Office action. When an applicant becomes aware that its application has been abandoned, either via receipt of a notice of abandonment or after checking the status of the application, the applicant is thereby on notice that the Office has taken action on the application. If the applicant then files a petition to revive an application held abandoned for failure to respond to an Office action which states that the applicant did not receive the action, and the petition is granted, the USPTO will issue a new Office action, if there are additional issues since the original Office action was sent, and provide the applicant with a new six-month response period. If all issues previously raised remain the same, after reviving the application, the USPTO will send a notice to the applicant directing the applicant to view the previously issued Office action in the electronic file for the application available on the USPTO's Web site and provide the applicant with a new six-month response period. When a petition to revive an application for failure to respond to a notice of allowance states that the applicant did not receive the notice, and the petition is granted, the USPTO will cancel the original notice of allowance and issue a new notice, giving the applicant a new six-month period in which to file a statement of use or request for extension of time to file a statement of use.

In either situation, the USPTO sends the new Office action or notice of allowance to the correspondence address of record. In general, under the current regulations at 37 CFR 2.18, the owner of an application has a duty to maintain a current and accurate correspondence address with the USPTO, which may be either a physical or email address. If the correspondence address changes, the USPTO must be promptly notified in writing of the new address. If the correspondence address has not changed in the USPTO records since the filing of the application, the applicant is on notice that documents regarding its application are being sent to that address by virtue of its awareness of the abandonment of the application and its subsequent filing of the petition to revive.

Allowing an applicant who is on notice that the Office has taken action in an application to continually assert non-receipt of the same Office action or notice of allowance significantly delays prosecution of the application. It also results in uncertainty for the public, which relies on the trademark electronic records system to determine whether a chosen mark is available for use or registration. Therefore, because the applicant is on notice that documents regarding its application are being sent to the address of record, this proposed rule would limit an applicant to asserting only once that the unintentional delay is based on non-receipt of the same Office action or notice of allowance. If the correspondence address has changed since the filing of the application, the applicant is responsible for updating the address, as noted above, so that any further Office actions or notices will be sent to the correct address.

Codify Requirements for Reinstatement: The USPTO proposes new regulations at § 2.64 to codify the requirements for seeking reinstatement of an application that was abandoned or a registration that was cancelled or expired due to Office error. The proposed regulations indicate that there is no fee for requesting reinstatement. They also set out the deadlines for submitting such requests, as discussed under the heading “Establish Certainty Regarding Timeliness,” and the nature of proof necessary to support an allegation of Office error in the abandonment of the relevant application or cancellation of the relevant registration. Further, the proposed regulation provides an avenue for requesting waiver of the requirements if the applicant or registrant is not entitled to reinstatement.

The rationale for the proposed changes to the deadline for requesting reinstatement of a registration when the registrant did not receive a notice of cancellation is discussed above. The TMEP currently sets out the deadlines for requesting reinstatement of an application or registration that was abandoned, cancelled, or expired due to Office error. TMEP §§ 1712.01, 1712.02(a). Other requirements, such as the nature of proof required to establish Office error, are also set out in the TMEP. However, although the TMEP sets out the deadlines and guidelines for submitting and handling requests for reinstatement, it does not have the force of law. Codifying the deadlines for filing a request for reinstatement in a separate rule that also lists the types of proof necessary to warrant such remedial action would provide clear and definite standards regarding an applicant's or registrant's burden. It would also furnish the legal underpinnings of the Office's authority to grant or deny a request for reinstatement as well as provide applicants and owners of registrations with the benefit of an entitlement to relief when the standards of the rules are met.

If an applicant or registrant is found not to be entitled to reinstatement, the proposed rule also provides a possible avenue of relief in that the request may be construed as a petition to the Director under § 2.146 or a petition to revive under § 2.66, if appropriate. In addition, if the applicant or registrant is unable to meet the timeliness requirement for filing the request, the proposed rule provides that the applicant or registrant may submit a petition to the Director under § 2.146(a)(5) to request a waiver of that requirement.

Summary of Major Provisions: As stated above, the USPTO proposes to revise the rules in part 2 of title 37 of the Code of Federal Regulations to clarify the requirements for seeking revival of an abandoned application, reinstatement of an application or registration, or submitting a petition to the Director to take some other action.

The USPTO proposes to add § 2.64 and to amend §§ 2.66 and 2.146 to clarify the requirements for submitting petitions to revive an abandoned application and petitions to the Director regarding other matters, as described in the section-by-section analysis below.

The USPTO proposes to add § 2.64 to codify the requirements for requests to reinstate an application that was abandoned, or a registration that was cancelled or expired, due to Office error.

The USPTO proposes to amend the title of § 2.66 to “Revival of applications abandoned in full or in part due to unintentional delay.”

The USPTO proposes to amend § 2.66(a) by adding the title “Deadline” and the wording “in full or in part” and “by not later than;” to amend § 2.66(a)(1) by indicating that the deadline is not later than two months after the issue date of the notice of abandonment in full or in part; and to amend § 2.66(a)(2) by revising the deadline if the applicant did not receive the notice of abandonment.

The USPTO proposes to amend § 2.66(b) by adding the title “Petition to Revive Application Abandoned in Full or in Part for Failure to Respond to an Office Action” and rewording the paragraph for clarity and to add “in full or in part”; revising § 2.66(b)(3) to clarify that a response to the outstanding Office action is required or, if the applicant asserts it did not receive the Office action, that the applicant may not assert more than once that the unintentional delay is based on non-receipt of the same Office action; and adding § 2.66(b)(3)(i)-(ii) to set out the requirements for requesting revival when the abandonment occurs after a final Office action.

The USPTO proposes to amend § 2.66(c) by adding the title “Petition to Revive Application Abandoned for Failure to Respond to a Notice of Allowance;” adding § 2.66(c)(2)(i)-(iv) to incorporate and further clarify requirements in current §§ 2.66(c)(4) and (5); deleting current § 2.66(c)(3)-(4); and redesignating current § 2.66(c)(5) as § 2.66(c)(3) and deleting the wording prior to “the applicant must file.”

The USPTO proposes to amend § 2.66(d) by adding the title “Statement of Use or Petition to Substitute a Basis May Not Be Filed More Than 36 Months After Issuance of the Notice of Allowance” and rewording the paragraph for clarity.

The USPTO proposes to delete current § 2.66(e).

The USPTO proposes to redesignate current § 2.66(f) as § 2.66(e), add the title “Request for Reconsideration,” reword the paragraph for clarity, and revise paragraphs (1) and (2) to clarify the requirements for requesting reconsideration of a petition to revive that has been denied.

The USPTO proposes to amend § 2.146(b) by deleting the wording “considered to be.”

The USPTO proposes to amend § 2.146(d) by deleting the current paragraph and adding a sentence introducing new § 2.146(d)(1)-(2)(iii), which sets out the deadlines for filing a petition.

The USPTO proposes to amend § 2.146(e)(1) by changing the wording “within fifteen days from the date of issuance” and “within fifteen days from the date of service” to “by not later than fifteen days after the issue date” and ” by not later than fifteen days after the date of service.” The USPTO proposes to amend § 2.146(e)(2) by changing the wording “within thirty days after the date of issuance” and “within fifteen days from the date of service” to “by not later than thirty days after the issue date” and “by not later than fifteen days after the date of service.”

The USPTO proposes to delete current § 2.146(i).

The USPTO proposes to redesignate current § 2.146(j) as new § 2.146(i), to delete the wording “the petitioner,” and to revise paragraphs (1) and (2) to clarify the requirements for requesting reconsideration of a petition to revive that has been denied.

Administrative Procedure Act: The changes in this proposed rulemaking involve rules of agency practice and procedure, and/or interpretive rules. See Perez v. Mortg. Bankers Ass'n, 135 S. Ct. 1199, 1204 (2015) (interpretive rules “advise the public of the agency's construction of the statutes and rules which it administers”) (citation and internal quotation marks omitted); Nat'l Org. of Veterans' Advocates v. Sec'y of Veterans Affairs, 260 F.3d 1365, 1375 (Fed. Cir. 2001) (rule that clarifies interpretation of a statute is interpretive); Bachow Commc'ns Inc. v. FCC, 237 F.3d 683, 690 (D.C. Cir. 2001) (rules governing an application process are procedural under the Administrative Procedure Act); Inova Alexandria Hosp. v. Shalala, 244 F.3d 342, 350 (4th Cir. 2001) (rules for handling appeals were procedural where they did not change the substantive standard for reviewing claims).

Accordingly, prior notice and opportunity for public comment for the changes in this proposed rulemaking are not required pursuant to 5 U.S.C. 553(b) or (c), or any other law. See Perez, 135 S. Ct. at 1206 (notice-and-comment procedures are required neither when an agency “issue[s] an initial interpretive rule” nor “when it amends or repeals that interpretive rule”); Cooper Techs. Co. v. Dudas, 536 F.3d 1330, 1336-37 (Fed. Cir. 2008) (stating that 5 U.S.C. 553, and thus 35 U.S.C. 2(b)(2)(B), does not require notice and comment rulemaking for “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice,” quoting 5 U.S.C. 553(b)(A)).

Regulatory Flexibility Act: Under the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), whenever an agency is required by 5 U.S.C. 553 (or any other law) to publish a notice of proposed rulemaking (NPRM), the agency must prepare and make available for public comment an Initial Regulatory Flexibility Analysis, unless the agency certifies under 5 U.S.C. 605(b) that the proposed rule, if implemented, will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 603, 605.

