Richard Manfredi, Author at Gibson Dunn

We are pleased to provide you with the October edition of Gibson Dunn’s digital assets regular update. This update covers recent legal news regarding all types of digital assets, including cryptocurrencies, stablecoins, CBDCs, and NFTs, as well as other blockchain and Web3 technologies. Thank you for your interest.

ENFORCEMENT ACTIONS

UNITED STATES

SEC Files Notice of Appeal in Case Against Ripple; Ripple Files Cross-Appeal
On October 2, the SEC filed a notice of appeal in its enforcement action against Ripple Judge Analisa Torres ruled in July 2023 that Ripple’s secondary sales of XRP did not violate the securities laws Ripple filed a cross-appeal on October 10 and indicated in a later filing that it intends to challenge several aspects of Judge Torres’s ruling, including whether institutional sales of XRP violated the securities laws and whether Ripple lacked fair notice that the securities laws apply to XRP transactions. Ripple CEO, Brad Garlinghouse, has stated that he is confident Ripple is “going to win the appeal” “because we’re on the right side of the law” and “right side of history.” CoinDesk; Garlinghouse Statement; CCN.
Crypto Gaming Platform Immutable Issued Wells Notice By SEC
On November 1, Immutable—a game development platform that simplifies building Web3 games—announced that it has received a Wells Notice from the SEC related to sales of its IMX token in 2021. In a statement released on its website, Immutable said that it received the Well Notice within hours of first meeting with the SEC and that “the SEC is continuing to indiscriminately assert that tokens are securities.” Immutable stated that it would continue “business as usual” and that it welcomes “regulatory clarity – but it appears that some elements of the SEC do not want to engage in a constructive dialogue.” Immutable’s CEO and a related entity, the Digital Worlds Foundation, reportedly received separate Wells Notices. Immutable Statement; CoinDesk.
SEC Sues Cumberland DRW Alleging It Operated as an Unregistered Dealer
On October 10, the SEC filed a lawsuit against Cumberland DRW LLC, a crypto trading firm, in the Northern District of Illinois alleging that Cumberland operated as an unregistered dealer in violation of the Securities Exchange Act when it bought and sold more than $2 billion in digital assets. In a letter to CoinDesk, Cumberland stated that it is “not making any changes to our business operations or the assets in which we provide liquidity as a result of this action.” The complaint seeks permanent injunctive relief, disgorgement of proceeds, prejudgment interest, and civil penalties. Press Release; Complaint; CoinDesk.
Former FTX Chief Engineer Avoids Prison After Cooperation in Bankman-Fried Case
On October 30, U.S. District Judge Lewis A. Kaplan sentenced former FTX chief engineer, Nishad Singh, to three years of supervision and no prison time, citing his immediate cooperation with authorities and testimony against Sam Bankman-Fried. Singh had pleaded guilty to six criminal counts and faced a theoretical statutory maximum sentence of up to 75 years in prison, but prosecutors had requested leniency for his ongoing cooperation. Law360; NYT.
Founder of Cryptocurrency Ponzi Scheme Sentenced to More Than 10 Years in Prison
On October 4, David Carmona, the founder of IcomTech, was sentenced to 121 months in prison. IcomTech, founded in 2018, was purportedly a cryptocurrency mining and trading company where customers purchased crypto-related investment products. Instead of making investments on behalf of clients, however, Carmona and other co-defendants used the money to promote the company, repay other clients, and enrich themselves. Press Release; The Block.
DOJ Brings Criminal Wash Trading Charges in Cryptocurrency Matter
On October 9, the U.S. Attorney’s Office for the District of Massachusetts charged eighteen individuals and numerous entities with market manipulation and fraud based on a wash trading theory. The government alleges that cryptocurrency companies, market makers, and employees engaged in pump-and-dump schemes through false statements and sham trades. As part of an international investigation of the alleged misconduct, federal investigators used NexFundAI, a government-created token, to try to induce the defendants to engage in wash trading. Also on October 9, the SEC filed parallel civil charges against some of the same entities and individuals. DOJ Press Release; SEC Press Release; Cointelegraph; TRM Labs.
Crypto Ponzi Scheme Promoter Sentenced to 20 Years in Prison
On October 15, Juan Tacuri, a senior promoter in the Forcount/Weltsys crypto Ponzi scheme that targeted Spanish speakers, was sentenced to the statutory maximum 240 months in prison by Judge Analisa Torres in the Southern District of New York. Tacuri was ordered to forfeit $3.6 million, pay restitution of at least $3.6 million, and relinquish all right and title to his Florida home. Press Release.

INTERNATIONAL

Dubai’s VARA Fines Seven Crypto Entities for Operating Without Licenses
On October 8, Dubai’s Virtual Assets Regulatory Authority (VARA) announced that it fined and issued cease-and-desist orders to seven entities for operating without the required licenses and for breaching marketing regulations. VARA stated that these actions serve as a “public warning . . . to all engaged in any unlicensed firms.” Press Release; CoinDesk.
Japanese Authorities Analyze Monero Transactions, Arrest 18 in Laundering Case
On October 21, Japan’s National Police Agency’s Cyber Special Investigation Unit arrested 18 individuals after analyzing nearly 900 transactions involving Monero—a digital asset with enhanced privacy properties—to identify instances of money laundering. According to Japanese authorities, this case marks the first time the country’s law enforcement agencies had used Monero transactions to identify suspected criminals. Cointelegraph.

REGULATION AND LEGISLATION

UNITED STATES

New California Law Targeting Sellers of Digital Goods Might Apply to NFTs
On September 24, California enacted AB 2426, which imposes new requirements on the sale of “digital goods.” Unless a company selling a digital good gives the buyer unrestricted ownership of the good, the seller may not use words like “buy” or “purchase” in advertising the sale, without one of two conditions being satisfied: (1) the seller obtains an affirmative acknowledgment from the buyer that the buyer is receiving only a revocable license to access the digital good, or (2) the seller provides the buyer with a “clear and conspicuous statement” that the buyers is purchasing only a revocable license. Although the law is silent on whether it applies to NFTs, the definition of “digital good” is arguably broad enough to encompass at least certain NFTs. The legislation will take effect on January 1, 2025. The National Law Review.
Pennsylvania House Passes Bipartisan Crypto Bill
On October 23, the Pennsylvania House of Representatives overwhelmingly passed House Bill 2481, known as the Bitcoin Rights bill, which addresses the use of bitcoin as a payment method, guidelines for taxing cryptocurrency transactions, and residents’ rights to self-custody digital assets. Similar bills are being considered by legislatures in other states. The bill will move to the Pennsylvania State Senate after the election. Bill; CoinDesk; Fox Business.
Senators Release Discussion Draft of Regulatory Framework for Stablecoins
On October 10, Sen. Bill Hagerty (R-TN) unveiled draft legislation that would establish a new framework to regulate stablecoins. The bill is modeled on the Clarify for Payment Stablecoins Act currently being debated in the House. It would split federal supervision of stablecoins between the Federal Reserve and the Office of the Comptroller for the Currency. Among other provisions, the bill would establish currency-reserve thresholds for issuers. Discussion Draft; The Block.
SEC Approves Listing of Bitcoin ETF Options; Delays Decision on ETH ETF Options
On October 18, the SEC approved two Bitcoin options ETFs. A week earlier, the SEC announced it would postpone until December 3 its decision whether to approve Ethereum options tied to ETFs. CoinDesk; Cointelegraph; CoinChapter; Cointelegraph.

INTERNATIONAL

Denmark’s Tax Law Council Recommends Taxing Unrealized Crypto Gains
On October 23, Denmark’s tax authority announced that the Minister of Taxation will introduce a bill in the first quarter of 2025 proposing “mark-to-market” taxation for digital assets. Under this proposal, appreciation of digital assets would be treated as capital income regardless of whether the asset is sold. Taxes are levied on the annual changes in the value of the digital asset. Denmark’s Tax Law Council recommended that the rules not take effect until Jan. 1, 2026 at the earliest, if enacted. Press Release (Danish); The Block.
Taiwan Releases New Draft AML Rules Requiring Crypto Firms to Register
On October 1, Taiwan’s Financial Supervisory Commission (FSC) published proposed amendments to the AML guidelines for virtual asset service providers (VASPs) and opened a 30-day comment period. The new regulations will go into effect on January 1, 2025, and VASPs are expected to register with the FSC by the end of September 2025. Failure to comply may result in imprisonment for up to two years and fines up to $155,900. The Block; CCN.
Italy Proposes Raising Capital Gains Tax on Cryptocurrencies
On October 16, Italy’s Deputy Finance Minister announced that the Italian government will increase its capital gains tax from 26% to 42% on cryptocurrency transactions in its 2025 budget bill. The bill also will remove the minimum revenue requirements for Italy’s Digital Services Tax (DST), which currently applies to companies with global annual income exceeding €750 million and in country income exceeding €5.5 million per calendar year. Press Conference (Italian); CoinDesk; VAT Calc.
Netherlands Opens Consultation on Crypto Tax Reporting Bill
On October 24, in response to EU directive DAC8, the Netherlands launched a public consultation on a proposed bill that would require crypto service providers to share user data with tax authorities. Folkert Idsinga, State Secretary for Taxation and Tax Authorities, emphasized that the measure aims to enhance transparency and prevent tax evasion through improved data exchange between EU member states. The consultation runs until November 21 and the bill is expected to reach the House of Representatives in the first half of 2025. CoinDesk; Cointelegraph.

CIVIL LITIGATION

UNITED STATES

Crypto.com Sues the SEC Alleging Regulatory Overreach
On October 8, after receiving a Wells Notice from the SEC, exchange Crypto.com filed a lawsuit against the agency and its Commissioners in the Eastern District of Texas, Tyler Division. Crypto.com alleges that SEC overstepped its jurisdiction by asserting authority over vast swathes of digital assets. Crypto.com claims that the SEC has adopted a de facto rule that nearly all digital assets are securities, without engaging in notice-and-comment rulemaking, and is seeking to impose that view on the crypto industry through a campaign of regulation by enforcement. Among other things, Crypto.com seeks a declaration that secondary-market transactions in digital assets are not securities and an injunction preventing the SEC from pursuing enforcement against Crypto.com based on the agency’s mistaken understanding of the securities laws. Reuters; CoinDesk.
Alameda Research Sues Crypto Exchange KuCoin Seeking Return of $50 Million
On October 28, Alameda Research, the crypto trading affiliate of bankrupt FTX, filed suit in Delaware bankruptcy court against crypto exchange KuCoin’s operators, seeking return of $50 million in assets currently held on the platform. The complaint alleges that KuCoin locked Alameda’s account with assets valued at nearly $30 million immediately after FTX’s November 2022 bankruptcy. KuCoin allegedly has since refused requests to return the assets, which are now valued at $50 million. This action is part of the FTX bankruptcy estate’s broader efforts to recover funds transferred from FTX prior to its bankruptcy. Law360; Cointelegraph.
Bitnomial Exchanges Sues SEC, Seeks Permission to List XRP Futures
On October 10, crypto exchange Bitnomial filed a lawsuit against the SEC in the U.S. District Court for the Northern District of Illinois seeking a declaration that the XRP token is not a security and thus is subject to the sole jurisdiction of the CFTC. After Bitnomial filed a self-certification with the CFTC for trading of the XRP U.S. Dollar futures contract on its exchange in August 2024, the SEC informed Bitnomial that, in the agency’s view, Bitnomial would violate the federal securities laws if it proceeded with its contemplated listing of XRP futures. Complaint; CoinDesk.
Federal Court Clears Kalshi to List Election Betting Contracts Pending CFTC Appeal
On October 2, the U.S. Court of Appeals for the D.C. Circuit denied the CFTC’s request for a stay of the U.S. District Court for the District of Columbia order that allowed KalshiEX LLC—a financial exchange and predictions market that allows trading of event contracts—to offer election-outcome betting contracts. The appellate court found that the CFTC failed to demonstrate a “concrete basis to conclude that event contracts” would result in irreparable harm or distort the electoral process. The CFTC filed its opening brief on October 16. Oral argument will follow the completion of briefing, which is currently scheduled to conclude on December 6. Reuters; The Block.
Delaware Judge Approves FTX Estate’s Bankruptcy Plan
On October 8, Delaware Bankruptcy Judge John Dorsey approved FTX’s bankruptcy plan filed in September 2024. Under the plan, customers are expected to receive cash repayments averaging 118% of the value of their assets as of FTX’s bankruptcy filing in November 2022. Those payouts, however, will not wholly account for the gains that Bitcoin and other cryptocurrencies experienced during the pendency of the bankruptcy proceeding. CoinDesk.

SPEAKER’S CORNER

UNITED STATES

Rep. Hill “Still Optimistic” on Year-End Crypto Bills
At the 8th Annual Washington D.C. Fintech Week on October 22, Rep. French Hill (R-AR) expressed optimism about year-end cryptocurrency legislation during a conversation with Georgetown University Law Center professor Dr. Christopher Brummer. Hill stated: “I’m still optimistic that FIT21, which is the regulatory framework bill, and the stablecoin bill have possible consideration in the lame duck,” noting that “in all lame duck sessions, they take the direction from who wins the top of the ticket, so that will govern a bit of what we’re dealing with.” The Block.
CFTC Chair Calls for Congressional Action on Crypto and Election Betting at SIFMA Meeting
Speaking at the Securities Industry and Financial Association’s annual meeting on October 21, CFTC Chair Rostin Benham called on Congress to address crypto regulation and election betting markets, including FIT21. Benham stated “there’s a lot going on in terms of technology and disruption. Digital assets obviously comes top of mind in terms of just regulating spot markets, but what is blockchain and tokenization going to do for financial markets? And those are areas where I personally would love for Congress to weigh in a little bit more than they have.” When discussing the CFTC’s ongoing case against Kalshi, Benham noted the CFTC is in a tough position as an “election cop” and thinks the subject matter of the case is “a classic area where Congress should actually weigh in.” The Block.
Federal Reserve Governor Waller Sees DeFi as “Complementary” to Traditional Finance
At the 19th Annual Vienna Macroeconomic Workshop in Austria, Federal Reserve Governor Christopher Waller addressed the future relationship between DeFi and traditional finance. “While there are certain services emerging through DeFi that cannot be provided by centralized finance, the technological innovations stemming from DeFi are largely complementary to centralized finance,” he stated. He also addressed stablecoins, noting that “if appropriate guardrails can be erected to minimize run risk and mitigate other risks, such as their potential use in illicit finance, then stablecoins may have benefits in payments and by serving as a safe asset on a variety of new trading platforms.” The Block.

OTHER NOTABLE NEWS

Stripe Acquires Stablecoin Platform Bridge for $1.1 Billion
On October 21, Bridge CEO and co-founder, Zach Abrams, announced in a post on X that Bridge will be “joining forces with Stripe.” Bridge provides services that allow businesses to accept payments in stablecoins. The $1.1 billion deal has been finalized but not yet completed. This acquisition would be the largest for Stripe and the largest ever in the crypto industry. The Block; Cointelegraph.

The following Gibson Dunn lawyers contributed to this issue: Jason Cabral, Kendall Day, Jeff Steiner, Sara Weed, Chris Jones, Sam Raymond, Nick Harper, Zachary Montgomery, Simon Moskovitz, and Gabriela Li.

FinTech and Digital Assets Group Leaders / Members:

Ashlie Beringer, Palo Alto (+1 650.849.5327, aberinger@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (+1 202.955.8256, mbopp@gibsondunn.com

Stephanie L. Brooker, Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)

Jason J. Cabral, New York (+1 212.351.6267, jcabral@gibsondunn.com)

Ella Alves Capone, Washington, D.C. (+1 202.887.3511, ecapone@gibsondunn.com)

M. Kendall Day, Washington, D.C. (+1 202.955.8220, kday@gibsondunn.com)

Michael J. Desmond, Los Angeles/Washington, D.C. (+1 213.229.7531, mdesmond@gibsondunn.com)

Sébastien Evrard, Hong Kong (+852 2214 3798, sevrard@gibsondunn.com)

William R. Hallatt, Hong Kong (+852 2214 3836, whallatt@gibsondunn.com)

Martin A. Hewett, Washington, D.C. (+1 202.955.8207, mhewett@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Stewart McDowell, San Francisco (+1 415.393.8322, smcdowell@gibsondunn.com)

Mark K. Schonfeld, New York (+1 212.351.2433, mschonfeld@gibsondunn.com)

Orin Snyder, New York (+1 212.351.2400, osnyder@gibsondunn.com)

Ro Spaziani, New York (+1 212.351.6255, rspaziani@gibsondunn.com)

Jeffrey L. Steiner, Washington, D.C. (+1 202.887.3632, jsteiner@gibsondunn.com)

Eric D. Vandevelde, Los Angeles (+1 213.229.7186, evandevelde@gibsondunn.com)

Benjamin Wagner, Palo Alto (+1 650.849.5395, bwagner@gibsondunn.com)

Sara K. Weed, Washington, D.C. (+1 202.955.8507, sweed@gibsondunn.com)

Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.

Federal and state regulators, utilities, generators, and data center developers convened to take on regulatory and technical obstacles to providing electricity to the expanding data center customer class.

Consistent with Gibson Dunn’s focus on all aspects of the data center sector, please find a comprehensive summary of the Federal Energy Regulatory Commission’s Technical Conference held last Friday. As described in more detail below, the conversations at the technical conference reflect that federal and state regulators, local utilities, grid operators, data centers, and large generators who would like to serve data centers have much work to do and many questions to answer as they navigate the expansion of the U.S. data center industry. Key issues identified for the energy and data center industries and their regulators to work to address include:

Developing accurate energy demand forecasts to facilitate planning for generation and transmission infrastructure to serve the growing need for electricity to serve data centers;
Ensuring there are adequate generation resources to serve both existing retail electricity customers and the expanding energy needs of data centers;
Modernizing electricity market rules to ensure that energy customers, including data centers taking generation service directly from co-located generation, pay for the grid services that are necessary to deliver their electricity, and that there are appropriate market mechanisms to incent generation facilities to come online when needed and stay online in the long term;
Reforming the transmission planning and interconnection processes to more quickly and efficiently add new generation to the grid; and
Which regulatory tools are appropriately available to state versus federal regulators as they monitor and oversee grid expansion, including what policy modifications regulators may make related to data center expansion.

On Friday, November 1, 2024, the Federal Energy Regulatory Commission (FERC) convened a commissioner-led technical conference on co-location of large energy users including data centers (referred to as “loads” in the electricity business) alongside power generating facilities. The impetus for this technical conference was the recent advent of data centers seeking to partner with large continuously operating power generators to directly supply data centers’ electricity needs, specifically embodied by a recent proposal by Talen Energy and PJM Interconnection (PJM) to employ 180 megawatts (MW) of an existing nuclear generator in Pennsylvania to directly serve a data center that would be located next to the nuclear power generating facility. Because FERC’s ex parte rules prevent FERC’s commissioners from speaking to stakeholders or the public about that specific proposal outside of that formal proceeding, the technical conference did not directly address the Talen Energy proposal and its related FERC filing by PJM. FERC instead convened this technical conference to discuss in a more general forum issues and policies related to the co-location of large loads including data centers at generating facilities.

The conference opened with FERC Chairman Willie Phillips acknowledging that two seemingly contradictory things can be true at once: data center growth and innovation is good for business and society, while that same innovation demands unprecedented amounts of electric energy, the need for which poses an unprecedented challenge to the U.S. electric grid. As data center developers continue to explore co-locating large loads including data centers at existing generating facilities, FERC’s members’ questions and statements at the conference suggest the agency wants to rise to the moment and address the issues, but currently lacks sufficient information and requires its many stakeholders, including state regulators, to educate and inform FERC of the interplay of issues, collaborate with FERC, and play their appropriate roles to accommodate data center expansion while continuing to serve existing retail customers reliably and at a reasonable cost. In furtherance of that need for collaboration, FERC gathered industry leaders and state government authorities to name the challenges, the players, and the potential roads ahead.

Chairman Philips opened by framing data centers, artificial intelligence, and other information-related technologies as national resources with multi-generational significance, deserving nationwide stewardship and active coordination between FERC and state regulators. He highlighted the opportunity to keep data centers as a critical economic sector onshore, citing the 2020 CHIPS for America Act to emphasize the requisite cost and focus that onshoring requires. Offshoring, he warned, would invite national security concerns and economic stagnation alike. Chairman Phillips’s remarks closely echoed a recent memorandum from the White House aimed at advancing the nation’s commitment to leadership in artificial intelligence as a national security issue.

The rest of the commissioners provided their own opening remarks providing additional framing. Commissioner Mark Christie flagged concerns with grid reliability impacts of data center co-location, resource adequacy impacts, and rate fairness for all consumers. Commissioner David Rosner emphasized optimism on the issue, lauding opportunities to unlock efficiencies of the nation’s infrastructure, get ahead, and get new rules right on co-location issues that fall within FERC’s jurisdiction. Commissioner Lindsay See shared that she anticipates leveraging the panelists’ expertise to untangle FERC and state jurisdictional issues. And Commissioner Judy Chang previewed questions about the impacts of a co-located load on the transmission system, and FERC’s tools to ensure grid reliability, address rapid load demands, and respond to challenges of the existing tight reserve margin. The Commissioners and invited speakers from the industry and state government then explored these issues across three panel discussions led in turns by the five FERC commissioners.

Panel 1 – Overview of Large Co-Located Load Issues. Panelists included:

Howard Gugel, Vice President Regulatory Oversight, North American Electric Reliability Corporation (NERC) | Statement
Stu Bresler, EVP, Market Services and Strategy, PJM Interconnection, L.L.C. | Statement
Aubrey Johnson, Vice-President, System & Resource Planning, Midcontinent Independent System Operator | Statement
Zachary G. Smith, Senior Vice President, System & Resource Planning, New York Independent System Operator
Jason Davis, Manager, Services Integration, Southwest Power Pool
Aaron Tinjum, Director, Energy Policy and Regulatory Affairs, Data Center Coalition | Statement
Mike Kormos, Independent Consultant | Presentation | Graphics Slide
Kent Chandler, Resident Senior Fellow, R Street Institute | Statement
Vincent Duane, Principal, Copper Monarch LLC | Statement | Presentation
Stacey Burbure, Vice President, FERC and RTO Strategy and Policy, American Electric Power | Statement

The first panel of industry leaders including regional transmission organization (RTO) representatives summarized large load and generator co-location pressure points and alternatives. Although the discussion often focused on generation provided by large nuclear facilities, various speakers acknowledged that other types of generation have been co-located with load over the years and that natural gas-fired generators might serve as another appropriate power source for co-location projects. For their part, commissioners focused on challenges and opportunities, including how each industry participant might adequately model and prepare for new large loads.

Representatives from RTOs and independent system operators (ISOs)—the nation’s transmission grid and market operators—addressed issues related to forecasting large load demands and impacts. They emphasized the importance of communication and transparency to maximize equity and efficiency. For example, Zachary Smith of the New York Independent System Operator (NYISO) described how the NYISO engages all known, New York-based data center and crypto currency mining developers to understand where they anticipate increased energy needs to assist with state load forecasts. Aubrey Johnson of the Midcontinent Independent System Operator (MISO) described how MISO attempts to take on load planning at three levels—creating long-range transmission planning scenarios; conducting annual forecasting surveys; and understanding realities in consumer contract negotiations. Many panelists expressed concern regarding the adequacy and accuracy of transmission owners’ forecasting. Due in part to the rapid pace of growth and expansion, data center and crypto currency mining operations often report their loads to more than one RTO or ISO, creating a risk of duplicate counting.

The large loads’ magnitude is not their only risk, explained Howard Gugel of NERC. Unique characteristics of each load and co-location matter, too. According to Mr. Gugel, current models are inadequate to account for potential grid interruptions created by co-locating load and generation behind a utility meter. While not every method of co-location would take energy or services from the grid, panelists appeared to be in alignment that most will. Panelists further emphasized that, whatever the magnitude of the load forecast, connecting new large loads to the grid will require infrastructure that does not yet exist, and that without coordinated preparation, reliability and efficiency could be compromised.

Panelists agreed that co-location of new large loads presents novel, fact-specific issues. Commissioner Christie presented various scenarios and asked panelists to opine on rate and cost impacts. Among those scenarios, Commissioner Christie offered by way of example a data center arranging for a previously retired generating unit to return to the grid (such as will be the case for the recently announced Crane Clean Energy Center revamp of Three Mile Island’s Unit 1 nuclear reactor), versus co-locating a large load behind the meter with an existing operating generating unit, which would effectively remove that generator from general grid participation. Most panelists agreed that merely matching supply and demand was not their greatest concern and was almost certainly feasible in the long term. Instead, they emphasized issues related to how co-located load would secure backup generation for critical operations relevant to national defense if their committed generator goes down for any reason, and what impact that might have on the grid and its service to other customers.

The panel emphasized customer advantages of co-location. Mike Kormos, an independent consultant and former Executive Vice President and Chief Operating Officer of PJM, emphasized customer agency, stating that co-location permits customers to make choices and take risks regarding generation sufficiency, monetizing a voluntary load-shedding and distribution scenario. Mr. Kormos emphasized that a behind-the-meter load configuration might use significantly fewer grid services in certain configurations, especially if the parties involved are content to forego profit on surplus energy. Kent Chandler, a former chair of the Kentucky Public Service Commission, added that these new dynamics require addressing cost allocation and rate design alike. Mr. Chandler encouraged commissioners to seize an opportunity to shepherd improved rate design, seizing on improved metering technologies and minimizing inefficient cost bypass.

Commissioner See probed potential balancing between uniformity and innovation. She asked how FERC should think about optimal uniformity and variety for general guidance. MISO’s Aubrey Johnson explained that each data center will be unique as a snowflake (a theme many other speakers would come back to throughout the day), counseling either narrowly tailored or broad, moldable FERC rules for justiciability’s sake.

Similarly, Commissioner Chang asked about balancing co-location’s short- and long-term concerns. Zachary Smith of NYISO countered that variance will be more than temporal. FERC will need to balance regional variation with consistent national structures, and how to support interconnectivity amidst those dynamics. In the short term, Mr. Smith suggested that FERC could clarify the load interconnection process itself, calling for consistency across RTOs and ISOs. For the long term, Mr. Smith raised concerns about the supply mix, grid reliability and adequacy, and impacts of today’s informal, makeshift processes.

Commissioner Chang asked whether prior experience with co-generation can inform this new era. Panelist Howard Gugel of NERC answered: history’s utility is limited because today’s data centers work with unprecedented pace and energy demands. Connecting some new large loads to the grid could impact broader systems immediately. Data centers’ cyber security concerns are unprecedented, too, and must be managed in new ways.

Panel 2: Exploration of Issues Presented by Large Co-Located Loads. Panelists included:

Joseph Bowring, Independent Market Monitor for PJM
Pallas LeeVanSchaick, Vice President, Potomac Economics
Karen Onaran, President & CEO, Electricity Consumers Resource Council
Brian George, US Federal Lead, Global Energy Market Development, Google
Kyle Hannah, Director, Electric Transmission Strategic Initiatives, Dominion Energy Statement
Dave Weaver, Vice President of Transmission Strategy, Exelon Utilities Comments and Appendix
Mason Emnett, SVP, Public Policy, Constellation
Cole Muller, Executive Vice President, Strategic Ventures, Talen Energy Corporation | Statement
J. Arnold Quinn, Senior Vice President, Regulatory Policy, Vistra
Marjorie Rosenbluth Philips, Sr. VP, Wholesale Market Policy, LS Power Development, LLC

The second panel addressed the development and operation of co-location of large loads at generating facilities. Panelists represented a cross-section of the electric industry, including competitive power generators (Talen Energy, LS Power, Constellation), regulated utilities (Dominion and Exelon), market monitors (PJM IMM and Potomac Economics), advocates for large energy consumers (ELCON), and an industry participant.

The commissioners probed national security, economic development, reliability, cost allocation, and market efficiency issues. Commissioner Phillips and many panelists pointed to national security concerns associated with slow development, focusing on the need to act swiftly, while appreciating broader economic development opportunities.

Commissioners Rosner, See, and Chang requested input on how FERC should regulate both co-located behind-the-meter and grid-connected configurations, while addressing cost allocation, market improvements, and reliability. In response, many panelists requested clarity on state regulator versus FERC jurisdictional authority, while others sought better methods for transmitting price signals across markets. For its part, the data center industry market participant’s representative emphasized the company’s willingness to pay for grid services and costs it causes, its keen interest in utilizing grid-connected generation, and its position that it seeks to use co-located structures outside of traditional grid interconnection primarily because grid-connected generation is not coming online fast enough but would be eager to utilize and pay for grid services when and as grid-connected generation becomes available.

Commissioner Christie asked Dominion Energy, which serves more load from data centers than anywhere else in the world, on whether ratepayer-funded nuclear generation would serve data center demand. The IMM raised similar concerns, suggesting that with generation scarcity, data centers should finance and bring generation online with them, whether co-located or elsewhere on the grid.

Cost allocation and responsibility to pay for transmission charges and ancillary services brought the most excitement to this discussion. While all panelists agreed that fair compensation should be provided for grid services, they did not agree about the benefits of co-location, even behind the meter. Talen Energy’s representative emphasized that co-located scenarios would be most likely to take ancillary services but less likely to need transmission service, and that ancillary services account for a fraction of costs compared to transmission charges, arguing that transmission charges should track what is drawn from the grid on a net basis.

