Gibson Dunn & Crutcher LLP advised private equity firm Cinven on the disposal of its stake in the Planasa Group, a global leader in the agri-food sector, to EW Group, a family-owned international group with key businesses in genetics, health, diagnostics, nutrition and food.

This transaction will allow EW Group to strategically expand its breeding activities into the area of fruit and vegetable breeding.

Gibson Dunn & Crutcher team was led by European Co-Chair of Private Equity Federico Fruhbeck, M&A and Private Equity partners Alice Brogi, Ariel Harroch and Judith Raoul-Bardy, as well as Labor & Employment partner Nataline Fleury.

The firm acted alongside Spanish firm Perez-Llorca on this transaction.

On June 29th, 2023, the Department of the Interior (“DOI”), acting through the Bureau of Ocean Energy Management (“BOEM”), published a proposed rule that would modify the criteria it uses to determine financial assurance and bond requirements for the offshore oil and gas industry in the Outer Continental Shelf (“OCS”).[1] This proposed rule modifies and does away with a proposed joint rulemaking with the Bureau of Safety and Environmental Enforcement (“BSEE”) from October 16, 2020 which also sought to update BOEM’s financial assurance criteria, along with other BSEE-administered regulations (further described in Section II below). This latest iteration is intended by BOEM to be more protective of taxpayers by ensuring that OCS lessees have sufficient resources to meet their lease and regulatory obligations.

The publication of the proposed rule triggered a 60-day comment period during which BOEM sought comments from the public and offshore oil and gas industry (further described in Section IV below). The comment period closed on September 7, 2023, and BOEM will now review and analyze all comments that were submitted during the comment period and may choose to modify the proposed rule, issue a final rule to be effective no sooner than 30 days after publication in the Federal Register, withdraw the proposal, or re-open the comment period. This alert will discuss (a) the history and current state of BOEM’s financial assurance regulations and the proposed changes thereto, (b) potential industry impacts as a result of the proposed changes, and (c) a general overview of the significant comments received by BOEM during the comment period.

History of Financial Assurance Rules and Proposed Changes

BOEM’s current regulations contemplate two forms of financial assurance to ensure that a grant holder or lessee can fulfill its regulatory and contractual obligations, including decommissioning liabilities: (a) base bonds in amounts prescribed by the regulations and (b) supplemental financial assurance, determined on the basis of a five-factor test. The posting of base bonds and any additional financial assurance is intended to cover the costs of clean-up and the decommissioning of offshore wells and infrastructure once they are no longer in use and to ensure that the federal government does not have to perform such activities, with taxpayers footing the bill.[2]

BOEM requires all lessees of an OCS oil and gas or sulfur lease to post base bonds at the time of (a) issuance of a new lease or (b) assignment of an existing lease. Base bonds can range from $50,000 for a lease-specific bond with no approved operational activity up to $3,000,000 for an area-wide bond that includes a development production plan.[3]

BOEM’s Regional Director may determine that additional security above the base bond is necessary. This additional security is often referred to as supplemental financial assurance and is determined based on the Regional Director’s evaluation of a lessee or grant holder’s ability to carry out present and future financial obligations demonstrated by a five-factor test. The five factors that the Regional Director will consider are (a) financial capacity, (b) projected financial strength (initial proposals that were done away with would have considered net worth in determining financial strength), (c) business stability, (d) record of compliance with current regulations, laws, and lease terms, and (e) reliability in meeting credit rating obligations. The Regional Director will determine the amount of supplemental financial assurance required to guarantee compliance, considering potential underpayment of royalty and cumulative decommissioning obligations.[4]

In October of 2020, BOEM and BSEE issued a joint-proposed rule with the intention of revising BOEM’s financial assurance regulations and BSEE’s decommissioning orders. This joint-proposed rule would have modified BOEM’s financial assurance requirements such that BOEM would consider a lessee’s credit rating from certain recognized rating agencies and proved reserves to determine whether supplemental financial assurance would be required. BOEM proposed an S&P Global Ratings (“S&P”) credit rating threshold of BB or a Ba3 from Moody’s Investor Service (“Moody’s”). Under the proposed framework, BOEM would waive supplemental financial assurance requirements of lessees in the event their predecessors had strong credit ratings. Ultimately, however, in response to comments received by BOEM and BSEE, they decided not to proceed with the joint-proposed rule.[5]

BOEM’s 2023 iteration of the proposed rule would update its criteria for determining whether oil, gas, and sulfur lessees, Rights-of-Use Easement grant holders, and Right-of-Way grant holders may be required to provide supplemental financial assurance. The change is intended to better protect taxpayers from bearing the cost of facility decommissioning and financial risks associated with OCS development, such as oil spill cleanup and other environmental remediation by switching to a metric more predictive of financial stress and bankruptcy (as discussed below), thus allowing BOEM to ensure vulnerable lessees and grant holders are providing adequate security for their decommissioning obligations and protecting the federal government, and, in-turn, the taxpayer from having to absorb said obligations in the event of default. In its latest form, the proposed rule does away with the five-factor test and, similar to the 2020 proposal, instead considers an OCS lessee’s (a) credit rating and (b) proved oil reserves in determining whether a grant holder or lessee in the OCS is required to obtain supplemental financial assurance.

Based on its credit rating and the valuation of its proved oil reserves, an OCS lessee would not be required by BOEM to provide supplemental financial assurance in any of the following cases: (a) if the lessee has an investment grade credit rating (greater than or equal to either BBB- from S&P or Baa3 from Moody’s),[6] (b) if there are multiple co-lessees on a lease, if any one lessee meets the credit rating threshold, or (c) for leases where all lessees are below investment grade, if the value of the lease’s proved oil and gas reserves is three times the decommissioning cost estimate for such lease. The shift from relying primarily on the net worth of a lessee to its credit rating to determine whether supplemental financial assurance is needed is based on studies that suggest a strong correlation between credit rating and the probability of default due to credit ratings being based on cash flow, debt-to-earnings ratios, debt-to-funds ratios, and past performance, amongst other financial metrics.[7] The ability of an entity’s credit rating to predict financial distress and, in turn, an inability to absorb future decommissioning liabilities better than its net worth will allow BOEM to ensure those lessees and grant holders that are most vulnerable to defaulting will have provided sufficient security to cover their liabilities in the form of supplemental financial assurance.

Further, under the proposed rules, BOEM will no longer set a lower supplemental financial assurance requirement for lessees with financially strong predecessor lessees, as was proposed by BOEM and BSEE in their 2020 joint-proposed rule. While BOEM will retain the authority to pursue predecessor lessees for the performance of decommissioning, the proposed rule would not allow BOEM to rely upon the financial strength of predecessor lessees when determining whether, or how much, supplemental financial assurance should be provided by current OCS leaseholders, thus ensuring that current lessees have the financial capability to fulfill decommissioning obligations and discouraging lessees from ignoring end-of-life decommissioning costs, further reducing the likelihood that such obligations would fall upon the federal government and taxpayers in the event of default.

In order to value the proved oil and gas reserves, the proposed rules require lessees to submit a reserve report that complies with the SEC’s accounting and reporting standards valuing the oil and gas reserves located on a given lease. Leases for which the value of the reserves exceeds three times the cost of the associated decommissioning estimate (using BSEE’s P70 decommissioning level, which provides a 70% likelihood of covering the full cost of decommissioning) would not be required to obtain supplemental financial assurance. Under the proposal, the P70 value would be used to set the amount of any required supplemental financial assurance.