For the reasons set forth herein, the Deputy General Counsel for General Law of the United States Patent and Trademark Office has certified to the Chief Counsel for Advocacy of the Small Business Administration that this rule will not have a significant economic impact on a substantial number of small entities. See 5 U.S.C. 605(b).

This proposed rule would amend the regulations to provide detailed deadlines and requirements for petitions to revive an abandoned application and petitions to the Director regarding other matters, and to codify USPTO practice regarding requests for reinstatement of abandoned applications and cancelled or expired registrations. The proposed rule will apply to all persons seeking a revival or reinstatement of an abandoned trademark application or registration, or other equitable action by the Director. Applicants for a trademark are not industry specific and may consist of individuals, small businesses, non-profit organizations, and large corporations. The USPTO does not collect or maintain statistics on small- versus large-entity applicants, and this information would be required in order to determine the number of small entities that would be affected by the proposed rule.

The burdens to all entities, including small entities, imposed by these rule changes will be minor procedural requirements on parties submitting petitions to revive an abandoned application and petitions to the Director regarding other matters, and those submitting requests for reinstatement of abandoned applications and cancelled or expired registrations. The proposed changes do not impose any additional economic burden in connection with the proposed changes as they merely clarify existing requirements or codify existing procedures.

Executive Order 12866 (Regulatory Planning and Review): This proposed rulemaking has been determined to be not significant for purposes of Executive Order 12866 (Sept. 30, 1993).

Executive Order 13563 (Improving Regulation and Regulatory Review): The USPTO has complied with Executive Order 13563 (Jan. 18, 2011). Specifically, the USPTO has, to the extent feasible and applicable: (1) Made a reasoned determination that the benefits justify the costs of the rule changes; (2) tailored the rules to impose the least burden on society consistent with obtaining the regulatory objectives; (3) selected a regulatory approach that maximizes net benefits; (4) specified performance objectives; (5) identified and assessed available alternatives; (6) provided the public with a meaningful opportunity to participate in the regulatory process, including soliciting the views of those likely affected prior to issuing a notice of proposed rulemaking, and provided online access to the rulemaking docket; (7) attempted to promote coordination, simplification, and harmonization across government agencies and identified goals designed to promote innovation; (8) considered approaches that reduce burdens and maintain flexibility and freedom of choice for the public; and (9) ensured the objectivity of scientific and technological information and processes, to the extent applicable.

Executive Order 13132 (Federalism): This proposed rulemaking does not contain policies with federalism implications sufficient to warrant preparation of a Federalism Assessment under Executive Order 13132 (Aug. 4, 1999).

Congressional Review Act: Under the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.), prior to issuing any final rule, the USPTO will submit a report containing the final rule and other required information to the United States Senate, the United States House of Representatives, and the Comptroller General of the Government Accountability Office. The changes in this notice are not expected to result in an annual effect on the economy of 100 million dollars or more, a major increase in costs or prices, or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets. Therefore, this notice is not expected to result in a “major rule” as defined in 5 U.S.C. 804(2).

Unfunded Mandates Reform Act of 1995: The changes in this proposed rulemaking do not involve a Federal intergovernmental mandate that will result in the expenditure by State, local, and tribal governments, in the aggregate, of 100 million dollars (as adjusted) or more in any one year, or a Federal private sector mandate that will result in the expenditure by the private sector of 100 million dollars (as adjusted) or more in any one year, and will not significantly or uniquely affect small governments. Therefore, no actions are necessary under the provisions of the Unfunded Mandates Reform Act of 1995. See 2 U.S.C. 1501 et seq.

Paperwork Reduction Act: This rulemaking involves information collection requirements which are subject to review by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). The collection of information involved in this rule has been reviewed and previously approved by OMB under control numbers 0651-0051, 0651-0054, and 0651-0061.

You may send comments regarding the collections of information associated with this rule, including suggestions for reducing the burden, to (1) The Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Room 10202, 725 17th Street NW., Washington, DC 20503, Attention: Nicholas A. Fraser, the Desk Officer for the United States Patent and Trademark Office; and (2) The Commissioner for Trademarks, by mail to P.O. Box 1451, Alexandria, VA 22313-1451, attention Catherine Cain; by hand delivery to the Trademark Assistance Center, Concourse Level, James Madison Building—East Wing, 600 Dulany Street, Alexandria, VA 22314, attention Catherine Cain; or by electronic mail message via the Federal eRulemaking Portal. All comments submitted directly to the USPTO or provided on the Federal eRulemaking Portal should include the docket number (PTO-T-2010-0016).

Notwithstanding any other provision of law, no person is required to respond to nor shall a person be subject to a penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act unless that collection of information displays a currently valid OMB control number.

For the reasons stated in the preamble and under the authority contained in 15 U.S.C. 1123 and 35 U.S.C. 2, as amended, the Office proposes to amend part 2 of title 37 as follows:

In the Rules and Regulations section of this issue of the Federal Register, the EPA is approving the State's SIP submittal as a direct rule without prior proposal because the Agency views this as noncontroversial submittal and anticipates no adverse comments. A detailed rationale for the approval is set forth in the direct final rule. If no relevant adverse comments are received in response to this action no further activity is contemplated. If the EPA receives relevant adverse comments, the direct final rule will be withdrawn and all public comments received will be addressed in a subsequent final rule based on this proposed rule. The EPA will not institute a second comment period. Any parties interested in commenting on this action should do so at this time.

For additional information, see the direct final rule which is located in the Rules and Regulations section of this Federal Register.

Why is EPA issuing this proposed rule?

The EPA proposes to approve the Commonwealth of Kentucky's UIC Program primacy application for Class II injection wells located within the state (except all wells on Indian lands), as required by rule under the SDWA. The proposed rule grants Kentucky primary enforcement authority to prevent Class II (oil and gas-related) underground injection activities that endanger underground sources of drinking water. Accordingly, the agency proposes to codify the state's program in the Code of Federal Regulations (CFR) at 40 CFR part 147. EPA will continue to administer the UIC Program for injection well Classes I, III, IV, V and VI and wells on Indian lands, if any such lands exist in the state in the future. The agency has published a direct final rule in the “Rules and Regulations” section of today's Federal Register, approving the state's program because EPA views this approval as noncontroversial and anticipates no adverse comment. The agency provided reasons for the approval and additional supplementary information in the preamble to the direct final rule. If EPA receives no adverse comment, the agency will not take further action on this proposed rule. If EPA receives adverse comment, the agency will withdraw the direct final rule and it will not take effect. The agency would then address all public comments in any subsequent final rule based on this proposed rule. The agency does not intend to institute a second comment period on this action. Any parties interested in commenting must do so at this time. For further information, please contact the persons listed in the FOR FURTHER INFORMATION CONTACT section.

The purpose of 45 CFR part 1630 is “to provide uniform standards for allowability of costs and to provide a comprehensive, fair, timely, and flexible process for the resolution of questioned costs.” 45 CFR 1630.1. LSC last revised part 1630 in 1997, when it published a final rule intended to “bring the Corporation's cost standards and procedures into conformance with applicable provisions of the Inspector General Act, the Corporation's appropriations [acts], and relevant Office of Management and Budget (OMB) Circulars.” 62 FR 68219, Dec. 31, 1997. Although the OMB Circulars are not binding on LSC because LSC is not a federal agency, LSC adopted relevant provisions from the OMB Circulars pertaining to non-profit grants, audits, and cost principles into the final rule for part 1630. Id. at 68219-20 (citing OMB Circulars A-50, A-110, A-122, and A-133).

LSC published the PAMM in 2001 “to provide recipients with a single complete and consolidated set of policies and procedures related to property acquisition, use and disposal.” 66 FR 47688, Sept. 13, 2001. Prior to the PAMM's issuance, such policies and procedures were “incomplete, outdated and dispersed among several different LSC documents.” Id. The PAMM contains policies and procedures that govern both real and non-expendable personal property, but, with the exception of contract services for capital improvements, the PAMM does not apply to contracts for services. Id. at 47695. The PAMM's policies and procedures were developed with guidance from the Federal Acquisition Regulation at 48 CFR parts 1-52, federal property management regulations, and OMB Circular A-110. Id. at 47688. The PAMM also incorporates several references to provisions of part 1630 pertaining to costs that require LSC's prior approval and the proper allocation of derivative income. Id. at 47696-98 (containing references to 45 CFR 1630.5(b)(2)-(4), 1630.5(c), and 1630.12, respectively).

Part 1630 and the PAMM have not been revised since 1997 and 2001, respectively. Since then, procurement practices and cost-allocation principles applicable to awards of federal funds have changed significantly. For instance, in 2013, OMB revised and consolidated several Circulars, including the Circulars LSC relied upon to develop part 1630, into a single Uniform Guidance. 78 FR 78589, Dec. 26, 2013; 2 CFR part 200. OMB consolidated and simplified its guidance to “reduce administrative burden for non-Federal entities receiving Federal awards while reducing the risk of waste, fraud and abuse.” 78 FR 78590, Dec. 26, 2013.

LSC has determined that it should undertake regulatory action at this time for three reasons. The first reason is to account, where appropriate for LSC, for changes in Federal grants policy. The second reason is to address the difficulties that LSC and its grantees experience in applying ambiguous provisions of Part 1630 and the PAMM. Finally, LSC believes rulemaking is appropriate at this time to address the limitations that certain provisions of both documents place on LSC's ability to ensure clarity, efficiency, and accountability in its grant-making and grants oversight practices.