Near the end of the panel, speakers began to coalesce their thoughts around the causes of co-location, with a sentiment that co-location arrangements are becoming more common now because generator interconnection to the grid is not happening fast enough. Generation developer representatives emphasized that once the market addresses the speed of interconnection challenge, the issue of serving data center load really comes down to a resource adequacy question. In many of the nation’s largest energy regions, the region relies on a market construct called a “capacity market” to attract sufficient generation online to serve load even under times of stress, but the adequacy of these capacity markets to that task has been under challenge at FERC in recent years, with many stakeholders calling for reform to capacity markets even before the challenges of serving data center load came to the forefront. A common theme raised at Friday’s technical conference, especially on the second panel, is that the trend toward co-location of large loads is a symptom of a larger problem: that the country’s energy markets are not responding quickly enough to recent (and rapidly accelerating) load growth from data centers, electric vehicles, and residential and commercial customer electrification.

Panel 3: Roundtable with State Representatives. Panelists included:

Katie Fry Hester, Senator, Maryland State Senate | Comments
Emile C. Thompson, Chairman, Public Service Commission of the District of Columbia
Sarah Moskowitz, Executive Director, Citizens Utility Board of Illinois
Stephen M. DeFrank, Chairman, Pennsylvania Public Utility Commission | Statement | Opening Comments
Sarah Freeman, Commissioner, Indiana Utility Regulatory Commission

The third panel featured state-level regulators, policy makers and advocates from urban and rural, and traditionally regulated and deregulated energy market perspectives. These panelists addressed the policy considerations that arise from co-located load arrangements, including emphasizing that customer impacts on their mind included retail consumer energy availability, environmental effects, and financial impacts. They also addressed the interplay of state and federal regulation and FERC’s potential impact on emerging issues, fielding pointed questions from the commissioners regarding what aspects of co-location of load with generation are subject to state retail jurisdiction. Panelists emphasized that the regulatory and market mechanisms available to state regulators vary widely depending on whether a state has adopted customer choice (i.e., electricity deregulation) or has maintained a traditional vertically-integrated utility framework.

State policy makers voiced concerns for local communities and ratepayers. From their perspective, removing generation from the grid would increase costs for ratepayers and would impose new costs related to building regional transmission and bringing replacement generation online. They invited FERC to collaborate with state policymakers to minimize co-location generation’s environmental impacts on local communities. Senator Hester implored FERC to halt non-networked co-location in the PJM until FERC can provide a regulatory structure to mediate power resource development and detrimental customer impact.

Policymakers sought increased FERC guidance on co-location expectations and greater transparency for generation capacity that may be removed from the grid and converted, in whole or in part, to co-located generation arrangements.

Closing Remarks

The Commissioners closed with their appreciation for stakeholder input. They acknowledged that co-location’s concerns do not exist in a vacuum—rather, they are intertwined with ongoing questions about adequate generation resource adequacy and transmission system capability.

They indicated that the Commission prioritizes bringing clarity to existing rules about resource adequacy and making clear the respective role of state and federal regulators in managing development of co-located loads.

Takeaways

Although the data center sector appears willing to pay the costs their projects cause to the grid, the grid—and the many entities that comprise it—has yet to find alignment on what those costs are or how they should be recovered in utility rate design. Reaching this alignment may prove to be the linchpin of the long-term prospects for U.S. data center growth to support the age of artificial intelligence. As Friday’s technical conference demonstrates, the work of accomplishing this task could call upon federal and state regulators, local utilities and RTOs and ISOs, and data centers and the generators who would like to serve them to, among other things, study and synthesize load growth trends and create accurate energy load forecasts, modernize longstanding market rules, and harmonize new market enhancements with recent reforms to transmission planning and interconnection processes, all within the complex and interrelated state and federal regulatory regimes that govern across U.S. jurisdictions.

Also on Friday, mere hours after the close of the technical conference, FERC issued an order rejecting PJM’s filing of the amended interconnection agreement for Talen Energy’s Pennsylvania data center co-location proposal, finding that PJM had failed to demonstrate the proposed deviations from its pro forma interconnection agreement was warranted in that case due to specific reliability concerns, novel legal issues, or other unique factors. While PJM could refile the amended interconnection agreement with additional justification, it is not clear whether they will do so or if they will seek rehearing of Friday’s FERC order.

Thus, while FERC has demonstrated enthusiasm for addressing data center-related issues to the extent they are within its jurisdictional purview, FERC and the entities it regulates have much work to do ensure market rules, regulations, and the transmission infrastructure itself is prepared to accommodate data centers, co-located loads, and load growth into the future.

Gibson Dunn’s Data Center Task Force attorneys are available to assist clients by offering strategic advice; drafting comment letters to agencies; arranging and preparing for high-level executive branch and congressional meetings; and helping clients take advantage of potential opportunities emerging from the rapidly changing regulatory environment.

The following Gibson Dunn lawyers prepared this update: F. Joseph Warin, William R. Hollaway, Ph.D., Tory Lauterbach, Stephenie Gosnell Handler, Taylor Cathleen Amato, David Casazza, Katherine Maddox Davis, and Simon Moskovitz.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Artificial Intelligence, Energy Regulation & Litigation, National Security, Public Policy, Real Estate, or White Collar Defense & Investigations practice groups, or the following authors:

William R. Hollaway, Ph.D. – Chair, Energy Regulation & Litigation Practice Group,
Washington, D.C. (+1 202.955.8592, whollaway@gibsondunn.com)

Tory Lauterbach – Partner, Energy Regulation & Litigation Practice Group,
Washington, D.C. (+1 202.955.8519, tlauterbach@gibsondunn.com)

Vivek Mohan – Co-Chair, Artificial Intelligence Practice Group,
Palo Alto (+1 650.849.5345, vmohan@gibsondunn.com)

Stephenie Gosnell Handler – Partner, National Security Practice Group,
Washington, D.C. (+1 202.955.8510, shandler@gibsondunn.com)

Michael D. Bopp – Co-Chair, Public Policy Practice Group,
Washington, D.C. (+1 202.955.8256, mbopp@gibsondunn.com)

Eric M. Feuerstein – Co-Chair, Real Estate Practice Group,
New York (+1 212.351.2323, efeuerstein@gibsondunn.com)

F. Joseph Warin – Co-Chair, White Collar Defense & Investigations Practice Group,
Washington, D.C. (+1 202.887.3609, fwarin@gibsondunn.com)

Amanda H. Neely – Of Counsel, Public Policy Practice Group,
Washington, D.C. (+1 202.777.9566, aneely@gibsondunn.com)

On October 28, 2024, the U.S. Department of the Treasury issued final regulations implementing an outbound investment control regime targeting AI, semiconductors, and quantum computing investments involving China that raise national security concerns. The regulations’ prohibitions and reporting requirements go into effect on January 2, 2025.

Outbound investment regulations have arrived, and with them the establishment of the newest U.S. regulatory regime concerning cross-border transactions.

While the regulations have effectively created a new regulatory regime out of whitespace—and indeed, there is much that is truly novel in the regulations—they nonetheless draw heavily on existing processes, definitions used, and potential penalties available in existing international trade regimes—namely, the Committee on Foreign Investment in the United States (CFIUS), sanctions, and export controls. The regulations are presently targeted to U.S. outbound investments in China and limited to a narrow group of critical technology sectors. The regime, however, could be expanded both with respect to target countries and the sectors of interest. Despite the limited scope of the regulations as they currently stand, the commercial importance of the targeted sectors and the potential for its expansion, makes it critical for U.S. investors to understand the contours of the regulations and potentially to de-risk potential investments. Effectively navigating these new regulations will require a thorough understanding of the nuances of the outbound requirements, the scope of additional due diligence of targets that includes detailed technical analysis, and the contours of guardrails that need to be implemented to achieve compliance.

While the regulations will come into force over a year after the President’s Executive Order (EO) 14105 invoked the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act (NEA) to prohibit or restrict certain U.S. investments in China on the basis of national security,[1] the notion of an outbound investment regime has been the topic of discussion within the executive branch and Congress for a number of years—reflecting, in no small part, policy hesitations with restricting U.S. investors’ ability to invest in foreign companies under national security auspices. Outbound investment was ultimately not included in the Foreign Investment Risk Review Modernization Act of 2018 and faltered again when the National Critical Capabilities Defense Act failed in the summer of 2022. That failure, however, spurred support for executive action. In the span of just two years, the outbound investment regime has developed from a few provisions included in the 2023 fiscal omnibus spending bill—the Senate explanations on that bill gave Treasury 60 days to “submit a report describing its efforts and identifying the resources that would be required to establish and implement” an outbound investment initiative [2]—into a new regulatory regime that will go into effect in the new year. The speed with which the regime has been developed through regulation—including proposed rules and public comment periods—demonstrates that outbound investment controls are an important national security priority for this Administration.

As outlined in the final regulations issued on October 28, 2024 (the “Final Rule”), the new outbound investment regime targets “covered transactions” involving U.S. persons and “covered persons” from, and certain persons affiliated with, the People’s Republic of China (including the Special Administrative Regions of Hong Kong and Macau) (collectively “China”) that involve specified national security technologies and products—which currently include semiconductors and microelectronics, quantum information technologies, and artificial intelligence (AI) systems. Beginning on January 2, 2025, some “covered transactions” will be prohibited outright, while others will require post-transaction notification to the newly created Office of Global Transactions within the U.S. Department of the Treasury (Treasury), which is charged with implementing and overseeing the outbound investment regime. While this office will sit under the same Investment Security bureau as CFIUS, unlike foreign direct investment review overseen by CFIUS, the outbound investment regime will not be implemented by either an inter-agency grouping or through a screening mechanism. Rather, the new Office of Global Transactions will have the lead, and instead of a governmental review, the new rule requires industry to conduct sufficient due diligence before engaging in “covered transactions” to assess if such transactions are prohibited or notifiable. In other words, the outbound investment regime will avoid the often-lengthy CFIUS review process—U.S. investments in China beginning in 2025 will fall under three categories: (i) prohibited; (ii) require notification; or (iii) permitted (with no further process required under the outbound investment regulation).

As with CFIUS, the proposed penalties for violations are steep. Specifically, Treasury may impose civil penalties of up to the greater of $368,136 (an amount adjusted annually for inflation) or twice the amount of the transaction that is the basis for the violation. Willful violations can result in criminal penalties of up to $1,000,000 or imprisonment of up to 20 years, or both.

We provide below: (1) a brief refresher on the outbound investment rulemaking process, (2) an outline of core provisions of the Final Rule, (3) an analysis of the Final Rule, focusing on key changes from the Notice of Proposed Rulemaking (NPRM) issued in June 2024,[3] (4) the status of congressional action on outbound legislation, and (5) our key takeaways for global companies and investment firms.

I. Background on the Outbound Investment Rule and Regulatory Process

In 2022, the Biden Administration’s National Security Strategy (the “Strategy”) identified China as “the only competitor with both the intent to reshape the international order and increasingly, the economic, diplomatic, military, and technological power to advance that objective.”[4] To meet the “pacing challenge” of China, the Strategy emphasized the importance of a modern industrial strategy in which U.S. technological leadership is a key national security priority. In support of that objective, in August 2023, President Biden issued EO 14105.[5] The EO outlined proposed regulatory controls on outbound U.S. investment in certain “countries of concern,” namely China. The EO was accompanied by an Advance Notice of Proposed Rulemaking (ANPRM) issued by Treasury that provided the broad contours of the proposed outbound investment regime and sought input from industry across many areas of implementation.[6] For more details on the EO and ANPRM, please refer to our prior client alert. Nearly a year later, the Administration issued an NPRM responding to comments from industry and providing more detailed regulations for public review.

II. Core Contours of the Outbound Regulations

The Final Rule largely adopts the structure and most definitions included in the NPRM, and sets forth the following contours for this new regulatory regime:

Overview
Scope	The Final Rule applies to U.S. persons, defined as any U.S. citizen or lawful permanent resident, U.S.-organized entities—including any foreign branch of any such entity—or any person in the United States (31 C.F.R. § 850.229).
Key Terms
Country of Concern	Currently includes the People’s Republic of China (inclusive of the Special Administrative Areas of Hong Kong and Macau) (31 C.F.R. § 850.205 and Annex to EO 14105). The Final Rule leaves open the possibility of adding additional countries of concern.
Covered Foreign Persons	(1) A person of a “country of concern” that engages in a covered activity; or (2) A person that has a voting or equity interest, board seat, or certain powers with respect to a person of a country of concern where more than 50% of one or more key financial metrics of the person is attributable to a person(s) of a country of concern (31 C.F.R. § 850.209).
Covered Transactions	Covered transactions include a U.S. person’s direct or indirect: Acquisition of an equity interest or contingent equity interest; Certain debt financing that affords or will afford the U.S. person an equity interest or certain board rights; Conversion of a contingent equity interest or equivalent; Greenfield investments or other corporate expansion; Entry into a joint venture; or Acquisition of a limited partner or equivalent interest in a non-U.S. investment fund (31 C.F.R. § 850.210).
Excepted Transactions	Excepted transactions include certain: Publicly traded securities (though, note that there are other sanctions-related restrictions on dealing in publicly traded securities issued by certain Chinese entities);[7] Securities issued by investment companies or business development companies; Limited partner investments; Derivatives; Buyouts of full country of concern ownership stake; Intracompany transactions initiated before January 2, 2025; Certain binding commitments entered into before January 2, 2025; Certain syndicated debt financings; Equity-based compensation; and Transactions involving third countries designated by the Secretary of the Treasury that have adopted similar national security measures (31 C.F.R. §§ 850.213, 850.501).
Knowledge	Knowledge is defined to include: Actual knowledge that a fact or circumstance exists or is substantially certain to occur; An awareness of a high probability of a fact or circumstance’s existence or future occurrence; or Reason to know of a fact or circumstances existence (31 C.F.R. § 850.216).
National Security Technologies and Products Subject to the Final Rule
Semiconductors and Microelectronics	Prohibited: Covered transactions related to certain electronic design automation software; certain fabrication or advanced packaging tools; the design or fabrication of certain advanced integrated circuits; advanced packaging techniques for integrated circuits; and supercomputers (31 C.F.R. § 850.224). Notifiable: Covered transactions related to the design, fabrication, or packaging of integrated circuits not otherwise covered by the prohibited transaction definition (31 C.F.R. § 850.217).
Quantum IT	Prohibited: Covered transactions related to the development or production of (i) quantum computers or critical components required to produce a quantum computer; (ii) certain quantum sensing platforms; and (iii) certain quantum networks or quantum communication systems (31 C.F.R. § 850.224). Quantum technologies are those that rely on the scientific principles of quantum mechanics to solve complex problems very quickly. Notifiable: N/A
Certain AI Systems	Prohibited: Covered transactions related to the development of any AI system: designed to be exclusively used for, or intended to be used for, certain end uses, that is trained using a quantity of computing power greater than 10^25 computational operations, or trained using primarily biological sequence data and a quantity of computing power greater than 10^24 computational operations (31 C.F.R. § 850.224). Notifiable: Covered transactions related to the development of any AI system not otherwise covered by the prohibited transaction definition, where such AI system is designed or intended to be used for certain end uses or applications, or trained using a quantity of computing power greater than 10^23 computational operations (31 C.F.R. § 850.217).

As the structure and substance of the Final Rule did not change significantly from the NPRM, we refer our clients to our previous analysis of the NPRM for a more detailed explanation of the provisions of the Final Rule.

III. Key Differences From the NPRM

While the Final Rule largely tracks that of the NPRM, there are certain notable distinctions, which we analyze below.

The Final Rule expands the scope of covered transactions involving AI systems.

The Final Rule combines the definitions of “artificial intelligence” and “AI system” from EO 14110 (the “AI Executive Order”), issued on October 30, 2023, outlining protections for the use and development of AI.[8] For consistency with the AI Executive Order, the Final Rule modifies the definition of AI system by moving the clause “uses data inputs” into 31 C.F.R. § 850.202(a)(1). This relatively minor definitional change indicates that Treasury is adopting this rule against the backdrop of the AI Executive Order and the recently released National Security Memorandum on AI and that the U.S. government is working to harmonize its approach to AI across agencies and regulatory programs.[9]

Throughout its rulemaking process, Treasury has grappled with where to set the computational thresholds for transactions involving AI systems that would trigger the Final Rule’s notification requirements. The ANPRM did not propose any thresholds. In the NPRM, Treasury proposed several thresholds for consideration ranging from greater than 10^23 to 10^25 computational operations. Computational operations are a measure of the compute power needed to train an AI system. The Final Rule selected greater than 10^23 computational operations (e.g., integer or floating-point operations) as the threshold for notifiable transactions involving the development of AI systems. Treasury explained that this threshold captures the lower end of large-scale AI models released to date and that the selection was based on the current number of publicly known AI models originating from China. Similarly, the Final Rule selected greater than 10^25 computational operations as the threshold for prohibited transactions involving an AI system (and at greater than 10^24 computational operations for an AI system using primarily biological sequence data). While some commenters noted (1) that a 10^26 threshold would better target AI systems that pose the most significant national security threats and (2) that widely-available commercial AI models have been trained at 10^25 computational operations, Treasury set the threshold at greater than 10^25, noting that it has identified greater than 10^25 models, including those trained on biological data, that originate from a country of concern and pose risks to national security. Treasury indicated that it relied on information from both public comments and U.S. government subject-matter experts to make its determination.

Treasury also noted that it considered how computing power may evolve as AI model development continues. Accordingly, the Final Rule acknowledges that computing power thresholds will need to be updated periodically to reflect developments in AI and directs that the Secretary of the Treasury, in consultation with the Secretary of Commerce, should assess and update the computing power threshold as appropriate. In our assessment, the notification process seems designed to help inform any future modifications to the thresholds—although the information collected extends well beyond technical specifications.

For companies, determining when a transaction involving an AI system is prohibited or notifiable based on the computational threshold may be challenging because of the limited amount of publicly available information and benchmarking about models using such thresholds. Thus, the Final Rule places a significant emphasis on effective due diligence for transactions involving AI systems.

The Final Rule provides clarity on the knowledge standard.

The knowledge standard describes the knowledge a U.S. person must have about certain facts and circumstances related to a covered transaction to trigger obligations under the Final Rule. Importantly, the notification requirements and prohibitions apply when a U.S. person has actual knowledge, an awareness of a high probability, or reason to know of a fact or circumstance’s existence such that the U.S. person knew or reasonably should have known that it was undertaking a covered transaction involving a covered foreign person. In other words, U.S. persons cannot ignore available information and must undertake sufficient due diligence before engaging in a transaction that may constitute a “covered transaction.” This standard of knowledge has become very common across a full scope of economic tools deployed by the Departments of the Treasury and Commerce (e.g., General Prohibition 10 under the Export Administration Regulations is triggered by a similar “knowledge” standard).

An assessment of whether a U.S. person had reason to know of a fact or circumstance takes into consideration whether a U.S. person conducted a “reasonable and diligent inquiry” at the time of the transaction.

Section 850.104(c) of the Final Rule provides an illustrative list of factors Treasury will consider when assessing whether a U.S. person has undertaken a reasonable and diligent inquiry, including:

The inquiry a U.S. person has made regarding an investment target or other relevant transaction counterparty (such as a joint venture partner), including questions asked of the investment target or relevant counterparty, as of the time of the transaction;
The contractual representations or warranties the U.S. person has obtained or attempted to obtain from the investment target or other relevant transaction counterparty (such as a joint venture partner) with respect to the determination of a transaction’s status as a covered transaction and status of an investment target or other relevant transaction counterparty (such as a joint venture partner) as a covered foreign person;
The efforts by the U.S. person as of the time of the transaction to obtain and consider available non-public information relevant to the determination of a transaction’s status as a covered transaction and the status of an investment target or other relevant transaction counterparty (such as a joint venture partner) as a covered foreign person;
Available public information, the efforts undertaken by the U.S. person to obtain and consider such information, and the degree to which other information available to the U.S. person as of the time of the transaction is consistent or inconsistent with such publicly available information;
Whether the U.S. person purposefully avoided learning or seeking relevant information;
The presence or absence of warning signs, which may include evasive responses or non-responses from an investment target or other relevant transaction counterparty (such as a joint venture partner) to questions or a refusal to provide information, contractual representations, or warranties; and
The use of available public and commercial databases to identify and verify relevant information of an investment target or other relevant transaction counterparty (such as a joint venture partner).

While these questions are broad in scope, Treasury has acknowledged that some of the factors may be inapplicable or impracticable for a given transaction. Consequently, in line with Treasury’s approach to enforcing sanctions, the Final Rule emphasizes that whether a U.S. person has conducted a reasonable and diligent inquiry will be based on consideration of the totality of relevant facts and circumstances. Still, the specific nature of the illustrated diligence arguably sets an expectations bar for investors. For example, Treasury’s reference to public and commercial databases is arguably specific enough that Treasury will look to see whether an investor took time to review these kinds of resources for relevant information.

Additionally, whereas the NPRM explicitly stated that in assessing knowledge Treasury would consider diligence conducted by the U.S. person, as well as diligence conducted by legal counsel and representatives on its behalf, the Final Rule removes these additional parties. Nevertheless, Treasury will still take into account whether a U.S. person has undertaken a reasonable and diligent inquiry of the facts and circumstances surrounding the transaction.

The Final Rule delineates activities from which U.S. persons may withdraw to avoid “knowingly directing” transactions.

The Final Rule prohibits U.S. persons from “knowingly directing” a transaction by a non-U.S. person when the U.S. person knows the transaction would be prohibited if made by a U.S. person. This is very similar to restrictions in U.S. sanctions which prohibit the referral by U.S. persons of business that would be sanctionable if undertaken by a U.S. person to a non-U.S. person.

A U.S. person “knowingly directs” a transaction when the U.S. person possesses authority to make or substantially participate in decisions made by the non-U.S. person, and exercises such authority to direct, order, or approve a transaction. U.S. persons who are officers, directors, or who otherwise possess executive responsibilities over a non-U.S. person are identified as having such authority.

However, the Final Rule states that if a U.S. person with such authority recuses themselves from specific activities, they will not be considered to have exercised their authority to direct a transaction, which will help U.S. persons avoid running afoul of the regulations. Unlike the NPRM, the Final Rule specifically includes recusal steps that U.S. persons should take, including refraining from: (1) participating in formal approval and decision-making processes related to the transaction; (2) reviewing, editing, commenting on, approving, and signing transaction documents; and (3) engaging in negotiations with the investment target or relevant transaction counterparty. Again, this is very similar to the recusal expectations in similar contexts under U.S. sanctions.

The Final Rule Updates the definition of “covered foreign person.”

The Final Rule reorganizes and clarifies the definition of a “covered foreign person” to better articulate the individuals and entities captured by the new regulations.

“Covered foreign person” specifically includes individuals and entities who may not themselves be persons “of a country” of concern—it also includes those persons who have a relationship with a person of a country of concern that is in turn engaged in a covered activity. In order to be deemed a “covered foreign person” in this circumstance, that person must hold an interest, such as a voting interest or equity interest, in the natural or corporate person engaging in the covered activity such that the relevant person has power to direct or manage that person. And if there is such an interest, more than fifty percent of the relevant person’s revenue or net income must be attributable to the person engaged in the covered activity.

Note the Final Rule defines a “person of a country of concern” in § 850.221 as an individual that is a citizen or lawful permanent resident of a country of concern (and also not a U.S. citizen or lawful permanent resident of the United States); an entity with a principal place of business in, headquartered in, or incorporated in or otherwise organized under the laws of, a country of concern; the government (and certain subdivisions and government owned enterprises) of a country of concern; persons acting on behalf of a government of a country of concern; and certain entities individually or in the aggregate, directly or indirectly, holding at least 50 percent of the outstanding voting interest, voting power of the board, or equity interest of any of the foregoing. We note that this definition is far broader than the definition of non-U.S. person in most U.S. sanctions programs.

The Final Rule modifies the treatment of certain debt and contingent equity transactions.

The NPRM sought comments regarding the effect, if any, on the definition of “covered transaction” for the conversion of contingent equity interests or acquisition of limited-partnership interests. Based on responsive comments in connection with §§ 850.210(a)(1) and 850.210(a)(3) of the NPRM, the Final Rule changes how certain debt and contingent equity transactions are treated under the definition of covered transaction. We highlight three main changes from the NPRM:

First, the Final Rule clarifies in Note 1 to § 850.210 that a U.S. person is not considered to have indirectly acquired an equity interest or contingent equity interest in a covered foreign person when the U.S. person acquires a limited partnership interest in a venture capital fund, private equity fund, fund of funds, or other pooled investment fund and that fund then acquires an equity interest or contingent equity interest in a covered foreign person. Thus, the U.S. person’s limited partnership investment into the investment fund is not a covered transaction, absent other circumstances. However, to the extent that the fund is a U.S. person, its transactions with a covered foreign person would be covered by the Final Rule if it meets the definition of a covered transaction.

Second, the Final Rule modifies the definition of contingent equity interest to (1) refer to a “financial interest” rather than a “financial instrument” to clarify that the Final Rule covers the acquisition or conversion of interests that are convertible into an equity interest and (2) clarify that debt can constitute a financial interest that is convertible into an equity interest. This inclusion of debt and convertible interests builds on Treasury’s focus on these instruments first seen in its Venezuela and Russia sanctions programs.

Third, the Final Rule clarifies in Note 2 to § 850.210 that neither the issuance of debt financing secured by equity collateral nor the acquisition of such secured debt on the secondary market is an acquisition of an equity or contingent equity interest. Thus, such debt transactions will not constitute covered transactions. However, the Final Rule states that foreclosure on such collateral where the debtholder takes possession of the pledged equity constitutes an acquisition of an equity interest and is thus a covered transaction. In general, the Final Rule does not cover debt financing unless it has equity-like characteristics or is convertible into an equity interest.

The Final Rule exempts passive limited partner investments of $2,000,000 or less.

The Final Rule does not cover any passive limited partner investments of $2 million or less, and also excepts limited partner investments that are accompanied by a binding contract that the capital invested would not be made to indirectly create a notifiable or prohibited transaction. Similar to CFIUS, the outbound regime enumerates in § 850.501(a)(2) a list of what it considers to qualify as passive minority shareholder protections.

The Final Rule clarifies and adds several exceptions.

The Final Rule clarifies and adds to § 850.501 several types of excepted transactions that would otherwise constitute prohibited or notifiable transactions, including the following:

Clarifies that derivative transactions are excepted so long as the derivative “does not confer the right to acquire equity, any rights associated with equity,” or any assets related to a covered foreign person. This is in line with Treasury’s general views on allowing derivatives without the receipt of the underlying asset that was developed in the context of Russia sanctions.
Excepts employee compensation in the form of equity, an option to purchase equity, and the exercise of such option.
Excepts transactions between a U.S. person and its controlling foreign entity that supports or maintains operations that are not covered activities or that maintains covered activities that the entity was engaged in prior to the Final Rule’s effective date.

The Final Rule provides that Treasury may disclose non-public information when doing so is “important” to the national security analysis or in “the national interest.”

Generally, information or documentation submitted to Treasury pursuant to the Final Rule’s requirements shall not be publicly disclosed if it is not otherwise publicly available, unless the parties to the notification consent to its disclosure. In certain instances, however, Treasury may disclose private information and materials to certain parties including Congress and congressional committees subject to appropriate confidentiality and classification requirements. Such information and materials may also be provided to other U.S. government entities or entities of allied foreign governments when such information is “important to the national security analysis or actions of such governmental entity or [Treasury].”[10] Despite this, our assessment remains that all such notifications should be marked confidential and, if possible, exempt from the Freedom of Information Act requests under one or more provisions concerning sensitive commercial information.

Additionally, the Final Rule provides that Treasury may disclose otherwise confidential information “when such disclosure of information is determined by the Secretary to be in the national interest.”[11] While the Final Rule does not explain how the Secretary would make that determination, it specifies that the determination may not be delegated below the level of the Assistant Secretary of the Treasury. These exceptions to confidentiality are noteworthy, as they provide somewhat less protection than similar confidentiality protections in the CFIUS regulations.[12]

IV. Congressional Outlook

While the outbound investment regime derives its authority from executive authorities, IEEPA, and the NEA, the prospect of additional congressional legislative action remains.

Momentum on an outbound investment regime first picked up steam in Congress, and while the executive branch firmly took the lead in establishing a regulatory regime, we will continue to watch as Congress works on its own outbound investment protocols—which may augment, conflict with, or overtake the executive’s action depending on how Congress proceeds.

In 2023, the Senate voted 91 to 6 to include the Outbound Investment Transparency Act in the FY 2024 National Defense Authorization Act (NDAA), though the measure was ultimately stripped from the final bill. An amendment to the Senate draft of the FY 2025 NDAA similarly would require U.S. persons to notify Treasury when investing in a “covered foreign entity” and the investment involves “covered sectors” (i.e., advanced semiconductors and microelectronics, artificial intelligence, quantum information science and technology, hypersonics, satellite-based communications, and networked laser scanning systems with dual-use applications). Covered foreign entities would include entities incorporated in countries of concern (i.e., North Korea, China, Russia, or Iran), entities that are primarily traded on exchanges in a country of concern, and entities majority owned by entities that fall under one of the first two categories. We note that the bill’s notification requirement would be in addition to existing restrictions on almost all transactions with Iran and DPRK, targeted restrictions on Russian transactions, and limitations on investments in publicly traded securities of certain Chinese companies. House Financial Services Committee Chairman Patrick McHenry opposed the FY 2024 provision, effectively blocking it from becoming law, and appears poised to do so again this year. He favors a sanctions regime, rather than limiting outbound investment. Consistent with that view, after the Final Rule was released, Chairman McHenry stated that he remains “skeptical of a sectoral approach to regulating outbound investment.”[13]

That said, House Speaker Mike Johnson, Foreign Affairs Committee Chairman Michael McCaul, and Select Committee on Strategic Competition Between the United States and the Chinese Communist Party Chairman John Moolenaar strongly support addressing outbound investment in the FY 2025 NDAA and are seeking a compromise. The day after Treasury released the Final Rule, Chairman Moolenaar issued a statement “commending” the regulation but calling for Congress to “build on these rules and address a broader set of technologies and transactions that threaten our national security.”[14]

Should such legislation pass, questions almost certainly will arise regarding harmonization with Treasury’s Final Rule.