In order to ease the significant financial burden on impacted lessees and grant holders, BOEM proposes to phase in its new bonding requirements over a three-year period, whereby a lessee receiving a supplemental financial assurance demand will be required to post 33% of the total financial assurance amount by the deadline listed in the demand and a second 33% of the total financial assurance amount by the end of the second year after receipt of the demand letter, with the final 33% of the total assurance amount due within 36 months after receipt of the demand letter. If a lessee’s credit rating improves to investment grade during the three-year period, BOEM will no longer collect the remaining financial assurance and will return any supplemental financial assurance previously provided.

Industry Impacts

BOEM’s proposed rule changes will be at the front of OCS lessees’ minds for the next few years. Investment grade companies will have new opportunities because they will be more attractive as lease partners. Meanwhile, sub-investment grade companies, particularly “small businesses” (which have less than 1,250 to 1,500 employees),[8] will have to figure out how to navigate the costs and challenges of complying with these new changes.

The most obvious impact will be the new premiums for the supplemental financial assurance that lessees will have to acquire in order to comply with the rule, which is expected to cost sub-investment grade companies an additional $319 million per year (assuming 7% discounting).[9] The costs of these new premiums will fall disproportionately on the 76% of OCS lessees that are small businesses which, without the support from an investment grade co-lessee, may have difficulty satisfying either prong of the revised financial assurance rule. The average investment grade company has a net worth of approximately $115 billion,[10] which is a hurdle that most small businesses are unlikely to meet. Small businesses also tend to focus on late-stage wind down of assets to extract value from marginal wells and will have a harder time meeting the 3x ratio of reserve value to decommissioning liability than larger entities that are drilling new reserves.[11] Relying on the ratio of reserve value to decommissioning liability likely may not be a long-term solution because (a) the lessee would be actively producing the asset (and lowering the ratio) and (b) in the event of a downturn in oil prices, the reserve value could get marked down and the lessee would be forced to secure a bond in a time of relative economic distress.

For some small businesses, these rules may change the calculus on whether to seek an investment grade partner for any current or future offshore projects. The current method of determining whether a lessee needed to provide additional financial security relied on a mix of objective and non-objective measures (see the five-factor test described in Section II above) that afforded small businesses the opportunity to avoid the need to post additional bonds by showing a history of sound operatorship and regulatory compliance without looking exclusively to hard financial metrics or a rating from a credit agency. The proposed rule may eliminate this opportunity. Seeking an investment grade partner may be a more attractive alternative than paying for additional bonding, securing an adequate credit rating, or relying on the ratio of reserves to decommissioning liabilities.

BOEM assesses that, based on P70 levels, there is approximately $42.8 billion of offshore decommissioning liability, $20.2 billion of which is held by sub-investment grade companies.[12] The revised bonding requirements would result in a $9.2 billion increase in the amount of bonds to cover that liability (on top of the approximately $3.0 billion that is currently in place).[13] BOEM cited the need to protect taxpayers from potential decommissioning liability as a justification for revising the rule and pointed to the more than 30 lessee bankruptcies since 2009, which resulted in $7.5 billion of un-bonded decommissioning liabilities. The ultimate risk to the taxpayer was not near that figure (BSEE requested a mere $30 million in its FY2023 budget to address unbonded liabilities).[14] In the vast majority of cases, the decommissioning costs were covered by either co-lessees or predecessors or acquired by entities who purchased the related assets out of bankruptcy. Ultimately, the biggest winner of these changes may be predecessors to the leases who sought a “clean exit” and may now have greater barriers between outstanding decommissioning liabilities and their balance sheets.

Significant Comments/Overview of Comments

During the comment period, BOEM sought comments on, amongst other things, (a) the wisdom in setting the supplemental financial assurance requirements based on each of the P50, P70, and P90 decommissioning liability levels, (b) the appropriateness of relying on S&P’s Credit Analytics credit model, or other similar, widely accepted credit rating models to generate proxy credit ratings and the appropriateness of relying on lessee and grant holder credit ratings, including whether BOEM has proposed an appropriate credit rating threshold of BBB-, and if not, what threshold would best protect taxpayer interests while balancing burdens on the industry, (c) whether financial assurance should be required of all companies, regardless of credit rating, and the impacts such a requirement might have on OCS investment and on potential taxpayer liabilities, (d) whether the elimination of the current five-factor test would create a disincentive to comply with regulations, (e) whether the use of a minimum number of years of production remaining is an appropriate criteria to qualify for an exemption from supplemental financial assurance as an alternative to the 3:1 ratio of value of reserves to decommissioning costs, and (f) the costs and benefits of considering the financial capacity of predecessor lessees or grantees in determining the level of supplemental financial assurance required.

BOEM received close to 1,200 comments during the public comment period which closed on September 7 after the initial August 28 deadline was extended. The comments received were generally opposed to the proposed rule, questioning the validity of BOEM’s claims and highlighting the lack of supporting evidence provided by BOEM. The submitted public comments generally claimed that BOEM (a) did not adequately account for adverse economic consequences, (b) conducted an inadequate cost-benefit analysis, and (c) overstated the current impact to taxpayers, and the claimed benefits to the taxpayer, of the proposed rule. The public comments further claimed that the proposed rule will disproportionately burden smaller businesses, and will “create more emissions harm than benefit by making it more expensive to explore in the Gulf of Mexico, resulting in more demand for higher carbon intensity oil from global sources.”[15]

One comment of note cited a study which independently calculated OCS plugging and abandonment liability, assessed the risk it presents to the U.S. taxpayer, and performed a cost-benefit analysis of the proposed rule’s economic impact on the offshore oil and gas industry, the Gulf Coast, and the United States. According to the study, additional bonding requirements will spur bankruptcies as surety markets have threatened to exit the offshore sector, reducing available bonding capacity and driving up costs, which will in turn guarantee that small independent lessees will not be able to obtain the required supplemental bonding. Further, the study claims that additional bonding will reduce offshore drilling and related production to the tune of approximately 55 million barrels of oil equivalent over a 10-year period, reducing associated U.S. royalty revenues by approximately $573 million over the 10-year period. Moreover, according to the study, additional bonding requirements will cause reduced revenues and operations for companies serving the OCS, resulting in a loss of jobs and tax revenues along the Gulf Coast, with the study estimating the impact of the additional bonding requirements on the U.S. Gross Domestic Product to be a reduction of approximately $9.9 billion over a 10-year period.[16]

Conclusion

BOEM’s proposed rule is intended to safeguard U.S. taxpayers by strengthening bonding and financial assurance requirements for the offshore oil and gas industry in the OCS; however, as seen in the volume and content of public comments BOEM has received, those in the industry are skeptical and fear that it may do more harm than good. How BOEM proceeds from here bears close scrutiny.

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[1] Risk Management and Financial Assurance for OCS Lease and Grant Obligations, 88 Fed. Reg. 42136-42176 (June 29, 2023).

[2] Id.

[3] 30 CFR 556.900.

[4] 30 CFR 556.901.

[5] BSEE instead issued a stand-alone final rule (88 Fed. Reg. 23569) effective as of May 18, 2023, which (a) included Rights-of-Use and Easements (“RUEs”) and RUE grant holders in the agency’s decommissioning regulations for the first time, and (b) formalized BSEE’s procedures for enforcement of decommissioning orders issued to predecessors when a subsequent assignee defaults on its obligations. RUE grants are authorizations from BOEM to use a portion of the seabed not encompassed by the holder’s lease to construct, modify, or maintain platforms, artificial islands, facilities, installations, and other devices that support exploration, development, or production from another lease. Pursuant to the BSEE rule, RUE holders and prior lessees or owners of operating rights are jointly and severally liable for meeting accrued decommissioning obligations for infrastructure installed subject to a lease and maintained after lease expiration under a RUE. Further, when BSEE issues a decommissioning order to predecessors, it requires them to monitor, maintain, and decommission all wells, pipelines, and facilities by (a) initiating maintenance and monitoring within 30 days of receipt, (b) designating an operator or agent for decommissioning activities within 90 days, and (c) submitting a decommissioning plan to BSEE within 150 days. BSEE did not promulgate previous proposals (x) requiring parties appealing decommissioning orders to file an appeal bond or (y) requiring the proceeding up the chain of title in “reverse chronological order” against predecessor lessees, grant holders, and owners of operating rights when subsequent assignees fail to perform.