In July 2014, the Operations and Regulations Committee (Committee) of LSC's Board of Directors (Board) approved Management's proposed 2014-2015 rulemaking agenda, which included revising Part 1630 and the PAMM as a priority item. On July 7, 2015, Management presented the Committee with a Justification Memorandum recommending publication of an Advance Notice of Proposed Rulemaking (ANPRM) to seek public comment on possible revisions to Part 1630 and the PAMM. Management stated that collecting input from the regulated community through an ANPRM would significantly aid LSC in determining the scope of this rulemaking and in developing a more accurate understanding of the potential costs and benefits that certain revisions may entail. On July 18, 2015, the LSC Board authorized rulemaking and approved the preparation of an ANPRM to revise Part 1630 and the PAMM.

Pursuant to LSC's Rulemaking Protocol, on October 4, 2015, the Committee voted to authorize publication of this ANPRM in the Federal Register for notice and comment. The ANPRM was published on October 9, 2015, with a 45-day comment period closing on December 8, 2015. 80 FR 61142, Oct. 9, 2015. After receiving comments on the ANPRM, LSC sought authorization from the Committee to conduct a series of rulemaking workshops to obtain additional stakeholder input on the questions asked in the ANPRM. The Committee authorized the workshops and publication of a Federal Register notice announcing the topics to be discussed and soliciting participants for the workshops. 81 FR 9410, Feb. 25, 2016.

LSC held workshops on April 20, May 18, and June 15, 2016, at its headquarters in Washington, DC. The three topics discussed were:

All materials related to the workshops, including agendas, audio recordings, and transcripts, are available at the rulemaking page for part 1630 on LSC's Web site, http://www.lsc.gov/rulemaking-cost-standards-and-property-management-acquisition-and-disposal.

LSC proposes to add or revise several definitions to Chapter XVI. First, LSC proposes to add a new definition for the terms Corporation funds and LSC funds. LSC currently uses these terms interchangeably throughout Chapter XVI, but does not define either term. LSC does define the term financial assistance as “annualized funding from the Corporation granted under section 1006(a)(1)(A) for the direct delivery of legal assistance to eligible clients.” 45 CFR 1600.1. LSC uses this term in very few places in Chapter XVI.

LSC believes that new definitions are necessary for three reasons. The first is to account for the widespread use of the terms Corporation funds and LSC funds throughout its regulations. The second is to distinguish between appropriated funds granted by LSC, which generally are governed by LSC's regulations, and private funds granted by LSC, which must be used consistent with 45 CFR part 1610. The third reason is to formalize LSC's longstanding policy that its regulations apply to all grant awards that LSC makes to carry out the purposes of the Legal Services Corporation Act, not just those grants described in the definition of financial assistance.

In recent years, LSC has begun receiving funds from private sources to make grants for specified purposes, not all of which are for the delivery of legal assistance to eligible clients. For example, LSC receives funding from the Arnold & Porter Foundation to make grants to LSC recipients to support leadership development training. Grants made through the G. Duane Vieth Leadership Development Program may be used to pay for individuals in leadership positions at LSC grantees to receive training, coaching, or other professional development in nonprofit leadership skills. Because the funding for this program is provided by a private foundation, it is not subject to LSC's regulations, which govern only those grants made with funds that Congress appropriated for the purpose of carrying out activities authorized by the LSC Act.

Since 1996, Congress has placed restrictions on how funds it appropriates to LSC may be used. In its annual directive, Congress does not distinguish between funds appropriated to make grants to provide legal assistance to eligible clients—Basic Field Grants—and funds that LSC may use to make other types of grants authorized by the LSC Act. At the current time, LSC uses the funds that Congress appropriates to carry out the purposes of the LSC Act to make awards in the following programs: (1) Basic Field Grants, (2) Technology Initiative Grants, and (3) the Pro Bono Innovation Fund. In addition to these grant programs, LSC uses recovered funds to award emergency relief grants to grantees in areas with government-declared emergencies on an as-needed basis. LSC historically has considered its regulations applicable to all three grant programs and grants made with recovered funds, as well as to any other funds that Congress occasionally appropriates to LSC for the purposes of carrying out the LSC Act. An example of the latter would be the 2013 supplemental appropriation to “carry out the purposes of the Legal Services Corporation Act by providing for necessary expenses related to the consequences of Hurricane Sandy[.]” Public Law 113-2, Div. A, Title X, Chap. 2, 127 Stat. 4, Jan. 29, 2013.

Against this background, LSC believes that it is necessary to define the terms Corporation funds and LSC funds, rather than to revise the regulations to replace those terms with the more limited term financial assistance. LSC proposes to define these terms to mean “any funds appropriated by Congress to carry out the purposes of the Legal Services Corporation Act of 1974, 42 U.S.C. 2996 et seq., as amended.” LSC believes that the proposed definition accurately describes the funds implicated by the use of these terms throughout Chapter XVI.

Second, LSC proposes to define the term non-LSC funds. LSC proposes to define the term in reference to the new definition of Corporation funds or LSC funds. LSC proposes this definition to make clear that the term non-LSC funds has the same meaning throughout LSC's regulations.

Organizational note. LSC proposes to reorganize part 1630 into four subparts. Subpart A will contain provisions generally applicable to all of part 1630. These provisions include the purpose and definitions. Subpart B will contain the sections governing the allocability and allowability of costs charged to LSC grants. It will also set forth the process that recipients should use to request prior approval for certain classes of costs. Subpart C will contain the sections governing questioned cost proceedings. In Subpart D, LSC will establish the rules governing the closeout of an LSC grant when a recipient stops receiving LSC funds. LSC believes that restructuring part 1630 in this way will improve the organization and coherence of the rule.

§ 1630.1 Purpose. LSC proposes to make no changes to this section.

§ 1630.2 Definitions. LSC proposes several revisions to this section. LSC proposes to remove the definition of the term allowed cost from § 1630.2(a) as that term is not used in part 1630. LSC also proposes to delete the definition of the term final action and remove references to final action throughout part 1630 because the term does not appear to have legal significance in this part. The remaining definitions will be redesignated as appropriate.

LSC proposes to revise definitions that are currently taken from the Inspector General Act, 5 U.S.C. Appx., as amended, to track the Uniform Guidance issued by the Office of Management and Budget (OMB), 2 CFR part 200. LSC believes that the OMB-defined terms are more appropriate in the context of LSC's cost standards and disallowance procedures, which are more similar to an agency's standards and procedures than to an inspector general's operations.

§ 1630.2(c) Disallowed cost. In addition to renumbering this definition, LSC proposes to revise the definition to substantially mirror the definition of disallowed cost contained in the Uniform Guidance, 2 CFR 200.31.

§ 1630.2(d) Final written decision. LSC proposes to replace the term management decision with the term final written decision. Management decision was adopted from section 5(f)(5) of the Inspector General Act, as the decision of an agency head “concerning its response to such findings and recommendations” made in an audit report issued by the agency's inspector general. For LSC's purposes, the decision described is not a final decision made by LSC management. Rather, the decision that this term refers to is made by an officer of LSC below the President after reviewing the evidentiary record supporting a staff determination that certain costs should be disallowed. In addition to replacing the term, LSC proposes to redefine the term to mean (1) the decision issued by the Vice President for Grants Management after reviewing a recipient's response to a questioned cost notice, or (2) that the notice of questioned costs will become the final written decision after 30 days if the recipient does not file a response.

§ 1630.2(e) Membership fees or dues. LSC proposes to adopt the definition of this term from part 1627 in substantial part. As noted in the April 20, 2015 NPRM, LSC proposed to relocate this section of part 1627 to part 1630 in order to limit the scope of part 1627 to the oversight of subgrants. 80 FR 21692, 21698, Apr. 20, 2015. LSC proposes to add a nonexclusive description of the types of fees or dues that recipients may use LSC funds to pay. Such fees or dues include those that an attorney must pay to the highest court of a state or a bar organization acting on behalf of the court or in another governmental capacity in order to practice law in the jurisdiction.

§ 1630.2(f) Questioned cost. LSC proposes to revise this definition to make clear that a questioned cost is one that LSC itself is questioning. This definition was adopted from section 5(f)(1) of the Inspector General Act. As currently drafted, the term indicates that the Office of Inspector General, the General Accounting Office (now the Government Accountability Office), and other authorized auditors may also question costs. While it is true that any of those entities may question costs, it is ultimately LSC's decision whether to issue a notice of questioned costs. Additionally, LSC may question costs based on information developed through its own oversight and program quality activities or as a result of information received from the public or whistleblowers. Finally, the text of existing § 1630.5(a) provides that LSC may question costs based on findings issued by the entities listed in the existing definition of questioned costs. For these reasons, LSC proposes to revise the definition of questioned costs.

§ 1630.3 Time. As part of the proposed reorganization of part 1630, LSC proposes to relocate existing § 1630.13 to § 1630.3 without change. This section prescribes the method for computing time periods under part 1630.

§ 1630.4 Burden of proof. LSC proposes no changes to this section.

§ 1630.5 Standards governing allowability of costs under LSC grants or contracts. LSC proposes to redesignate existing § 1630.3 as § 1630.5 within Subpart B as part of the restructuring of part 1630. Except as described below, LSC proposes to make only technical edits to this section.