V. Key Takeaways for the Private Sector

Even though the Final Rule does not come into effect until next year, there are steps that clients can take now to prepare.

Companies and other investors with global operations should review and update their operations and investment processes now so that they can come into compliance with these rules once they become effective.

The January 2, 2025 effective date will arrive quickly, especially with planning time lost to the upcoming end-of-year holidays. Companies and other investors should consider updating their approach to diligence and negotiating terms for investments now. In the comments to the NPRM, industry requested more guidance on what due diligence steps Treasury envisioned U.S. firms would take, with many asking for an illustrative list of proposed steps (e.g., a list of due diligence questions or sample agreement representations). Treasury declined to provide this level of detail. However, companies will be well placed to develop their own diligence questions and terms for use in the investments and transactions that will be agreed to in 2025. In particular, companies will want to focus their due diligence process on ascertaining whether the technology and products of potential investments fall under the prohibited or notifiable categories. For example, determining whether an AI system was trained using a quantity of computing power greater than 10^23 computational operations may well fall outside the scope of existing due diligence questions.

Importantly, the Final Rule exempts certain intracompany transactions between U.S. persons and their controlled foreign entities that are instigated prior to the January 2, 2025 effective date. Transactions that would be covered transactions but that support the U.S. person’s ongoing operations with respect to covered activities that the controlled foreign entity was engaged in prior to January 2, 2025 effective date will be excepted. Therefore, companies with global operations should review and assess their current activities in order to document them as part of their compliance plans and more clearly establish them as activities that are grandfathered for purposes of this exception.

Treasury will provide more information on the format for providing notifications.

Clients subject to the Final Rule will need to determine which transactions are covered by the Final Rule (both prohibited and notifiable) and navigate the new process to notify Treasury of notifiable transactions. In a guidance document published simultaneously with the Final Rule, Treasury has committed to providing additional information before the effective date to facilitate compliance. Such guidance will include instructions on how to file a notification and how to request a national interest exemption. Treasury also indicates that it will engage in stakeholder outreach about the Final Rule’s requirements. We will be closely engaging with Treasury about this and will be monitoring Treasury’s Outbound Investment Security Program website for additional information. We urge our clients to do the same.

Non-U.S. private equity and investment funds must actively manage their investment in sensitive areas—U.S. limited partners may be excluded from certain investments.

The Final Rule was modified in response to several comments about the low threshold for the passive investment exception. Treasury considered alternatives to limiting the Final Rule’s impact on passive investment by U.S. limited partners in non-U.S. funds—considering a limit tied to a dollar amount versus a limit tied to a percentage of the fund’s capital. Commenters preferred the percentage approach because the dollar limit was so low as compared with typical passive investment amounts. However, in the Final Rule, Treasury applied the dollar limit, modified by raising it from $1 million to $2 million. A $2 million limit on passive investment means that the Final Rule will impact many U.S. investors such that funds and their limited partners may instead need to rely on using contractual rights for U.S. investors to be excluded from transactions that implicate outbound investment restrictions. The responsibility (and cost) to effectively implement this approach is likely to be shared by general partners/managers and limited partners alike.

[1] Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern, 88 Fed. Reg. 54,867 (Aug. 11, 2023).

[2] Staff of S. Comm. on Appropriations, 117th Cong., Explanatory Statement, Division B—Commerce, Justice, Science, and Related Agencies Appropriations Act, 2023 at 59 (Dec. 19, 2022), https://www.appropriations.senate.gov/imo/media/doc/Division%20B%20-%20CJS%20Statement%20FY23.pdf.

[3] Provisions Pertaining to U.S. Investments in Certain National Security Technologies and Products in Countries of Concern, 89 Fed. Reg. 55,846 (July 5, 2024).

[4] The White House, National Security Strategy at 8 (Oct. 2022), https://www.whitehouse.gov/wp-content/uploads/2022/10/Biden-Harris-Administrations-National-Security-Strategy-10.2022.pdf.

[5] Exec. Order No. 14105, Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern, 88 Fed. Reg. 54,867 (Aug. 11, 2023).

[6] Provisions Pertaining to U.S. Investments in Certain National Security Technologies and Products in Countries of Concern, 88 Fed. Reg. 54,961 (Aug. 14, 2023).

[7] Client Alert, 2021 Year-End Sanctions and Export Controls Update, Gibson, Dunn & Crutcher LLP (Feb. 4, 2022), https://www.gibsondunn.com/2021-year-end-sanctions-and-export-controls-update/.

[8] Exec. Order No. 14110, Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence, 88 Fed. Reg. 75,191 (Nov. 1, 2023).

[9] See White House, Memorandum on Advancing the United States’ Leadership in Artificial Intelligence; Harnessing Artificial Intelligence to Fulfill National Security Objectives; and Fostering the Safety, Security, and Trustworthiness of Artificial Intelligence (Oct. 2024), https://www.whitehouse.gov/briefing-room/presidential-actions/2024/10/24/memorandum-on-advancing-the-united-states-leadership-in-artificial-intelligence-harnessing-artificial-intelligence-to-fulfill-national-security-objectives-and-fostering-the-safety-security/.

[10] 31 C.F.R. § 850.801(b)(3).

[11] 31 C.F.R. § 850.801(d).

[12] See 31 C.F.R. § 800.802.

[13] Press Release, Chairman of the House Fin. Servs. Comm Patrick McHenry, McHenry Statement on Treasury’s Outbound Investment Final Rule (Oct. 28, 2024) here.

[14] Press Release, Chairman of the Select Comm. on the Strategic Competition Between the U.S. and the Chinese Communist Party John Moolenaar, Moolenaar: Biden Regulations on Outbound Investment to China a Good Step, Congress Must Strengthen (Oct. 29, 2024), https://selectcommitteeontheccp.house.gov/media/press-releases/moolenaar-biden-regulations-outbound-investment-china-good-step-congress-must.

The following Gibson Dunn lawyers prepared this update: Stephenie Gosnell Handler, Adam M. Smith, Christopher Timura, Michelle Weinbaum, Amanda Neely, Chris Mullen, Hugh Danilack, Sarah Burns*, Kelly Yahner*, Jayee Malwankar, David Wolber, and Mason Gauch.

Gibson Dunn attorneys are available to counsel clients regarding potential or ongoing transactions and other compliance or public policy concerns. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s International Trade practice group:

United States:
Ronald Kirk – Co-Chair, Dallas (+1 214.698.3295, rkirk@gibsondunn.com)
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202.887.3547, asmith@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, shandler@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, ctimura@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202.887.3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213.229.7269, nhanna@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202.955.8685, cmbrown@gibsondunn.com)
Amanda H. Neely – Washington, D.C. (+1 202.777.9566, aneely@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202.887.3509, ssewall@gibsondunn.com)
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, mweinbaum@gibsondunn.com)
Hugh N. Danilack – Washington, D.C. (+1 202.777.9536, hdanilack@gibsondunn.com)
Mason Gauch – Houston (+1 346.718.6723, mgauch@gibsondunn.com)
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, cmullen@gibsondunn.com)
Sarah L. Pongrace – New York (+1 212.351.3972, spongrace@gibsondunn.com)
Anna Searcey – Washington, D.C. (+1 202.887.3655, asearcey@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202.955.8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, stoussaint@gibsondunn.com)
Claire Yi – New York (+1 212.351.2603, cyi@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, szhang@gibsondunn.com)

Asia:
Kelly Austin – Hong Kong/Denver (+1 303.298.5980, kaustin@gibsondunn.com)
David A. Wolber – Hong Kong (+852 2214 3764, dwolber@gibsondunn.com)
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing (+86 10 6502 8534, qyue@gibsondunn.com)
Dharak Bhavsar – Hong Kong (+852 2214 3755, dbhavsar@gibsondunn.com)
Felicia Chen – Hong Kong (+852 2214 3728, fchen@gibsondunn.com)
Arnold Pun – Hong Kong (+852 2214 3838, apun@gibsondunn.com)

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Patrick Doris – London (+44 207 071 4276, pdoris@gibsondunn.com)
Michelle M. Kirschner – London (+44 20 7071 4212, mkirschner@gibsondunn.com)
Penny Madden KC – London (+44 20 7071 4226, pmadden@gibsondunn.com)
Irene Polieri – London (+44 20 7071 4199, ipolieri@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Nikita Malevanny – Munich (+49 89 189 33 224, nmalevanny@gibsondunn.com)
Melina Kronester – Munich (+49 89 189 33 225, mkronester@gibsondunn.com)
Vanessa Ludwig – Frankfurt (+49 69 247 411 531, vludwig@gibsondunn.com)

*Sarah Burns and Kelly Yahner, associates working in the firm’s Washington, D.C. office, are not yet admitted to practice law.

We are pleased to provide you with the October edition of Gibson Dunn’s monthly U.S. bank regulatory update. Please feel free to reach out to us to discuss any of the below topics further.

KEY TAKEAWAYS

The Office of the Comptroller of the Currency (OCC) released its bank supervision operating plan for fiscal year 2025 signaling the OCC’s supervision priorities for the next fiscal year. Although the key areas of heightened focus for supervisory strategies in fiscal year 2025 largely mirror those from fiscal year 2024, changes or updates include (predictably) a focus on third-party risk management, as well as a heightened focus on capital optimization activities (e.g., credit risk transfer transactions) and changes to the supervisory posture with respect to climate-related financial risks.
The Consumer Financial Protection Bureau (CFPB) issued its final rule implementing Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule was quickly met with a challenge by the Bank Policy Institute and Kentucky Bankers Association.
On October 21, 2024, the OCC finalized revisions to its recovery planning guidelines for national banks, federal savings associations and federal branches, expanding coverage of the guidelines to institutions with at least $100 billion in total assets (reduced from $250 billion). As adopted, the guidelines include a new “risk-based” testing standard and changes designed to ensure that non-financial risks are addressed in recovery planning efforts. The final guidelines become effective on January 1, 2025, with changes to the initial compliance dates.
The Federal Deposit Insurance Corporation (FDIC) extended the comment period on its brokered deposits proposal until November 21, 2024 and the comment period on its request for information on deposit data until December 6, 2024. See our Client Alert on both here.
The New York State Department of Financial Services (NYDFS) released guidance to address cybersecurity risks arising from artificial intelligence (AI). The guidance does not impose new requirements beyond those obligations codified in the NYDFS’ cybersecurity regulations—23 NYCRR Part 500. Instead, according to the NYDFS, the guidance is designed “to explain how [covered entities] should use the framework set forth in Part 500 to assess and address the cybersecurity risks arising from AI.”

DEEPER DIVES

OCC Releases Bank Supervision Operating Plan for Fiscal Year 2025. On October 1, 2024, the OCC released its bank supervision operating plan for fiscal year 2025. The plan signals the OCC’s supervision priorities for the fiscal year. The key areas of heightened focus for supervisory strategies in fiscal year 2025 largely mirror key areas of focus in the fiscal year 2024 plan (e.g., BSA/AML, cybersecurity, consumer compliance, asset/liability management, credit and allowance for credit losses, operational risk, enterprise change management, payments, CRA, fair lending), with certain notable changes or updates.

Insights. Not surprisingly, the plan includes as a new, separate line item, third-party risks and third-party risk management. The plan also specifically identifies capital as an area of heighted focus, most notably capital optimization activities, “including any new plans by banks to engage in credit risk transfer transactions.” With respect to climate-related financial risks for banks (or U.S. branches of foreign banks) with over $100 billion in total assets, the 2025 plan states that “examiners should conduct target examinations” to assess banks’ ability to identify and manage climate-related financial risks. The 2024 plan contemplated examiners’ “engagement with bank management” with respect to climate-related financial risks. Finally, the 2025 plan excludes substantive discussion of distributed ledger technology-related products and services.

OCC Finalizes Revisions to Its Recovery Planning Guidelines. On October 21, 2024, the OCC finalized revisions to its recovery planning guidelines. Under the final rule, coverage of the recovery planning guidelines was extended to institutions with $100 billion or more in total assets—down from the current $250 billion threshold. The revised guidelines become effective on January 1, 2025.

Insights. The final guidelines implement two principal changes from the July 3, 2024 proposal. First, the testing requirement is now risk-based—i.e., “appropriate for the bank’s individual size, risk profile, activities, and complexity, including the complexity of its organizational and legal entity structure.” Second, the guidelines provide covered institutions with more time to both develop a testing framework and conduct testing. Specifically, under the final guidelines, institutions currently subject to the guidelines will have 12 months to amend their recovery plans to address non-financial risk and an additional 6 months to comply with the new testing provision; institutions that are not covered by the current guidelines but that become subject to the guidelines on the effective date (or thereafter) will have 12 months to develop their recovery plan and an additional 12 months to comply with the testing provision. Finally, the revised guidelines include the condition that recovery planning “should appropriately consider both financial risk and non-financial risk (including operational and strategic risk).”

CFPB Releases Personal Financial Data Rights Final Rule. On October 22, 2024, the CFPB issued its final rule implementing Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the “open banking” rule. The stated policy rationale of Section 1033 is to empower consumers and authorized third parties to access account data controlled by certain financial data providers in a safe, secure, reliable and competitive manner. “Data providers” include financial institutions as defined in Regulation E, card issuers as defined in Regulation Z, digital wallet providers, and “any other person that controls or possesses information concerning a covered consumer financial product or service that the consumer obtained from that person”, but excludes depository institutions with less than $850 million in total assets—which are exempt from the final rule’s requirements.
Under the final rule, data providers are required to transfer an individual’s personal financial data (Covered Data) to another party at the consumer’s request for free. The final rule requires data providers to create and maintain a consumer interface and a developer interface, and to make this Covered Data available in a machine-readable format without charge. Data providers must also establish and maintain written policies and procedures, though data providers do have the flexibility to design policies and procedures to avoid acting inconsistently with other legal obligations, or in a way that could reasonably hinder enforcement against unlawful or potentially unlawful conduct. Although depository institutions with less than $850 million in total assets are exempt from the final rule’s requirements, nondepository entities of all sizes must comply with the final rule.

The final rule includes several other notable deviations from the October 19, 2023 proposed rule. First, it provides an extended, tiered compliance structure. The first compliance date, which applies to the largest bank and non-bank covered entities, is April 1, 2026. Second, there is no assignment of liability among commercial entities or safe harbors from the Electronic Fund Transfer Act and Regulation E or the Truth in Lending Act and Regulation Z. Third, the final rule includes an exclusion for any products or services that “merely facilitate first party payments”, defined as “a transfer initiated by the payee or an agent acting on behalf of the underlying payee.” However, this exclusion is narrow because first party payments that relate to a product that facilitates payments to other payees or a data provider that is otherwise providing a Regulation E or Regulation Z account, remain in scope.
Immediately following the release of the rule, the Bank Policy Institute and Kentucky Bankers Association filed a lawsuit against the CFPB in U.S. District Court. The lawsuit asserts that the CFPB exceeded its statutory authority and finalized a rule that jeopardizes consumers’ privacy, financial data and account security. The lawsuit raises several key concerns with the final rule.

Insights. In parallel with legal challenges, covered entities are expected to prepare to come into compliance with the final rule. Both depository and nondepository institutions will be significantly impacted by the final rule, but the impacts will be different. All covered entities will need to engage in a mapping exercise to determine the products and data in scope and uplift their infrastructure to comply with the requirements. Banks will likely have an increased focus on ascertaining the risks associated with the compliance requirements and determining the appropriate risk mitigation. Nondepository institutions that less clearly control or possess Covered Data may be required to face significant reengineering hurdles to make Covered Data available consistent with the requirements of the final rule.

NYDFS Issues New AI Guidance. On October 16, 2024, the NYDFS published guidance addressing how AI is changing cyber risk and how covered entities can mitigate risks associated with AI. According to the NYDFS, the guidance does not impose any new requirements, but rather explains how covered entities should use the Part 500 framework to address cybersecurity risks arising from the use of AI. The Guidance addresses four risks related to the use of AI: (i) AI-enabled social engineering; (ii) AI-enhanced cybersecurity attacks; (iii) exposure or theft of vast amounts of nonpublic information; and (iv) increased vulnerabilities due to third-party, vendor, and other supply chain dependencies. The guidance maintains that covered entities must assess AI-related risks and implement minimum cybersecurity standards to address such risks. Examples of compensating controls include: (1) cybersecurity risk assessments; (2) incorporating AI-risks into business continuity and disaster recovery planning; and (3) incorporating AI-related risks into third-party risk management processes.

Insights. The guidance provides examples on how covered entities may fortify their pre-existing programs to address AI-related risks and highlights some of the current cybersecurity risks associated with AI that all organizations should consider when developing a cybersecurity program and implementing cybersecurity controls. Critical to undertaking a risk mitigation strategy, covered entities should first consider the risks presented by AI in their cybersecurity risk assessments. Even if a covered entity itself does not deploy AI tools, the covered entity should consider both AI used by any third-party service provider, and the risks that bad actors may use AI to infiltrate covered entities’ information systems.

FSOC Continues Focus on Private Credit. On October 18, 2024, the Financial Stability Oversight Council (FSOC) met in executive session. At the meeting, the FSOC received updates from Treasury and other regulators’ staffs on efforts to provide better visibility into private credit. The readout from the meeting noted “that the current lack of transparency in the private credit market can make it challenging for regulators to fully assess the buildup of risks in the sector.”
Relatedly, both Commissioner Peirce and Acting Comptroller Hsu recently weighed in on this topic. On October 15, Commissioner Peirce gave a speech titled “Temporarily Terrified by Thomas: Remarks on Private Credit” in which she emphasized the need to understand the private credit market and to use existing tools in monitoring the evolving market. She noted that “[i]nvoking systemic risk to regulate private credit in the same way we regulate bank lending would engender risks of its own. Doing so would squelch the dynamism that enables the non-bank sector to serve companies and investors so well. It would homogenize the market, which could make future financial contagion more, not less, likely. … If anything, the growing private credit sector may highlight the need for streamlining our public market regulation.” In addition, on October 25, 2024, Acting Comptroller Hsu gave a speech titled “Systemic Risk and Crossing the Hellespont.” In his remarks, Acting Comptroller Hsu identified private credit (along with “banking supply chains and, possibly, mortgage servicing”) as areas that are being closely monitored by regulators for potential build ups of systemic risk.

Insights. The FSOC highlighted its focus on the private credit market in its 2023 Annual Report and such attention has continued through 2024. This focus follows the FSOC’s easing of its process to designate nonbank financial companies as systemically important financial institutions coupled with banking regulation that created additional opportunities for nonbanks in the private credit sector. Whether and how the FSOC seeks to make designations in the private credit or other sectors are likely to be impacted by the upcoming U.S. election.

OTHER NOTABLE ITEMS

FDIC Announces Extension of Comment Period for Proposed Changes to its Brokered Deposits Regulations and Request for Information on Deposit Data. On October 8, 2024, the FDIC announced it will extend until November 21, 2024 the comment period on its notice of proposed rulemaking proposing significant changes to the FDIC’s brokered deposits rules. The FDIC also separately announced it is extending until December 6, 2024 the comment period on its Request for Information on deposit data.

Vice Chairman Hill Updates FDIC Staff’s Review of Applications Pending Before FDIC. Following the October 17, 2024 meeting of the FDIC Board, Vice Chairman Travis Hill released a statement lauding FDIC staff’s work to improve the application review process and reduce the number of merger and FDIC deposit insurance applications outstanding for more than nine months. According to Vice Chairman Hill, that number has “consistently hovered around 10” over the last two-and-a-half years; it currently sits at three for the first time since October 2021. Following a June 20, 2024 FDIC Board resolution, FDIC staff is now required to brief the full FDIC Board “any time a merger or deposit insurance application is outstanding for more than nine months.”

Speeches by Governor Bowman on Community Banking. On October 2, 2024 and October 11, 2024, Federal Reserve Board Governor Michelle Bowman gave speeches titled “Building a Community Banking Framework for the Future” and “Challenges to the Community Banking Model.” In her speeches, Governor Bowman reiterated consistent themes like the tradeoffs of regulation, guidance and supervision and their unintended consequences, competition and de novo banking, tailoring, and the risks faced by community banks.

Speech by Governor Bowman at the Eighth Annual Fintech Conference hosted by the Federal Reserve Bank of Philadelphia. On October 23, 2024, Federal Reserve Board Governor Michelle Bowman gave the opening remarks for the second day of the Federal Reserve Bank of Philadelphia’s annual fintech conference. In her remarks, Governor Bowman reiterated her view that regulators “have an obligation to understand the functionality of new innovations” and encouraged regulators to “prioritize how we integrate innovation as we revise or enhance regulatory frameworks.”

Speech by Governor Waller on DeFi. On October 18, 2024, Federal Reserve Board Governor Christopher Waller gave a speech titled “Centralized and Decentralized Finance: Substitutes or Complements?” Governor Waller’s speech examined whether defi and centralized finance are substitutes or complementary. While citing the benefits of the technology underlying decentralized finance, Governor Waller ultimately concluded that technological innovations stemming from defi are largely complementary to centralized finance and have the ability to “improve centralized finance” and realize “significant value” to financial intermediaries in the financial markets.

Speeches by Governor Jefferson on the Discount Window. On October 8, 2024 and October 9, 2024, Vice Chair Phillip Jefferson gave a two-part speech titled “A History of the Fed’s Discount Window: 1913–2000” and “The Fed’s Discount Window: 1990 to the Present,” respectively. In his speeches, Vice Chair Jefferson detailed the history of the Federal Reserve’s Discount Window from its inception in 1913 through its evolution in the 21st century and explored the rise of the Discount Window “stigma” and tackled ways in which the Federal Reserve is working to eliminate or reduce that stigma.

Speech by Governor Cook on AI. On October 1, 2024, Federal Reserve Board Governor Lisa Cook gave a speech titled “Artificial Intelligence, Big Data, and the Path Ahead for Productivity.” Her speech explored the potential impacts of AI and big data on productivity and labor markets. Governor Cook reiterated her “cautiously optimistic” view on AI while noting that there is still a great deal of uncertainty surrounding AI’s long-term effects.

OCC Solicits Research on AI in Banking. On October 7, 2024, the OCC announced it was soliciting academic research papers on the use of AI in banking and finance. Authors of selected papers will be invited to present to OCC staff and other stakeholders on June 6, 2025. Interested researchers can submit papers to EconomicsSymposium@occ.treas.gov. The deadline for submission is December 15, 2024.

FDIC Extends Compliance Date for Subpart A of the FDIC Official Signs and Advertising Requirements, False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC’s Name or Logo. On October 17, 2024, the FDIC announced that the compliance deadline for the FDIC’s new rule on FDIC signage and advertising (Subpart A of Part 328) has been extended from January 1, 2025, to May 1, 2025. Specifically, such rules require (i) the use of the FDIC official sign, official digital sign, and other signs differentiating deposits and non-deposit products across all banking channels; and (ii) the establishment and maintenance of policies and procedures designed to achieve compliance with Part 328. The compliance deadline for rules relating to misrepresentations of deposit insurance coverage (Subpart B of Part 328) remains January 1, 2025.

The following Gibson Dunn lawyers contributed to this issue: Jason Cabral, Ro Spaziani, Zach Silvers, Karin Thrasher, and Nathan Marak.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work or any of the member of the Financial Institutions practice group:

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Ro Spaziani, New York (212.351.6255, rspaziani@gibsondunn.com)

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

M. Kendall Day, Washington, D.C. (202.955.8220, kday@gibsondunn.com)

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, jsteiner@gibsondunn.com)

Sara K. Weed, Washington, D.C. (202.955.8507, sweed@gibsondunn.com)

Ella Capone, Washington, D.C. (202.887.3511, ecapone@gibsondunn.com)

Rachel Jackson, New York (212.351.6260, rjackson@gibsondunn.com)

Chris R. Jones, Los Angeles (212.351.6260, crjones@gibsondunn.com)

Zack Silvers, Washington, D.C. (202.887.3774, zsilvers@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

Nathan Marak, Washington, D.C. (202.777.9428, nmarak@gibsondunn.com)

This update examines why Germany does not require anti-(anti) suit injunctions and how EU entities with a nexus to Germany can counter Russian avoidance tactics in German courts, particularly in light of Russian anti-arbitration injunctions based on Article 248.1 of the Russian Arbitration Procedure Code. It highlights the existing tools within the German legal system available to affected parties, illustrating why Germany need not adopt Anglo-American-inspired anti-suit injunctions.

I. Introduction

Over the past months, there has been quite a number of cases in which Russian entities have resorted to local courts, asking the court to claim exclusive jurisdiction over a dispute with EU-domiciled opponents and applying for an anti-arbitration injunction on the basis of Article 248.1 of the Russian Arbitration Procedure Code – despite an obviously valid arbitration agreement. It may well be said that, unsurprisingly, in almost all of these cases, this led to a detrimental judgment for the involved EU party,[1] including the issuance of extremely high fines in case of non‑compliance with the injunction. It is needless to say that these state court proceedings do not adhere to the rule of law. This approach exposes EU‑parties to a high economic risk, especially when judgments are to be enforced in countries where the EU entity has assets, though enforcement within EU member states remains unlikely.

This article analyzes how EU entities with nexus to Germany may tackle these avoidance tactics of Russian parties before German courts. In particular, the article examines which tools the German legal system already provides for affected parties and whether there is an actual need for the German jurisprudence to introduce the concept of anti‑suit injunctions, as inspired by Anglo‑American legal systems. Perhaps surprisingly, the German legal system already seems to provide sufficient instruments parties can resort to in order to protect themselves and finally bring their case to arbitration.

II. Background

1. Articles 248.1, 248.2 Russian Arbitration Procedure Code

In response to EU sanctions, Russia introduced amendments to its Arbitration Procedure Code to protect “the rights of individuals and legal entities in connection with restrictive measures introduced by a foreign state (…) or state association” in 2020.[2] This legislation gives Russian state courts the power to claim exclusive competence over disputes involving “sanctioned” parties even if the parties have explicitly agreed to submit their disputes to arbitration (Article 248.1). The only requirement is that arbitration outside of Russia is “not feasible” due to the application of restrictive measures against one party by a foreign state, which must create an “obstacle to access to justice” for that party (Art. 284.1(4)). The Russian courts interpret this requirement very broadly, as recent decisions have shown. Accordingly, obstacles to access to justice are assumed if a party is subject to “sanctions” imposed by the state in which arbitral proceedings are meant to take place. Further, parties may apply for an anti‑arbitration injunction before Russian courts in these situations (Art. 248.2).

Thus, the Russian Arbitration Procedure Code not only gives Russian entities the possibility to avoid arbitration agreements and go to state court instead, but also to effectively fend off upcoming or pending arbitral proceedings. Considering that Russian courts, when issuing anti‑suit injunctions, have often imposed additional fines in case of non-compliance, those new instruments may have serious consequences for EU parties wanting to enforce a claim or an arbitral award in Russia.

The number of anti-arbitration injunctions based on Art. 248 issued by Russian courts has significantly risen in the past two years.[3] When rendering those injunctions, Russian courts frequently invoke allegedly sweeping restrictions of Russian entities even if the company in question is not directly sanctioned under EU law. In particular, Russian courts have been arguing that Russian parties would not obtain sufficient legal representation in the EU, resorting to the ban on providing legal advice to Russian companies under Article 5n(2) of Regulation (EU) No. 833/2014 (EU-Sanctions Regulation). It has been definitively confirmed, however, that these arguments lack any foundation, as demonstrated by the General Court of the European Union: In three very recent decisions, the General Court confirmed that the general prohibition on providing legal advice to the Russian entities or bodies established in Russia under the EU‑Sanctions Regulation does not extend to services provided in connection judicial, administrative, or arbitration proceedings, as laid down in the respective exception of Article 5n(5) of EU-Sanctions Regulation.[4]

2. The EU’s 14th Sanctions Package of June 2024

The EU responded to these developments in June 2024 by introducing provisions within a new sanctions package (Regulation (EU) 2024/1745 of 24 June 2024) setting out amendments to the EU Sanctions Regulation.[5] The sanctions package introduces a transaction ban prohibiting any direct and indirect transactions with persons and entities who have initiated claims before Russian courts based on Art. 248.1 Russian Arbitration Procedure Code, after these persons have been listed in Annex XLIII of the Regulation (Article 5ab). Further, the regulation provides EU entities with a new damage compensation mechanism in case arbitration agreements are undermined by sanctioned parties. Specifically, EU persons are entitled to damages against Russian persons or entities if (i) they initiated proceedings outside of the EU (ii) in connection with contracts or transactions affected, directly or indirectly, by EU sanctions and (iii) if no effective access to justice was provided to the EU person (Article 11a). Given that the regulation provides that entities are entitled to “any damages, including legal costs incurred by that person in a consequence of (these) claims”, damages may well include fines imposed by Russian state courts alongside with anti-arbitration injunctions. Thus, Article 11a of the EU‑Sanctions Regulation intends to provide an instrument for EU entities affected seeking to enforce damage claims within the EU. However, it is unclear how national courts of the different Member States will apply Article 11a. The regulation merely sets out the scope of the compensation, however, it does not contain any further provisions. In this regard, each Member State will apply its own civil code governing damage claims between private parties, which might lead to differences in enforcement in the relevant states.