[6] For entities not rated by a major credit rating agency, BOEM proposes using an “equivalent proxy credit rating.” Such entities would be required to submit audited financial statements, which BOEM would use to determine its equivalent proxy credit rating using a commercially available credit model. (88 Fed. Reg. 42143).

[7] 88 Fed. Reg. 42136-42176 (June 29, 2023).

[8] See Id. (BOEM is required to analyze the impact of its regulations on “small” entities pursuant to the Regulatory Flexibility Act, 5 U.S.C. 601–12. The Small Business Administration (SBA) defines a small entity as one that is “independently owned and operated and which is not dominant in its field of operation.” What constitutes a “small business” varies by industry, but in the context of offshore hydrocarbon development, the SBA defines a small business as one with fewer than (i) 1,250 employees for upstream companies and (ii) 1,500 employees for midstream companies.)

[9] Id.

[10] Id.

[11] See Id.

[12] Id.

[13] Id.; BOEM Collateral List Report.

[14] Id.

[15] For comments, please see: https://www.regulations.gov/document/BOEM-2023-0027-0001/comment.

[16] https://opportune.com/insights/news/a-cost-benefit-analysis-of-increased-ocs-bonding-july-2023.

The following Gibson Dunn attorneys assisted in preparing this client update: Michael P. Darden, Rahul D. Vashi, Graham Valenta, Zain Hassan, and Luke Strother.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Oil and Gas practice group, or the following authors:

Oil and Gas Group:
Michael P. Darden – Co-Chair, Houston (+1 346-718-6789, [email protected])
Rahul D. Vashi – Co-Chair, Houston (+1 346-718-6659, [email protected])

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.

On September 11, 2023, the Chief Judge of the U.S. District Court for the Eastern District of Washington issued a strongly worded order confirming his August 11, 2023 dismissal of a stockholder derivative suit, National Center for Public Policy Research v. Schultz et al., No. 2:22-cv-00267. The suit, brought by a conservative think tank as a derivative claim purportedly on behalf of Starbucks Corporation against certain of its officers and directors, sought declaratory judgment and injunctive relief on the grounds that some of Starbucks’ diversity initiatives allegedly violated Section 1981 of the 1866 Civil Rights Act, Title VII of the Civil Rights Act of 1964, and state anti-discrimination laws, and further alleged that the policies constituted a breach of directors’ fiduciary duties.

A. Allegations

In its August 30, 2022 complaint (which was removed to federal court on November 7), the National Center for Public Policy Research (“NCPPR”) took aim at certain of Starbucks’ diversity, equity, and inclusion (“DEI”) policies, including (1) Starbucks’ goal to “achiev[e] BIPOC representation of at least 30% at all corporate levels and at least 40% [of] all retail and manufacturing roles by 2025” and various initiatives aimed at achieving that goal (Compl. ¶ 51); (2) its commitment to increase its spending with diverse suppliers from $800 million “to $1.5 billion by 2030” (id. ¶ 53); (3) its goal of allocating 15% of Starbucks’ 2022 advertising budget to minority-owned and targeted media companies (id.); and (4) its internal “Leadership Accelerator Program,” which would initially only be open to certain racially and ethnically diverse employees, and which aimed to improve those employees’ “capacity for self-promotion, advocacy and career navigation” and help them access “the leadership pipeline at Starbucks” (id).

According to NCPPR, these policies “facially violate § 1981” because they “expressly require the ‘but-for’ exclusion of individuals and businesses from contracts because of their race” (Compl. ¶ 88), and “facially violate Title VII” because they purport to make hiring, firing, compensation, and promotional decisions on the basis of race. See id. ¶ 98. The plaintiff also argued that the policies “expose Starbucks to potential litigation” and other liabilities (id. ¶ 110), and that implementing the policies breached Starbucks directors’ fiduciary duties, as they “knew or should have known that the [p]olicies were illegal.” Id. ¶ 127.

B. Opinion

Chief Judge Stanley A. Bastian granted Starbucks’ and the individual defendants’ motion to dismiss on August 11, 2023. Chief Judge Bastian indicated in an oral decision that a stockholder derivative suit was an improper forum for making political statements, and observed, “If the plaintiff doesn’t want to be invested in ‘woke’ corporate America, perhaps it should seek other investment opportunities rather than wasting this court’s time.” He also stated that “[t]he plaintiffs have ignored the fundamental rules of corporate law, including the business judgment rule. Courts of law have no business involving themselves with legitimate and legal decisions made by the board of directors of public corporations.”

The written order, issued on September 11, echoed these sentiments, noting that “Plaintiff is apparently unhappy with its investment decisions in so-called ‘woke’ corporations. This Court is uncertain what that term means but Plaintiff uses it repeatedly as somehow negative.” Order at 8. The court disapproved of the political nature of the complaint, stating, “This Complaint has no business being before this Court and resembles nothing more than a political platform,” and “[w]hether DEI and ESG initiatives are good for addressing long simmering inequalities in American society is up for the political branches to decide. If Plaintiff remains so concerned with Starbucks’ DEI and ESG initiatives and programs, the American version of capitalism allows them to freely reallocate their capital elsewhere.” Id. Notably, the court considered the context of NCPPR’s overall mission, explaining that “Plaintiff has a clear goal of dismantling what it sees as destructive DEI and ESG initiatives in corporate America. Contempt for DEI and ESG programming and practices is clear in Plaintiff’s publications and literature.” Id. at 7. The court concluded that, “[b]ased on the briefing and nature of Plaintiff’s self-described political interests, it is clear to the Court that Plaintiff did not file this action to enforce the interests of Starbucks, but to advance its own political and public policy agendas.” Id.

In its opinion, the court found it “unnecessary” to address the adequacy of the plaintiff’s factual and legal allegations under a Fed. R. Civ. P. 12(b)(6) standard (id. at 8), and instead analyzed “whether a derivative plaintiff fairly and adequately represents the interests of a corporation or its shareholders.” Id. at 5. The court explained that “[i]n Washington corporate law [where Starbucks is incorporated], a corporation’s board of directors have exclusive authority to make decisions concerning the management of the corporation’s business” and that “[s]hareholder derivative lawsuits are disfavored and may be brought only in exceptional circumstances.” Id. at 6 (citations and quotations omitted). Thus, the court declined to allow NCPPR to litigate these claims on behalf of Starbucks and its stockholders, adding, “It is clear Plaintiff is pursuing its personal interests rather than those of Starbucks.” Id. The court further determined that, far from representing the interests of most Starbucks stockholders, the plaintiff “has shown obvious vindictiveness toward Starbucks,” aimed to “cause significant harm to Starbucks and other investors,” and “lacks the support of the vast majority of Starbucks shareholders.” Id. at 6-7.

C. Implications

The Starbucks suit predated the Supreme Court’s decision in Students for Fair Admissions v. President & Fellows of Harvard Coll., No. 20-1199 (U.S. Jun. 29, 2023) (“SFFA”), which struck down the use of affirmative action in college and university admissions. Nevertheless, this case has been closely watched by companies that have been affected by increasing scrutiny of corporate DEI post-SFFA. The SFFA decision incited a flurry of reverse-discrimination litigation and other challenges to corporate DEI policies, as well as a warning from a group of 13 Republican attorneys general to Fortune 100 companies, threatening “serious legal consequences” over certain DEI policies.