LSC proposes to delete paragraph (a)(8) from this section. The preamble to the 1986 final rule for part 1630 describes paragraph (a)(8) as “a standard federal provision to ensure that [matching funds for federal grants] must be raised from a source other than the federal treasury and taxpayer.” 51 FR 29076, 29077, Aug. 13, 1986. Under existing § 1630.3(a)(8), recipients may use LSC funds to satisfy the matching requirement of a federal grant program only if “the agency whose funds are being matched determines in writing that Corporation funds may be used for federal matching purposes[.]” LSC introduced this language in response to comments expressing concern that because LSC makes grants from appropriated funds, those grants could not be used to match, for example, grants awarded by the Administration on Aging within the U.S. Department of Health and Human Services. Id. LSC's approach is unique in requiring recipients to obtain a written determination from the agency whose grant the LSC funds are intended to match that the LSC funds may be used to satisfy the match. It is not clear from the regulatory history of the 1986 final rule why LSC believed it was appropriate for a different agency to find that LSC's funds could be used to match the agency's funds in order for the recipient to use LSC funds in that manner.

The 1986 preamble was correct that federal funds cannot be used to satisfy the matching requirement of another federal grant unless specifically authorized by law. See U.S. Government Accountability Office, “Principles of Federal Appropriations Law,” 3rd Ed., Vol. II, at 10-97 (Feb. 2006). But section 1005 of the Legal Services Corporation Act states that, “[e]xcept as otherwise specifically provided in [the Act],” LSC is not “considered a department, agency, or instrumentality, of the Federal Government.” 42 U.S.C. 2996d(e)(1). Therefore, LSC funds are not “federal funds” for matching purposes. Several federal agencies, including the Department of the Treasury, the Department of Justice, and the General Accountability Office, have reached the same conclusion and do not consider LSC funds to be “federal funds” subject to federal grant policy. See, e.g., Department of Treasury Memorandum GLS-107648 (Mar. 26, 2011); U.S. Gen. Accounting Office, Legal Services Corporation: Governance and Accountability Practices Need to Be Modernized and Strengthened (2007).

Based on this language, LSC is reversing its prior policy with respect to the use of LSC funds to match grants awarded by federal agencies. LSC believes that recipients may use LSC grant funds to satisfy cost-sharing or matching requirements of federal awards as long as the funds are used consistent with LSC's governing statutes and regulations. LSC is considering other mechanisms for communicating its position on the use of LSC funds to satisfy cost-sharing or cost-matching requirements to federal agency funders.

§ 1630.6 Prior approval. LSC proposes to redesignate existing § 1630.5, which lists costs requiring LSC's prior approval, as § 1630.6 with substantive changes. LSC proposes no changes to paragraph (a) (Advance understandings.) or (c) (Duration.).

LSC proposes to simplify paragraph (b) and relocate all provisions pertaining to prior approval for purchases and leases of personal property, contracts for services, purchases of real estate, contracts for capital improvements, and use of LSC funds to pay costs after the cessation of an LSC grant. LSC proposes to relocate the provisions governing prior approval of purchases and contracts to proposed part 1631. LSC also proposes to create a new Subpart D in part 1630 that will establish the procedures for closing out an LSC grant, including the use of LSC funds to complete the closeout process. Because LSC does not permit applicants for funding to charge costs incurred prior to the start date of the grant to LSC funds, LSC proposes to eliminate pre-award costs from the list of costs for which recipients must seek prior approval.

Consistent with the proposal to relocate the prior approval provisions, LSC also proposes to eliminate existing § 1630.6—Timetable and basis for granting prior approval.

Finally, LSC proposes to redesignate newly transferred §§ 1630.14 (Membership fees or dues), 1630.15 (Contributions), and 1630.16 (Tax-sheltered annuities, retirement accounts, and penalties) as §§ 1630.7-1630.9, respectively, with no changes.

For readability and ease of reference, LSC proposes to split existing § 1630.7 into two discrete sections. Proposed § 1630.10 will govern only LSC's initial decision to question costs, and proposed § 1630.11 will describe the process by which a recipient may appeal a disallowed cost of $2,500 or more to the LSC President. Finally, LSC proposes to redesignate existing §§ 1630.8-1630.12 as §§ 1630.12-1630.16 with only minor technical changes.

§ 1630.10 Review of questioned costs. LSC proposes to redesignate § 1630.7(a)-(d) as § 1630.10(a)-(b) and (e)-(f), respectively. In order to locate all provisions governing questioned costs in one section, LSC proposes to move the second sentence of existing § 1630.4(b) to paragraph (c) of this section. In that paragraph, LSC states that when it disallows a cost solely because the cost is excessive, LSC will disallow only the amount that LSC has determined is excessive.

LSC is proposing to eliminate the five-year lookback period within which LSC may recover questioned costs. The LSC Act does not place any temporal limitation on LSC's ability to recover costs inappropriately charged by a recipient to its LSC grant. LSC adopted the five-year period when it revised part 1630 in 1997. 62 FR 68219, 68226, Dec. 31, 1997. This requirement is located currently at 45 CFR 1630.7(b) and states that LSC must provide a recipient with notice when LSC “determines that there is a basis for disallowing a questioned cost, and if not more than five years have elapsed since the recipient incurred the cost[.]”

Since LSC first promulgated part 1630 in 1986, it has chosen to limit the amount of time for which it may recover questioned costs from a recipient. LSC adopted a six-year period in the original version of § 1630.7(b), which it shortened to five years in 1997. 51 FR 29076, 29083, Aug. 13, 1986 (1986 final rule); 62 FR 68219, 68226, Dec. 31, 1997 (1997 final rule). The preamble to the 1997 final rule contains the most substantive discussion about LSC's intent regarding the limitation. Initially, the Board proposed a three-year limitation period on the recovery of questioned costs. 62 FR 68223. LSC Management and the Office of Inspector General recommended that the Board adopt a five-year period

Id. The Board accepted the recommendation and adopted a five-year lookback period.

Based on its oversight experience in the intervening years, LSC has come to the conclusion that limiting its ability to recover misspent costs is not consistent with its duty to responsibly administer appropriated funds. In LSC's experience, some misuses of funds are not discovered within the five-year period, even though LSC conscientiously reviews the reports and other documentation it requires recipients to provide. In some cases, recipients have failed to represent uses of LSC funds accurately, and those misrepresentations have come to LSC's attention only through complaints to LSC itself or via the Office of Inspector General. LSC also proposes to streamline the questioned costs review procedure. In the current version of § 1630.7, a recipient has 30 days from the date it receives a questioned cost notice from LSC to respond with evidence and an argument for why LSC should not disallow the cost. 45 CFR 1630.7(c). If the recipient does not respond within 30 days, LSC management must issue a second decision. LSC believes that this second step is redundant. It places an unnecessary administrative burden on LSC to confirm its own action in the absence of a challenge by the recipient. LSC proposes to replace this step with a new paragraph (d)(2), which states that if the recipient does not respond within 30 days, the notice of questioned costs automatically converts to LSC's final written decision.

§ 1630.11 Appeals to the President. LSC proposes to move existing § 1630.7(e)-(g) to § 1630.11 with one substantive change. LSC proposes to introduce paragraph (a)(2), which prohibits a recipient from appealing a final written decision to the LSC President when the recipient did not seek review of the initial notice of questioned costs. In LSC's view, a senior manager with direct oversight of the office that issues a notice of questioned costs should have the first opportunity to review the evidence relating to the decision to question costs for two reasons. First, reviews of questioned cost notices may involve consultations with several offices within LSC, as well as several rounds of engagement with the recipient to obtain all of the information necessary to fairly consider the recipient's request for review. Second, an intermediate level of review may provide the recipient with the relief sought, reduce the amount of the costs LSC proposes to disallow, or narrow the issues in dispute. The effort needed to fully evaluate the recipient's defenses and narrow down the amount and issues in dispute is better invested at an earlier, lengthier stage in the process than during review by the President, who is the ultimate decision-maker for the Corporation. The President has only 30 days to make a decision on the recipient's appeal under § 1630.11(c), compared to the 60 days provided for review at the senior management stage in § 1630.10(e).

§ 1630.12 Recovery of disallowed costs and other corrective action. LSC proposes to redesignate existing § 1630.8 to § 1630.12 with only minor technical changes to reflect the removal of final action from the rule.

§ 1630.13 Other remedies; effect on other parts. LSC proposes to redesignate existing § 1630.9 as § 1630.13 with only minor technical edits. LSC proposes to remove the references to denials of refunding under part 1625 as obsolete. In paragraph (b), which describes types of sanctions that are not equivalent to a disallowed cost proceeding, LSC proposes to include limited reductions of funding under part 1606. LSC added limited reductions of funding as an enforcement mechanism in 2013. 78 FR 10085, Feb. 13, 2013.

LSC proposes to redesignate existing §§ 1630.10 (Applicability to subgrants.); 1630.11 (Applicability to non-LSC funds.); and 1630.12 (Applicability to derivative income.) to §§ 1630.13-16 without change.

LSC proposes to create Subpart D to formalize its procedures to close out grants whenever a recipient ceases to receive LSC funding. LSC's closeout procedures are currently located on its Web site at http://www.lsc.gov/orderly-conclusion-role-responsibilities-recipient-lsc-funds. LSC proposes to promulgate the procedures as rules in the interest of formalizing and consolidating its grant requirements. The procedures established in Subpart D reflect LSC's current process for closing out grants.