III. German Law: Providing a powerful Toolkit

German law already provides a powerful toolkit, based both on substantive law in the German Civil Code (BGB) and on procedural law in the German Civil Procedure Code (ZPO). Essentially, a party affected by the above-described avoidance tactics has three options before a German court: (1) applying for injunctive relief under Sec. 826, 1004(1) Sentence 2 BGB analog, (2) seeking declaratory relief under Sec. 1032(2) ZPO, and (3) seeking damages. In view of the authors, these tools are sufficient to effectively protect affected parties in these scenarios, rendering the introduction of anti-(anti-) suit injunctions in the German legal system unnecessary.

1. Injunctive Relief under Sec. 826, 1004(1) Sentence 2 BGB analog

a) Background

First, it is important to note that the German legal system, whether in substantive or procedural law, generally does not recognize the technical term of anti-(anti-) suit injunctions or anti‑enforcement injunctions.[6] There is a general reluctance of German courts to issue such injunctions, irrespective of the exact legal basis on which such injunction may be based.[7] The reason for this is that under German law, there is no “right not be sued abroad”, i.e. in a non-competent forum or court outside of Germany. Further, the jurisdiction of the German courts is clearly defined and limited; German judges do not possess the power to issue discretionary decisions based on fairness (Ermessensentscheidungen nach Billigkeit).[8] However, in view of the authors, anti-(anti-) suit injunctions or anti‑enforcement injunctions issued by a German court inspired by the Anglo-American model are not necessary for a party to effectively defend itself against unjust proceedings or judgments outside of Germany. Instead, affected parties can apply for injunctive relief under Sec. 826, 1004(1) Sentence 2 BGB.

b) Substantive Basis: Sec. 826, 1004(1) Sentence 2 BGB analog

Sec. 826 BGB can form the substantive basis for injunctive relief against a Russian (“sanctioned”) party which initiated proceedings based on Art. 248.1 Russian Arbitration Procedure Code or which has already obtained a judgment from such proceedings. In fact, the injunctive relief comes somewhat close to what is considered an anti-suit injunction in Anglo‑American legal systems.

In general, Sec. 826 BGB provides relief by way of a tort claim in case there is an intentional damage inflicted in a manner offending common decency (vorsätzliche sittenwidrige Schädigung).[9] Although the intended relief provided in the wording of Sec. 826 BGB is compensation for damages in accordance with Sec. 249 et seq. BGB, it is widely acknowledged a person threatened by intentional damage may also file for injunctive relief in accordance with Sec. 826, 1004(1) Sentence 2 BGB analog.[10]

The requirements for a tort claim under Sec. 826 BGB are rather high. First, the opponent must inflict a damage, which is any adverse effect on the financial position of the other party or the impairment of a recognized interest.[11] Second, the act inflicting the damage must be immoral (i.e. offending common decency, (sittenwidrig)). According to the long‑standing definition established by the German Reichsgericht, a conduct is immoral when it goes against the of decency among all fair and just thinkers.[12] In addition, the 4th Senate of the German Federal Court of Justice requires a particular reprehensibility (Verwerflichkeit) of the conduct, which must be present in relation to the specific injured party. Reprehensibility may result from the objective pursued, the means used, the attitude revealed, or the consequences incurred.[13] Third, the party must act intentionally regarding the fact that the act causes harm to another person. It is required that intent refers to the facts giving rise to immorality, but not to immorality itself.[14]

What is crucial for the sanctions‑context is that Sec. 826 BGB also applies to damages inflicted based on procedural (immoral) conduct. In this regard, Sec. 826 BGB has played out already before the sanctions-context in different scenarios, for example in case of the immoral obtaining of a judgment (sittenwidrige Titelerschleichung). This is the case when a party has brought about either the decision itself or at least the entry into force of the decision in a manner offending common decency, for example by fraud or coercion.[15] In this case, the aggrieved party may apply to a state court to refrain from enforcing the decision under Sec. 826 BGB.[16] The same is true when a party tries to enforce a judgment that has not been obtained fraudulently but recognized as untenable and there are special circumstances making the exploitation of such a judgment appear immoral.[17] In all these cases, the legal validity of the judgment (Rechtskraft) may be exceptionally set aside. In this context, Sec. 826 BGB does not function as a damage claim but as a claim for injunctive relief.

Lastly, in case the initiating of a claim outside of Germany fulfills the requirements of Sec. 826 BGB, it has been recognized that a party may seek injunctive relief by way of an analogous application of Sec. 826, 1004(1) Sentence 2 BGB.[18] Thus, by way of invoking Sec. 826, 1004(1) Sentence 2 BGB, a party can defend itself against an unlawful act of a party who exploits a judicial measure in his favor, in an unlawful immoral manner of damage so that the party suffers damage by the other party obtaining an unlawful judgment or conducting an unlawful procedure.

Here, the damage inflicting conduct offending common decency would be applying for an anti‑arbitration injunction under Art. 248.2 Russian Arbitration Procedure Code before a Russian state court, knowing that the procedure before the state court will not be in accordance with the rule of law and will be detrimental for the opposing party (not the ignorance and violation of the arbitration agreement). Thus, the immoral conduct is using a supposed legal protection that has nothing to do with the rule of law.

It follows from the above analysis that what Anglo-American legal systems understand as anti-suit and anti-enforcement injunction is possible in German law by means of Sec. 826, 1004(1) Sentence 2 BGB on the substantive law level. The application to be submitted by a party in front of the German Court could be:

“To order the respondent to refrain from pursuing the state court proceedings in Russia and, in case there is already a rendered judgment, to refrain from enforcing this judgment against the claimant.”

Further, it is advisable to apply for a corresponding warning in accordance with Sec. 890(2) ZPO, namely that in case of a violation of the stipulated obligation, the court will impose on the defendant for each count of the violation, upon the creditor filing a corresponding petition, a coercive fine and, for the case that such payment cannot be obtained, to coercive detention or coercive detention of up to six (6) months, Sec. 890(1) ZPO.

c) Procedural Enforcement

In general, there are two ways to procedurally enforce the injunctive relief: by way of main proceedings (Hauptsacheverfahren) or via preliminary injunction under Sec. 935 ZPO.[19] With regards to the main proceedings, it would be an action for performance in the sense of a preliminary injunction (allgemeine Leistungsklage). However, these proceedings tend to be lengthy. A faster way would be applying for a preliminary injunction under Sec. 935 ZPO (injunction regarding the subject matter of the litigation). An advantage here is that the facts giving rise to a tort claim under Sec. 826 BGB only need to be demonstrated to the satisfaction of the court (Glaubhaftmachung), Sec 935, 936, 920(2), 294 ZPO, which is a lower burden compared to the general standard of proof during the main proceedings. In particular, for the sake of introducing evidence, it is also permitted to make a statutory declaration in lieu of an oath (eidestattliche Versicherung). Additionally, the court may grant an injunction on an ex parte basis.

d) Analysis

In sum, the German legal system does not need anti-suit injunctions as it already provides a useful toolkit in this context, injunctive relief by way of Sec. 826, 1004(1) Sentence 2 BGB analog. An important difference to anti-suit injunctions would be that a tort claim under Sec. 826 BGB is initiated to bind another party, whereas injunctions are intended to bind other courts or tribunals.

All in all, the BGB provides a practical and well-defined framework, outlining a clear path for navigating such legal matters in Germany: The authors believe that, despite the high legal threshold, there is a credible argument that a Russian party initiating proceedings under Article 248.1 of the Russian Arbitration Procedure Code – and thereby seeking legal protection through biased means that do not adhere to the rule of law, constitutes an intentional immoral conduct. This especially applies to abusive practices where a Russian party not designated on any EU sanctions list initiates proceedings under Article 248.1 of the Russian Arbitration Procedure Code under the pretext of being subject to restrictions of Article 5n of EU-Sanctions Regulation on the provision of legal advisory services allegedly restricting its access to legal remedies within the EU, which is clearly not the case. As such, it is not unlikely that German courts will find that such behavior fulfills the requirements of Sec. 826 BGB and issue injunctive relief on that basis.

2. Declaratory Relief under Sec. 1032(2) ZPO

a) Background

Another tool provided for in the German Civil Procedural Code is the declaratory relief under Sec. 1032(2) ZPO.[20] This provision is an addition to the UNCITRAL Model Law and serves as a unique mechanism within the German legal system, setting it apart from other jurisdictions.[21] According to the intent of the German legislator, the declaratory relief should precede the arbitration proceedings, safeguarding a due clarification of the question whether arbitration is admissible between the parties at an early stage of the dispute.[22] Under the provision, parties may apply for the determination of the (in‑)admissibility of arbitral proceedings until the arbitral tribunal is constituted. Upon application, the court will examine two questions: whether the arbitration agreement is valid and whether the dispute at hand is subject to it.[23]

b) Requirements

Relief under Sec. 1032(2) ZPO is extraterritorial, meaning that declaratory relief can be sought even if the arbitral seat is outside of Germany. This can be derived from Sec. 1025(2) ZPO.[24] From its mere wording, it may seem that Sec. 1025(2) in conjunction with Sec. 1032(2) ZPO stipulates a “worldwide and universal jurisdiction”. However, most scholars and courts agree that the international jurisdiction must be limited, requiring at least some nexus of the applying party to Germany to establish jurisdiction.[25] In that sense, it can be sufficient that the party is domiciled in Germany and that its financial situation and assets in its registered seat in Germany are affected by the Russian state court proceedings.[26] On the contrary, an application will be denied when the applicant has no assets in Germany and there is no indication that this circumstance will change in the future.[27] In that regard, future cases will show which circumstances are sufficient to establish international jurisdiction over an applicant.

Application for declaratory relief must be directly filed with a German higher regional court (Oberlandesgericht). In case the arbitral seat is in Germany, the court in the district of the seat of the arbitration will be competent, Sec. 1025(1), 1026, 1062(1) No. 2 ZPO. In case the arbitration is seated outside of Germany, it will be the Higher Regional Court in the district of which the party opposing the application has their seat or place of abode, or in which assets of the party opposing the application are located or in which the object being laid claim to by the request for arbitral proceedings or affected by the measure is located; or, by way of alternative jurisdiction (hilfsweise Zuständigkeit), the Higher Regional Court of Berlin (Kammergericht), Sec. 1025(2), 1026, 1062(2) ZPO.

In general, all parties who may be affected by the arbitration proceedings have the right to file an application.[28] A special interest in a declaratory judgment is not required (Feststellungsinteresse). The applicant only needs a general legal interest worthy of protection in determining the admissibility of arbitral proceedings (allgemeines Rechtsschutzinteresse). In particular, the application is already admissible prior to the formal initiation of the arbitral proceedings.[29]

Yet, the timeframe in which application can be filed is limited. Relief under Sec. 1032(2) ZPO can be sought only until the constitution of the arbitral tribunal. A later challenge or change of arbitrators is irrelevant.[30] The deciding point in time is the day the application of the party seeking relief arrives at the court. Until this day, the arbitral tribunal must not have been constituted.[31]

In sum, due to its extraterritoriality, Sec. 1032(2) ZPO is particularly relevant for parties lacking sufficient nexus to seek a common law anti-suit injunction, offering them an alternative route through the German legal system. Additionally, it complements the tools available for the cases at hand.

c) Recent Decisions of the Higher Regional Court Berlin (Kammergericht)

In fact, the Higher Regional Court Berlin (Kammergericht) granted declaratory relief in accordance with Sec. 1032(2) ZPO to EU entities facing anti-arbitration injunctions issued by Russian state courts on the basis of Art. 248.1, 248.2 Russian Arbitration Procedure Code in two recent cases.[32] In the 2023 decision, the court clarified that arbitration may be initiated even though the defendant is sanctioned under EU law, stating that Russian entities cannot unilaterally withdraw from arbitration agreements by referring to Russian national law. Instead, even despite sanctions, it must be ensured that a party which concluded an arbitration agreement with a Russian entity retains access to arbitral proceedings. During the proceedings, the Higher Regional Court had faced difficulties to serve the Russian party with process in accordance with Hague Convention. Several attempts to serve process were denied both by the Russian court as well as by the Russian Ministry of Justice. The Higher Regional Court Berlin finally conducted service of process via public service under Sec. 185 No. 3, 188 ZPO (öffentliche Zustellung). The public service was effected by posting a notice on the court’s notice board for one month, Sec. 186(2), 188 Sentence 1 ZPO.

The decisions show the current trend that EU member states increasingly defend themselves against unlawful behavior of other states.

d) Analysis: Determination of Admissibility of Arbitral Proceedings (and then what?)

These cases and the current situation raise one fundamental question: What practical effect does a declaratory judgment under Sec. 1032(2) ZPO have? Does it have a purely factual effect or does it have any more far-reaching legal effects? Can it affect the enforcement of a judgment obtained in Russia under unlawful conditions within the EU?

One can easily conclude that the original purpose of Sec. 1032(2) ZPO is not actually tailored to these cases. What is certain, however, is that the declaratory relief is binding for other German courts. As an example, it has prejudicial effect for annulment proceedings before German courts. Further, it facilitates the arbitration defense under Sec. 1032(1) ZPO when case a party initiates litigation before another German court.[33]

In view of the authors, a declaratory judgment under Sec. 1032(2) ZPO could serve as a sword against the enforcement of the Russian state court judgment in another state. The court at the place of enforcement might deny enforcement due to the opposing judgment of the German court determining that arbitral proceedings are admissible. At a minimum, the German court’s decision, particularly as issued by a higher regional court, could have a factual impact. Since decisions under Sec. 1032(2) ZPO are a fairly new phenomenon, in this regard, it remains to be seen how courts outside Germany respond to those declaratory judgments by German courts.

In light of its limited legal effect and the fact that it can only be invoked until the arbitral tribunal has been constituted, declaratory relief is a less useful tool compared to injunctive relief under Sec. 826, 1004(1) Sentence 2 BGB analog.

3. Damage Claims

Lastly, an EU-party may seek damages before a German court, either under Art. 11a EU‑Sanctions Regulation or, provided that the arbitration agreement is subject to German law, under Sec. 280(1) BGB.

Article 11a EU‑Sanctions Regulation refers to the fact that a sanctioned party initiates proceedings before a Russian national court knowing that the court proceeding does not adhere to the rule of law and does not provide effective access to justice to the EU party. In accordance with Article 11a of the Regulation, a party may recover any damages, including legal costs, incurred by the court proceedings outside the EU. This might well include inappropriately high fines issued in conjunction with anti-arbitration injunctions by a Russian court.

A damage claim under Sec. 280(1) BGB, on the other hand, can be based on the fact that the Russian party violates the arbitration agreement.[34] An action brought before a state court in disregard of a valid arbitration agreement covering the dispute arbitration agreement will be generally considered unlawful.[35] In this regard, a declaratory judgment under Sec. 1032(2) ZPO could also have prejudicial effects with regards to the question of whether there is a valid arbitration agreement between the parties. Damages may, in accordance with Sec. 249 et seq. BGB, include all costs incurred by the unlawful foreign proceeding, including the imposed fines. Continuing this thought, it might even be possible under German law that when the state court litigation is still pending, the party seeking to initiate arbitration might force the other party to withdraw its claim under Sec. 280(1), 249(1) BGB, which constitutes the principle of restoration of the status quo ante (Naturalrestitution), which, with regards to its effect, would come close to an anti‑suit injunction.

IV. Conclusion

The foregoing analysis shows that the German legal system as such, with its comprehensive array of procedural and substantive legal tools, does not require anti-(anti)-suit or anti-enforcement injunctions to effectively protect entities’ rights in sanctions-related disputes. Instead, it offers robust mechanisms that German courts can utilize to uphold these rights without resorting to such injunctions. Instead, the German legal system provides sufficient instruments courts may resort to in order to safeguard entities’ rights in sanction related disputes.

While declaratory relief under Sec. 1032(2) ZPO might be a unique tool to determine admissibility of arbitral proceedings, it is limited by its applicability only up until the constitution of the arbitral tribunal. Moreover, it remains less effective than injunctive relief due to its restricted flexibility and limited legal reach. In contrast, injunctive relief grounded in tort claims under Sec. 826 and Sec. 1004(1) Sentence 2 BGB provides a more powerful and adaptable tool for countering avoidance tactics by Russian parties, offering German courts a stronger and more comprehensive means of addressing such challenges.

[1] Similar considerations apply for non-EU entities where jurisdiction can be established in Germany.

[2] See Federal Law of 08.06.2020 No. 171-ФЗ “On Introducing Changes to the Arbitration Procedure Code of the Russian Federation (Protected) for the Protection of Rights of Individual and Legal Personalities State (Interstate) Institution of Foreign State or State Association and (or) Union”, See https://www.acerislaw.com/wp-content/uploads/2020/07/Anti-Russian-Sanctions-Law-English.pdf.

[3] See UniCredit Bank GmbH v RusChemAlliance LLC (RCA), judgment of 5 August 2023; Siemens Mobility v JSC Russian Railways, judgment of 18 October 2023 (Case No. 305-ES23-19401); Gazprom v JSC Naftogaz, judgment of 22 January 2024 (Case No. A56-124094/2023); Gazprom v Net4Gas, judgment of 6 March 2024 (Case No. A56-9516/2024); Deutsche Bank AG v. RusChemAlliance (RCA), judgment of 16 October 2024 (Case No. A56-90971/2024).

[4] General Court of the European Union Case Nos. T-797/22; T-798/22; T-828/22, Press Release of the General Court of 2 October 2024.

[5] Council Regulation (EU) 2024/1745 of 24 June 2024 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine, See https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202401745.

[6] Higher Regional Court München (Oberlandesgericht), Judgment of 12 December 2019 – 6 U 5042/19, GRUR 2020, 379 para. 54; Ehlgen in GRUR 2022, 537.

[7] M. Stürner in RabelsZ Bd. 71(2007), p. 601.

[8] R. Geminer in NJW 1991, 3072, 3074; Higher Regional Court Düsseldorf (Oberlandesgericht), Judgment of 17 June 2024 – 26 W 7/24 –, juris para. 34.

[9] Section 826 BGB reads: „A person who, in a manner offending common decency, intentionally inflicts damage on another person is liable to the other person to provide compensation for the damage. “

[10] Higher Regional Court of Saarbrücken (Saarländisches Oberlandesgericht), Judgment of 7 January 1987 – 1 U 165/84 –, juris. Section 1004(1) BGB reads: „If the ownership is interfered with by means other than removal or retention of possession, the owner may demand that the disturber remove the interference. If there is the concern that further interferences will ensue, the owner may seek a prohibitory injunction.”

[11] German Federal Court of Justice (Bundesgerichtshof), Judgment of 19 July 2004 – II ZR 402/02 –, juris.

[12] „Anstandsgefühl aller billig und gerecht Denkenden”, Reichsgericht, Judgment of 11 April 1901, RGZ 48, 114 (124).

[13] German Federal Court of Justice (Bundesgerichtshof), Judgment of 28 June 2016 – VI ZR 536/15 –, juris.

[14] German Federal Court of Justice (Bundesgerichtshof), Judgment of 21 April 2009 – VI ZR 304/07 –, juris.

[15] Braun/Heiß in Münchener Kommentar zur ZPO, 6th edition 2020, preliminary remarks on Sec. 578 ZPO, para. 12.

[16] German Federal Court of Justice (Bundesgerichtshof), Judgment of 25 May 1959 – II ZR 231/58 –, juris.

[17] German Federal Court of Justice (Bundesgerichtshof), Judgment of 21 June 1951 – III ZR 210/50 –, juris.

[18] Reichsgericht, Judgment of 3 March 1938, RGZ 157, 136, 140. M. Stürner in RabelsZ Bd. 71(2007), p. 602; Schack in: Internationales Zivilverfahrensrecht, 7th edition 2019, p. 323, Higher Regional Court Düsseldorf (Oberlandesgericht), Judgment of 17 June 2024 – 26 W 7/24 –, juris; Higher Regional Court Düsseldorf (Oberlandesgericht), Judgment of 18 Juli 1997 – 22 U 271/96, NJW-RR 1998, 283, 284.

[19] Section 935 ZPO reads: „Injunctions regarding the subject matter of the litigation are an available remedy given the concern that a change of the status quo might frustrate the realisation of the right enjoyed by a party, or might make its realisation significantly more difficult.”

[20] Sec. 1032(2) ZPO reads: „Until the arbitral tribunal has been formed, a request may be filed with the court to have it determine the admissibility or inadmissibility of arbitral proceedings.”

[21] See BT Drs 13/5274, p. 38.

[22] German Federal Court of Justice (Bundesgerichtshof), Decision of 27 July 2023 – I ZB 43/22 –, juris para. 77; Münch in: Münchener Kommentar zur ZPO, 6th edition 2022, Sec. 1032 para. 1.

[23] German Federal Court of Justice (Bundesgerichtshof), Decision of 19 July 2012 – III ZB 66/11, SchiedsVZ 2012, 281.

[24] Sec 1025(2) ZPO reads: „The provisions of sections 1032, 1033 and 1050 are to be applied also in those cases in which the place of arbitration is located abroad or has not yet been determined.”

[25] Münch in: Münchener Kommentar zur ZPO, 6th edition 2022, Sec. 1025 para. 21; Gerl in: SchiedsVZ 2024, 218, 222; Berlin (Kammergericht), Decision of 10 August 2006, 20 Sch 7/04 –, juris para. 97.

[26] Berlin (Kammergericht), Decision of 1 June 2023, 12 SchH 5/22 –, juris para. 22.

[27] Berlin (Kammergericht), Decision of 10 August 2006, 20 Sch 7/04 –, juris para. 96.

[28] Higher Regional Court Saarbrücken (Oberlandesgericht), Decision of 29 May 2008, Sch 2/08, SchiedsVZ 2008, 313, 315.

[29] Higher Regional Court Frankfurt am Main (Oberlandesgericht), Decision of 10 June 2014, SchiedsVZ 2015, 47.

[30] Voit in: Musielak/Voit ZPO, 21st ed. 2024, Sec. 1032 para. 10; Münch in: Münchener Kommentar zur ZPO, 6th edition 2022, Sec. 1032 para. 30.

[31] Voit in: Musielak/Voit ZPO, 21st ed. 2024, Sec. 1032 para. 10.

[32] Higher Regional Court Berlin (Kammergericht), Decision of 1 June 2023, 12 SchH 5/22 –, juris. The second decision dated 3 September 2024 decision is still unpublished.

[33] Voit in: Musielak/Voit ZPO, 21st ed. 2024, Sec. 1032 para. 13.

[34] That the violation of an arbitration agreement may lead to a claim under Sec. 280(1) BGB is recognized by most scholars, although the German Federal Court of Justice has not yet ruled on the issue. See however German Federal Court of Justice (Bundesgerichtshof), Judgment of 17 October 2019 – III ZR 42/19 – juris granting damages under Sec. 280(1) BGB regarding agreements as to the choice of venue (Sec. 38 ZPO), which, in the view of most scholars, can be applied to arbitration agreements. See for example: E. Peiffer and M. Weiler in: RIW 2020, 641, 648 et seq; J. Antomo in: EuZW 2020, 143, 150; M. Oehm and C. Jung-Arras in: BakerMcKenzie Kompass, Blogpost dated 11 November 2019, available at: https://www.bakermckenzie-kompass.de/2019/11/11/gerichtsstandsvereinbarung-schadensersatz-verlangen-wenn-am-falschen-gerichtsstand-geklagt-wird/.

[35] E. Peiffer and M. Weiler in: RIW 2020, 641, 648 et seq.

The following Gibson Dunn lawyers prepared this update: Dr. Finn Zeidler, Dr. Annekathrin Schmoll, Dr. Nikita Malevanny, and Charlotte Popp*.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, the leaders or members of the firm’s Judgment and Arbitral Award Enforcement, International Arbitration, or International Trade practice groups, or the authors in Germany:

Frankfurt:
Dr. Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com)
Dr. Annekathrin Schmoll (+49 69 247 411 533, aschmoll@gibsondunn.com)

Munich:
Dr. Nikita Malevanny (+49 89 189 33 224, nmalevanny@gibsondunn.com)

*Charlotte Popp, a law clerk in the Frankfurt office, is not yet admitted to practice law.

This update provides an overview of key class action-related developments during the third quarter of 2024 (July to September).

Table of Contents

Part I reviews three decisions rejecting certification based on Rule 23(b)(3)’s predominance requirement;

Part II summarizes a Fifth Circuit decision addressing how questions of standing fit within the Rule 23 inquiry;

Part III summarizes the Seventh Circuit’s application of Bristol-Myers Squibb to Fair Labor Standards Act collective actions, deepening an existing circuit split; and

Part IV highlights decisions from three circuits analyzing formation and assent to online arbitration agreements.

I. The Eighth, Ninth, and Eleventh Circuits Reject Class Certification on the Ground That Individualized Issues Would Predominate

This past quarter, three courts of appeals enforced Rule 23’s rigorous predominance requirement, clarifying that no class can be certified when adjudicating class members’ entitlement to relief and available defenses would require resolving individualized issues.

In Carter v. City of Montgomery, 108 F.4th 1334 (11th Cir. 2024), Montgomery residents brought a putative class action in connection with the city’s practice of jailing certain traffic offenders for failing to pay their fines. The Eleventh Circuit affirmed the denial of class certification for lack of predominance, holding that each class member’s claim would ultimately depend on resolving individualized issues, including whether she (1) was individually denied certain legal rights, (2) was on probation, or (3) had a history of payments or missed payments. Id.at 1345-46.

Similarly, in Black Lives Matter v. City of Los Angeles, 113 F.4th 1249 (9th Cir. 2024), the Ninth Circuit reversed certification of classes alleging claims for excessive force and arrests for protected activity, holding that the district court did not conduct a sufficiently rigorous analysis of whether common issues would predominate. The court of appeals held that individual inquiries—including how any injury was caused, whether the challenged conduct was reasonable under the circumstances, the specific conditions of each arrest, and whether officers had probable cause to arrest—would be required, making it unlikely that the case could be resolved via classwide evidence. Id. at 1259-61.

And in Ford v. TD Ameritrade, 115 F.4th 854 (8th Cir. 2024), the Eighth Circuit reversed certification of a class of investors who transacted through TD Ameritrade and who claimed that TD Ameritrade violated its “duty of best execution,” which requires brokers to “use reasonable efforts to maximize the economic benefit of the client in each transaction.” Id. at 858. Although the commission investors paid was a flat rate, the court of appeals held that was insufficient to establish common questions about economic loss because of individualized issues about what the best price reasonably available would be under the circumstances, the existence of alternative brokers, the fees of those brokers, and the prices those brokers could have obtained for each trade. Id. at 861.

II. The Fifth Circuit Addresses Whether Named Plaintiffs Have Standing to Litigate Class Actions on Behalf of Absent Class Members with Different Theories of Injury

In July, the Fifth Circuit addressed an issue subject to a longstanding circuit split: whether a named plaintiff has standing to litigate absent class members’ injuries that are similar, but “not precisely analogous,” to those suffered by the named plaintiff. Chavez v. Plan Benefit Servs., Inc., 108 F.4th 297, 307 (5th Cir. 2024).

In Chavez, the three named plaintiffs were employed by the same company, which disbursed their retirement and healthcare plan benefits through two trusts managed by the defendant. The plaintiffs alleged that the defendant mismanaged employer-contributed funds based on the plaintiffs’ enrollment in certain benefit plans. The district court certified classes consisting of “all participants and beneficiaries of plans that provide employee benefits through” each trust. Id. at 305. On appeal, the defendant argued that the plaintiffs lacked “standing to challenge fees that they were never subjected to, in plans that they never participated in, relating to services that they never received, from employers for whom they never worked.” Id. at 306.

The Fifth Circuit outlined two analytical approaches to standing arguments based on a “disjuncture” between the injury alleged by a named plaintiff and the injuries purportedly suffered by the broader class. Under the “class certification approach” favored by the First, Third, and Sixth Circuits, a court decides whether a named plaintiff has standing to bring her own claims and, if so, addresses any “disjuncture” between the plaintiff’s and the absent class members’ injuries as part of the Rule 23 analysis. See, e.g., In re Asacol Antitrust Litig., 907 F.3d 42, 49 (1st Cir. 2018); Boley v. Universal Health Servs., Inc., 36 F.4th 124, 133 (3d Cir. 2022); Fallick v. Nationwide Mut. Ins. Co., 162 F.3d 410, 424 (6th Cir. 1998). Under the “standing approach” taken in other circuits, a court “simply find[s] that the class representative lacks standing to pursue the class members’ claims because she did not suffer their injuries.” Chavez, 108 F.4th at 307. Courts of appeals have applied this approach with varied degrees of strictness, with the Second and Eleventh Circuits applying the most rigorous formulations. See, e.g., Barrows v. Becerra, 24 F.4th 116, 129 (2d Cir. 2022); Fox v. Ritz-Carlton Hotel Co., LLC, 977 F.3d 1039, 1046 (11th Cir. 2020). The Ninth Circuit has followed both the class certification approach and a more lenient version of the standing approach. Compare B.K. ex rel. Tinsley v. Snyder, 922 F.3d 957, 967 (9th Cir. 2019) (class certification approach), with Armstrong v. Davis, 275 F.3d 849, 867 (9th Cir. 2001) (lenient standing approach).