The opinion in NCPPR suggests that, despite increasing scrutiny of DEI policies, there will be substantial defenses to shareholder derivative litigation in this area, as courts tend to disfavor judicial meddling “with reasonable and legal decisions made by the board of directors of public corporations.” Order, at 6. Indeed, two other recent high profile shareholder cases challenging corporate diversity initiatives or alleging failure to abide by those initiatives—including in Delaware, where many companies are incorporated—have not survived beyond the motion to dismiss stage.[1]

___________________________

[1] See Simeone v. Walt Disney Co., 2023 WL 4208481, at *1 (Del. Ch. Jun. 27, 2023) (in lawsuit where plaintiff requested records to determine whether Disney breached its fiduciary duties by failing to withdraw its public opposition to Florida’s so-called “Don’t Say Gay” bill, declining to grant books and records request on the grounds that Disney’s “business decision” “cannot provide a credible basis to suspect potential mismanagement irrespective of its outcome”); Lee v. Fisher et al., 70 F.4th 1129 (9th Cir. 2023) (dismissing on procedural grounds a lawsuit alleging that Gap Inc. and its directors breached fiduciary duties by ignoring public promises to increase management-level diversity).

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Jessica Brown, Brian Lutz, Elizabeth Ising, Ronald Mueller, Lori Zyskowski, and Anna Ziv.

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, Securities Litigation, or Securities Regulation and Corporate Governance practice groups, the authors, or the following practice leaders and partners:

Jessica Brown – Partner, Labor & Employment Group, Denver (+1 303-298-5944, [email protected])

Elizabeth A. Ising – Partner & Co-Chair, Securities Regulation & Corporate Governance Group, Washington, D.C. (+1 202-955-8287, [email protected])

Monica K. Loseman – Partner & Co-Chair, Securities Litigation Group, Denver (+1 303-298-5784, [email protected])

Brian Lutz – Partner & Co-Chair, Securities Litigation Group, San Francisco (+1 415-393-8379, [email protected])

Jason J. Mendro – Partner, Securities Litigation Group, Washington, D.C. (+1 202-887-3726, [email protected])

Ronald O. Mueller – Partner, Securities Regulation & Corporate Governance Group, Washington, D.C. (+1 202-955-8671, [email protected])

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group, Washington, D.C. (+1 202-955-8242, [email protected])

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group, Los Angeles (+1 213-229-7107, [email protected])

Jessica Valenzuela – Partner, Securities Litigation Group, Palo Alto (+1 650-849-5282, [email protected])

Craig Varnen – Partner & Co-Chair, Securities Litigation Group, Los Angeles (+1 213-229-7922, [email protected])

Lori Zyskowski – Partner & Co-Chair, Securities Regulation & Corporate Governance Group, New York (+1 212-351-2309, [email protected])

For the seventh successive Congress, Gibson Dunn is pleased to release a table of authorities summarizing the oversight and investigative (“O&I”) authorities of each House and Senate committee. Congressional investigations can arise with little warning and immediately attract the media spotlight. Understanding the full extent of a committee’s investigative arsenal is crucial to successfully navigating a congressional investigation.

Congressional committees have broad investigatory powers, including the power to issue subpoenas to compel witnesses to produce documents, testify at committee hearings, and, in some cases, appear for depositions. Committees may adopt their own procedural rules for issuing subpoenas, taking testimony, and conducting depositions, and many committees update their rules each Congress. Committees are also subject to the rules of the full House or Senate, and, in the House, the Chair of the Committee on Rules issues regulations prescribing general deposition procedures applicable to all committees.

Failing to comply with a subpoena from a committee or to otherwise adhere to committee rules during an investigation may have severe legal, strategic, and reputational consequences. If a subpoena recipient refuses to comply with a subpoena, committees may resort to additional demands, initiate judicial enforcement or contempt proceedings, and/or generate negative press coverage of the noncompliant recipient. Although rarely used, criminal contempt prosecutions can also be brought in the event of willful refusals to comply with lawful congressional subpoenas. As we have detailed in previous client alerts,[1] however, defenses exist to congressional subpoenas, including challenging a committee’s jurisdiction, asserting attorney-client privilege and work product claims, and raising constitutional challenges.

With Republicans in control of the House, committee investigations to date have focused on environmental, social, and corporate governance (“ESG”) investing, social media censorship, collusion between the government and private parties to censor conservative speech, China, and COVID-19 origins and the government’s response to the pandemic. In the Senate, where Democrats have an effective one-seat majority, investigations have centered on climate change, healthcare, prescription drug costs and labor-related issues. We also anticipate that committees in both chambers will pursue investigations regarding the power of technology companies, international corporate and military competition and espionage, cybersecurity breaches, and supply chain issues, including forced and child labor.

Attached you will find a table that presents key investigative powers and authorities for each House and Senate committee. The table includes information for each committee that answers key O&I related questions, including:

What is the scope of the committee’s investigative authority?
What are the procedures for exercising the committee’s subpoena power?
Can the chair of the committee issue a subpoena unilaterally?
Does the committee permit staff to question witnesses at a hearing?
Can the committee compel a witness to sit for a deposition? If so, what are the procedures for doing so?
What are the rules that apply to depositions before the committee?

The table includes hyperlinks to the sources of committee rules and jurisdiction and is meant to be a one-stop-shop for information relevant to O&I activities.

Below, we have highlighted noteworthy changes in the committee rules, which House and Senate committees of the 118th Congress adopted earlier this year.

If you see something missing from our discussion or the table, please let us know. We welcome your feedback.

Some items of note:

House:

As we detailed in earlier this year,[2] the House Republican majority is well-equipped to conduct investigations. In 2019, the new Democratic majority expanded their set of investigative tools and continued to add new ones in 2021. Republicans are taking full advantage of those expanded tools.
The Rules of the 118th Congress authorized three new investigative committees in the House: The Committee on Oversight and Accountability (formerly known as the Committee on Oversight and Reform) now has a Select Subcommittee on the Coronavirus Pandemic; the House Judiciary Committee now has a Select Subcommittee on the Weaponization of the Federal Government; and the Rules package and a separate House resolution created a new full investigative committee, the Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party.
- The Select Subcommittee on the Coronavirus Pandemic is tasked with investigating and reporting on the origins of the COVID-19 pandemic, waste or fraud involving pandemic-relief funds, vaccine development, and COVID-related school closings. The Select Subcommittee does not have subpoena power nor legislative authority and, thus, cannot report legislation. However, the full Oversight and Accountability Committee or its Chair “may authorize and issue subpoenas to be returned at the select subcommittee,” and the select subcommittee can from “time to time” report to the House or any House committee the results of its investigations or legislative recommendations.[3] To date, the Select Subcommittee has focused on the origins of COVID-19, allegations of government cover-ups regarding its origins, and the consequences of school closures.
- The Select Subcommittee on the Weaponization of the Federal Government is directed to study and issue a final report on its findings regarding executive branch collection of information on and investigation of U.S. citizens as well as “how executive branch agencies work with, obtain information from, and provide information to the private sector, non-profit entities, or other government agencies to facilitate action against American citizens.”[4] The Select Subcommittee does not have its own subpoena authority, but the Chair of the full Judiciary Committee may issue subpoenas for the Subcommittee.[5] The Subcommittee has cast a wide net and has issued document and information requests to a broad range of companies, non-profits, and government entities.
- The Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party is directed to investigate and submit policy recommendations concerning the status of the economic, technological, and security progress of the Chinese Communist Party and its competition with the United States.[6] The Chair has the power to authorize and issue subpoenas for testimony and documents.[7] Thus far, the Select Committee has held seven hearings on a variety of topics relating to China’s economic aggression, human rights record, and threat to the security of the United States.