§ 1630.17 Applicability. In this section, LSC proposes to describe when the procedures of Subpart D apply. Cessation of LSC funding may occur either voluntarily or involuntarily and may take different forms. Changes requiring closeout of the LSC grant include merger or termination with another LSC funding recipient, changes to the recipient's current identity or status as a legal entity, or the recipient's decision to stop receiving LSC grants. Involuntary termination occurs when LSC decides to stop funding a recipient. Terminations may occur during or at the end of a grant period.

§ 1630.18 Closeout plan; Timing. LSC proposes to require recipients who stop receiving funding to provide LSC with a plan for the orderly closeout of the grant. Recipients who are merging or consolidating with another LSC recipient, changing legal status, or opting out of further LSC grants must provide LSC with notice and the closeout plan no less than 60 days prior to the change ending the grant. If LSC involuntarily terminates a recipient's funding, the recipient must provide LSC with the closeout plan no more than 15 business days after receiving the notice of termination from LSC.

LSC proposes to maintain the required elements of a closeout plan on its Web site and to provide recipients with a link to the relevant page in the grant award documents. Currently, LSC provides the link in the annual grant assurances that recipients must sign. LSC proposes to continue this practice, which is similar to the approach that LSC has taken in other rules that require compliance with statutes or policies that may be updated without needing to go through the regulatory process. For example, when LSC updated 45 CFR part 1640—Application of Federal Law to LSC Recipients in 2015, it undertook an obligation to post and maintain the list of applicable federal laws on its Web site. 80 FR 21654, 21655, Apr. 20, 2015. LSC believes this approach is desirable because it allows LSC the flexibility to change the information it needs to ensure that grants are closed out properly without having to engage in rulemaking.

§ 1630.19 Closeout costs. In this section, LSC proposes to formalize its policies for approving the use of LSC funds to complete closeout activities. Recipients must submit a detailed budget and timeline for completing the activities described in the closeout plan. LSC must approve both the budget and the proposed timeline before closeout activities may begin. In paragraphs (b) and (c) LSC proposes to restate its policy of withholding any unreleased funds until the recipient has satisfactorily completed all closeout activities.

§ 1630.20 Returning funds to LSC. In new § 1630.20, LSC proposes to formalize the procedures for recipients to return to LSC excess fund balances and derivative income received after the end of the LSC grant period. The procedure for returning derivative income described in paragraph (b) applies only to derivative income attributable to work performed by the recipient during the term of and attributable to work funded by the LSC grant.

In the ANPRM, LSC asked for comments on whether the PAMM should remain a separate manual or be incorporated into Chapter XVI of the Code of Federal Regulations as an official rule. Only the National Legal Aid and Defender Association (NLADA) responded to this item, recommending against codifying the PAMM as a rule. NLADA stated that making the PAMM into a rule would “deprive LSC of flexibility and impose rigid rules on LSC and the programs in an ever-evolving delivery system where modifications will need to be made.” Instead, NLADA advocated that LSC publish a regulation that provides “a very general description of the overall guidelines with references to a resource that consolidates the LSC Accounting Guide, Property Management Guide and other LSC documents with fiscal, property and accounting policies.”

As indicated in the ANPRM, LSC believes that incorporating the PAMM into Chapter XVI of the Code of Federal Regulations will “promote and preserve the effectiveness and consistency of LSC's property acquisition, use, and disposal policies and procedures.” 80 FR 61142, 61142, Oct. 9, 2015. The LSC Act requires LSC to publish all rules, regulations, and guidelines for public comment, and to publish all rules, regulations, guidelines, and instructions in the Federal Register for 30 days prior to their effective date, which deprives LSC of flexibility to make changes quickly to even informal grants administration guidelines and instructions. In fact, the PAMM itself was published after a notice and comment process, even though it is not a formal rule. 66 FR 47688, Sept. 13, 2001.

LSC thus proposes to introduce a new procurement and property management rule at 45 CFR part 1631. The new part 1631 will draw substantially from the existing PAMM, but will differ from the PAMM in three significant respects. First, LSC proposes to require that recipients adopt policies for making purchases with LSC funds. Second, LSC proposes to expand the rule to include contracts for services made with LSC funds. Lastly, LSC proposes to restructure the PAMM into five discrete subparts: Subpart A—General Provisions; Subpart B—Procurement Policies and Procedures; Subpart C—Personal Property Management; Subpart D—Real Estate Acquisition and Capital Improvements; and Subpart E—Real Estate Management. LSC proposes this restructuring to improve the coherence and usability of the rule.

§ 1631.1 Purpose. LSC proposes to describe the purpose of part 1631 as twofold: (1) Setting standards for policies governing the purchase of property, including real estate, or contracts for services with LSC funds; and (2) establishing the requirements governing the use and disposition of property purchased with LSC funds.

§ 1631.2 Definitions. LSC proposes to adopt several definitions from the PAMM into part 1631. LSC also proposes to add new definitions.

§ 1631.2(a) Capital improvements. LSC proposes to adopt the definition of this term from the PAMM with technical changes for ease of readability.

§ 1631.2(b) LSC property interest agreement. LSC proposes to adopt the PAMM definition of this term with only technical changes.

§ 1631.2(c) Personal property. LSC proposes to simplify the PAMM definition of this term to mean any property other than real estate. LSC intends the revised definition to include both expendable property (e.g., supplies) and non-expendable property (e.g., equipment, furniture, law books). LSC believes this change is appropriate for several reasons. First, LSC is proposing to require recipients to establish procurement policies that apply to all purchases of property, so that continuing to exclude supplies (expendable property) from the definition no longer makes sense. Second, and similarly, LSC is proposing to require recipients to seek prior approval for all purchases of personal property that exceed a specific dollar threshold. LSC does not believe it is appropriate to distinguish between expendable and non-expendable personal property under this proposal.

§ 1631.2(d) Purchase. LSC proposes to revise this definition for simplicity and to include contracts for services.

§ 1631.2(3) Quote. LSC proposes to adopt the PAMM definition of this term with only minor technical changes.

§ 1631.2(f) Real estate. LSC proposes to revise the PAMM definition of the term real property for clarity. LSC does not intend the change from “land, buildings, and appurtenances, including capital improvements thereto, but not including moveable personal property” in the existing PAMM to limit, narrow, or expand the scope of property captured by the revised definition.

§ 1631.2(g) Services. Because LSC is proposing to expand the scope of the PAMM to include contracts for services, LSC believes it is necessary to define the types of services it intends to regulate. LSC proposes to adopt a definition of services that reflects how the term is used in the Uniform Guidance, particularly 2 CFR 200.431 and 200.459.

LSC proposes to define services as those professional and consultant services provided to a recipient by members of a particular profession or individuals having a specific skill who are not employees of the recipient. Such individuals would include, but are not limited to, management consultants, payroll administrators, custodians, plumbers, and computer maintenance personnel. LSC does not, however, propose to include fringe benefits, such as health insurance, pensions, and unemployment benefits, within the scope of services regulated by part 1631.

During the rulemaking workshops, several commenters identified an issue that LSC had not considered when drafting the NPRM. Those commenters noted that their largest contracts for services were contracts with their employee insurance providers or insurance brokers. They expressed concerns that (1) the process of obtaining bids and negotiating terms with health insurance providers is a time-sensitive process that would be complicated by having to simultaneously engage in a prior approval process with LSC; (2) their health insurance was provided by the county in which their offices were located and it was not possible for them to negotiate terms with the government agency providing the benefits; (3) there is only one provider in the area, so it is not possible to obtain multiple quotes for insurance; and (4) they use a healthcare administrator to handle employee claims for benefits. See, e.g., Transcript of April 20, 2016 Rulemaking Workshop, at 67-68 (comments of Steve Pelletier), 69 (comments of AnnaMarie Johnson); Transcript of May 18, 2015 Rulemaking Workshop, at 55-56 (comments of Steve Pelletier), 63-64 (comments of Diana White). When LSC proposed to regulate services contracts, it did not consider whether employee benefits were services that should be subject to part 1631. After the commenters raised the concern that employee benefits could be covered by the proposed rule, LSC considered the issue and determined that employee benefits are not the type of services over which LSC intended to increase its oversight. Consequently, LSC proposes to exclude contracts for employee benefits from the definition of services. LSC notes that contracts for employee benefits are subject to the reasonable and necessary standard of part 1630 for costs charged to the LSC grant.

§ 1631.2(h) Source. LSC proposes to adopt the PAMM definition of this term with technical changes to reflect the inclusion of contracts for services within part 1631.

§ 1631.3 Prior approval process. LSC proposes to relocate the provisions governing the timetable and basis for granting prior approval from existing § 1630.6 to new § 1631.3. LSC proposes to require recipients to obtain prior approval for (1) all purchases and leases of personal property, (2) contracts for services, and (3) capital improvements when the cost of any of those transactions exceeds $25,000 of LSC funds. LSC also proposes to increase the prior approval threshold. Currently, the prior approval threshold in the PAMM is $10,000. LSC established this threshold when it revised part 1630 in 1986. 51 FR 29076, 29082, Aug. 13, 1986. In its comments on the ANPRM, Northwest Justice Project (NJP) encouraged LSC to increase this threshold to $25,000 to account for inflation in the intervening years. LSC agrees that an increase in the threshold is appropriate. Consistent with NJP's recommendation and reasoning, LSC proposes to increase the prior approval threshold to $25,000.