The Fifth Circuit in Chavez declined to adopt either approach. Chavez, 108 F.4th at 314. The court of appeals held that the named plaintiffs had standing for their own claims because the defendant’s alleged mismanagement of the trusts devalued their benefits, and thus any doubts about their adequacy as class representatives could be resolved under Rule 23(a). Id. at 312. The court also held that the plaintiffs’ alleged injuries were not “so unique” that they warranted “an isolated remedy that would be inappropriate if extended to other class members,” nor did their injuries implicate “a significantly different set of concerns” from the other class members. According to the court, the plaintiffs therefore satisfied even the strictest formulations of the “standing approach.” Id. at 312-13.

The Chavez defendant has filed a petition for certiorari seeking U.S. Supreme Court review (No. 24-426), and the petition remains pending.

III. The Seventh Circuit Joins the Third, Sixth, and Eighth Circuits, in Holding That Courts Need Personal Jurisdiction Over Each Plaintiff Joining a FLSA Collective Action

The Seventh Circuit in August reversed a district court’s decision holding that a court overseeing a collective action under the Fair Labor Standards Act need not secure personal jurisdiction over each plaintiff’s claim individually (whether representative or opt-in). Luna Vanegas v. Signet Builders, Inc., 113 F.4th 718, 724 (7th Cir. 2024). In Luna Vanegas, the court of appeals applied the holding in Bristol-Myers Squibb Co. v. Superior Court, 582 U.S. 255 (2017), which requires a “claim-by-claim personal jurisdiction analysis” in mass actions. Id. at 265. The Seventh Circuit explained that an FLSA collective action is like a mass action because it is a “consolidation of individual cases, brought by individual plaintiffs.” Luna Vanegas, 113 F.4th at 725. As the court of appeal detailed, that distinction makes mass and FLSA collective actions, in which the individuals seeking recovery participate as parties, different from class actions under Rule 23, in which representative plaintiffs litigate the claims of absent, non-party class members. Id. at 724. The court thus joined the Third, Sixth, and Eighth Circuits in holding that FLSA collective actions, like mass actions, require courts to have personal jurisdiction over each plaintiff. Id. at 724.

The Seventh Circuit’s decision adds to an existing, if lopsided, circuit split: only the First Circuit has declined to follow that line of decisions and instead has held that courts need not have personal jurisdiction over every opt-in plaintiff in FLSA cases. Waters v. Day & Zimmerman NPS, Inc., 23 F.4th 84, 93 (1st Cir. 2022).

IV. Multiple Circuits Address What Constitutes Reasonable Notice of and Assent to Online Arbitration Agreements

This past quarter, the First, Fourth, and Seventh Circuits all addressed what constitutes reasonable notice of and assent to online arbitration agreements, clarifying that litigants can be bound to arbitrate based on their actions in signing up for and logging into websites in view of conspicuous disclosures of terms requiring arbitration.

In Toth v. Everly Well, Inc., — F.4th —, 2024 WL 428467 (1st Cir. Sept. 25, 2024), the First Circuit affirmed an order granting a motion to compel arbitration, reasoning that the account-creation page the plaintiff used in connection with an at-home lab test gave her proper notice of the contract and that the defendant secured meaningful assent by having the plaintiff click a checkbox indicating that she read and accepted certain terms and conditions before creating her account. Id. at *5-7. Similarly, in Domer v. Menard, Inc., 116 F.4th 686 (7th Cir. 2024), the Seventh Circuit affirmed an order granting a motion to compel arbitration, holding that the website operator of an online paint company provided reasonably conspicuous notice of the terms to which the plaintiff would be bound when he ordered paint through the defendant’s website. The court held that the plaintiff assented to the arbitration provision by clicking “submit order” because the reasonably conspicuous notice—advising consumers that “[b]y submitting [their] order [they] accept [the] Terms” that were hyperlinked for easy review—would have put a reasonable user on inquiry notice of the terms. Id. at 696-97. The Seventh Circuit also expressly rejected the plaintiff’s argument that there had to be standalone “I agree” language to manifest assent. Id. at 700.

Conversely, in Marshall v. Georgetown Memorial Hospital, 112 F.4th 211 (4th Cir. 2024), the Fourth Circuit affirmed the denial of the defendant’s motion to compel arbitration for failure to show formation of an agreement to arbitrate. There, the plaintiff filed a putative class action alleging disability discrimination after the defendant didn’t hire her following a failed physical agility test. The court held that the defendant’s website did not offer reasonable notice of the agreement to arbitrate for two main reasons: (1) although the plaintiff could have scrolled down to see the arbitration agreement at the bottom of the webpage, she was not required to do so to submit her employment application, and (2) even though the webpage contained an arbitration notice, it informed the plaintiff only that her application would be subject to South Carolina arbitration law, not that it was subject to specific contract terms that could be reviewed by scrolling down or clicking a hyperlink. Id. at 221. The Fourth Circuit also agreed with the district court that the plaintiff did not assent to arbitration because she only had to click a “Submit” button at the top of the webpage. As the court explained, “The word ‘submit,’ in its ordinary meaning,” does not “manifest assent to an agreement or acceptance of contract terms,” and there was no “notice near the relevant button to explain that by clicking ‘submit,’ the applicant is agreeing to any terms and conditions or that she would be bound to an arbitration agreement.” Id. at 223.

The following Gibson Dunn lawyers contributed to this update: Kory Hines, Nasim Khansari, Milene Minassians, Matt Aidan Getz, Wesley Sze, Lauren Blas, Bradley Hamburger, Kahn Scolnick, and Christopher Chorba.

Gibson Dunn attorneys are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions, Litigation, or Appellate and Constitutional Law practice groups, or any of the following lawyers:

Theodore J. Boutrous, Jr. – Los Angeles (+1 213.229.7000, tboutrous@gibsondunn.com)

Christopher Chorba – Co-Chair, Class Actions Practice Group, Los Angeles
(+1 213.229.7396, cchorba@gibsondunn.com)

Theane Evangelis – Co-Chair, Litigation Practice Group, Los Angeles
(+1 213.229.7726, tevangelis@gibsondunn.com)

Lauren R. Goldman – Co-Chair, Technology Litigation Practice Group, New York
(+1 212.351.2375, lgoldman@gibsondunn.com)

Kahn A. Scolnick – Co-Chair, Class Actions Practice Group, Los Angeles
(+1 213.229.7656, kscolnick@gibsondunn.com)

Bradley J. Hamburger – Los Angeles (+1 213.229.7658, bhamburger@gibsondunn.com)

Michael Holecek – Los Angeles (+1 213.229.7018, mholecek@gibsondunn.com)

Lauren M. Blas – Los Angeles (+1 213.229.7503, lblas@gibsondunn.com)

From the Derivatives Practice Group: The SEC announced its 2025 examination priorities, which include continued focus on security-based swap dealers and the potential for examinations of security-based swap execution facilities in 2025. The CFTC will hold an open meeting on Tuesday, October 29.

New Developments

CFTC to Hold a Commission Open Meeting October 29. On October 22, the CFTC announced that it will an open meeting Tuesday, Oct. 29 at 10:00 a.m. – 4:30 p.m. (EDT) at the CFTC’s Washington, D.C. headquarters. Members of the public can attend the meeting in person, listen by phone, or view a live stream at CFTC.gov. The CFTC will consider the following: (1) Final Rule – Operational Resilience Framework for Futures Commission Merchants, Swap Dealers, and Major Swap Participants; (2) Final Rule – Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations, (3) Final Rule – Derivatives Clearing Organizations Recovery and Orderly Wind-down Plans; Information for Resolution Planning; (4) Commission Fall 2024 Unified Agenda Submission; and (5) CFTC Executive and Supervisor Compensation Structures. [NEW]
SEC Division of Examinations Announces 2025 Priorities. On October 21, the SEC’s Division of Examinations released its 2025 examination priorities. The Division of Examinations indicated that it will continue to focus on whether security-based swap dealers (“SBSDs”) have implemented policies and procedures related to compliance with security-based swap rules generally, including whether they are meeting their obligations under Regulation SBSR to accurately report security-based swap transactions to security-based swap data repositories and, where applicable, whether they are complying with relevant conditions in SEC orders governing substituted compliance. For other SBSDs, the Division of Examinations said that it may focus on SBSDs’ practices with respect to applicable capital, margin, and segregation requirements and risk management. The Division of Examinations also indicated that it expects to assess whether SBSDs have taken corrective action to address issues identified in prior examinations. Additionally, the Division of Examinations advised that it may begin conducting examinations of registered security-based swap execution facilities in late fiscal year 2025. [NEW]
CFTC Staff Issues Supplemental Letter Regarding No-Action Position Related to Reporting and Recordkeeping Requirements for Fully Collateralized Binary Options. On October 4, the CFTC’s Division of Market Oversight and the Division of Clearing and Risk announced they have taken a no-action position regarding swap data reporting and recordkeeping regulations in response to a request from KalshiEX LLC, a designated contract market, and Kalshi Klear LLC, a derivatives clearing organization, to modify CFTC Letter No. 21-11 to cover transactions cleared through Kalshi Klear LLC. According to the announcement, the divisions will not recommend the CFTC initiate an enforcement action against KalshiEX LLC, Kalshi Klear LLC, or their participants for failure to comply with certain swap-related recordkeeping requirements and for failure to report to swap data repositories data associated with binary option transactions executed on or subject to the rules of KalshiEX LLC and cleared through Kalshi Klear LLC, subject to the terms and conditions in the no-action letter.

New Developments Outside the U.S.

ESMA Responds to the Commission Rejection of Certain MiCA Technical Standards. On October 16, ESMA responded to the European Commission proposal to amend the Markets in crypto-assets Regulation (“MiCA”) Regulatory Technical Standards (“RTS”). In their response, ESMA emphasized the importance of the policy objectives behind the initial proposal.
ESAs Respond to the European Commission’s Rejection of the Technical Standards on Registers of Information under the Digital Operational Resilience Act and Call for Swift Adoption. On October 15, the European Supervisory Authorities (“ESAs”) issued an Opinion on the European Commission’s rejection of the draft Implementing Technical Standards (“ITS”) on the registers of information under the Digital Operational Resilience Act. The ESAs raise concerns over the impacts and practicalities of the proposed EC changes to the draft ITS on the registers of information in relation to financial entities’ contractual arrangements with ICT third-party service providers.
ESMA, ECB and EC Announce Next Steps for the Transition to T+1 Governance. On October 15, ESMA, the European Commission and the European Central Bank announced the next steps to support the preparations towards a transition to T+1 in a Joint Statement. ESMA stressed in the Joint Statement that they believe a coordinated approach across Europe is desirable, with efforts to reach consensus on the timing of any move to T+1.
ESMA Publishes Its First Annual Report on EU Carbon Markets. On October 7, ESMA published the 2024 EU Carbon Markets report, providing details and insights into the functioning of the EU Emissions Trading System market. The report indicates that prices in the EU ETS have declined since the beginning of 2023; emission allowance auctions remain significantly concentrated, with 10 participants buying 90% of auctioned volumes, reflecting a preference by most EU ETS operators to source allowances from financial intermediaries; and the vast majority of emission allowance trading in secondary markets takes place through derivatives, reflecting the annual EU ETS compliance cycle where non-financial sector firms hold long positions (for compliance purposes) while banks and investment firms hold short positions. The report builds on ESMA’s 2022 report on the trading of emission allowances, mandated in the context of rising energy prices and a three-fold increase of emission allowances’ prices in 2021.

New Industry-Led Developments

Central Database of Reporting Entity Contact Details for EU and UK EMIR. On October 17, ISDA produced a central database of contact details to assist members resolve reconciliation breaks with counterparties for EU and UK European Market Infrastructure Regulation (“EMIR”) reporting. The central database was created by contributing firms’ submissions and includes details such as entity names, legal entity identifiers and reporting contact emails.
ISDA, GFXD respond to ESMA on Order Execution Policies. On October 16, ISDA and the Global FX Division of the Global Financial Markets Association responded to a consultation paper from ESMA on “Technical Standards specifying the criteria for establishing and assessing the effectiveness of investment firms’ order execution policies.” In the response, the associations discuss the requirement for pre-selected execution venues, mandatory consumption of consolidated tapes and categorization of financial instruments under the Markets in Financial Instruments Regulation, among other issues.
ISDA Submits Paper to ESMA on MIFIR Post-Trade Transparency. On October 8, ISDA submitted a paper to ESMA, in which it outlined its views on the scope of OTC derivatives post-trade transparency in the revised MiFIR. The paper outlines ISDA’s view on the treatment of certain interest rate derivatives, index credit default swaps and securitized derivatives. ISDA indicated that it is anticipating the publication of ESMA’s consultation paper on the revised regulatory technical standards, covering OTC derivatives, later in 2024 or in the first quarter of 2025.

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Derivatives practice group, or the following practice leaders and authors:

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, jsteiner@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Adam Lapidus – New York (212.351.3869, alapidus@gibsondunn.com )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

William R. Hallatt , Hong Kong (+852 2214 3836, whallatt@gibsondunn.com )

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki , New York (212.351.4028, mtakagaki@gibsondunn.com )

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

This year has reflected a dichotomy in SEC Enforcement. On one hand, the Enforcement Division has continued to pursue an aggressive agenda pressing expansive legal theories, increasing sanctions and broad rulemaking.

At the same time, certain Commissioners have publicly dissented from the some of the Division’s more aggressive positions, and the SEC has suffered a number of notable defeats in the courts, all of which have potentially broad implications for the Enforcement program.

Added to all of that is the potential for a shift enforcement focus with the upcoming change in administration, regardless of the outcome of the Presidential election.

Gibson Dunn attorneys, including two former SEC regional directors, will cover the latest hot topics in SEC Enforcement, including:

Implications of recent court decisions
Latest trends in SEC Enforcement
Strategies for mitigating risk of investigations and enforcement actions
Looking ahead to 2025 and beyond

PANELISTS:

Mark K. Schonfeld is a litigation partner in the New York office of Gibson, Dunn & Crutcher and co-chair of Gibson Dunn’s Securities Enforcement Practice Group. He is also a member of the firm’s Crisis Management, Accounting Firm Advisory and Defense and White Collar Defense and Investigations Practice Groups. Mark’s practice focuses on the representation of financial institutions, public companies, hedge funds, accounting firms and private equity firms in investigations conducted by the Securities and Exchange Commission (SEC), Department of Justice (DOJ), States Attorneys General, Financial Industry Regulatory Authority (FINRA) and other regulatory organizations. Mark also conducts internal investigations and counsels clients on compliance and corporate governance matters.

Prior to joining Gibson Dunn, Mark concluded a 12-year career with the SEC, the last four years as the Director of the New York Regional Office, the largest of the SEC’s regional offices. Mark oversaw professional staff of nearly 400 enforcement attorneys, accountants, investigators and compliance examiners engaged in the investigation and prosecution of enforcement actions and the performance of compliance inspections of more than 4,000 SEC registered financial institutions in the region. Mark led the New York Office through one of the most vibrant and rapidly evolving periods in the history of the SEC and securities law enforcement and brought many of SEC’s major landmark cases dealing with complex accounting fraud, mutual fund trading, hedge fund abuses, foreign bribery, insider trading and market manipulation. He is admitted to practice law in the State of New York.

David Woodcock is a partner in the Dallas and Washington offices of Gibson, Dunn & Crutcher. He is a co-chair of the firm’s Securities Enforcement Practice Group, and a member of the firm’s Securities Regulation and Corporate Governance, Accounting Firm Advisory and Defense; White Collar Defense and Investigations; Energy, Regulation and Litigation; Securities Litigation; and Oil and Gas Practice Groups. His practice focuses on internal investigations and SEC defense, with a particular emphasis on accounting and financial reporting, corporate compliance, and audit/special committee investigations. Mr. Woodcock regularly advises clients on corporate securities and governance, the role of the board, shareholder activism, and ESG-related issues, including the energy transition, climate disclosures, enterprise risk management practices, cybersecurity, and related U.S./European regulations. He also counsels investment advisors and private equity funds in the context of SEC examinations and investigations, ESG matters, and portfolio due diligence and compliance. David is admitted to practice law in the District of Columbia and the State of Texas.

Tina Samanta is a partner in the New York office of Gibson, Dunn & Crutcher. She is a member of the firm’s Litigation, Securities Enforcement, White Collar Defense and Investigations, and Securities Litigation Practice Groups. Tina’s practice focuses on representing financial institutions, corporations, and individuals in sensitive and high-stakes securities-related investigations and litigation. She has represented clients in investigations conducted by the Securities and Exchange Commission, the Department of Justice, the Financial Industry Regulatory Authority, the New York Attorney General’s Office, and numerous other regulatory authorities. She has also represented a diverse range of clients in all phases of litigation, including trial, before federal and state courts across the country. Tina is admitted to practice in the State of New York, as well as in the United States District Courts for the Southern and Eastern Districts of New York. She is a Co-Chair of the New York Office Women’s Committee.

MCLE CREDIT INFORMATION:

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For the first time, the U.S. Environmental Protection Agency (EPA) has announced its intention to pursue a coordinated “strategic civil-criminal enforcement policy,” with targeted enforcement priorities that include mitigating climate change, addressing exposure to PFAS, and reducing air pollution in Environmental Justice communities. Working hand-in-hand with the Department of Justice’s Environmental Crimes Section (ECS), EPA has indicated that it will leverage the full array of compliance monitoring and enforcement tools to address violations of environmental laws and pursue new and innovative enforcement theories and remedies. Understanding these policies and trends, and critically examining recent criminal case studies, will help regulated parties anticipate, avoid, and defend against environmental criminal enforcement.

Please join our panelists from Gibson Dunn’s White Collar Defense and Investigations and Environmental Litigation and Mass Tort practice groups as they discuss the current environmental criminal enforcement landscape, analyze lessons learned from recent criminal resolutions of note, and anticipate potential changes in environmental criminal enforcement as a result of the 2024 presidential election.

PANELISTS:

Michael S. Diamant is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where he is a member of the White Collar Defense and Investigations Practice Group and serves on the firm’s Finance Committee. His practice focuses on white collar criminal defense, internal investigations, and corporate compliance. He has represented clients in an array of matters, including accounting and securities fraud, antitrust violations, and environmental crimes, before law enforcement and regulators, including the U.S. Department of Justice and the Securities and Exchange Commission. Among Michael’s environmental crime representations are investigations involving diesel emissions and related criminal issues. Michael also has managed numerous internal investigations for publicly traded corporations and conducted fieldwork in nineteen different countries on five continents. He is admitted to practice in the District of Columbia and the Commonwealth of Virginia.

Rachel Levick is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where she practices in the firm’s Litigation Department and is a member of the Environmental Litigation and Mass Tort and Environmental, Social and Governance (ESG) Practice Groups. Rachel represents companies across multiple industries in a wide range of federal and state litigation, agency enforcement actions, and administrative rulemaking proceedings. She works with her clients to assess compliance, navigate enforcement actions, and defend against litigation under a variety of environmental statutes and programs, including the Clean Air Act (CAA), the Toxic Substances Control Act (TSCA), the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA/Superfund). Rachel was recognized by Law360 as a 2023 Environmental “Rising Star,” and in the 2023 Lawdragon 500 X – The Next Generation edition. She was also named by Best Lawyers as “One to Watch” in Environmental Litigation for 2022 and 2023. Rachel is admitted to practice law in Maryland and the District of Columbia, and before the United States Court of Appeals for the District of Columbia Circuit and the United States District Court for the District of Columbia.

Stacie B. Fletcher is a litigation partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and is co-chair of the Environmental Litigation and Mass Tort Practice Group. Stacie has handled a wide variety of cases under federal and state environmental statutes, including serving as lead counsel on numerous high-profile enforcement defense matters with U.S. EPA and state agencies. Stacie has been recognized by Chambers USA as a leading environmental lawyer in the District of Columbia each year since 2021. According to Chambers USA, clients note that Stacie is “[h]ighly skilled in federal and state environmental enforcement matters,” “has a tremendous grasp of environmental issues and she is dialed in on what is going on at the agencies,” and is “thorough, extraordinarily attentive to detail and great at managing relationships with parties on both sides of a matter.” Stacie is admitted to practice in the Commonwealth of Virginia and the District of Columbia.

David Fotouhi is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where he practices in the firm’s Litigation Department and is a member of the firm’s Environmental Litigation and Mass Tort practice group. David previously served as Acting General Counsel and Principal Deputy General Counsel at the U.S. Environmental Protection Agency (EPA). David combines his expertise in administrative and environmental law with his litigation experience and a deep understanding of EPA’s inner workings to represent the firm’s clients in environmental enforcement actions, regulatory challenges, and other environmental litigation. He has provided legal counsel and managed litigation under every major environmental statute, including the Clean Air Act (CAA), Clean Water Act (CWA), Resource Conservation and Recovery Act (RCRA), and Toxic Substances Control Act (TSCA). According to Chambers USA, which recognized David as a leading environmental lawyer in the District of Columbia, clients praised David as a “sophisticated lawyer” with “in-depth knowledge of the dynamics of a case and its interaction with the authorities” and “unique experience and expertise from his work at the EPA.” The National Law Journal recognized David as a “Trailblazer” in environmental and energy law, and Law360 named David a “Rising Star” in environmental law for his work “on game-changing regulations and litigation.” David is a member of the bars of the District of Columbia and Texas.

MCLE CREDIT INFORMATION:

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1 hour.

Application for approval is pending with the Colorado, Illinois, Texas, Virginia, and Washington State Bars.

Gibson Dunn’s Workplace DEI Task Force aims to help our clients develop creative, practical, and lawful approaches to accomplish their DEI objectives following the Supreme Court’s decision in SFFA v. Harvard. Prior issues of our DEI Task Force Update can be found in our DEI Resource Center. Should you have questions about developments in this space or about your own DEI programs, please do not hesitate to reach out to any member of our DEI Task Force or the authors of this Update (listed below).

Key Developments:

On October 15, 2024, Do No Harm filed a complaint against the University of Washington School of Medicine and various school officials, challenging the university’s networking directory that permits medical students who are “Black, Indigenous, or People of Color” to access a database of BIPOC physicians. Do No Harm claims that the directory improperly excludes white students and white physicians in violation of the 14th Amendment, Title VI, and the Affordable Care Act. Do No Harm is seeking a declaratory judgment, permanent injunction, and reasonable costs and expenses of the litigation.

On October 15, 2024, the American Alliance for Equal Rights (AAER) filed a Section 1981 complaint against Jopwell, a recruiting and job-posting platform that is allegedly open to “Black, Latinx, and Native American students and professionals.” The complaint alleges that the platform includes companies like Google and Blackrock and exists to create a “pipeline” of diverse talent for top employers. AAER filed suit on behalf of an anonymous college student who claims to meet all the nonracial eligibility criteria but says he could not access the full Jopwell platform after he identified himself as white and Asian during the registration process. AAER is seeking an injunction, declaratory judgment, and attorney’s fees and costs.

On October 15, 2024, U.S. District Court Judge Reed O’Connor of the Northern District of Texas ordered supplemental briefing on the parties’ request to approve a plea agreement in U.S. v. The Boeing Company, 4:21-cr-00005-O (N.D. Tex. Oct. 15, 2024), a case related to the 737 Max. The agreement provides that the government will appoint an independent compliance monitor. In his order, Judge O’Connor questioned a provision allowing the government to select a monitor with input from Boeing and “in keeping with the Department’s commitment to diversity and inclusion.” Judge O’Connor asked the government to elaborate on the definitions of “diversity” and “inclusion,” and noted that both the DOJ and Boeing have publicly acknowledged their commitment to advance DEI. In his order, Judge O’Connor stated that Boeing has “aspirations” to “advance equity and diversity” that “include racial quotas,” and that Boeing “ties executive compensation to achieving DEI goals.” Judge O’Connor ordered the government and Boeing to submit supplemental briefing describing how the diversity provision in the plea agreement promotes safety and compliance efforts, what role Boeing’s internal focus on DEI plays in its compliance and ethics obligations, and how the government and Boeing will use the diversity provision to appoint the monitor.

On October 22, 2024, AAER filed a complaint under Section 1983 against Jay Pritzker, the Governor of Illinois, and Kevin Huber, the Chairman of the Illinois Student Assistance Commission, alleging that the state’s Minority Teachers of Illinois Scholarship Program violates the Equal Protection Clause by excluding non-minority students from the application and selection processes. AAER alleges the scholarship program, which defines “minority students” as “American Indian or Alaska Native, Asian, Black or African American, Hispanic or Latino, or Native Hawaiian or Other Pacific Islander,” is unconstitutional because the exclusion of potential applicants who are not racial minorities is not narrowly tailored to a compelling governmental interest. AAER is seeking an injunction, declaratory judgment, and attorney’s fees and costs.

Media Coverage and Commentary:

Below is a selection of recent media coverage and commentary on these issues:

Wall Street Journal, “Companies are Scrapping or Rolling Back DEI Grants” (October 11): Ruth Simon and Theo Francis of The Wall Street Journal report that large companies are shrinking or winding down grant and other aid programs previously designed to help Black- and Hispanic-owned small businesses. While numerous aid programs had launched or expanded in 2020, many are now pulling back amid high-profile public pressure campaigns and legal threats. Of 60+ small-business grant programs that aid racial and ethnic minorities, the authors identified more than 40% that no longer exist, and another 27% that no longer consider race or ethnicity when making awards. Simon and Francis report that the change has been most prominent for programs supported by large companies. Simon and Francis say that the funding gap may hit Black- and Hispanic-owned businesses especially hard, as data from the Federal Reserve shows that only a third of Black- or Hispanic-owned small businesses received the full amount of financing they applied for, compared to more than half of white business owners.
Washington Post, “Racism was called a health threat. Then came the DEI backlash.” (October 11): The Washington Post’s Akilah Johnson reports that university researchers are being targeted for their work researching and teaching about the nexus between racism and health. Johnson says that these researchers, including at Tulane University School of Tropical Health and Medicine and University of Minnesota, initially experienced an outpouring of support for anti-racism research centers and programs in 2020, as racism was declared a public health threat. However, anti-DEI activists have criticized those same programs, including filing civil rights complaints targeted at programs such as the Minority Stroke Program and Minority Men’s Health Center at the Cleveland Clinic.
ABC News, “When DEI is gone: A look at the fallout at one Texas university” (October 13): Kiara Alfonseca of ABC News reports on the impact of SB 17, a piece of legislation in Texas that bars DEI offices and programming at public higher education institutions. Alfonseca reports that DEI offices at University of Texas-Austin have been closed, staff have been terminated, and previously available resources have been discontinued. Texas Governor Greg Abbott previously stated the legislation was intended to prevent universities from using DEI offices to “advance political agendas and exclude conservative viewpoints on college campuses.” In response to SB 17, Alfonseca says that UT Austin terminated over 60 employees and eliminated targeted programming, such as support for undocumented students. According to Alfonseca, student organizations at UT Austin are trying to fill the gap and offer resources to their fellow Longhorns.
The New York Times Magazine, “The University of Michigan Doubled Down on DEI. What Went Wrong?” (October 16): Nicholas Confessore of The New York Times reports on the frustration among students and faculty over the University of Michigan’s extensive DEI initiatives. Confessore interviewed more than 60 individuals connected with the university to understand the impact of its decade-long quarter-billion-dollar investment in DEI academic training, programming, and incorporation across disciplines, which it now calls its “DEI 1.0” strategy. Confessore says that the campus community criticized these efforts as lacking depth and failing to address specific issues, such as the low enrollment of Black students (just 5%), in a state where 14% of residents are Black. Students and faculty also expressed that the programming seems to create a framework for grievances rather than fostering genuine interaction and understanding among different groups. Nonetheless, amidst a national backlash against DEI initiatives, Confessore reports that Michigan is pushing forward with its “DEI 2.0” strategy, announced a year ago and instituted when school began this August.
AP News, “Members of Congress call on companies to retain DEI programs as court cases grind on” (October 15): Cathy Bussewitz of AP News reports that a group of 49 House Democrats sent a letter to the leaders of the Fortune 1000, urging the businesses to retain their DEI programs in the face of recent DEI backlash. Bussewitz says that the letter was sent in response to several companies recently pulling back on their DEI initiatives in response to pressure from anti-DEI activists. According to Bussewitz, corporations are also concerned about the growing number of reverse discrimination suits, and will be closely watching the Supreme Court’s deliberations in Ames v. Ohio Department of Youth Services, where the plaintiff claims she was subject to employment discrimination because she is heterosexual. “The Supreme Court’s interest in that case signals some potential that they’re going to lower the bar,” according to Jason Schwartz, co-chair of Gibson Dunn’s Labor & Employment practice, who also notes that “[w]e already see a really massive uptick in these reverse discrimination cases.”