Senate:

In the Senate, the Democrats’ one-seat majority gives them significantly more power to investigate in the 118th Congress. During the 117th Congress, subpoenas required bipartisan support in the evenly divided Senate. Now, Democratic chairs can issue subpoenas with the consent of their ranking members or by majority vote of their committees. We’ve already seen a strong start to their investigative agenda in the 118th Congress, as evidenced by investigations into technology companies,[8] labor practices,[9] and bank failures.[10]
Although its rules have not meaningfully changed since last Congress, the Senate Health, Labor, Education and Pensions (“HELP”) Committee has interpreted its Rule 17(a) to require a separate vote to authorize an investigation prior to voting on authorizing a subpoena.
The Senate Budget Committee issued its first subpoena in decades in a congressional investigation. The move, which had bipartisan support, signals a possible expansion or congressional use to subpoenas to committees beyond those we typically see active in the investigatory space. The move indicates that Senate Democrats are actively strengthening their investigative arsenal across committees, particularly regarding subpoena and deposition authority.

Our table of authorities provides an overview of how individual committees can compel a witness to cooperate with their investigations. But each committee conducts congressional investigations in its own particular way, and investigations vary materially even within a particular committee. While our table of authorities provides a general overview of what rules apply in given circumstances, it is essential to look carefully at a committee’s rules and be familiar with its practices to understand how its authorities apply in a particular context.

Gibson Dunn lawyers have extensive experience defending targets of and witnesses in congressional investigations. They know how investigative committees operate and can anticipate strategies and moves in particular circumstances because they also ran or advised on congressional investigations when they worked on the Hill. If you have any questions about how a committee’s rules apply in a given circumstance or the ways in which a particular committee tends to exercise its authorities, please feel free to contact us for assistance. We are available to assist should a congressional committee seek testimony, information, or documents from you.

Table of Authorities of House and Senate Committees

_______________________________

[1] Michael Bopp, Thomas Hungar, and Megan Kiernan, 118th Congress: Investigative Tools And Potential Defenses, Law 360 (March 3, 2023), https://www.gibsondunn.com/wp-content/uploads/2023/03/Bopp-Hungar-Kiernan-118th-Congress-Investigative-Tools-And-Potential-Defenses-Law360-03-03-2023.pdf.

[2] Congressional Investigations in the 118th Congress: ESG, China, and the Biden Administration Take Center Stage, (Jan. 13, 2023), https://www.gibsondunn.com/wp-content/uploads/2023/01/congressional-investigations-in-118th-congress-esg-china-and-the-biden-administration-take-center-stage.pdf.

[3] H.R. Res. 5, 118th Cong. § 4(a)(2).

[4] H.R. Res. 12, 118th Cong. § 1(b)(1) (2023).

[5] H.R. Res. 12, 118th Cong. § 1(c)(1)(B) (2023).

[6] H.R. Res. 11, 118th Cong. § 1(b)(2) (2023).

[7] House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party, Committee Rule VI.

[8] Sen. Cruz Launches Sweeping Big Tech Oversight Investigation, (Feb. 13, 2023) https://www.commerce.senate.gov/2023/2/sen-cruz-launches-sweeping-big-tech-oversight-investigation.

[9] Chairman Sanders Questions Howard Schultz in HELP Committee Hearing and Calls on Starbucks to End the Illegal Union Busting, (Mar. 29, 2023) https://www.help.senate.gov/chair/newsroom/press/prepared-remarks-chairman-sanders-questions-howard-schultz-in-help-committee-hearing-and-calls-on-starbucks-to-end-the-illegal-union-busting.

[10] Recent Bank Failures and the Federal Regulatory Response, (Mar. 28, 2023) https://www.banking.senate.gov/hearings/recent-bank-failures-and-the-federal-regulatory-response.

The following Gibson Dunn attorneys assisted in preparing this client update: Michael D. Bopp, Thomas G. Hungar, Roscoe Jones, Jr., Amanda H. Neely, Daniel P. Smith, Tommy McCormac, Hayley Lawrence, and Wynne Leahy.

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 or the following lawyers in the firm’s Congressional Investigations group in Washington, D.C.:

Michael D. Bopp – Chair, Congressional Investigations Group (+1 202-955-8256, [email protected])

Thomas G. Hungar (+1 202-887-3784, [email protected])

Roscoe Jones, Jr. (+1 202-887-3530, [email protected])

Geopolitical tensions and strategic competition between the United States and China have increasingly influenced the investment landscape in recent years, implicating established regulatory frameworks such as that of the Committee on Foreign Investment in the United States (“CFIUS”), as well as driving non-traditional government actors to take action. Recently, plans to build a corn milling plant in North Dakota have caused states governments to consider their role in protecting both state and national security. In December 2022, CFIUS determined that it did not have jurisdiction to review the proposed acquisition of North Dakota land by a Chinese company, Fufeng Group, with the intent to build a $700 million corn milling plant. The Fufeng case generated significant national security and geopolitical debate in Washington given the proximity of the land to the Grand Forks Air Force Base.[1] These debates rapidly radiated beyond the beltway to state legislatures.

Since that CFIUS determination, lawmakers in a growing number of U.S. states have been quick to introduce and, in some cases, pass legislation that restricts foreign ownership of land within their states by governments, individuals, and/or entities associated with certain identified “foreign adversaries” of the United States. While the bills often include other “foreign adversaries,” most of the bills are particularly focused on China and Chinese investments. The list of states that have enacted such legislation in 2023 includes Alabama, Arkansas, Florida, Idaho, Indiana, Louisiana, Mississippi, Montana, North Dakota, Oklahoma, South Dakota, Tennessee, Utah, West Virginia, and Virginia—an additional 20 states have introduced bills that would regulate foreign ownership of real estate if enacted.[2]

In this alert, we discuss:

The typical contours of state legislation relating to certain foreign real estate activities;
The emerging trendline of state legislation regulating the acquisition of real estate by certain foreign persons;
A spotlight on Florida SB 264;
The closely watched case of Shen v. Simpson; and
Federal activity in this space, and the potential impact on state initiatives.

I. General Contours of State Legislation Restricting Certain Foreign Real Estate Activities

The bills introduced in state legislatures across the country in recent months vary in scope. They tend, however, to share certain core areas of focus:

The type of land restricted—e.g., agricultural land, land with proximity to military installations, or all real property;
The class of foreign persons restricted—e.g., foreign governments; government officials and political parties; designated military companies; foreign companies; foreign nationals; or a combination of the above;
The jurisdictions targeted—e.g., federally designated “foreign adversaries,” which includes China and the Hong Kong Special Administrative Region (“Hong Kong”), Cuba, Iran, North Korea, Russia, and the Nicolás Maduro Regime (“Maduro Regime”) of Venezuela;[3] a broader list which could also include countries such as Burma, Saudi Arabia, or Syria; or restrictions solely focused on China and Hong Kong;
The types of activities restricted—e.g., whether the restrictions apply to ownership/purchases, direct and indirect investments, and/or leaseholds;
Retroactivity and forced divestments; and
Specific exceptions and carve outs.

II. A New Trendline—With an Established Precedent

While the trendline of state governments imposing restrictions on certain foreign ownership of real estate is new, there is established precedent for state government involvement in the broader foreign policy sphere. Specifically, these laws are similar in type to the scores of state statutes that impose various restrictions on the ability of state actors (including pension funds and procurement offices) to do business with Iran or Sudan or with parties who refuse to do business with Israel. Such laws have withstood judicial challenge in large part because Congress has granted states the authority to impose such restrictions—to effectively legislate their own foreign policy in this narrow lane.[4] However, as of yet, Congress has not authorized the same powers to states regarding dealings with China or some of the other foreign states that these bills frequently address, such as Russia, Venezuela, and others. In addition, by implicitly or explicitly targeting nationals of foreign countries or seeking to force divestment of current interests, many of these state property laws may be vulnerable to other constitutional challenges based on equal protection or due process grounds, as discussed further in Section IV.