LSC proposes to expand the prior approval process to include contracts for services and all purchases of personal property, whether the purchase is for a single item or multiple items, exceeding the $25,000 threshold. Throughout the initial stages of this rulemaking, commenters opposed the potential application of the prior approval requirement to contracts for services. In its response to the ANPRM, NLADA stated that its members “strongly oppose prior approval of service contracts.” NLADA observed that recipients need the flexibility to make rapid decisions about how to address, for example, a computer system crash. NLADA also asserted that whatever policy LSC adopted should allow recipients to enter into sole-source contracts for reasons other than exigent circumstances. As examples, NLADA discussed the situations where a recipient purchases hardware or software form a vendor that includes routine maintenance, or the service is a specialty service for which only one vendor is available in the recipient's area. NLADA concluded that “[s]ound fiscal policies and internal controls will promote clarity, efficiency, and accountability while not unduly burdening the recipient.”

Workshop panelists discussed the problems with expanding the prior approval requirement to both contracts for services and aggregate purchases of property. Like NLADA, panelists discussed the need to react quickly in emergency situations, which generally makes prior approval impractical as well as impossible. See, e.g., Transcript of April 20, 2016 Workshop at 72-73 (statement of AnnaMarie Johnson); May 18, 2016 Workshop at 57-58 (statement of Jonathan Asher), 69-71 (statement of Jose Padilla). Panelists also observed that some situations in which they must contract for services, such as labor-management negotiations or mediating employment issues, are sensitive situations in which is it inappropriate for LSC to weigh in on the recipient's choice of contractor. See Transcript of May 18, 2016 Workshop at 57 (statement of Jonathan Asher), 59-63 (statement of Jose Padilla), 67-69 (statement of Jonathan Asher), 69-72 (statement of Jose Padilla).

Panelists opined as well on the issue of prior approval of aggregate purchases. Several panelists expressed concern that the concept of aggregate purchases was ambiguous, with respect to both timing—did LSC mean a purchase of multiple items occurring at one time, or several purchases of the same type of item over a certain period?—and nature—do all items in the purchase have to be the same, or would aggregate purchase include a copier and all of the accessories needed to operate it?—of the purchase. See, e.g., Transcript of April 20, 2016 Workshop at 53-54 (statements of Steve Pelletier and George Elliott), 62-65 (statement of Jonathan Asher), 70-71 (statement of George Elliott), 72-73 (statement of Michael Maher); Transcript of May 18, 2016 Workshop at 13-14 (statement of Jonathan Asher). Panelists discussed and questioned the value of obtaining prior approval for regular purchases of supplies throughout the course of the year, in contrast to obtaining prior approval for major purchases that they have planned for. See Transcript of May 18, 2016 Workshop at 20-22 (statements of Shamim Huq and Steve Pelletier). One panelist calculated the amount of time that would be required of his staff if LSC were to implement a prior approval requirement for all purchases of personal property at the current threshold of $10,000. He stated that based on his organization's purchasing patterns, his staff would need to put in an additional 105 work hours to comply with such a requirement. See Transcript of April 20, 2016 Workshop at 59 (statement of Shamim Huq).

LSC understands recipients' need to react quickly to prevent or mitigate damage caused by unexpected crises. To address that concern, LSC proposes to allow recipients to purchase personal property or contract for services without first seeking prior approval in limited emergency circumstances. Proposed § 1631.3(d)(1) permits a recipient to use more than $25,000 in LSC funds to obtain personal property or services when the purchase is necessary to avoid imminent harm to, remediate, or mitigate damage to the recipient's personnel, physical facilities, or systems. Under proposed § 1631.3(d)(2), the recipient would have to provide LSC with the information it normally would submit as a request for prior approval within a reasonable time after the situation requiring the emergency purchase or contract has ended.

Regarding contracts for labor counsel, mediators, or other services needed to address sensitive personnel issues, LSC observes that recipients do not need to disclose in the prior approval request the nature of the problems they are attempting to address. LSC proposes to require only that recipients describe how the services will further their legal service delivery. In these circumstances, a statement that the service is necessary to ensure the efficient functioning of the office may satisfy that requirement. Additionally, LSC notes that at the current time, contracts for services are subject to 45 CFR part 1630. Part 1630 requires that recipients document that any costs charged to the LSC grant are incurred in the performance of the grant, reasonable and necessary for the performance of the grant, and allocable to the grant. 45 CFR 1630.3(a)(1)-(3). Requiring prior approval for service contracts does nothing more than give LSC the ability to oversee costs recipients intend to use LSC funds to pay prior to the costs being incurred, rather than after. Prior approval may prevent the funds from being misspent, whereas an after-the-fact review of the cost could lead to sanctions, disallowed costs, suspension, or termination, depending on the magnitude of the wrongdoing. All of these after-the-fact proceedings are time consuming for both LSC and the recipient and do not prevent the misuse of funds. LSC believes that for large purchases or contracts, regardless of the nature of the property or service involved, prior approval is a more effective tool for preventing fraud, waste, and abuse than post hoc review.

Finally, with respect to aggregate purchases of property, LSC believes that the proposals to require recipients to adopt procurement policies and to seek prior approval for purchases and contracts using $25,000 or more of LSC funds will eliminate the ambiguities and burdens identified by commenters. The proposed rule makes clear that recipients must seek prior approval for any single purchase whose cost exceeds $25,000 in LSC funds, regardless of whether that purchase is of a single item of personal property, several unrelated items of personal property, or a combination of personal property and services. Additionally, the proposed increase of the threshold to $25,000 will relieve recipients of the burden of seeking prior approval for relatively small purchases of personal property.

LSC specifically requests comment on the number of purchases recipients have made in the preceding five years for which they would have had to seek prior approval under the new threshold, including purchases of services. LSC believes that the proposed $25,000 threshold is appropriate as it corresponds to inflation over the 30-year period since LSC adopted the current $10,000 threshold. Recipients, however, are in the best position to provide information regarding the impact that LSC's proposals to both increase the prior approval threshold and require recipients to seek prior approval of all purchases exceeding the proposed threshold are likely to have.

LSC proposes to simplify the procedure described in current § 1630.7 by committing to make a decision or inform the requester of the date by which LSC expects to make a decision within a specific time frame. For purchases or leases of personal property, contracts for services, or capital improvements, LSC will make a decision or give notice of the date by which it expects to make a decision within 30 days of receiving the request. For purchases of real estate, the time frame for decision or notice is 60 days.

Finally, as LSC did in the revisions to part 1627, LSC is eliminating language that suggests recipients may incur costs without receiving prior approval if LSC has not made a decision within the regulatory time frame. LSC does not believe that responsible grants administration practices should permit the expenditure of large amounts of LSC funds without LSC's prior approval. At the same time, LSC commits itself to making a decision or communicating the anticipated decision date to the requester within the time frames specified in § 1631.3(b).

§ 1631.4 Effective date and governing regulations. In this section, LSC proposes to require that the provisions of part 1631 apply to all purchases of real estate, purchases and leases of personal property, and contracts for services occurring after the effective date of part 1631. LSC also proposes to make Subparts A (General Provisions), C (Personal Property Management), and E (Real Estate Management) applicable to all personal property leased or purchased with LSC funds and real estate leased or owned by recipients on the effective date of part 1631. LSC recognizes that recipients will need time to develop procurement policies and procedures, obtain insurance for real property, and ensure that real estate leased or purchased with LSC funds meets the new maintenance standards. LSC therefore proposes to require that recipients comply no later than 90 days after the effective date of part 1631. LSC specifically seeks comment on whether 90 days is the appropriate transition period to come into compliance.

§ 1631.5 Use of funds. Sections 6 and 7 of the PAMM require recipients and former recipients of LSC funds to repay LSC for its contributions to purchases of personal property or real estate in certain circumstances. Both sections have paragraphs stating that LSC will use funds repaid upon disposition of property purchased in whole or in part with LSC funds to make emergency and special grants. Because the provisions have the exact same language, LSC proposes to consolidate them in § 1631.5 with only minor changes to reflect the consolidation.

§ 1631.6 Recipient policies, procedures, and recordkeeping. LSC proposes to require recipients to adopt written policies and procedures implementing part 1631. LSC also proposes to require that recipients maintain documentation sufficient to demonstrate compliance with this part. The documentation described in this section includes documentation showing that the procedures followed for each lease or purchase of personal property, purchase of real estate, or contract for services complied with the recipients' policies.

§ 1631.7 Characteristics of procurements. Concurrent with this NPRM, LSC issued a final rule implementing revisions to 45 CFR part 1627 regarding subgrants. The primary purpose of that rulemaking was to distinguish between awards from recipients to third parties to help recipients carry out the delivery of legal assistance and awards to provide property or services, such as janitorial services, to recipients. In part 1627, LSC adopted the characteristics of subgrants from the Office of Management and Budget's (OMB) Uniform Guidance, 2 CFR 200.330(a), to help recipients determine when their proposed awards of LSC funds to third parties constitute subgrants that must comply with LSC's governing statutes and regulations. LSC now proposes to adopt a parallel list of characteristics of procurement contracts in part 1631.