Case Updates:

Below is a list of updates in new and pending cases:

1. Contracting claims under Section 1981, the U.S. Constitution, and other statutes:

Faculty, Alumni, and Students Opposed to Racial Preferences (FASORP) v. Northwestern University, No. 1:24-cv-05558 (N.D. Ill. 2024): A nonprofit advocacy group filed suit against Northwestern University, alleging that the university is violating Title VI, Title IX, and Section 1981 by considering race and sex in law school faculty hiring decisions. The suit also claims that student editors of the Northwestern University Law Review give discriminatory preference to “women, racial minorities, homosexuals, and transgender people when selecting their members and editors” and when selecting articles to publish. FASORP is seeking to enjoin Northwestern from (1) considering race, sex, sexual orientation, or gender identity in the appointment, promotion, retention, or compensation of its law school faculty or the selection of articles, editors, and members of the Northwestern University Law Review, and (2) soliciting any information about the race, sex, sexual orientation, or gender identity of law school faculty candidates or applicants for the Law Review. FASORP also asked the court to order Northwestern to establish a new policy for selecting law school faculty and law review articles, editors, and members, and to appoint a court monitor to oversee all related decisions.
- Latest update: On September 30, 2024, FASORP filed an amended complaint, adding detailed allegations of plagiarism among candidates who were selected for Law School faculty positions and more comprehensive allegations of the Law Review’s discrimination, which include details on the editor selection process based on personal statements, an article selection process based on author identity, and plagiarism in published articles. FASORP also added detail about three unnamed members who were allegedly wronged by the university. Finally, FASORP added a demand that the court enjoin Northwestern University from accepting any federal funds until it has ceased all alleged discriminatory practices.

2. Employment discrimination and related claims:

Bradley, et al. v. Gannett Co. Inc., 1:23-cv-01100 (E.D. Va. 2023): On August 18, 2023, white plaintiffs sued Gannett over its alleged “Reverse Race Discrimination Policy,” claiming Gannett’s expressed commitment to having its staff demographics reflect the communities it covers violates Section 1981. On August 21, 2024, the court granted Gannett’s motion to dismiss, holding that Gannett’s diversity policy alone did not establish disparate treatment, since it did not define any specific goals or quotas. The court also held that each of the named plaintiffs had failed to state a claim for individual relief pursuant to Section 1981, and dismissed the class allegations because the class was not ascertainable and lacked commonality. On September 19, 2024, the plaintiffs filed a second amended complaint.
- Latest update: On October 3, 2024, Gannett moved to dismiss the second amended complaint for failure to state a claim and a moved to dismiss or strike the class allegations. Gannett argued that because the plaintiffs did not amend any of their dismissed class allegations, the proposed class could not be certified for the reasons previously determined by the Court. Furthermore, the company argued that the plaintiffs’ allegations were again conclusory and simply recited the elements of the claim without providing any details about the allegedly discriminatory policy. The court set a hearing for November 6, 2024.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Blaine Evanson, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Zoë Klein, Mollie Reiss, Jenna Voronov, Alana Bevan, Marquan Robertson, Janice Jiang, Elizabeth Penava, Skylar Drefcinski, Mary Lindsay Krebs, David Offit, Lauren Meyer, Kameron Mitchell, Maura Carey, Jayee Malwankar and Heather Skrabak.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment practice group, or the following practice leaders and authors:

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group
Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, mdenerstein@gibsondunn.com)

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, zswilliams@gibsondunn.com)

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, msenger@gibsondunn.com)

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, bevanson@gibsondunn.com)

We are pleased to provide you with Gibson Dunn’s ESG update covering the following key developments during September 2024. Please click on the links below for further details.

I. GLOBAL

International Financial Reporting Standards (“IFRS”) Foundation launches guide to help companies voluntarily apply International Sustainability Standards Board (“ISSB”) sustainability reporting standards

On September 25, 2024, the IFRS Foundation released a new guide to support companies that plan to voluntarily adopt the ISSB’s sustainability and climate disclosure standards, which have already been adopted by jurisdictions representing nearly 55% of global GDP and more than 40% of global market capitalization.

The new guide, titled Voluntarily Applying ISSB Standards—A Guide for Preparers, is designed to support companies that operate in jurisdictions that do not yet require application of the ISSB standards, but who nevertheless wish to voluntarily report under them, either in response to investor demand or in preparation for global requirements. The IFRS Foundation notes that the guide helps support implementation by highlighting the following: (i) transition relief that allows companies to use a phased-in approach to the ISSB standards, (ii) proportionality mechanisms to address “the range of capabilities and circumstances of companies,” and (iii) resources from the IFRS Foundation to help companies transition from other frameworks and standards (such as the Task Force on Climate-related Financial Disclosure and Sustainability Accounting Standards Board standards) to the ISSB standards.

International Energy Agency (“IEA”) publishes guidance on implementing COP28 energy goals

In connection with Climate Week NYC, the IEA published From Taking Stock to Taking Action on September 24, 2024. This report explores the actions needed to fully implement the global energy goals agreed on at the COP28 conference, as well as the risks of failing to do so. These goals include a 2050 net zero emissions pledge for the energy industry, a transition away from fossil fuels, and an intention to triple renewable energy capacity by 2030, among others.

24% of investors in Vanguard’s proxy choice program chose ESG-focused voting policy

On September 17, 2024, Vanguard released data from its 2024 Investor Choice voting pilot program, reporting that 24% of participating investors opted for an ESG-focused voting policy. Vanguard’s pilot program allows investors to select from a range of voting policy options and covers equity funds comprising more than $100 billion in assets. Of the 40,000 participants for the 2024 proxy season, 24.4% selected the Third Party ESG Policy (which will vote in accordance with Glass Lewis’s ESG Voting Policy recommendations), 43% selected the Vanguard-Advised Funds Policy (which will vote in accordance with the guidelines of each of Vanguard’s funds), 30.3% selected the Company Board-Aligned Policy (which will vote in accordance with the recommendations of each company’s board of directors), and 2.3% selected the “Not Voting” Policy (which will leave all shares unvoted). Vanguard stated that the Investor Choice pilot is meant to “enabl[e] interested individual investors to more fully align their investment portfolios with their personal preferences in order to advance their long-term financial goals” and that Vanguard is “committed to continuing to empower investors by expanding access to the proxy voting process.”

II. UNITED KINGDOM

Financial Conduct Authority (“FCA”) offers temporary flexibility for firms to comply with its “naming and marketing” sustainability rules

On September 9, 2024, the FCA published a statement setting out temporary measures for firms to comply with its naming and marketing sustainability rules. The FCA noted that in-scope firms “should now be taking all reasonable steps to ensure compliance with the ‘naming and marketing’ and disclosure rules,” which come into effect starting on December 2, 2024. The FCA also noted that it is taking longer than expected for some firms to make the necessary changes. As a result, the FCA is providing further support and flexibility to firms that may need additional time to make the required changes. Until 5 pm on April 2, 2025, firms have limited temporary flexibility to comply with the naming and marketing rules in relation to a sustainability product that is a UK-authorised investment fund. The flexibility only applies to firms that comply with certain criteria outlined in the FCA’s statement. Regarding the authorization of mergers, wind-ups or terminations before December 2, 2024, the FCA has announced that it intends to take a “supportive, proportionate and outcomes-based approach in these circumstances.” Firms are requested to contact their supervisor or usual supervisory contact at the FCA to discuss on a case-by-case basis.

Financial Reporting Council (“FRC”) publishes 2024 Annual Review of Corporate Reporting

On September 24, 2024, the FRC published its Annual Review of Corporate Reporting with its findings from monitoring UK companies’ annual report and accounts and its expectations for the upcoming reporting season. With respect to sustainability reporting, the FRC noted that “there were comparatively few compliance issues in premium-listed companies’ reporting against the Taskforce for Climate-related Financial Disclosures (TCFD) framework.” The FRC also wrote to companies that did not report against TCFD despite being in scope of the relevant Listing Rules or provided inadequate disclosures, amongst other reasons. This winter (2024/2025), the FRC also plans to publish results of a thematic review of climate-related financial disclosures reporting under the Companies Act 2006, which will cover a selection of large private and AIM companies with a year-end between August and December 2023.

Competition and Markets Authority (“CMA”) publishes greenwashing guidance for the fashion industry and stakeholders

On September 18, 2024, the CMA published a compliance guide for fashion retail businesses explaining how they can follow the Green Claims Code when making environmental claims. According to the guidance, all businesses in the clothes, footwear, fashion accessories and related services (such as packaging, delivery and returns) supply chain are responsible for ensuring their environmental claims are accurate and substantiated. Given the guidance, the CMA expects there will be no excuse for using misleading claims, and that failure to ensure practices are aligned with consumer protection rules could carry a risk under the Digital Markets Competition and Consumers Act (of up to 10% of global turnover), once the Act’s enforcement provisions take effect in 2025. The publication follows a review in 2022 by the CMA into the fashion industry.

UK government transfers the National Grid Electricity System Operator (“ESO”) into public ownership in £630m acquisition

On September 13, 2024, the UK Government announced its decision to acquire the ESO from National Grid, transitioning it into public ownership. From October 1, 2024, the entity will be reestablished as the National Energy System Operator (the “NESO”) and will assume responsibility for the comprehensive planning of Britain’s gas and electricity networks. For the purposes of the Energy Act 2023, NESO will be designated independent from the Government as the licensed Independent System Operator and Planner for the UK, taking on all existing functions of the ESO, under the oversight of Ofgem. This follows the joint consultation (which closed on May 9, 2024) by Ofgem and the Department for Energy Security & Net Zero on the structure and licensing of NESO, which noted that NESO will take on key operational roles in electricity, as well as planning roles in gas and hydrogen. This aligns with the UK Government’s commitment to decarbonise the power grid by 2030.

Britain ends its dependence on coal for electricity

On September 30, 2024, the UK’s last remaining coal-fired power station at Ratcliffe-on-Soar closed, making Britain the first G7 nation to have ended its reliance on coal for electricity production. The closure follows the Government’s announcement in 2015 that all coal-fired power stations would close by 2025, a date which was later brought forward to 2024 in advance of the UK hosting COP26 in Glasgow. The phase-out of coal is a significant milestone in the UK’s transition plans.

New Water (Special Measures) Bill to give regulators enforcement powers against water companies damaging the environment

On September 4, 2024, the Water (Special Measures) Bill was introduced by the UK Government in the House of Lords, proposing changes to the regulation of private companies providing water and sewerage services in England and Wales, including by requiring water companies to publish annual pollution incident reduction plans, providing information on emergency sewage overflows, introducing new automatic penalties for offences committed by water companies and giving regulators new powers to recover costs for enforcement work. Alongside the bill, the government also published explanatory notes, a delegated powers memorandum and a policy statement supporting the bill.

III. EUROPE

Lawsuit against European Commission demands stricter emissions reductions by 2030

On August 27, 2024, Climate Action Network Europe and the Global Legal Action Network submitted their final written statements before the oral hearing in a lawsuit against the EU Commission. The NGOs challenge the legality of Europe’s emissions allowances for the period leading up to 2030, arguing that the EU Commission failed to adequately assess and establish suitable emission reduction targets and did not properly evaluate the impacts of climate change on fundamental rights. It is also alleged that the emission reductions in the EU’s Fit for 55 package are inadequate to meet the 1.5°C target of the Paris Agreement.

If the lawsuit is successful, this could lead to stricter emission targets, raising carbon allowance costs in the EU’s Emissions Trading System and impacting covered sectors and importers under the Carbon Border Adjustment Mechanism. Despite early challenges in court, a recent European Court of Human Rights ruling recognizing climate protection as a human right may bolster the NGOs’ case.

European Commission proposes carbon footprint labels for flights

On September 25, 2024, the European Commission published a statement announcing the launch of a consultation on a new EU Flight Emissions Label (“FEL”) initiative to provide passengers with standardized information about the carbon footprint of their flights. The initiative is part of the broader ReFuelEU Aviation regulations, adopted in 2023, which seek to decarbonize the aviation sector. The FEL aims to establish a standardized and regulated approach for calculating flight emissions by considering factors like aircraft type, average passenger count, cargo weight, and the type of fuel used. Beginning in 2025, airlines operating flights within or departing from the EU will be able to voluntarily participate in this initiative.

Italy launches greenwashing investigation into Shein, global fashion retailer, over environmental claims

On September 25, 2024, the Italian Competition Authority announced its investigation into Shein’s website operator, Infinite Styles Services CO. Limited, over potentially misleading advertising claims regarding the environmental sustainability of Shein-branded clothing. The inquiry focuses on claims made in various sections of the website. The Italian Authority alleges that Shein attempts to project an image of sustainable production and commercial practices through vague and potentially misleading statements, aiming to capitalize on increased consumer sensitivity to environmental issues. This investigation aligns with broader actions taken by EU regulators and lawmakers to combat greenwashing and protect consumers from misleading sustainability claims.

European Commission launches infringement procedures against 17 member states over Corporate Sustainability Reporting Directive (“CSRD”) transposition delays

On September 26, 2024, the European Commission initiated infringement procedures against 17 EU member states (Belgium, Czechia, Germany, Estonia, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia, and Finland) for failing to fully transpose the CSRD into their national laws. Although the CSRD took effect in early 2024, with the first reports due in 2025 for large public-interest companies, the mentioned countries missed the July 6, 2024 deadline for transposition.

In its published statement, the Commission emphasized that without full transposition, harmonized sustainability reporting across the EU would be impossible to achieve, which could potentially hinder informed investment decisions based on companies’ sustainability performance.

Under the EU’s infringement procedures, these 17 member states have two months to respond and complete transposition before the Commission may escalate the process (ultimately referring the matter to the European Court of Justice to impose penalties). Notably, on July 25, 2024, the Commission had already initiated an infringement procedure against Sweden, which delayed the implementation of the CSRD by six months, requiring Swedish companies to report only for fiscal years starting after July 1, 2024. In a related move, the Commission also launched infringement actions against 26 member states for failing to implement provisions under the Renewable Energy Directive, which aims for renewable energy to account for 42.5% of the EU’s total energy consumption by 2030.

IV. NORTH AMERICA

California Governor signs amendments to climate-related legislation

On September 27, 2024, Governor Gavin Newsom signed Senate Bill (“SB”) 219, enacting amendments to SB 253 (requiring reporting of greenhouse gas emissions) and SB 261 (requiring reporting of climate-related financial risks and the measures taken to reduce and adapt to them). The amendments provide the California Air Resources Board (“CARB”) an additional six months to publish regulations related to SB 253, extending the deadline to July 1, 2025 from January 1, 2025, but do not alter the deadline for companies to comply with these regulations. SB 219 also allows emissions reports under SB 253 to be consolidated at the parent company level (which was already allowed under SB 261) and makes other changes to CARB’s responsibilities described in our client alert. For further details on SB 253 and SB 261, please see our client alert and blog post.

U.S. Senate bill would prevent retirement plan managers from using ESG factors in investment decisions

On September 26, 2024, U.S. Senator Bill Cassidy (R-LA) introduced the Restoring Integrity in Fiduciary Act, legislation that would prevent fiduciaries from considering ESG factors in investment decisions. In a press release, Senator Cassidy stated, “[a]sset managers should prioritize helping Americans achieve the best return for their retirement, not funneling their clients’ money to fund a left-wing political agenda.” The bill would amend the Employee Retirement Income Security Act (“ERISA”) to require fiduciaries to make investment decisions based only on “pecuniary factors.”

Senator Cassidy’s bill responds to the U.S. Department of Labor’s November 2022 rules that permit fiduciaries of ERISA-governed retirement plans to consider ESG in the selection process for investments. In March 2024, Congressman Greg Murphy introduced a similar bill to prevent retirement plan trustees from considering ESG factors when making investment decisions (described in our client alert).

California sues Exxon Mobil Corporation (“Exxon”) over claims about plastic recycling

On September 23, 2024, the State of California brought a lawsuit against Exxon alleging the company made false and deceptive claims that recycling could solve the problem of plastic waste pollution. The lawsuit alleges Exxon knew the technology for recycling plastic was inadequate to process the amount of plastic waste the company produced, yet it continued to promote recycling as the solution to the plastic pollution crisis. Among other relief, California is seeking to compel Exxon to establish and contribute to an abatement fund to address plastic pollution in the state. In the press release announcing the lawsuit, the California Attorney General notes that this lawsuit follows a two-year investigation into the fossil fuel and petrochemical industries’ role in the plastic pollution crisis and is aimed to “protect California’s natural resources from further pollution, impairment, and destruction, as well as to prevent [Exxon] from making any further false or misleading statements about plastics recycling and its plastics operations.”

Toyota entities accused of misrepresenting machinery emissions compliance

A complaint was filed in a California federal district court against Toyota Industries Corporation (“Toyota”) and related entities on September 22, 2024 for allegedly misrepresenting the true emissions levels of its engines used in forklifts and other construction machinery. According to the class action lawsuit, Toyota represented these vehicles were “clean-burning, low-emissions, high-performance, and sustainable,” and plaintiffs purchased the vehicles assuming they met regulatory emissions standards. However, the complaint alleges that the vehicles emitted more emissions than were reasonably expected and did not comply with emissions standards.

Microsoft Corporation (“Microsoft”) and Constellation announce renewable energy agreement and restart of Three Mile Island

On September 20, 2024, Constellation announced it had signed a 20-year power purchase agreement with Microsoft. Constellation intends to restart Three Mile Island Unit 1 (under the new name “Crane Clean Energy Center”) by 2028, and Microsoft will purchase the resulting energy to help match the power used for Microsoft’s data centers. The project is expected to require significant financial investment in addition to U.S. Nuclear Regulatory Commission approval and state and local permitting.

U.S. Commodity Futures Trading Commission (“CFTC”) issues final guidance regarding the listing of voluntary carbon credit derivative contracts

As summarized in our alert, on September 20, 2024, the CFTC issued final guidance regarding the listing of voluntary carbon credit derivative contracts on CFTC-regulated exchanges.

U.S. Securities and Exchange Commission (“SEC”) finds investment advisory firm misled investors with its data-driven “biblically responsible investing” strategy

On September 19, 2024, the SEC charged investment advisory firm Inspire Investing with making misleading statements about using data-driven methodology to avoid investing in companies whose business practices did not align with biblical values. The firm represented that its methodology would score companies based on their business practices and not invest in companies that participate in certain enumerated activities or products. But according to the SEC order, as a result of a failure to adopt written policies and procedures governing its investment process, Inspire Investing inconsistently applied its investment criteria and had invested in companies that engaged in business practices that did not align with its investment criteria, failing to comply with its representations about its investment strategy.

U.S. House of Representatives passes anti-ESG bills

On September 19, 2024, the House passed the Prioritizing Economic Growth Over Woke Policies Act, H.R. 4790, by a vote of 215-203. The Act contains a series of anti-ESG bills aimed at curbing corporate ESG initiatives, signaling Republicans’ 2025 legislative priorities. Among other things, the package includes measures to (i) limit the SEC’s authority to impose new ESG disclosure requirements, including by requiring that rulemakings with disclosure obligations be grounded in materiality, (ii) require the SEC to report on the effects of the E.U.’s directives on corporate sustainability on companies, consumers, and investors, (iii) allow companies to exclude shareholder proposals with subject matters that are “environmental, social, or political (or a similar subject matter)” without regard to whether the proposal relates to a significant social policy issue, and (iv) require the SEC to study the financial and other incentives of shareholder proposals, proxy advisory firms, and the proxy process.

Ten U.S. State Governors Form Coalition for Energy Choice

On September 17, 2024, Louisiana Governor Jeff Landry and New Hampshire Governor Chris Sununu announced the formation of The Governors’ Coalition for Energy Choice with eight other senators. The Coalition is intended to help address high energy costs and inflation and to support the formulation of smart energy policies. Its goals are to “ensure continued energy choice, minimize permitting and other regulatory barriers, limit expensive energy mandates, focus on affordability and reliability of energy infrastructure, and coordinate to positively manage energy resources and the environment.”

SEC disbands Climate and ESG Task Force

The SEC recently disclosed that in the past few months, it disbanded the Climate and ESG Task Force in the Division of Enforcement. Formed in 2021 and reportedly composed of 21 lawyers, it pursued companies and investment advisors for three years for ESG-related fraud. The Task Force was involved in cases against numerous companies related to ESG matters, including publicly listed companies, financial institutions, and investment advisors. The expertise from the Task Force is now said to reside more generally within the Division of Enforcement.

V. APAC

Australian court fines Vanguard over misleading sustainable investing claims

On September 25, 2024, an Australian federal court imposed a record A$12.9 million (USD$8.9 million) penalty on Vanguard Investments Australia for misleading claims about its ESG fund, the Vanguard Ethically Conscious Global Aggregate Bond Index Fund. The fund, launched in 2018, claimed to exclude companies with operations in fossil fuels and other controversial sectors. However, the Australian Securities & Investments Commission found that ESG research was not conducted on a significant portion of bond issuers, leading to the finding that the fund had investments in fossil fuel-related companies. Vanguard self-reported the issue in 2021 and admitted to making false claims. The court ruled that Vanguard’s misrepresentations were serious, affecting the fund’s main distinguishing feature and benefiting the company.

Singapore Exchange to start incorporating IFRS Sustainability Disclosure Standards

On September 24, 2024, Singapore Exchange’s market regulator, SGX RegCo, updated its sustainability reporting rules for listed companies. The update follows the announcement earlier this year by the government of Singapore that it will implement mandatory climate-related reporting requirements for listed and large non-listed companies. The changes include delaying mandatory Scope 3 emissions reporting for smaller issuers, following concerns about evolving measurement and reporting methodologies. Larger issuers are expected to begin Scope 3 reporting for fiscal year 2026. Scope 1 and 2 emissions reporting will be required for fiscal year 2025. The new rules also mandate other sustainability report disclosures beginning for fiscal year 2026, covering ESG factors, policies, practices, and governance.

Malaysia launches National Sustainability Reporting Framework

On September 24, 2024, Malaysia introduced a National Sustainability Reporting Framework (“NSRF”) to support its goal of reducing carbon intensity by 45% by 2030 and achieving net-zero emissions by 2050. Developed by the Advisory Committee on Sustainability Reporting, the NSRF employs ISSB Standards, specifically IFRS S1 and IFRS S2, as its baseline for sustainability disclosures. The NSRF aims to enable companies to provide reliable and comparable sustainability information, enhancing transparency regarding climate-related risks and sustainability practices. Implementation will be on a phased basis, allowing companies to adopt the standards based on their readiness, though they can also use other complementary frameworks.

Hong Kong proposes IFRS-aligned sustainability reporting standards

On September 16, 2024, the Hong Kong Institute of Certified Public Accountants (“HKICPA”) released new Exposure Drafts for its HKFRS Sustainability Disclosure Standards (the HKFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and HKFRS S2 Climate-related Disclosures), ( proposing full convergence with the ISSB standards. The convergence aims to enhance global comparability and meet investors’ needs for reliable sustainability information and is expected to take effect on August 1, 2025. The HKICPA is seeking public comments on the Exposure Drafts until October 27.

Hong Kong and Dubai strengthen collaboration on sustainable finance

On September 16, 2024, the Hong Kong Monetary Authority (“HKMA”) and Dubai Financial Services Authority (“DFSA”) concluded their first Joint Climate Finance Conference in Hong Kong. The event, themed “Building a Net-Zero Asia – Middle East Corridor,” attracted over 240 participants from various financial sectors across Asia and the Middle East. The conference addressed transition finance demands and explored investment opportunities for the global net-zero transition. Notably, the HKMA and DFSA signed a Memorandum of Understanding to enhance their partnership in sustainable finance, promoting cross-border dialogue, knowledge sharing, and joint research.

New Japan low carbon hydrogen development fund launched

On September 12, 2024, the Japan Hydrogen Fund, a new initiative dedicated to developing a low-carbon hydrogen value chain, was launched by a consortium of Japanese financial and industrial companies along with French energy giant, TotalEnergies. The fund has secured USD$400 million in initial commitments from investors including Toyota Motor Corporation, Iwatani Corporation, major Japanese banks, and other corporations. This launch aligns with Japan’s 2050 carbon neutrality goal and its 2030 interim targets for emissions reduction and energy mix transformation. The fund aims to support the development of a hydrogen supply chain both in Japan and globally by providing funding to hydrogen-related companies and projects.

Australia passes mandatory climate reporting law

On September 9, 2024, Australia’s House of Representatives passed the Treasury Laws Amendment bill, introducing mandatory climate-related reporting requirements for large and medium-sized companies. The bill, which follows Senate approval in August, requires disclosures on climate-related risks and opportunities and greenhouse gas emissions across the value chain. Reporting will begin in January 2025 for the largest companies, with a phased approach for smaller entities, with reporting requirements varying depending on size. The legislation aligns with ISSB standards and includes a one-year grace period for Scope 3 reporting. Additionally, the House passed a law establishing the Net Zero Economy Authority, tasked with guiding Australia’s transition to net zero emissions. This includes reskilling workers and coordinating with industry and investors on transformation opportunities.

Please let us know if there are other topics that you would be interested in seeing covered in future editions of the monthly update.

Warmest regards,
Susy Bullock
Elizabeth Ising
Perlette M. Jura
Ronald Kirk
Michelle M. Kirschner
Michael K. Murphy

Chairs, Environmental, Social and Governance Practice Group, Gibson Dunn & Crutcher LLP

For further information about any of the topics discussed herein, please contact the ESG Practice Group Chairs or contributors, or the Gibson Dunn attorney with whom you regularly work.

The following Gibson Dunn lawyers prepared this update: Lauren Assaf-Holmes, Spencer Bankhead, Mitasha Chandok, Becky Chung, Martin Coombes, Ferdinand Fromholzer, William Hallatt, Kriti Hannon*, Elizabeth Ising, Vanessa Ludwig, Cynthia Mabry, Babette Milz*, Johannes Reul, Emily Rumble, Meghan Sherley, Helena Silewicz*, and Katherine Tomsett.

*Kriti Hannon, an associate in Orange County; Babette Milz, a research assistant in Munich; and Helena Silewicz, a trainee solicitor in London, are not admitted to practice law.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Environmental, Social and Governance practice group:

Environmental, Social and Governance (ESG):

Susy Bullock – London (+44 20 7071 4283, sbullock@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
Perlette M. Jura – Los Angeles (+1 213.229.7121, pjura@gibsondunn.com)
Ronald Kirk – Dallas (+1 214.698.3295, rkirk@gibsondunn.com)
Michelle Kirschner – London (+44 20 7071 4212, mkirschner@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, mmurphy@gibsondunn.com)

This update summarizes key takeaways and considerations from this year’s developments, including the trends from our review of nearly 100 companies’ public AB 1305 reports.

Last year, California adopted a trio of laws requiring certain public and private companies to provide climate-related disclosures. As a quick refresher:

Climate Corporate Data Accountability Act (Senate Bill 253). For U.S. companies doing business in California with annual revenues over $1 billion, Senate Bill (“SB”) 253 requires them to report their greenhouse gas (“GHG”) emissions annually beginning in 2026 (for Scope 1 and 2 GHG emissions) and 2027 (for Scope 3 emissions).
Greenhouse Gases: Climate-related Financial Risk (Senate Bill 261). For U.S. companies doing business in California with annual revenues over $500 million, SB 261 effectively requires them to begin biennial reporting in 2025 regarding their “climate-related financial risks” and adopted measures to reduce or adapt to them.
Voluntary Carbon Market Disclosures (Assembly Bill 1305). For companies that make certain environmental claims, adopt particular environmental goals, or purchase, use, market, or sell voluntary carbon offsets in California, Assembly Bill (“AB”) 1305 requires annual website disclosure providing support for those claims, goals, or offsets.

More background SB 253 and 261 is detailed here, and AB 1305 is further discussed here.

The California Legislature and Governor Gavin Newsom proposed varied amendments to these laws in 2024, and certain largely administrative amendments have now been signed into law. Litigation challenging SB 253 and 261 is also ongoing (as described here), though the laws have not been stayed while the litigation proceeds. As a result, companies are now facing a mostly unchanged—though uncertain—reporting landscape in the state.

To help companies prepare for reporting under these laws (including SB 253 and SB 261, if they ultimately go into effect), we have summarized below our key takeaways and considerations from this year’s developments, including the trends from our review of nearly 100 companies’ public AB 1305 reports.

SB 253 & 261: Amendments Adopted (But Little Changed For Reporting Companies).

In June 2024, Governor Newsom proposed a trailer bill that would have delayed the initial reporting deadlines for SB 253 and 261 by two years, from 2026 to 2028, and provided the California Air Resources Board (“CARB”) more time to adopt implementing regulations (delaying the deadline from January 1, 2025 to January 1, 2027), among other changes. These proposals echoed the Governor’s previously expressed concerns over the bills’ financial impacts on covered companies and timing of the original reporting deadlines.

The California Legislature did not adopt the trailer bill and, rejecting any reporting delay for companies, instead proposed its own amendments (SB 219), which the Governor signed into law on September 27. SB 219 did not remove the SB 253 or 261 filing fee payments, but did remove the requirement that the payments be made at the time the reports are disclosed or submitted. It also makes clear that companies can report at the parent level on a consolidated basis for both reports (this was previously clear only for SB 261 reporting).

The remainder of SB 219’s changes impact CARB, including:

For SB 253:
- extending CARB’s deadline to adopt implementing regulations by six months from January 1, 2025 to July 1, 2025;
- removing the requirement that CARB engage an “emissions reporting organization” to receive companies’ GHG emission reports and to develop a digital platform for receiving and disclosing emissions reports, among other responsibilities. Instead, CARB could opt to receive the disclosure directly and develop such a platform;
- granting CARB greater discretion to set a schedule for Scope 3 GHG emissions reporting, rather than requiring that the deadline be no later than 180 days after Scope 1 and 2 GHG emissions are disclosed;
- removing the requirement that CARB review and assess GHG accounting and reporting standards every five years after 2033; and
- extending CARB’s deadline to publish the emissions reports it receives from 30 days to 90 days.
For SB 261:
- removing the requirement that CARB contract with a climate reporting organization for certain activities or publications on the climate-related risks that have been reported.