III. Spotlight on Florida SB 264

Of the various bills that have been introduced, Florida Senate Bill 264 (2023) (“SB 264”), has garnered significant attention as it is one of the most restrictive of this new wave of legislation.[5] SB 264 was codified at Florida Statutes § 692.201–.204, and took effect on July 1, 2023. As we discuss further in Section IV, SB 264 is also the subject of a constitutional and statutory challenge in the federal courts in the case of Shen v. Simpson (“Shen”).[6]

In particular, SB 264 contains three separate sections prohibiting covered foreign persons from owning or acquiring interests in land in Florida:

Section 692.202 states that “foreign principals” cannot “directly or indirectly own, have a controlling interest in, or acquire by purchase, grant, devise, or descent” any “agricultural land” in the state.[7]
- The term “foreign principal” captures, inter alia, governments and government officials; political parties and their members; partnerships or corporations organized under the laws of or having its principal place of business in, or persons (other than U.S. citizens or lawful permanent residents) domiciled in, a “foreign country of concern.”[8] The term “foreign country of concern” includes China, Russia, Iran, North Korea, Cuba, the Maduro Regime of Venezuela, and Syria, as well as “any agency of or any other entity of significant control of such foreign country of concern.”[9]
Section 692.203 applies the same prohibition to real property within ten miles of any “military installation”[10] or “critical infrastructure facility” (such as airports, seaports, power plants, or refineries).[11]
Section 692.204 goes further, specifically targeting China by prohibiting certain China-related persons from “directly or indirectly own[ing], hav[ing] a controlling interest in, or acquir[ing] by purchase, grant, devise or descent” any real property in Florida, including land, buildings, fixtures, and all other improvements to land.[12] This prohibition applies to the PRC government and the Chinese Communist Party, respective officials or members thereof; any partnership or corporation organized under the laws of or having its principal place of business in China, and its subsidiaries; and any person who is domiciled in China and who is not a U.S. citizen or lawful permanent resident, and “any person, entity, or collection of persons or entities described [above] having a controlling interest in a partnership, association, corporation, organization, trust, or any other legal entity or subsidiary formed for the purpose of owning real property in this state” (collectively, “Relevant Chinese Persons”).[13]

There are four exceptions provided under SB 264 that are applicable to the restrictions set out above (under Sections 692.202, 692.203 and 692.204). In summary, these are:

Ownership and interests in land or real property acquired prior to July 1, 2023—a foreign principal or Relevant Chinese Person that owns or acquires interests in land or real property that is subject to the restrictions set out above before July 1, 2023, may continue to own or hold such land or real property.[14] However, such foreign principal must register their property ownership with the Department of Agriculture and Consumer Services by January 1, 2024 (with respect to the restriction on agricultural land), or with the Department of Economic Opportunity by December 31, 2023 (with respect to real property that is not agricultural land).[15]
De minimis indirect interest—a foreign principal or Relevant Chinese Person may own or acquire land or real property that is subject to the restrictions set out above provided that the foreign principal or Relevant Chinese Person only has a “de minimus [sic] indirect interest” in such land or real property. A foreign principal or Relevant Chinese Person has a de minimis indirect interest if “any ownership is the result of [their] ownership of registered equities in a publicly traded company owning the land and if [their] ownership interest in the company is either: (a) less than 5 percent of any class of registered equities or less than 5 percent in the aggregate in multiple classes of registered equities; or (b) a noncontrolling interest in an entity controlled by a company that is both registered with the United States Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended, and is not a foreign entity.”[16]
Land or real property interests acquired by certain means—a foreign principal or Relevant Chinese Person may, on or after July 1, 2023, acquire land or real property that is subject to the restrictions set out above provided that such acquisition was by “devise or descent, through the enforcement of security interests, or through the collection of debts,” and provided that such foreign principal or Relevant Chinese Person “sells, transfers, or otherwise divests itself of such real property within 3 years after acquiring the real property.”[17] A Relevant Chinese Person relying on this exception, and who owns or acquires more than a de minimis indirect interest in real property in Florida on or after July 1, 2023, is required to register their real property within 30 days after the property is acquired.[18]
Residential real property—a foreign principal or a Relevant Chinese Person who is a natural person may purchase one residential real property that is up to two acres in size if all of the following apply: “(a) The parcel is not on or within 5 miles of any military installation in [Florida]. (b) The person has a current verified [U.S.] Visa that is not limited to authorizing tourist-based travel or official documentation confirming that the person has been granted asylum in the United States, and such visa or documentation authorizes the person to be legally present within [Florida]. (c) The purchase is in the name of the person who holds the visa or official documentation described in paragraph (b).”[19] Such foreign principles and Relevant Chinese Persons are required to register with the Department of Economic Opportunity within 30 days of owning or acquiring such residential real estate on or after July 1, 2023.[20] This exception only applies to residential real property, and is therefore not applicable to the restriction under Section 692.202 that applies with respect to agricultural land.

SB 264 remains untested in terms of enforcement, and the state has yet to provide significant regulatory guidance. At this point, the law appears to be broad in scope, seemingly restricting not only direct purchases of covered land but also indirect investments, such as through investment funds.

Moreover, SB 264 leaves important nuances unclear. For example, it is not clear from the plain language of SB 264 whether its restrictions extend to leasehold interests in addition to purchases and investments. However, we have seen some indications that the law does not. In August 2023, the Florida Department of Commerce released a Notice of Development of Rulemaking,[21] stating that it planned to “create a rule that aligns with new legislative changes from [SB 264] that prohibits the purchase of real property […] by foreign principals.” In the same notice, the Department explained that the subject area to be addressed is the “purchase of real property […] by foreign principals.” The fact that the Notice only refers to rulemaking regarding the purchase of real property, while making no mention of leases, could indicate that SB 264 will likely, at least at this stage, not apply to leasehold interests.[22]

Another question is whether Hong Kong, a popular place of incorporation for many companies (including those not based in a foreign country of concern) due to the ease of incorporation and favorable tax regime, will be treated as part of China for the purposes of SB 264. Although there is no Florida guidance on this point, the U.S. government revoked Hong Kong’s special status in 2020.[23] It now treats Hong Kong as part of China for trade and security purposes. For example, as we noted in our client alert, the Biden Administration’s recent Executive Order regarding outbound investment restrictions included Hong Kong as part of China. And, the U.S. Secretary of Commerce has explicitly included Hong Kong as part of China under U.S. export controls as well as federal regulation that designates China a “foreign adversary” for information security purposes.[24] Many of the other states that have passed or are considering legislation in this area have adopted the Department of Commerce definition, which includes Hong Kong as part of China.

IV. Shen v. Simpson—Key Developments and Areas to Watch

In May 2023, four Chinese citizens residing in Florida and a real estate brokerage firm that does business with Chinese citizens launched a constitutional challenge against SB 264, contending that it violates the Fourteenth Amendment’s Equal Protection and Due Process Clauses and the Supremacy Clause, as well as the Fair Housing Act.[25] Plaintiffs sought declaratory relief and a preliminary injunction to preclude the enforcement of SB 264. On August 17, 2023, the U.S. District Court for the Northern District of Florida denied the motion for a preliminary injunction, ruling that Plaintiffs had not shown that their case had a “substantial likelihood of success on the merits,” of their various causes of action, including the constitutional challenges.

Subsequently, on August 21, 2023, the Plaintiffs filed an emergency motion for an injunction against the implementation of SB 264 pending appeal.[26] The district court also denied this motion on August 23, 2023.[27] On August 26, 2023, the Plaintiffs-Appellants filed an emergency motion for an injunction pending appeal and motion for expedited appeal to the Eleventh Circuit to halt the implementation of portions of SB 264 with respect to the restrictions on the ability of people whose “domicile” is in China to purchase residential real estate in Florida.[28] This motion is still pending as of the date of this alert.