Like the characteristics of subgrants, the characteristics of procurement contracts originated in OMB's Uniform Guidance, 2 CFR 200.330. The characteristics describe awards that recipients make to obtain goods or services necessary to administer their programs, rather than those that recipients give to other legal aid providers or bar associations to help them achieve the goals of their grant awards. LSC proposes to make only minor revisions to the characteristics to reflect their use in the LSC grant context. As with the characteristics of a subgrant in part 1627, not all of the characteristics of a contract need be present for an award to be considered a contract, and recipients must use judgment in evaluating whether a particular award should be considered a subgrant under part 1627 or a contract under part 1631.

§ 1631.8 Procurement policies and procedures. In the ANPRM, LSC proposed to revise part 1630 and the PAMM “to incorporate minimum standards for recipient procurement policies.” 80 FR 61142, 61146, Oct. 9, 2015. LSC noted that unlike the Uniform Guidance, part 1630 and the PAMM do not require LSC funding recipients to have procurement policies and procedures. LSC sought comment on whether LSC should revise part 1630 and the PAMM to incorporate contracting provisions similar to those contained in the Uniform Guidance or to be consistent with the policies and procedures required by recipients' other funders. LSC also sought comment about whether the same or different standards should apply to contracts for services.

NLADA recommended that LSC refrain from adopting the contracting standards in the Uniform Guidance. They described the procurement standards in the Uniform Guidance as “one-size-fits-all” and stated that they “would be quite burdensome for grantees and unnecessary for recipients to be accountable for following reasonable and responsible procurement standards.” NLADA described the procurement requirements and guidelines currently in the PAMM and LSC's Accounting Guide for Recipients as “procedures [that] maintain accountability, while allowing programs necessary flexibility to meet their programs' needs effectively and efficiently.” NLADA continued to describe the unique needs faced by some of LSC's statewide and rural recipients:

With respect to the proposal to regulate contracts for services, NLADA stated that their members recommended that LSC “not go beyond requiring that grantees have policies and procedures covering service contracts in place approved by their board.” They observed that recipients need the flexibility to make rapid decisions about how to address, for example, a computer system crash. They also asserted that whatever policy LSC adopted should allow recipients to enter into sole-source contracts for reasons other than exigent circumstances, such as when the vendor that a recipient purchased software or hardware from offers maintenance coverage or when the service is a specialty service for which only one vendor is available in the area. NLADA concluded that “[s]ound fiscal policies and internal controls will promote clarity, efficiency, and accountability while not unduly burdening the recipient.”

CLS provided similar comments in its response. Like NLADA, CLS opined that recipients must have the ability to enter into contracts for services quickly when they experience emergencies. CLS also observed that all contracts for services must be reasonable and necessary for carrying out the LSC grant if LSC funds are to be expended on the contracts.

In December, 2015, LSC's Office of Inspector General issued a compendium report of its audit findings regarding recipients' internal controls over a two-year period. See Compendium of Internal Control Audit Findings & Recommendations from Reports Issued October 1, 2013 through September 30, 2015, available at https://oig.lsc.gov/images/Final_Compendium_Report_-_ISSUED.pdf (“Compendium Report”). In the report, the OIG stated that it had issued 18 internal control audit reports containing a total of 166 recommendations for improvement. Of those recommendations, 67 pertained to weaknesses in recipients' written policies and procedures and 24 pertained to contracting. See Compendium Report at 3. Of the 67 recommendations for improvement of written policies and procedures, 13 pertained to weaknesses in recipients' procurement policies. Id. All 18 reports contained recommendations to improve recipients' written policies and procedures.

With respect to written policies and procedures, OIG found that several recipients' policies lacked terms that complied with LSC's Accounting Guide for Recipients. Specifically, OIG identified “procedures for securing various types of contracts, competition requirements, approval authorities, dollar thresholds for approvals, documentation requirement to support contracting decisions and contract oversight responsibilities [and documentation of] deviations from approved contracting processes” as missing from many procurement policies. See Compendium Report at 6.

OIG grouped the findings of weaknesses in recipients' contracting practices into six categories: Inadequate supporting documentation; failure to ensure that a contract was valid and formalized; poor adherence to written policies; failure to maintain a centralized filing system for procurement-related documents; failure to periodically evaluate long-term contracts and put them out for bids when appropriate; and failure to cross-train employees on contracting procedures. See Compendium Report at 7-12. Notably, OIG found that “[i]n certain cases, the contracting process and payments made to vendors conformed to LSC regulations and guidelines; however, supporting documentation justifying the process used to obtain the contracts, some of which were sole-sourced, did not exist or was not adequate.” Id. at 8. OIG also found that some recipients' “current practices were not in accordance with their current contracting policy or LSC's Fundamental Criteria.” Id. at 9.

In response to the Compendium Report, LSC issued Program Letter 16-3, “Procurement Policy Drafting Guidance for LSC Recipients.” The letter was accompanied by a document explaining in detail the elements of an effective procurement policy and factors that recipients should consider when developing their own policies. In the guidance document, LSC identified four areas that it believes are critical to an effective procurement policy:

Based on the feedback received in the comments to the ANPRM and the rulemaking workshops and on the findings in OIG's Compendium Report, LSC proposes a rule requiring recipients to develop policies and procedures governing purchases of personal property and contracts for services made with LSC funds. Rather than adopting the procurement rules in OMB's Uniform Guidance, LSC proposes to create a rule based substantially on the guidance provided in Program Letter 16-3 and the accompanying guidance documents. The rule will identify generally the elements that a recipient's policy must have, but it will not prescribe the specific procedures that recipients must follow when making purchases with LSC funds. The proposed rule will replace the specific requirements currently contained in Sections 3(a) and 3(d) (personal property) and 4(f) (capital expenditures) of the PAMM. LSC is also proposing to revise the parts of Section 4 of the PAMM that govern the use of LSC funds to acquire real property. Those changes will be discussed in more detail below.

In § 1631.8, LSC proposes to require that recipients develop procurement policies that have the following elements:

LSC strongly encourages recipients to look to Program Letter 16-3 and its accompanying documents, as well as the Accounting Guide, for guidance when drafting their procurement policies. In particular, LSC recommends that recipients consider establishing annual purchasing plans and contract management procedures if they have not done so already. In addition to thoughtful procurement policies, well-considered purchasing plans and effective contract management procedures can reduce the risk of fraud, waste, and abuse of LSC funds.

§ 1631.9 Prior approval. In this section, LSC proposes to prescribe the contents of a request for prior approval. A request must include a statement explaining how the personal property or services will further the delivery of legal services to eligible clients and documentation showing that the recipient followed the procurement policy and procedures it developed under § 1631.8. This language is adopted from §§ 3(d) and 4(f) of the PAMM, but has been revised to reflect LSC's proposal to require general procurement policies, rather than to incorporate the current purchase-specific procedures.

§ 1631.10 Applicability of part 1630. Because LSC is proposing to limit the prior approval requirement to all purchases of real property, purchases and leases of personal property costing more than $25,000 in LSC funds, and contracts for services exceeding $25,000 in LSC funds, LSC also proposes to include a section restating the applicability of part 1630 to all leases, purchases, and contracts made using LSC funds.

§ 1631.11 Use of property in compliance with LSC's statutes and regulations. LSC proposes to adopt § 5(a), (d), and (e) of the PAMM in this section with only minor technical changes.

§ 1631.12 Intellectual property. In this section, LSC proposes to adopt § 5(g) of the PAMM without change.

§ 1631.13 Disposing of personal property purchased with LSC funds. In this section, LSC proposes to adopt § 6(d), (e), (f), and (g) of the PAMM with one substantive change. In proposed paragraph (a)(2), LSC proposes to explicitly authorize recipients to determine the appropriate method to dispose of personal property that has little or no fair market value at the time of disposal. The recipient does not have to notify LSC of its intent to dispose of such property, nor does it have to compensate LSC out of the proceeds from any sale of the property. LSC proposes to include this provision in response to feedback it received from panelists during the rulemaking workshops that prior approval to dispose of personal property with nominal or no monetary value is unnecessary. See, e.g., Transcript of April 20, 2016 Rulemaking Workshop at 94 (Statement of Jonathan Asher); Transcript of May 18, 2016 Rulemaking Workshop at 101 (Statements of Steve Pelletier and Diana White). Additionally, LSC proposes to reorganize the paragraphs taken from the PAMM for ease of reference.

§ 1631.14 Use of derivative income from sale of personal property purchased with LSC funds. In § 1631.14(a), LSC proposes to adopt § 6(e) of the PAMM without change. LSC also proposes to include paragraph (b), which requires recipients to account for income earned from the sale, rent, or lease of personal property purchased with LSC funds as required by § 1630.16—Applicability to derivative income.

§ 1631.15 Purchasing real property with LSC funds. LSC proposes to adopt in significant part the requirements of § 4 of the PAMM. In paragraph (a), LSC proposes to consolidate and restructure existing paragraphs (a)-(c) of § 4 of the PAMM. LSC also proposes to introduce paragraph (a)(3), which allows a recipient who cannot evaluate three properties to explain why such an evaluation is not possible. For example, a recipient may not be able to compare three properties if the inventory of commercial properties suitable for the recipient's activities is extremely limited.