With Additional Guidance Almost A Year Away, What Can Reporting Companies Do Now. Although the fate of SB 253 and 261 is unclear given the pending litigation, companies can consider the following steps, as appropriate depending on their circumstances, as they prepare for potential SB 253 and 261 reporting:

consulting with counsel to determine whether they would be required to report under SB 253 or 261. Where companies’ current revenue levels or activities do not meet the thresholds, but are very close, monitor acquisition activity and any anticipated increases in revenue that may push the company into scope in future years;
if there is no current emissions reporting process, consulting with internal stakeholders and external advisors to estimate the time for developing such a process;
if there is a current emissions reporting process, review the current process and controls to assess differences between the company’s current methodology and the Greenhouse Gas Protocol and what updates may need to be made;
reviewing the time required to obtain limited assurance on Scope 1 and 2 GHG emissions data. If limited assurance is not currently being obtained, conduct a gap analysis to determine what additional work may be required to obtain it and identify potential third-party firms who could provide assurance;
conducting a gap analysis of any current climate-related risk reporting against the reporting standards referenced in SB 261—the Task Force on Climate-related Financial Disclosure (“TCFD”) or International Sustainability Standards Board (“ISSB”) standards—including reports currently described as TCFD or ISSB reports. Such reports have historically been voluntary, and additional disclosure may be required now that the disclosures are being prepared for legal compliance purposes; and
revisiting environmental policies and voluntary sustainability reporting. Companies may currently describe climate-related issues in different documents prepared by different teams for different purposes, such as committee charters, environmental policies, CDP questionnaire responses, and proxy statement or other public or regulatory reporting. In advance of potential mandatory reporting, consideration should be given to aligning these teams and internal controls.

AB 1305: No Pending Changes, But A Wealth of Examples.

AB 1305 does not specify the first reporting deadline for required disclosures: instead, it requires that the disclosures be updated no less than annually. The resulting uncertainty as to whether the first reporting deadline would be January 1, 2024—when the law first became effective—or January 1, 2025, resulted in some companies providing responsive disclosures late in 2023 and early 2024. To address this question, in January 2024, the author of AB 1305 published a statement of legislative intent reflecting his expectation that the first responsive disclosures be posted by January 1, 2025.

The California Legislature then progressed on a number of amendments to AB 1305 through AB 2331, including to push the first reporting deadline further (to July 1, 2025), carve out certain renewable energy credits (“RECs”) from the definition of voluntary carbon offsets, and substantively revise the information required under the law, particularly for the marketing or sale of voluntary carbon offsets. AB 2331 was not passed by the California Legislature prior to the close of the general session in August, leaving the original reporting requirements in place for now. However, the California Attorney General has issued a formal legal opinion concluding that RECs used by reporting companies outside of California’s regulatory programs would not be considered voluntary carbon offsets for purposes of AB 1305.

Early Filers Provide a Range of Reporting Approaches. AB 1305 does not contain specific formatting or presentation requirements. This is a notable contrast to other more prescriptive California website reporting requirements and has resulted in a variety of approaches to AB 1305-related reporting across the more than 90 reports that have been published as of early September 2024. Key takeaways from our review of these reports include:

Most Filers are Public Companies. We identified at least 68 public company reports and 26 private company reports across a range of industries. As one public company subsequently took down their report, we have excluded it from the following statistics, for a total sample of 93 companies. Below, we have summarized the market capitalization for reporting public companies.

Most Acknowledge a Sample or Category of Potentially In-Scope Claims. Most companies (70, or 75%) provided some reference to potential in-scope claims they had made, whether it was noting a specific achievement or corporate goal (e.g., achieving carbon neutral operations or adopting a net zero goal) or making a generic reference to its past reporting on targets and emissions reductions.
Few Companies Provide an Explicit Tie to Each Requirement. Only 12 companies (13%) provided an index or heading identifying their claims or supporting information side by side with each reporting requirement.
Most Do Not Summarize AB 1305’s Requirements. More than three-quarters of the companies surveyed (72, or 77%) did not include a description of AB 1305’s reporting requirements, while the remaining 21 companies (23%) provided a full or partial description.
Most Do Not Include an “As Of” Date or Disclaimer. Less than half of companies (37, or 40%) included a clear “as of” date for the disclosure, which must be updated no less than annually. Twenty-seven companies (or 29%) included a general disclaimer regarding the report’s contents and/or a more extensive forward-looking-statement-type disclaimer.
Most Disclosures Focus Only on Applicable Requirements. Only a quarter of companies (23, or 25%) included an affirmative statement that some portion of the law did not apply to them (e.g., that they did not purchase or use voluntary carbon offsets). Otherwise, companies typically were silent on this but addressed only the sections of the law that were applicable to them: in other words, if they only market or sell voluntary carbon offsets, they only addressed the disclosures required for that activity.
Most Prefer a Standalone PDF Format. Over half of the companies (53, or 57%) provided their AB 1305 disclosure in a standalone PDF available on their website. A smaller portion (28, or 30%) provided the disclosure on their websites as a standalone webpage, while 11 companies (or 12%) addressed AB 1305 as a subset or reference on an existing page. In one instance, the disclosure was available only by clicking an “AB 1305” link on the website that downloaded an Excel file.

Considerations for Preparing (or Updating) AB 1305 Disclosures. In addition to the reporting trends noted above, reporting companies preparing or updating their AB 1305 disclosures should also consider:

reviewing current website disclosure and corporate publications to identify relevant claims and conducting a gap analysis between AB 1305’s requirements and current public disclosure. The results of our survey only reflect those public disclosures that were clearly identified as being provided for purposes of AB 1305 and may not represent the full universe of disclosure approaches. For example, some companies may already provide the responsive disclosure in existing reports and determine a standalone report or heading is not necessary;
building out internal controls and resources to collect relevant claims, activities, and corresponding support throughout the year;
educating relevant stakeholders that will be important to support the identification of claims or activities, including the marketing, sales, product, procurement, and investor relations teams. For example, AB 1305 can apply to claims about the company’s products, and such claims can appear in locations that the legal or compliance teams are less involved with, such as advertisements, mailings, press releases, or product literature that can reach California consumers. The relevant internal controls may therefore run through the legal or compliance teams, but will likely rely in part on information from other areas of the business; and
monitoring for future developments, because while changes proposed by AB 2331 were not ultimately adopted this year, similar changes may be sought in future legislative sessions.

The following Gibson Dunn attorneys assisted in preparing this update: Aaron Briggs, Elizabeth Ising, Cynthia Mabry, Michael Murphy, Lauren Assaf-Holmes, and Meghan Sherley.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more, please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Securities Regulation and Corporate Governance or Environmental, Social and Governance practice groups, or the following authors:

Aaron Briggs – San Francisco (+1 415.393.8297, abriggs@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
Cynthia M. Mabry – Houston (+1 346.718.6614, cmabry@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, mmurphy@gibsondunn.com)

Please also view Gibson Dunn’s Securities Regulation and Corporate Governance Monitor.

The UK Court of Appeal has confirmed that ICSID Contracting States’ agreement to Art. 54 of the ICSID Convention is to be interpreted as a “written agreement” waiving State immunity and a submission to jurisdiction under the UK’s State Immunity Act 1978. The decision is positive news for parties looking to enforce ICSID awards in the UK; it re-affirms the UK’s pro-enforcement stance in relation to investor-State awards.

1. Executive Summary

On 22 October 2024, the UK Court of Appeal issued an important judgment in relation to arbitral award enforcement in the combined appeals of Infrastructure Services Luxembourg S.À.R.L. v Kingdom of Spain (“Infrastructure Services v Spain”) and Border Timbers Limited v Republic of Zimbabwe (“Border Timbers v Zimbabwe”).[1] The lead judgment was delivered by Lord Phillips, with whom Lord Newey and Sir Julian Flaux Chancellor of the High Court agreed.

The decision is critical to jurisdictional and State immunity issues arising in the context of enforcement of arbitral awards against sovereign States, pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (the “ICSID Convention” and “ICSID”).

In short, the Court of Appeal has confirmed that, whilst the UK’s State Immunity Act 1978 (the “1978 Act”) does apply to ICSID enforcement proceedings, there is an applicable exception to State immunity. The relevant exception arises from s. 2 of the 1978 Act, which provides that a State may waive its immunity by a “prior written agreement” (read together with s. 17(2) of the 1978 Act, which provides that a “prior written agreement” includes references to a “treaty, convention or other international agreement”). The Court of Appeal affirmed that such prior written agreement is found in Art. 54 of the ICSID Convention.[2]

2. Background to the Court of Appeal’s Judgment

a. Infrastructure Services v Spain

The award creditors (the “ISL Claimants”) obtained an ICSID award worth approx. EUR 101 million for Spain’s violations of the Energy Charter Treaty stemming from the regulatory changes Spain introduced to its renewable energy subsidy scheme.

The ISL Claimants commenced enforcement proceedings in the UK pursuant to s. 1(2) of the Arbitration (International Investment Disputes) Act 1966 (the “1966 Act”) and obtained a registration order, which Spain sought to set aside on State immunity grounds. At first instance, Mr Justice Fraser dismissed Spain’s set-aside application and upheld the registration order.[3] A central finding in that decision—the one on appeal—was that Art. 54 of the ICSID Convention constitutes a “prior written agreement” under s. 2(2) of the 1978 Act.[4]

b. Border Timbers v Zimbabwe

The award creditors (the “Border Claimants”) obtained an ICSID award worth approx. USD 124 million arising out of Zimbabwe’s expropriation of the Border Claimants’ land in breach of the bilateral investment treaty between Switzerland and Zimbabwe (1996). Mirroring the Infrastructure Services v Spain case, the Border Claimants obtained a registration order under the 1966 Act, which Zimbabwe applied to set aside on State immunity grounds.

At first instance, Mrs Justice Dias dismissed Zimbabwe’s set-aside application and upheld the registration order but on a different basis to (and expressly disagreeing with) Fraser J in Infrastructure Services v Spain.[5] In Dias J’s view, the bespoke procedure for registration of ICSID awards set out in CPR 62.21 does not require service of any originating process on the respondent, and, as such, the doctrine of State immunity is not engaged at all in relation to such an application.[6] However, Dias J also separately held that Art. 54 of the ICSID Convention does not constitute a “prior written agreement” pursuant to s. 2(2) of the 1978 Act.[7]

Spain and Zimbabwe each obtained permission to appeal. The Court of Appeal decided to hear the appeals jointly in light of the overlapping issues, in particular as regards the “prior written agreement” exception under s. 2 of the 1978 Act. The appeals were heard between 17–20 June 2024 and the Court of Appeal handed down its judgment on 22 October 2024.

3. The Court of Appeal’s Judgment

In the appeal, the parties largely maintained their positions taken at first instance. The Border Claimants also advanced a new argument: that Zimbabwe did not benefit from State immunity because s. 23(3) of the 1978 Act excluded from the scope of s. 1(1) of the 1978 Act “matters that occurred before the date of the coming into force of [the 1978 Act]”, and the ICSID Convention and the 1966 Act were such “matters”.[8]

As such, the Court of Appeal had to resolve the following three questions:[9]

whether State immunity applies, in principle, to the registration of ICSID awards against a foreign State under the 1966 Act;

if State immunity does apply, whether Contracting States to the ICSID Convention have nonetheless waived that immunity from enforcement proceedings pursuant to s. 2 of the 1978 Act by ratifying the ICSID Convention (and, specifically, Art. 54 therein); and

if there is no such waiver by prior written agreement, whether a foreign State is estopped or otherwise prevented from asserting the invalidity of the underlying award, with the result that the arbitration exception in s. 9 of the 1978 Act is necessarily satisfied.

In relation to the first question, the Court of Appeal held that State immunity applies to applications for the registration of ICSID awards under the 1966 Act.[10] Disagreeing with Dias J’s decision, the Court of Appeal concluded that the registration of an ICSID award as a judgment of the Court is not merely a ministerial or administrative act as it requires a judge to be satisfied to the requisite standard as to the proof of authenticity and the “other evidential requirements” of the 1966 Act.[11] The Court of Appeal also rejected the Border Claimants’ new argument described above, holding that the phrase “matters” in s. 23(3) of the 1978 Act cannot be stretched to encompass treaties and legislation (such as the ICSID Convention and the 1966 Act).[12]

The Court of Appeal (disagreeing with Fraser J) also held that the UK Supreme Court’s judgment in Micula v Romania[13] is not a binding authority for the proposition that State immunity does not apply to enforcement proceedings for ICSID awards (as opposed to execution proceedings).[14] That is because Micula did not expressly concern State immunity[15] and the 1978 Act is a complete code with regards to exceptions to State immunity, which does not exclude the “regime” for registration of ICSID awards under the 1966 Act from the scope of State immunity.[16]

As regards the second question, the Court of Appeal followed Fraser J’s reasoning, concluding that Art. 54 of the ICSID Convention amounts to a sufficiently clear and express waiver of State immunity under s. 2 of the 1978 Act.[17] As such, it held that by ratifying the ICSID Convention, Contracting States have waived immunity, and submitted to the courts of the UK, for the purposes of enforcement of ICSID awards, although immunity in respect of execution is preserved by Art. 55 of the ICSID Convention.[18]

In reaching these conclusions, the Court of Appeal extensively referred to (and quoted from) the decision of the High Court of Australia (“HCA”), Australia’s apex court, in the enforcement proceedings brought by the ISL Claimants against Spain there,[19] noting that, “[a]s a general rule it is desirable that international treaties should be interpreted by the courts of all the states uniformly.”[20] Lord Phillips observed that the HCA’s decision was a “highly persuasive opinion” and, also, on the interpretation of Art. 54 of the ICSID Convention, “plainly right”.[21]

The Court of Appeal considered that the language of Art. 54 of the ICSID Convention is clear and unambiguous, flowing from the “straightforward reading of the text”, which is also supported “rather than undermined, by the clear object and purpose of the Convention, as evidenced by the Preamble.”[22]

In response to an argument raised by Zimbabwe, the Court of Appeal also considered briefly (and obiter) the potential impacts of its findings on Art. 54 of the ICSID Convention with respect to Art. III of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the “New York Convention”): i.e., whether its conclusions meant that Art. III of the New York Convention also amounts to a waiver of immunity. Although providing limited observations, the Court of Appeal did not answer that question, noting that it had not heard full arguments and was not in a position to decide the issues.[23]

In light of its findings on the second question, the Court of Appeal considered that it was unnecessary to consider the third question.[24] Regardless, the Court did observe (obiter) that “it is difficult to interpret section 9 of the SIA other than as imposing a duty on the court to satisfy itself that the state in question has in fact agreed in writing to submit the dispute in question to arbitration.”[25]

4. Comment

The Court of Appeal’s judgment is significant. It lends further weight to the growing body of international jurisprudence on the effect of Art. 54 of the ICSID Convention. The UK Court of Appeal, like the HCA, has confirmed that Contracting States’ agreement to Art. 54 by ratifying the ICSID Convention is to be interpreted as a written agreement waiving State immunity and a submission to jurisdiction for the purposes of enforcement of an ICSID award. As recognised by the Court of Appeal, this also brings the UK position in line with the law in Australia, New Zealand, France, and Malaysia, as well as multiple decisions in the US.[26]

The decision is positive news for parties looking to enforce ICSID awards in the UK; it re-affirms the UK’s pro-enforcement stance in relation to investor-State awards.

We note that the decision may well be subject to a further appeal to the UK Supreme Court.

[1] Infrastructure Services Luxembourg SARL v Kingdom of Spain and Border Timbers Ltd v Republic of Zimbabwe [2024] EWCA Civ 1257 (Sir Julian Flaux Chancellor of the High Court, Newey LJ, Phillips LJ) (the “Judgment”).

[2] Judgment, para. 103.

[3] Infrastructure Services Luxembourg SARL v Kingdom of Spain [2023] EWHC 1226 (Comm) (Fraser J). See further our client alert on this decision.

[4] Infrastructure Services Luxembourg SARL v Kingdom of Spain [2023] EWHC 1226 (Comm) (Fraser J), para. 95.

[5] Border Timbers Ltd v Republic of Zimbabwe [2024] EWHC 58 (Comm) (Dias J).

[6] Border Timbers Ltd v Republic of Zimbabwe [2024] EWHC 58 (Comm) (Dias J), para. 106.

[7] Border Timbers Ltd v Republic of Zimbabwe [2024] EWHC 58 (Comm) (Dias J), paras. 72–73.

[8] Judgment, para. 11.

[9] Judgment, para. 12.

[10] Judgment, para. 58.

[11] Judgment, paras. 35–39.

[12] Judgment, paras. 40–42.

[13] Micula & Ors v Romania (European Commission intervening) [2020] UKSC 5 (Lady Hale, Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Sales SCJJ). See further our client alert on this decision.

[14] Judgment, paras. 51–52.

[15] Romania did not challenge the registration of the ICSID award on state immunity or any other grounds in that case.

[16] Judgment, paras. 43–58.

[17] Judgment, para. 103.

[18] Judgment, paras. 77-79.

[19] Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2023] HCA 11 (Kiefel CJ, Gageler, Gordon, Edelman, Steward, Gleeson and Jagot JJ). See further our client alert on this decision.

[20] Judgment, para. 60, quoting Islam v Secretary of State for the Home Department [1999] 2 AC 629, 657A-B, per Lord Hope.

[21] Judgment, para. 77.

[22] Judgment, para. 80.

[23] Judgment, paras. 99–102.

[24] Judgment, para. 104.

[25] Judgment, para. 105.

[26] Judgment, para. 60.

The following Gibson Dunn lawyers prepared this update: Doug Watson, Piers Plumptre, Ceyda Knoebel, Alexa Romanelli, Theo Tyrrell, and Dimitar Arabov.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration, Judgment and Arbitral Award Enforcement, or Transnational Litigation practice groups, or the authors in London:

Doug Watson (+44 20 7071 4217, dwatson@gibsondunn.com)
Piers Plumptre (+44 20 7071 4271, pplumptre@gibsondunn.com)
Ceyda Knoebel (+44 20 7071 4243, cknoebel@gibsondunn.com)
Alexa Romanelli (+44 20 7071 4269, aromanelli@gibsondunn.com)
Theo Tyrrell (+44 20 7071 4016, ttyrrell@gibsondunn.com)
Dimitar Arabov (+44 20 7071 4063, darabov@gibsondunn.com)

The advisory is another indication of the U.S. government’s increasing focus on financial institutions in the implementation and enforcement of export controls.

On October 9, 2024, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS” or the “Bureau”) issued the latest in a series of advisories to financial institutions (“FIs”) regarding the evolving regulatory expectations for FIs and their compliance obligations with U.S. export controls that regulate the transfer of U.S. commodities, software and technology (“goods”) around the world.[1]

This advisory is another indication of the U.S. government’s increasing focus on financial institutions in the implementation and enforcement of export controls. While banks have long been viewed as on the frontlines of sanctions implementation and enforcement, they have traditionally not been a principal tool of export controls implementation. This has been so in large part given the fundamental challenge of FIs providing trade finance and other products to definitively know what its customers are importing and exporting using bank financing. This is no longer the case.

This latest issuance is the most prescriptive and detailed advisory BIS has released regarding the specific types of controls that the Bureau expects FIs to employ in order to mitigate the risk that their financial services support violations of U.S. export controls. It does so, even as it acknowledges the continued challenges and limitations for FIs when it comes to identifying export controls risks in the ordinary course of business acting as a financial services intermediary. The guidance, for the first time, provides the Bureau’s strong suggestions as to the controls and legal standards it expects. Importantly, the Bureau has tried to appropriately tailor these expectations to the limitations stemming from how FIs operate.

Despite is strides towards clarity with respect to regulatory expectations for FIs, ambiguities remain, and this will continue to be an area of uncertainty and risk as banks and other FIs work to operationalize the controls called for in the guidance.

Below we discuss some of the key elements and takeaways.

“Prohibition 10” and Evolving BIS Expectations for Financial Institutions

Historically, export controls compliance and related risk has been a concern primarily for the commercial parties who export or reexport the items subject to these controls. However, in recent years, as restrictions mounted and export controls began to play a much more central role in U.S. efforts to confront major geopolitical challenges (including, but no limited to, China and Russia), BIS has increasingly signaled that intermediaries who provide services related to the movement of these items are also in the crosshairs. Initially focused on freight forwarders and distributors of controlled goods and technologies, BIS also began to focus on the FIs who finance or otherwise facilitate underlying trade transactions.

As laid out in the October 9th guidance, the primary regulatory risk for financial institutions acting as intermediaries stems from General Prohibition No. 10 (“GP 10”) of the Export Administration Regulations (“EAR”). This extremely broad and temporally and geographically unbounded regulation prohibits the financing or servicing of an item subject to the EAR “with knowledge that a violation of the EAR has occurred, is about to occur, or is intended to occur in connection with the item.”

BIS exercises very far reaching jurisdiction under the EAR. As the guidance notes, items “subject to the EAR” include all items in the United States, including in a U.S. Foreign Trade Zone or moving in-transit through the United States from one foreign country to another (with certain exceptions); U.S.-origin items wherever located; certain foreign-made items that incorporate more than a de minimis amount of U.S.-origin controlled content; and even completely foreign-produced items if they are produced using certain controlled U.S. software, technology, or tools.

Thus, parties to an export, reexport or even an in-country transfer of items anywhere in the world can potentially find themselves subject to the EAR, even where there may not appear to be any U.S. nexus to the transaction. As the guidance indicates, BIS jurisdiction is not dependent on the involvement of U.S. persons or U.S. FIs, although there are provisions in the EAR which do apply specifically to U.S. persons (including U.S. FIs) anywhere in the world, prohibiting them from financing or otherwise supporting certain specified activities (and as we noted in a previous Gibson Dunn alert, these latter U.S. person support rules are poised to expand).[2]

Accordingly, under GP 10, BIS jurisdiction can reach the activities of FIs around the world. This jurisdiction exists regardless of whether U.S. or non-U.S. institutions are involved or if institutions are engaging in transactions in the United States or using the U.S. Dollar. Jurisdiction is based solely on the product in question.

The standard of “knowledge” within GP 10 concerns not only positive knowledge that a specific circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. On an enforcement basis, this can be inferred from a FI’s conscious disregard or willful avoidance of certain facts.

The challenge for banks and other FIs who act as intermediaries or service providers to customers involved in trade has been how to identify circumstances where a FI would be deemed by BIS to be acting with such requisite knowledge. FIs are typically given limited information regarding such trade – often lacking the full list of parties, the nature of the items being exported, how items are to be used, and the types of services involved in an underlying trade transaction. Each of these considerations speaks to whether U.S. export control authorizations would be required – and thus whether an underlying transaction could give risk to an EAR violation if such authorizations were not received.

Over the past several years, BIS, working with other U.S. agencies and U.S.-allied governments, has taken a number of steps to increase awareness of export controls risks. This has included, among other things, providing industry with a list of potential red flags which indicate possible export control issues as well as more detailed information about goods that are of heightened concern (to provide some notice that particular transactions deserve greater diligence).[3] These actions have effectively lowered the bar in terms of what BIS may need to do to establish that an intermediary acted with “knowledge,” and consequently inconsistent with GP 10.

This recent BIS guidance, acknowledging the challenges that remain for FIs, offers further, more concrete recommendations, cautions and prescriptions to address the GP 10 risks and BIS diligence expectations regarding the evolving knowledge standard.

Recommended Controls for FIs

The October 9th guidance recommends FIs implement controls around customer due diligence and screening, post-transaction reviews for potential red flags and, in certain circumstances, real-time transaction screening, to avoid violations of GP 10.

Specifically, BIS advises:

screening customers against the Consolidated Screening List, which includes against various BIS restricted party lists (which indicate various, often highly technical and nuanced, transfer restrictions for goods subject to the EAR) before onboarding and as part of a periodic due diligence refresh;
screening customers – “and, where appropriate, customers’ customers” – against a list maintained by the non-governmental organization Trade Integrity Project (“TIP”) of entities which have allegedly shipped items on the “Common High Priority List” to Russia;
where a customer is identified on a BIS restricted or TIP list, and the FI determines the customer is involved in transactions involving U.S. exports, seeking a certification from the customer that it complies with the EAR, as well as employing enhanced due diligence controls on that customer’s trade transactions;
employing post-transaction, risk-based assessments to identify possible export controls-related red flags;
where a red flag is uncovered post-transaction and cannot be resolved satisfactorily through requests for further information from the customer, refraining from processing future transactions related to the parties associated with the red flags; and,
in certain circumstances involving “cross-border payments and other transactions that are likely to be associated with exports from the United States (or re-exports or in-country transfers outside the United States),” conducting real-time screening against a subset of BIS restricted persons and addresses and halting processing of the transaction until and unless the FI can obtain comfort the transaction is not prohibited under the EAR.

FIs are also reminded that they are required to report any suspicious activities related to potential EAR violations to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) via the filing of Suspicious Activity Reports (SARs). FIs are also encouraged to submit Voluntary Self-Disclosures to BIS if deemed necessary. Following an FI’s filing of a SAR with FinCEN, BIS may, under certain circumstances, provide the FI with additional information that would establish “knowledge” under GP 10, which then obliges the FI to take further steps in ensuring compliance (e.g., by termination of the customer relationship).

Key Takeaways and Open Questions

The October 9th guidance moves the needle in terms of providing FIs with concrete steps they can take to begin addressing their evolving export compliance risks, and it provides some comfort concerning BIS’s expectations about compliance standards and expectations. However, there remains ambiguity, and some of the recommended controls will be operationally challenging for most FIs to implement. We address a few of the key takeaways and potential issues below.

Reasonable Reliance

BIS explicitly recognizes the relative disparity in information which FIs have about goods underlying a trade transaction compared with the commercial parties to the transaction, and the guidance notes that FIs may “generally rely on their customers’ representations regarding compliance…unless such reliance would be unreasonable – for example, when the FI has reason to know that such representations may be false.”

This is a welcome further ratification of the principle that most FIs have long followed – namely that they should be able to reasonably rely on a customer’s attestations and representations regarding the nature of any items it is exporting using the FI’s services. Moreover, this confirms that the FI itself is, in most circumstances, not expected to conduct its own independent investigation of the goods being transacted by their customers. In order to be complete such an analysis would require not just a technical assessment of the types of goods being traded (and an assessment of their sensitivity), but also the end users and end uses for such goods.

Focus on Customer Due Diligence and Post Transaction Review, Not Real-time Screening

FIs may also take some comfort that, as a general matter, BIS is not expecting them to engage in real time screening of transactions as a preventative measure. BIS recognizes the challenges that would arise from requiring a real-time ‘catch-and-release’-type control to triage export controls risks in transaction processing similar to the way FIs are expected to triage risks associated with economic sanctions. Instead, the October 9th guidance explicitly states that, generally, “BIS does not expect FIs to engage in real-time screening of parties to a transaction to prevent violations of GP 10.”

This is welcome acknowledgement that the U.S. Government understands the difficulties (and likely significant challenges to the ready flow of global commerce) that FI’s would face in attempting to screen underlying goods at the point of transaction processing.

But…Some Real-Time Screening?

However, the BIS guidance does recommend real time screening in certain situations – namely “cross-border payments and other transactions that are likely to be associated with exports from the United States (or re-exports or in-country transfers outside the United States),” where those transactions involve a subset of parties or addresses restricted under various BIS rules and lists. The identified lists are generally those that are the most restrictive and apply to transactions that involve items that are “subject to the EAR,” even if such items are not particularly sensitive (e.g., those that do not have a dual civilian and military use).

In those circumstances, BIS “recommends that FIs decline to proceed with a transaction until the FI can determine that the underlying export, reexport, or transfer (in-country) is authorized under the EAR (or alternatively not subject to the EAR). Failure to do so risks liability for a knowing violation of the EAR under GP 10.”

Absent further guidance from BIS, this recommendation to real-time screen in limited situations creates ambiguity and some operational and enforcement risk for FIs.

It will be challenging to determine which cross-border payments or transactions are “likely” to be associated with exports, reexports or in-country transfers of such items. In addition, for most FIs, it is technically and/or operationally challenging to employ real time screening against only a specific subset of BIS restricted persons. Address screening, as a general matter, may also present difficulties when trying to employ an effective and efficient screening program.

Conclusion

The October 9th guidance from BIS is a welcome addition to the U.S. Government’s guidance to FIs working to understand their export control compliance obligations in a rapidly evolving regulatory and enforcement environment. It provides some clarity concerning specific expectations and regulatory standards in an area of compliance that is new and largely untested for the financial sector. It is also new and untested for regulators – as such it is not surprising that ambiguities and challenges remain.

In the interim we assess that it would be a best practice for those FIs involved in international trade to develop a protocol to map out what criteria they will use to assess where within their portfolio of services exists a “likelihood” of GP 10 or other export controls issues. The challenge will be to do so while staying true to the BIS guidance, being neither under-inclusive and missing risky transactions, or over-inclusive and potentially imperiling the free flow of the significant majority of trade that is without export control issues.

We will continue to work closely with our clients, with industry and the U.S. Government to share our understandings and to align market practice with regulatory expectations in this space.

[1] “Bureau of Industry and Security Issues New Guidance to Financial Institutions on Best Practices for Compliance with the Export Administration Regulations,” Oct. 9, 2024.