Many interested parties are tracking developments in Shen as an indication not only of whether SB 264 will survive the constitutional challenge, but also as an indication of the potential viability of other similar state laws that have been or are in the process of being enacted.

Twelve other U.S. states collectively filed an amicus brief in Shen opposing Plaintiffs’ challenge to SB 264.[29] State legislatures in some of those states have proposed laws similar to SB 264 and therefore would have an interest in the outcome of the constitutional challenge in Shen. Conversely the U.S. federal government filed an amicus brief supporting Plaintiffs’ motion in this case, underlining the federal government’s opposition to SB 264 and similar state laws, and potentially highlighting that a challenge to SB 264 or other such state law may eventually make its way to the U.S. Supreme Court.[30]

Courts will need to decide the extent to which federal law preempts state law in this area. Given the existing laws and regulations governing foreign investment at the federal level—and pending legislation in Congress that would enhance restrictions on real estate investments by foreign persons as described further below—it is not clear how the courts will navigate a preemption challenge in this context. An important question here is whether courts will apply the finding in Crosby v. National Foreign Trade Council[31] in which the U.S. Supreme Court unanimously struck down a Massachusetts state law prohibiting State business with Burma as unconstitutional under the Supremacy Clause. In Crosby, the Court held that Congress had preempted the subject matter and delegated the application of economic sanctions against Burma to the President.[32]

In addition to preemption concerns, other potential constitutional challenges may undermine these state laws, including potential challenges based on Equal Protection concerns due to a focus on national origin, or due process failings. In the meantime, however, in light of the district court’s refusal to enjoin the law (despite requests from the federal government), the Florida law and others like it may cause significant upheaval regarding real estate investment throughout the United States. We do not expect these issues to be resolved quickly, and it is reasonable to anticipate it could be several years before a final resolution by the Supreme Court.

V. The Federal Landscape Continues to Evolve Regarding Foreign Investment in Real Estate

While state legislatures are increasingly active, the Fufeng CFIUS case has also spurred action at the federal level. On May 5, 2023, the Department of the Treasury published a proposed rule expanding the list of military installations covered under the CFIUS regulations; Grand Forks Air Base, the military base at issue in the Fufeng was included amongst the eight new installations subject to CFIUS jurisdiction. Members of Congress have also introduced bills that would restrict foreign ownership of agricultural land at the federal level. For example, on July 25, 2023, with a broad bipartisan majority, the Senate voted to include the Promoting Agriculture Safeguards and Security Act (“PASS Act”) of 2023 into the National Defense Authorization Act (“NDAA”) for Fiscal Year 2024.[33] The PASS Act would expand CFIUS jurisdiction to certain agricultural transactions involving investments by a foreign person. If such an agricultural transaction would result in control over such agricultural land or business by a “covered foreign person,” the President would be required to prohibit the transaction.[34] The “covered foreign persons” who are targeted by the restrictions captures, inter alia, persons who are citizens or residents of, entities registered in or organized under the laws of, or entities that have a principal place of business in, China, Russia, Iran, or North Korea.[35] The PASS Act does provide a waiver process for the President on a case-by-case basis if the waiver is deemed “vital” to U.S. national security interests.[36] It is not yet clear if the PASS Act will become law as part of the FY 2024 NDAA, which will require the Senate and House versions to be reconciled in conference committee. Regardless of the outcome, the bipartisan support it received in the Senate is reflective of the broader U.S. political climate regarding certain foreign investments into the United States and the continuing trendline of heightened restrictions for foreign persons acquiring certain real estate. Should the PASS Act be enacted, it could reinforce the preemption challenges discussed in Section IV.

VI. Conclusions

The passage of SB 264 and similar state legislation throughout the United States is a manifestation of the increasingly complex and rapidly evolving geopolitical rivalry between Beijing and Washington. These state regulations add another complex layer to the various and broad U.S. restrictions at the federal level targeting trade and financial flows with China. While Biden Administration officials have sought to decrease tensions during recent visits to Beijing, simultaneous Biden Administration initiatives, such as the issuance of the long-awaited executive order outlining an outbound investment regime, have reinforced the strategic competition between the two countries and have tempered the salutary effect of these senior-level engagements.[37]

Given the controversy surrounding SB 264, we anticipate further challenges like Shen. These state developments mean that international investors and multinational businesses must not only consider federal law when undertaking transactions in the United States, but must factor in state-specific restrictions that may also play increasingly important roles in managing their commercial engagements and exposure in the country.

___________________________

[1] TJ Nelson, Fufeng USA Looking To Move Ahead With Grand Forks Project After Federal Agency Review Suddenly Ends, KVRR Local News (Dec. 13, 2022), https://www.kvrr.com/2022/12/13/fufeng-usa-looking-to-move-ahead-with-grand-forks-project-after-federal-agency-review-suddenly-ends/ (publishing CFIUS letter).

[2] Anderson, Mulligan, Hawkins, State Regulation of Foreign Ownership of U.S. Land: January to June 2023, Cong’l Research Service (July 28, 2023), chrome-https://crsreports.congress.gov/product/pdf/LSB/LSB11013.

[3] See 15 C.F.R. § 7.4 (determination of foreign adversaries), https://www.ecfr.gov/current/title-15/subtitle-A/part-7/subpart-A/section-7.4.

[4] See Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000) (unanimously striking down as unconstitutional under the Supremacy Clause a Massachusetts state law prohibiting State business with Burma, holding that subject matter had been preempted by federal statute and the delegation of application of economic sanctions against Burma to the President). See also Cong. Rsch. Serv., State and Local Economic Sanctions: Constitutional Issues (Feb. 20, 2013), here.

[5] S. B. 245, 2023 Leg. (Fla. 2023), https://www.flsenate.gov/Session/Bill/2023/264/BillText/er/PDF.

[6] See Shen v. Simpson, 2023 WL 5517253 (N.D. Fla. Aug. 17, 2023), appeal docketed, No. 23-12737 (11th Cir. Aug. 23, 2023).

[7] Defined separately under Fla. Stat. § 193.461.

[8] Fla. Stat. § 692.201(4).

[9] Fla. Stat. § 692.201(3).

[10] Fla. Stat. § 692.201(5) (“military installation” means a base, camp, post, station, yard, or center encompassing at least 10 contiguous acres that is under the jurisdiction of the Department of Defense or its affiliates).

[11] Fla. Stat. § 692.201(2).

[12] Fla. Stat. §§ 692.204(1), 692.201(1)(6).

[13] Id.

[14] Fla. Stat. §§ 692.202(2); 692.203(2); 692.204(3).

[15] Fla. Stat. §§ 692.202(3); 692.203(3); 692.204(4).

[16] Fla. Stat. §§ 692.201(1); 692.203(1); 692.204(1).

[17] Fla. Stat. §§ 692.201(4); 692.203(5); 692.204(5).

[18] Fla. Stat. § 692.204(4).

[19] Fla. Stat. §§ 692.203(4); 692.204(2).

[20] Fla. Stat. §§ 692.203(3); 692.204(4).

[21] Notice of Development of Rulemaking No. 27393496, https://www.flrules.org/Gateway/View_Notice.asp?ID=27393496.

[22] In the same vein, the court in Shen, though not legally binding, described SB 264 as a law that restricts “land purchases” and requires “anyone purchasing real property ..[…] [to] sign an affidavit attesting that he is not a foreign principal.” Ord. Denying Preliminary Injunction Mot. at 2-3, Shen v. Simpson, No. 4:23-cv-00208-AW-MAF (N.D. Fla. Aug. 17, 2023), ECF No. 69.