LSC proposes to adopt § 4(d) of the PAMM in significant part in paragraph (b). LSC proposes to revise two specific provisions to allow recipients additional flexibility when purchasing real property. In § 1631.15(b)(6), LSC proposes to allow a recipient to provide documentation that the recipient's governing body approves of the purchase, even if the governing body's approval is contingent upon LSC's approval. LSC understands that some recipient governing bodies may be reluctant to authorize a real estate purchase if they are not assured that one of the proposed funding sources consents to the purchase. As a funder, LSC similarly wants to know that a recipient's governing body has been informed about a proposed purchase and agrees that the purchase is in the recipient's interest. Consequently, LSC proposes to revise existing § 4(d)(4) of the PAMM to allow for contingent approvals.

Additionally, LSC proposes to revise existing § 4(d)(5) of the PAMM and promulgate it as § 1631.15(b)(8). Currently, § 4(d)(5) requires a recipient to include in its request for prior approval a “statement of handicapped accessibility sufficient to meet the requirements of 45 CFR 1624.5(c)[.]” On several occasions, LSC has received simultaneous requests to purchase real estate and to make capital improvements to the property for the purpose of making it accessible to persons with disabilities. For this reason, LSC proposes to revise this requirement to allow the recipient to provide a statement that the property will be accessible once the requested capital improvements have been completed. LSC expects the recipient to act expeditiously to make the requested improvements if LSC approves both the purchase and the capital expenditures. Consequently, LSC proposes to require that any capital improvements authorized under this section be completed within 60 days of the date the real estate purchase is completed.

LSC proposes to add three additional elements to the list of requested information currently contained in § 4(d) of the PAMM and proposed for inclusion in § 1631.15(b). First, LSC proposes to require that recipients provide the information described in paragraph (a) as part of the prior approval request. Second, LSC proposes to require recipients to provide a breakdown of the sources of funds it intends to use toward the purchase. In other words, recipients would provide an estimate of the amount of LSC funds and non-LSC funds, respectively, that it intends to put toward the acquisition costs of the building and subsequent mortgage payments for the life of the financing arrangement. Third, LSC proposes to require recipients to provide a comparison of available loan terms considered by the recipient. LSC proposes this requirement to encourage recipients to investigate various options for financing a building purchase to obtain the best value.

In § 1631.15(c), LSC proposes to adopt § 4(e) of the PAMM with only a minor conforming change. LSC does, however, propose to add subparagraph (c)(4), which will require a recipient to agree not to dispose of real estate purchased with LSC funds without prior approval.

§ 1631.16 Capital improvements. In this section, LSC proposes to adopt § 4(f) of the PAMM in substantial part. LSC proposes to replace existing § 4(1)(ii) of the PAMM, which requires a recipient to provide a description of the contractor selection process, with a requirement to provide documentation showing that the recipient complied with the procurement process it developed under § 1631.8. LSC also proposes to add language requiring a recipient to maintain adequate supporting documentation to identify and account for any LSC funds used to make capital improvements.

§ 1631.17 Using real estate purchased with LSC funds. LSC proposes to adopt § 5(a), (d), and (f) of the PAMM with only minor technical changes.

§ 1631.18 Maintenance. LSC proposes to introduce a section requiring recipients to maintain real estate purchased with LSC funds in efficient operating condition and in compliance with state and local property standards and building codes. From previous requests to dispose of real estate, LSC has learned of recipient facilities falling into disrepair. LSC believes that it is essential that recipients maintain assets purchased with appropriated funds in compliance with state and local standards and building codes. LSC also believes it is critical to the delivery of legal services for recipients to provide services in space that is clean, in good repair, and welcoming to clients. For these reasons, LSC proposes to prescribe the facilities standards that recipients must meet if they use LSC funds to purchase real estate.

§ 1631.19 Insurance. LSC proposes to introduce minimum standards for the insurance of real estate acquired or improved with LSC funds. Similar to the rationale for prescribing minimum maintenance standards, LSC believes it is essential for recipients to provide the same level of insurance for real estate acquired or improved with appropriated funds as they do for non-LSC funded real estate and in a manner that protects LSC's interest in the event of a title failure or physical destruction of the property. LSC proposes to adopt the insurance standard from the regulations governing facilities purchases under the Head Start program, 45 CFR 1309.23.

§ 1631.20 Accounting and reporting to LSC. LSC proposes to require recipients to maintain records showing, for each piece of real estate purchased in whole or in part with LSC funds, the amount of LSC funds it spends each year on the property. Costs that recipients should account for include, but are not limited to, acquisition costs in the year of purchase; mortgage payments; insurance, maintenance, and taxes; and costs associated with capital improvements made using LSC funds. LSC also proposes to require recipients to provide LSC with the accounting in one of two ways. The first is by submitting the accounting to LSC no later than April 30 of the calendar year following the calendar year in which the recipient incurred the costs. In other words, if a recipient uses LSC funds to purchase a new office building in March, 2017, it must provide LSC with an accounting of all LSC funds used in 2017 to support the purchase and maintenance for the building by April 30, 2018. The second method is to provide LSC with the required accounting in the audited financial statements that recipients must submit to LSC annually.

§ 1631.21 Disposing of real estate purchased with LSC funds. In this section, LSC proposes to adopt § 7 of the PAMM in substantial part. In a change from the PAMM, LSC proposes to require that all proposed dispositions of real estate acquired using LSC funds be subject to LSC's prior approval. This approach is consistent with the federal government's policy regarding grantee disposal of property purchased with federal funds. See 2 CFR 200.311(c). LSC believes that the federal government's policy on the disposition of real property purchased with federal funds is more appropriate to its oversight role than the policy that currently exists in the PAMM. Under the PAMM, organizations must seek LSC's approval prior to disposing of property purchased with LSC funds only when they are no longer receiving LSC funds. In LSC's experience, it is far more common for LSC recipients to sell real estate acquired with LSC funds while they are still receiving LSC funds. At the present time, the PAMM does not require recipients to seek LSC's approval before selling such property, although LSC's property interest agreements generally contain terms requiring recipients to seek approval before encumbering or selling the property. LSC believes it is appropriate for the requirement to be formalized in a rule.

LSC proposes to establish the prior approval process for disposition of real estate in § 1631.21(c). LSC proposes to require a recipient or former recipient to seek prior approval at least 60 days before the recipient proposes to dispose of the property. In its request, the recipient or former recipient should tell LSC how it proposes to dispose of the property and why; provide documentation of the fair market value of the property; if selling, describe its process for advertising the property and receiving offers; account for all LSC funds used in the acquisition and capital improvement of the property; and identify the proposed transferee. The requester should also provide a document describing the terms of transfer or sale. LSC also proposes to clarify that LSC's percentage interest in the proceeds of a real estate sale is equal to the percentage of the costs of the original acquisition and any capital improvements made to the real estate over the life of the property that were paid using LSC funds.

§ 1631.22 Retaining income from sale of real property purchased with LSC funds. LSC proposes to consolidate §§ 6(e) and 8(c) of the PAMM in this section. LSC proposes to make only technical edits to reflect the redesignation of § 1630.12 as § 1630.16.

For the reasons stated in the preamble, the Legal Services Corporation proposes to amend 45 CFR Chapter XVI as follows:

With the assistance of a third-party contractor, Widelity, Inc., and based on the record to date, the Media Bureau has developed and now updated the catalog of eligible reimbursement expenses (Catalog) for reimbursement-eligible entities to use as a guide. The Catalog is not intended to be a definitive list of all reimbursable expenses, but, rather, as a means of facilitating the process for reimbursement-eligible entities to claim reimbursement during the post-incentive auction repacking. This Public Notice (available at: http://transition.fcc.gov/Daily_Releases/Daily_Business/2016/db1013/DA-16-1164A1.pdf), seeks comment not only on the updated categories and prices for the reimbursement expenses listed, but also on the proposed economic methodology that the Media Bureau will employ to update the prices in the Catalog throughout the three-year reimbursement period. The Media Bureau proposes to modify the baseline costs contained in the Catalog annually based upon the Producer Price Indexes (PPI) annual average, specifically the WPUFD4 series, as calculated by the Bureau of Labor Statistics, and seeks comment on its proposal to do so. After considering the comments received, the Catalog the Media Bureau adopts will be embedded in the on-line Reimbursement Form, FCC Form 2100, Schedule 399, which will be used by entities seeking reimbursement to file estimated costs and reimbursement claims for actual costs incurred. The record obtained in response to this Public Notice will allow the Media Bureau to adopt an updated Catalog, reflecting current baseline costs for listed reimbursement expenses, and to determine the methodology it will use to adjust the listed expenses in the Catalog during throughout the reimbursement period. After considering the comments filed in connection with the updated Catalog and our proposed economic methodology for adjusting the baseline costs, we will finalize the Catalog and the Reimbursement Form. Thereafter, we will resubmit the Reimbursement Form to the Office of Management and Budget (OMB) for approval under the Paperwork Reduction Act (PRA) of the changes resulting from the modifications to the Catalog, as well as other minor modifications to the Reimbursement Form that are designed to assist filers in describing their claims. The public will have an opportunity to comment on the incremental data collections contained in the finalized Reimbursement Form, as required by the PRA, after we receive comments in response to the updated Catalog, and the finalized Reimbursement Form is submitted to OMB for approval under the PRA. This is a summary of the FCC's document GN Docket No. 12-268; MB Docket No. 16-306; DA 16-1164 (released October 13, 2016). The full text of this document is available for inspection and copying during normal business hours in the FCC Reference Center (Room CY-A257), 445 12th Street SW., Washington, DC 20554.