[2] Proposed Rule, “End-Use and End-User Based Export Controls, Including U.S. Persons Activities Controls: Military and Intelligence End Uses and End Users,” Jul. 29, 2024; Gibson Dunn Client Alert “Proposed Rules Call for Significant Restrictions on Facial Recognition Technologies, Defense Services, U.S. Persons Activities, and New Classes of Foreign End-Users,” Aug. 13, 2024.

[3] See, e.g., publication of the “Comon High Priority List,” Feb. 23, 2024; “Department of Commerce, Department of the Treasury, and Department of Justice Tri-Seal Compliance Note: Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls,” Mar. 2, 2023; “Department of Commerce, Department of the Treasury, Department of Justice, Department of State, and Department of Homeland Security Quint-Seal Compliance Note: Know Your Cargo: Reinforcing Best Practices to Ensure the Safe and Compliant Transport of Goods in Maritime and Other Forms of Transportation,” Dec. 11, 2023; “FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security Urge Increased Vigilance for Potential Russian and Belarusian Export Control Evasion Attempts,” June 28, 2022; publication of a list of private and commercial aircraft who violated GP 10 by flying into Russia, Mar. 18, 2022.

The following Gibson Dunn lawyers prepared this update: David Wolber, Adam M. Smith, Christopher Timura, and Samantha Sewall.

Gibson Dunn lawyers are monitoring the proposed changes to U.S. export control laws closely and are available to counsel clients regarding potential or ongoing transactions and other compliance or public policy concerns.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s International Trade or Financial Institutions practice groups:

Financial Institutions:
Stephanie Brooker – Co-Chair, Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)
M. Kendall Day – Co-Chair, Washington, D.C. (+1 202.955.8220, kday@gibsondunn.com)

International Trade:

United States:
Ronald Kirk – Co-Chair, Dallas (+1 214.698.3295, rkirk@gibsondunn.com)
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202.887.3547, asmith@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, shandler@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, ctimura@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202.887.3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213.229.7269, nhanna@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202.955.8685, cmbrown@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202.887.3509, ssewall@gibsondunn.com)
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, mweinbaum@gibsondunn.com)
Mason Gauch – Houston (+1 346.718.6723, mgauch@gibsondunn.com)
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, cmullen@gibsondunn.com)
Sarah L. Pongrace – New York (+1 212.351.3972, spongrace@gibsondunn.com)
Anna Searcey – Washington, D.C. (+1 202.887.3655, asearcey@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202.955.8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, stoussaint@gibsondunn.com)
Claire Yi – New York (+1 212.351.2603, cyi@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, szhang@gibsondunn.com)

Asia:
Kelly Austin – Hong Kong/Denver (+1 303.298.5980, kaustin@gibsondunn.com)
David A. Wolber – Hong Kong (+852 2214 3764, dwolber@gibsondunn.com)
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing (+86 10 6502 8534, qyue@gibsondunn.com)
Dharak Bhavsar – Hong Kong (+852 2214 3755, dbhavsar@gibsondunn.com)
Arnold Pun – Hong Kong (+852 2214 3838, apun@gibsondunn.com)

From the Derivatives Practice Group: On October 15, ESMA, the European Commission and the European Central Bank announced the next steps to support the preparations towards a transition to T+1 in a Joint Statement. In the Joint Statement, ESMA expressed that close cooperation between regulators and the financial industry is of the utmost importance to facilitate the transition to T+1.

New Developments

CFTC Staff Issues Supplemental Letter Regarding No-Action Position Related to Reporting and Recordkeeping Requirements for Fully Collateralized Binary Options. On October 4, the CFTC’s Division of Market Oversight and the Division of Clearing and Risk announced they have taken a no-action position regarding swap data reporting and recordkeeping regulations in response to a request from KalshiEX LLC, a designated contract market, and Kalshi Klear LLC, a derivatives clearing organization, to modify CFTC Letter No. 21-11 to cover transactions cleared through Kalshi Klear LLC. According to the announcement, the divisions will not recommend the CFTC initiate an enforcement action against KalshiEX LLC, Kalshi Klear LLC, or their participants for failure to comply with certain swap-related recordkeeping requirements and for failure to report to swap data repositories data associated with binary option transactions executed on or subject to the rules of KalshiEX LLC and cleared through Kalshi Klear LLC, subject to the terms and conditions in the no-action letter.
US Appeals Court Clears Kalshi to Restart Elections Betting. On October 2, the U.S. Court of Appeals for the D.C. Circuit upheld the D.C. District Court’s order that permitted KalshiEX LLC to list contracts that allow Americans to bet on election outcomes. The Court said that the CFTC did not show how the agency or the public interest would be harmed by the “event” contracts. The CFTC’s motion was denied “without prejudice to renewal should more concrete evidence of irreparable harm develop during the pendency of appeal.”

New Developments Outside the U.S.

ESMA Responds to the Commission Rejection of Certain MiCA Technical Standards. On October 16, ESMA responded to the European Commission proposal to amend the Markets in crypto-assets Regulation (“MiCA”) Regulatory Technical Standards (“RTS”). In their response, ESMA emphasized the importance of the policy objectives behind the initial proposal. [NEW]
ESAs Respond to the European Commission’s Rejection of the Technical Standards on Registers of Information under the Digital Operational Resilience Act and Call for Swift Adoption. On October 15, the European Supervisory Authorities (“ESAs”) issued an Opinion on the European Commission’s rejection of the draft Implementing Technical Standards (“ITS”) on the registers of information under the Digital Operational Resilience Act. The ESAs raise concerns over the impacts and practicalities of the proposed EC changes to the draft ITS on the registers of information in relation to financial entities’ contractual arrangements with ICT third-party service providers. [NEW]
ESMA, ECB and EC Announce Next Steps for the Transition to T+1 Governance. On October 15, ESMA, the European Commission and the European Central Bank announced the next steps to support the preparations towards a transition to T+1 in a Joint Statement. ESMA stressed in the Joint Statement that they believe a coordinated approach across Europe is desirable, with efforts to reach consensus on the timing of any move to T+1. [OPEN]
ESMA Publishes Its First Annual Report on EU Carbon Markets. On October 7, ESMA published the 2024 EU Carbon Markets report, providing details and insights into the functioning of the EU Emissions Trading System market. The report indicates that prices in the EU ETS have declined since the beginning of 2023; emission allowance auctions remain significantly concentrated, with 10 participants buying 90% of auctioned volumes, reflecting a preference by most EU ETS operators to source allowances from financial intermediaries; and the vast majority of emission allowance trading in secondary markets takes place through derivatives, reflecting the annual EU ETS compliance cycle where non-financial sector firms hold long positions (for compliance purposes) while banks and investment firms hold short positions. The report builds on ESMA’s 2022 report on the trading of emission allowances, mandated in the context of rising energy prices and a three-fold increase of emission allowances’ prices in 2021.
The European Supervisory Authorities Share Highlights from the 2024 Joint Consumer Protection Day in Budapest. On October 3, the European Supervisory Authorities and ESMA organized the 11th edition of their annual Consumer Protection Day, in Budapest. The event followed the theme of “Empowering EU consumers: fair access to the future of financial services” and had three panels covering the topics of artificial intelligence in financial services, access to consumer centric products and services, and sustainable finance. Speakers and panelists included leaders from consumer organizations, regulatory authorities, EU institutions, academia, and market participants from across the European Union. [NEW]
ESMA Launches New Consultations Under the MiFIR Review. On October 3, ESMA launched two consultations on transaction reporting and order book data under the Markets in Financial Instruments Regulation (“MiFIR”) Review. ESMA is seeking input on the amendments to the RTS for the reporting of transactions and to the RTS for the maintenance of data relating to orders in financial instruments.
Joint UK Regulators Issue Press Release on the End of LIBOR. On October 1, the Bank of England published a joint press release with the FCA and the Working Group on Sterling Risk-Free Reference Rates on the end of LIBOR. On September 30, the remaining synthetic LIBOR settings were published for the last time and LIBOR came to an end. All 35 LIBOR settings have now permanently ceased. The Working Group has met its objective of finalizing the transition away from LIBOR and will be wound down effective as of October 1. Market participants are encouraged to continue to ensure they use the most robust rates for the relevant currency and should ensure their use of term risk-free reference rates are limited and remain consistent with the relevant guidance on best practice on the scope of use.
ESAs Appoint Director to Lead their DORA Joint Oversight. On October 1, the European Supervisory Authorities appointed Marc Andries to lead their new joint Directorate in charge of oversight activities for critical third-party providers established by the Digital Operational Resilience Act (“DORA”). In his role as DORA Joint Oversight Director, Marc Andries will be responsible for implementing and running an oversight framework for critical third-party service providers at a pan-European scale, contributing to the smooth operations and stability of the EU financial sector.
ESMA 2025 Work Programme: Focus on Key Strategic Priorities and Implementation of New Mandates. On October 1, ESMA published its 2025 Annual Work Programme (AWP). A significant portion of ESMA’s work in 2025 will comprise policy work to facilitate the implementation of the large number of mandates received in the previous legislative cycle, and the preparation of new mandates, such as the European Green Bonds and the ESG Rating Providers Regulations.

New Industry-Led Developments

Central Database of Reporting Entity Contact Details for EU and UK EMIR. On October 17, ISDA produced a central database of contact details to assist members resolve reconciliation breaks with counterparties for EU and UK European Market Infrastructure Regulation (“EMIR”) reporting. The central database was created by contributing firms’ submissions and includes details such as entity names, legal entity identifiers and reporting contact emails.
ISDA, GFXD respond to ESMA on Order Execution Policies. On October 16, ISDA and the Global FX Division of the Global Financial Markets Association responded to a consultation paper from ESMA on “Technical Standards specifying the criteria for establishing and assessing the effectiveness of investment firms’ order execution policies.” In the response, the associations discuss the requirement for pre-selected execution venues, mandatory consumption of consolidated tapes and categorization of financial instruments under the Markets in Financial Instruments Regulation, among other issues. [NEW]
ISDA Submits Paper to ESMA on MIFIR Post-Trade Transparency. On October 8, ISDA submitted a paper to ESMA, in which it outlined its views on the scope of OTC derivatives post-trade transparency in the revised MiFIR. The paper outlines ISDA’s view on the treatment of certain interest rate derivatives, index credit default swaps and securitized derivatives. ISDA indicated that it is anticipating the publication of ESMA’s consultation paper on the revised regulatory technical standards, covering OTC derivatives, later in 2024 or in the first quarter of 2025.
ISDA, FIA Respond to BoE Consultations on CCP Recovery and Resolution. On October 4, ISDA and FIA submitted a joint response to two Bank of England (“BoE”) consultations on central counterparty (“CCP”) recovery and resolution: the BoE’s power to direct a CCP to address impediments to resolvability ; and the BoE’s approach to determining commercially reasonable payments for contracts subject to a statutory tear up in CCP resolution. In response to the BoE’s consultation on its power to direct a CCP to address impediments to resolvability, the associations said that they welcome the clarity provided on the timescales the BoE would follow when using its power to address impediments to resolvability. However, the response notes that the BoE should more explicitly set out whether and how it would consider informing clearing members ahead of using this power. In response to the BoE’s consultation on its approach to determining commercially reasonable payments for contracts subject to statutory tear up in CCP resolution, the associations expressed caution on the proposed approach, which they indicated could result in placing too much reliance on the CCP’s own rules and arrangements to generate commercially reasonable prices for contracts subject to tear up. The response highlights that in a situation where the BoE would have to use its power to tear up contracts – i.e., after a failed auction – there might not exist a clear price for those contracts.

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, jsteiner@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Adam Lapidus – New York (212.351.3869, alapidus@gibsondunn.com )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

William R. Hallatt , Hong Kong (+852 2214 3836, whallatt@gibsondunn.com )

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki , New York (212.351.4028, mtakagaki@gibsondunn.com )

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

A quarterly update of high-quality education opportunities for Boards of Directors.

Gibson Dunn’s summary of director education opportunities has been updated as of October 2024. A copy is available at this link. Boards of Directors of public and private companies find this a useful resource as they look for high quality education opportunities.

This quarter’s update to the summary of director education opportunities includes a number of new opportunities as well as updates to the programs offered by organizations that have been included in our prior updates. Some of the new opportunities are available for both public and private companies’ boards.

Read More

The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Julia Lapitskaya, Lori Zyskowski, Elizabeth Ising, Ronald Mueller, Caroline Bakewell, Jason Ferrari, and To Nhu Huynh.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Regulation and Corporate Governance practice group, or the following authors:

Hillary H. Holmes – Houston (+1 346.718.6602, hholmes@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
Julia Lapitskaya – New York (+1 212.351.2354, jlapitskaya@gibsondunn.com)
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, rmueller@gibsondunn.com)
Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com)

Please also view Gibson Dunn’s Securities Regulation and Corporate Governance Monitor.

A buyer seeking to rely on an MAE clause in a share purchase agreement to justify termination should proceed with caution, whether in the US or under English law.

In the recent case of BM Brazil & Ors v Sibanye BM Brazil & Anor [2024] EWHC 2566 (Comm) (“Sibanye”), the English Commercial Court considered whether the buyer under two sale and purchase agreements relating to nickel mines in Brazil (the “SPAs”) was entitled to terminate the SPAs on the basis that a material adverse effect (“MAE”) had occurred at one of the mines prior to completion. The Court’s decision was rendered by The Hon. Mr Justice Butcher.

Background

A buyer may seek to include MAE provisions in a share purchase agreement to allow it to terminate the agreement if the target suffers an MAE between the signing and completion of the transaction.

An MAE provision will typically cover events or changes which materially and adversely affect a target’s business, operations, assets, liabilities, condition (whether financial, trading or otherwise) or operating results, but will often be subject to carve-outs relating to changes in interest rates, commodity prices, wars, natural disasters, etc. MAEs are a customary provision in share purchase agreements governed by Delaware law (and other US state law), but less common where English law is the governing law.

In Sibanye, a “geotechnical event” occurred at one of the mines between signing and completion. The buyer claimed this constituted an MAE so as to discharge it from its obligation to complete the transactions and allow it to terminate the SPAs. The seller asserted that the geotechnical event was not an MAE and that the purported termination was therefore wrongful and repudiatory, allowing the seller to terminate the SPAs and bring a claim against the buyer.

Decision

The Court ruled that the geotechnical event was not, and was not reasonably expected to be, an MAE under the SPA. In reaching that decision the Court had to decide on the central issue of whether the geotechnical event was an MAE.

There being no standard meaning of “material adverse effect” or “material adverse change” under English law, the Court confirmed that the proper approach to determining this issue was to apply the ordinary principles of construction of contracts governed by English law. The three main issues of construction or interpretation of the MAE provisions considered by the court in reaching this decision were:

Whether a ‘revelatory event’ would be an MAE for purposes of the SPAs. The Court considered that matters did not count as material for the purposes of the MAE definition by reason only of their ‘revelatory’ effects.
The assessment of what ‘would reasonably be expected to be material and adverse’. The Court considered that it was common ground that this analysis required an objective rather than subjective assessment, and that the assessment should be made from the perspective of a reasonable person in the position of the parties at the time when cancellation on the basis of the alleged MAE is notified.
What is meant by ‘material’. The Court determined that the geotechnical event was not material. On this point, the Court agreed with certain Delaware case law^[1] that there is no bright line test for what constitutes materiality that will be applicable to all MAE clauses. In Sibanye, the Court considered that the size of the transaction, the nature of the assets concerned, including that they are susceptible to such matters as geotechnical events, the length of the process of the sale of the mines and the complexity of the SPAs were all relevant factors militating against setting the bar of materiality too low. Although not determinative in establishing materiality in Sibanye, the Court referred to Laster VC’s view in Akorn that a reduction in the equity value of the target of more than 20% was material in that case, and went on to note that a reduction of more than 15% might well be considered material.

Relevance of the United States perspective

In contrast to practice in the US, MAE clauses are not customarily included in share purchase agreements governed by English law (i.e. buyers are required to complete a transaction even in the event an MAE occurs), although this will be dependent on the circumstances, including the location and respective bargaining power of the parties.

As a result, there is a relative dearth of relevant English authority on MAE clauses with a better developed body of case law in the US, notably in Delaware^[2]. Interestingly, the Court noted in Sibanye that the “comparative dearth is beginning to be made good” by reference to four English law authorities[3].

While agreeing that US cases are neither binding nor formally persuasive, the Court considered various US authorities which many lawyers in the US consider seminal (including Re IBP, Frontier Oil, Hexion and Akorn)[4] in reaching its decision. Although it did not view those decisions as binding precedent, the Court weaved into its own textual and contextual analysis some of the key thinking from those US cases. Particularly on how to analyse the qualitative, quantitative and durational impact of an event on the equity value of a company.

Notably, the Delaware court has in certain cases[5] granted the seller the remedy of specific performance and ordered the buyer to close the transaction, flowing from the Court’s findings that there has been no MAE excusing the buyer from closing.

Whilst there are multiple grounds for the English Court to refuse an order for the equitable remedy of specific performance, there are instances where the Court has granted orders requiring parties to close on contracts for the sale of shares[6]. However, these cases have not involved the invocation by the buyer of MAE provisions under such contracts.[7] Those cases determined that specific performance could be granted on the basis that damages would not be an adequate remedy. In Gaetano, damages were not considered to be adequate because there was no ready market for the shares and the shareholding was difficult to sell as a result of the target’s poor financial performance.

Therefore, a well-advised buyer negotiating an English law share purchase agreement will seek to exclude, and a well-advised seller will seek to include, specific performance as a remedy – particularly in circumstances where it is likely that there would not be a ready market for the shares.

The Sibanye decision adds to the growing body of English authority on MAE clauses and will reassure parties seeking deal certainty that England and Wales continues to be a strong jurisdictional choice for major M&A transactions on the basis that establishing the occurrence of an MAE is not an easy route to abandon a transaction.

Invoking an MAE clause

A buyer seeking to rely on an MAE clause in a share purchase agreement to justify termination should proceed with caution, whether in the US or under English law. The buyer will need to establish that the MAE has occurred within the meaning of the contract and, as proved to be the case in Sibanye, that can be a challenging task. The exercise is heavily fact-specific and it is hard to know what it might entail at the time of contracting. If the buyer wrongly asserts an MAE, it risks incurring liability to the seller for wrongful termination and/or repudiatory breach of contract.

[1] Akorn Inc v Fresenius Kabi AG (Court of Chancery of Delaware, Memorandum Opinion 1 October 2018, Laster VC) and Snow Phipps Group LLC v KCake Acquisition Inc (Court of Chancery of Delaware, Memorandum Opinion 30 April 2021, McCormick VC).

[2] Cockerill J in Travelport Ltd v WEX Inc [2020] EWHC 2670 (Comm) (at [175]-[176]).

[3] Grupo Hotelero Urvasco v Carey Added Value SL [2013] EWHC 1039; Decura IM Investments LLP v UBS AG [2015] EWHC 171 (Comm); Travelport Ltd v WEX Inc [2020] EWHC 2670 (Comm); and Finsbury Food Group PLC v Axis Corporate Capital UK Ltd [2023] EWHC 1559 (Comm).

[4] Re IBP Inc. Shareholders Litigation Del. Ch., 789 A.2d 14 (2001), the Court of Chancery of Delaware (Strine VC); Frontier Oil Corp. v Holly Corporation (Court of Chancery of Delaware, Memorandum Opinion 29 April 2005, Noble VC); Hexion Spec. Chemicals v Huntsman Corp Del. Ch. 965 A. 2d. 715 (2008); Akorn Inc v Fresenius Kabi AG (Court of Chancery of Delaware, Memorandum Opinion 1 October 2018, Laster VC); and Snow Phipps Group LLC v KCake Acquisition Inc (Court of Chancery of Delaware, Memorandum Opinion 30 April 2021, McCormick VC).

[5] Snow Phipps Group LLC v KCake Acquisition Inc (Court of Chancery of Delaware, Memorandum Opinion 30 April 2021, McCormick VC).

[6] Gaetano Ltd v Obertor Ltd [2009] EWHC 2653 (Ch); and MSAS Global Logistics Ltd v Power Packaging Inc [2003] EWHC 1393 (Ch).

[7] Specific performance was not part of the decision in Sibanye, where the claim was for declaratory relief and damages.

The following Gibson Dunn lawyers prepared this update: Sarah Leiper-Jennings, Anne MacPherson, George Sampas, Piers Plumptre, and Will Summers.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Mergers and Acquisitions, Private Equity, or Transnational Litigation practice groups:

Mergers and Acquisitions:
Robert B. Little – Dallas (+1 214.698.3260, rlittle@gibsondunn.com)
Saee Muzumdar – New York (+1 212.351.3966, smuzumdar@gibsondunn.com)
George Sampas – New York (+1 212.351.6300, gsampas@gibsondunn.com)

Private Equity:
Richard J. Birns – New York (+1 212.351.4032, rbirns@gibsondunn.com)
Wim De Vlieger – London (+44 20 7071 4279, wdevlieger@gibsondunn.com)
Federico Fruhbeck – London (+44 20 7071 4230, ffruhbeck@gibsondunn.com)
Scott Jalowayski – Hong Kong (+852 2214 3727, sjalowayski@gibsondunn.com)
Ari Lanin – Los Angeles (+1 310.552.8581, alanin@gibsondunn.com)
Michael Piazza – Houston (+1 346.718.6670, mpiazza@gibsondunn.com)
John M. Pollack – New York (+1 212.351.3903, jpollack@gibsondunn.com)
Will Summers – London (+44 20 7071 4203, wsummers@gibsondunn.com)

Transnational Litigation:
Susy Bullock – London (+44 20 7071 4283, sbullock@gibsondunn.com)
Perlette Michèle Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com)
Piers Plumptre – London (+44 20 7071 4271, pplumptre@gibsondunn.com)
Markus Rieder – Munich (+49 89 189 33-260, mrieder@gibsondunn.com)
Andrea E. Smith – New York (+1 212-351-3883, aesmith@gibsondunn.com)
William E. Thomson – Los Angeles (+1 213-229-7891, wthomson@gibsondunn.com)

Policymakers in Washington and other allied capitals have continued to push the limits of economic statecraft by imposing new sanctions and export controls on major economies such as Russia and China, and aggressively enforcing existing measures. A recent surge of collaboration among sister agencies and partner countries has also sharply increased the compliance burden on multinational firms. To help make sense of this fast-shifting landscape, attorneys from Gibson Dunn explain how U.S. sanctions and export controls work, discuss notable new trade restrictions and recent record-setting enforcement activity, and share best practices in multi-agency and multi-jurisdictional investigations and defense.

PANELISTS:

Adam M. Smith is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and serves as co-chair of the firm’s International Trade Practice Group. He is an experienced international lawyer with a focus on international trade compliance and white collar investigations, including federal and state economic sanctions enforcement, CFIUS, the Foreign Corrupt Practices Act, embargoes, and export and import controls.

Clients benefit from Adam’s experience in the Obama Administration, where he was Senior Advisor to the Director of the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and Director for Multilateral Affairs on the National Security Council. At OFAC, he was instrumental in shaping and enforcing sanctions policies, briefing Congressional and private sector leaders, conducting extensive international outreach, and negotiating complex agreements. On the National Security Council, he advised the President on international sanctions, coordinated inter-agency efforts, and developed strategies to counter corruption and promote asset recovery. Adam is admitted to practice in District of Columbia and the State of Maryland.

Christopher T. Timura is a partner in the Washington D.C. office of Gibson, Dunn & Crutcher LLP and a member of the firm’s International Trade, White Collar Defense and Investigations, and ESG Practice Groups. Chris helps clients solve problems that arise at the intersection of U.S. national security, foreign policy, and international trade regulation. Chris advises clients on compliance with U.S. export controls (ITAR and EAR), import controls, and economic sanctions, and advocates for clients before the departments of State (DDTC), Treasury (OFAC and CFIUS), Commerce (BIS), Homeland Security (Customs & Border Protection), and Justice in civil and criminal enforcement actions, UFLPA and other forced labor-related detentions, and investment reviews. His clients span sectors and range from start-ups to Global 500 companies. He is regularly ranked in Chambers Global and U.S.A. guides for his work and is a regular speaker and writer on the policy drivers, trends, and impacts of evolving international trade policy and regulation. Chris is admitted to practice in the District of Columbia.

Scott Toussaint is a senior associate in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the firm’s International Trade Practice Group. His practice focuses on compliance with U.S. laws governing international business transactions, including economic sanctions, export controls, and foreign investment in the United States. He advises clients on matters before the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), the Committee on Foreign Investment in the United States (CFIUS), and other regulatory and enforcement agencies. Scott has extensive experience counseling U.S. and foreign companies on compliance with OFAC sanctions, obtaining licenses and authorizations, developing corporate compliance programs, and assessing the national security implications of proposed mergers and acquisitions. Scott is admitted to practice in the State of California and the District of Columbia.

Anna Searcey is a litigation associate in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of both the International Trade, and White Collar Defense and Investigations practice groups. Her experience includes conducting internal investigations for multinational corporate clients, representing corporate and individual clients in government investigations involving the Department of Justice and other regulatory and enforcement agencies, and advising clients regarding the development of their compliance and ethics programs. She also advises clients on U.S. economic sanctions and export controls, including conducting company-wide risk assessments, strengthening trade compliance programs, and developing restricted-party screening protocols. Anna is admitted to practice in the District of Columbia and Virginia. She is also admitted to practice before the United States District Court for the District of Maryland and the United States Court of Appeals for the Fourth Circuit.

MCLE CREDIT INFORMATION:

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour in the General Category.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

Partners from Gibson Dunn’s antitrust group discuss recent changes to the Hart-Scott-Rodino rules, including a review of key changes, their potential impact on HSR filing preparation and transaction timelines, as well as preliminary thoughts on new best practices to address these developments.

PANELISTS:

Joshua Lipton is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He maintains a broad-based antitrust and consumer protection practice, including litigation in state and federal courts, merger and acquisition investigations, civil and criminal antitrust and consumer protection investigations by government authorities, and antitrust counseling.

Admissions: District of Columbia Bar

Sophia (Vandergrift) Hansell is a partner in the Washington, D.C. office of Gibson, Dunn and Crutcher. She is a member of the Antitrust and Competition Practice Group. Before joining the firm, Ms. Hansell served as an attorney in the Mergers IV Division of the Federal Trade Commission’s Bureau of Competition, where she focused on merger review and enforcement litigation. At the FTC, Ms. Hansell was a core member of trial teams that blocked proposed mergers for Sysco and US Foods, Advocate Health Care and NorthShore University HealthSystem, and Wilhelmsen and Drew Marine. Previously, Ms. Hansell served in the United States Attorney’s Office for the District of Columbia as a Special Assistant United States Attorney in the General Crimes Division. Leveraging her experience in government enforcement, Ms. Hansell’s practice focuses on complex antitrust litigation and investigations before the Department of Justice, Federal Trade Commission, and state attorneys general. She also has experience counseling companies on a broad range of competition issues relating to M&A transactions, including pre-deal risk assessments, transaction negotiations, and gun jumping issues. Ms. Hansell also develops and executes strategies to secure merger clearance with U.S. and foreign competition authorities.

Admissions: District of Columbia Bar, Virginia Bar

Michael Perry is a partner in the Washington, D.C. office of Gibson Dunn & Crutcher and a member of the firm’s Antitrust and Competition Practice Group. Michael represents clients in merger and non-merger related investigations before the U.S. Federal Trade Commission and the U.S. Department of Justice, and complex private and government antitrust litigation. His practice spans a variety of industries, including healthcare and life sciences, energy, and technology, and he is experienced in issues at the intersection of antitrust and intellectual property law. Michael previously served as Counsel to the Director of the Federal Trade Commission’s Bureau of Competition from 2015 to 2016 and as an attorney in the agency’s healthcare division. During his tenure at the FTC, Michael played an integral role in many of the agency’s most significant antitrust enforcement actions, including FTC v. Actavis, FTC v. Cephalon, FTC v. Sysco, and FTC v. St. Luke’s Health System.

Admissions: District of Columbia Bar, California Bar

Jamie France is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the firm’s Antitrust and Competition Practice Group. She represents clients in antitrust merger and non-merger investigations before the U.S. Federal Trade Commission, U.S. Department of Justice Antitrust Division, state Attorneys General, and international competition authorities, as well as in complex private and government antitrust litigation. She also counsels clients on a range of antitrust merger and conduct matters. Jamie joined the firm after six years as an attorney in the Mergers IV Division of the Federal Trade Commission’s Bureau of Competition, where she served in lead roles on high-profile merger investigations and enforcement actions. Jamie has significant experience litigating merger challenges and was an integral member of the FTC’s trial teams on FTC v. Thomas Jefferson University, FTC v. Hackensack Meridian Health, FTC v. Sanford Health, FTC v. Advocate Health Care Network, and FTC v. Benco Dental Supply. She was twice honored with the FTC’s Janet D. Steiger Award for her contributions to the Sanford and Advocate litigations.

Admissions: District of Columbia Bar, New York Bar

MCLE CREDIT INFORMATION:

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour in the General Category.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

Gibson Dunn has advised Helmerich & Payne, Inc. and its wholly owned subsidiary, HP Falcon Investments, LLC, on its accelerated bookbuild offering to institutional investors of 159,652,173 existing ordinary shares in ADNOC Drilling Company P.J.S.C. The sale generated proceeds of approximately $197 million.

The Gibson Dunn team was led by partners Marwan Elaraby (Dubai), Ibrahim Soumrany (Dubai) and Hillary Holmes (Houston), and included associates Adri Langemeier (Houston), Ian Mwiti Mathenge (Abu Dhabi), and Huw Thomas (Abu Dhabi).