[23] Exec. Ord. No. 13936, 85 Fed. Reg. 138 (July 14, 2020).

[24] See 15 C.F.R. § 7.4.

[25] 42 U.S.C. §§ 3604, 3605.

[26] Emergency Mot. for Injunction Pending Appeal, Shen v. Simpson, No. 4:23-cv-00208-AW-MAF (N.D. Fla. Aug. 21, 2023), ECF No. 71.

[27] Ord. Denying Mot. for Injunction Pending Appeal, Shen v. Simpson, No. 4:23-cv-00208-AW-MAF (N.D. Fla. Aug. 23, 2023), ECF No. 72.

[28] Time-Sensitive Mot. for Injunction Pending Appeal and For Expedited Appeal, Shen v. Simpson, No. 23-12737 (11th Cir. Aug. 26, 2023), ECF No. 4.

[29] The 12 states are: Idaho, Arkansas, Georgia, Indiana, Mississippi, Missouri, Montana, New Hampshire, North Dakota, South Carolina, South Dakota, and Utah.

[30] Statement of Int. of the U.S. in Support of Plaintiffs’ Mot. for Preliminary Injunction, Shen v. Simpson, No. 4:23-cv-00208-AW-MAF (N.D. Fla. June 27, 2023), ECF No. 54.

[31] Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000).

[32] Id.

[33] S. Amdt. 813 to S. Amdt. 935, 118th Congress (2023-2024), https://www.congress.gov/amendment/118th-congress/senate-amendment/813.

[34] Id.

[35] Id.

[36] Id.

[37] For further detailed background on these various issues, see several recent Gibson Dunn sample client alerts addressing U.S. China trade issues: With Biden Executive Order, a U.S. Outbound Investment Control Regime Takes an Important Step Forward – Focused on China, but Significant Steps Remain Before Implementation, Gibson Dunn (Aug. 14, 2023), https://www.gibsondunn.com/with-biden-executive-order-us-outbound-investment-control-regime-takes-important-step-forward-focused-on-china/; 2022 Year-End Sanctions and Export Controls Update, Gibson Dunn (Feb. 7, 2023), https://www.gibsondunn.com/2022-year-end-sanctions-and-export-controls-update/#_Toc126615914; Biden’s National Security Strategy Reinforces Tech Decoupling and Increased Regulatory Focus, Gibson Dunn (Nov. 18, 2022), https://www.gibsondunn.com/bidens-national-security-strategy-reinforces-tech-decoupling-and-increased-regulatory-focus/; Webcast: U.S. Export Controls: New Sweeping Tech Controls on China – What You Need to Know, Gibson Dunn (Nov. 15, 2022) https://www.gibsondunn.com/webcast-u-s-export-controls-new-sweeping-tech-controls-on-china-what-you-need-to-know/.

The following Gibson Dunn lawyers prepared this client alert: Adam M. Smith, Stephenie Gosnell Handler, David Wolber, Amanda Neely, Arnold Pun, Sarah Pongrace, Dasha Dubinsky, and Jane Lu.

Gibson Dunn’s International Trade lawyers are highly experienced in advising companies about the potential legal implications of their international transactions and regularly assist clients in their efforts to comply with the shifting legal landscape and to implement best practices. The firm’s Congressional Investigations team has represented numerous clients responding to congressional inquiries regarding national security issues, and its Public Policy Practice Group frequently works with clients to monitor developments on Capitol Hill and the Administration in real time and to ensure their voices are heard in the policy debate. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Gibson Dunn attorneys also have vast experience preparing effective submissions to government regulators and remain ready to assist with this process as well as to help prepare stakeholders for discussions with members of the Treasury or other federal agencies on the proposed regulations.

Please contact the Gibson Dunn lawyer with whom you usually work or any of the following authors for additional information about how we may assist you:

Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, [email protected])
David A. Wolber – Hong Kong (+852 2214 3764, [email protected])

International Trade Group:

United States
Judith Alison Lee – Co-Chair, Washington, D.C. (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, Dallas (+1 214-698-3295, [email protected])
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202-887-3547, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, [email protected])
David P. Burns – Washington, D.C. (+1 202-887-3786, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Marcellus A. McRae – Los Angeles (+1 213-229-7675, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Hayley Lawrence – Washington, D.C. (+1 202-777-9523, [email protected])
Annie Motto – Washington, D.C. (+1 212-351-3803, [email protected])
Chris R. Mullen – Washington, D.C. (+1 202-955-8250, [email protected])
Sarah L. Pongrace – New York (+1 212-351-3972, [email protected])
Anna Searcey – Washington, D.C. (+1 202-887-3655, [email protected])
Samantha Sewall – Washington, D.C. (+1 202-887-3509, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, [email protected])
Claire Yi – New York (+1 212-351-2603, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, [email protected])

Asia
Kelly Austin – Hong Kong/Denver (+1 303-298-5980, [email protected])
David A. Wolber – Hong Kong (+852 2214 3764, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Hong Kong (+852 2214 3731, [email protected])
Felicia Chen – Hong Kong (+852 2214 3728, [email protected])
Arnold Pun – Hong Kong (+852 2214 3838, [email protected])

Europe
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Patrick Doris – London (+44 (0) 207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 (0) 20 7071 4205, [email protected])
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, [email protected])
Penny Madden KC – London (+44 (0) 20 7071 4226, [email protected])
Irene Polieri – London (+44 (0) 20 7071 4199, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Nikita Malevanny – Munich (+49 89 189 33 160, [email protected])

In its 2023 M&A rankings, which recognize the best firms in Asia for M&A work, Asian Legal Business recommended Gibson Dunn in Singapore: International, China: International and in Hong Kong. The rankings were published on September 12, 2023.

Gibson Dunn’s Mergers and Acquisitions Practice Group is an international leader in mergers, acquisitions, divestitures, spin-offs, proxy contests and joint ventures. Our M&A clients include public and private companies, ranging from Fortune 100 and multinational corporations to smaller companies; private equity firms; boards of directors and special committees; selling shareholders; management teams; and financial advisors. Clients also regularly enlist Gibson Dunn to provide advice regarding takeover preparedness and the implementation of defensive measures.

Asian Legal Business has named Hong Kong partner Connell O’Neill in its Asia Top 15 TMT Lawyers 2023. The survey showcases “the top technology, media, and telecommunications lawyers across Asia who have powered through the pandemic, continuing to grow their practices at a remarkable pace while adapting to new markets, disruptive technology and ever-changing regulatory regimes.” The list was published on September 12, 2023.

Connell heads the firm’s technology practice in Asia, and advises clients throughout APAC and the Middle East on corporate and commercial transactions, privacy and cybersecurity, product counselling, and commercial intellectual property matters in the information technology, media and telecommunications sectors.

We are pleased to provide you with Gibson Dunn’s ESG monthly update for August 2023. This month, our update covers the following key developments. Please click on the links below for further details.

I. International

1. World Water Week and the announcement of the COP28 Water Agenda

Between August 20-24, 2023, the Stockholm International Water Institute (SIWI) hosted the annual World Water Week conference. The event brought together 15,000 business leaders, decision-makers, planners and researchers, from 193 countries and territories, to explore how the natural resource of water can be harnessed to address the climate crisis. This year’s theme, Seeds of Change: Innovative Solutions For a Water-Wise World, sought to promote the benefits of a mission-driven approach to global planning for the increasing scarcity of water world-wide. It also sought to raise awareness of the significance of designing policy to work with the water cycle.

SIWI identified some Key Trends from the week: (i) interconnectivity and inclusion being critical for progress; (ii) shifting perceptions of innovation away from conventional thought towards broader governance, finance, values and culture; (iii) learning from indigenous peoples for innovation; (iv) oceans, and the connectivity between freshwater, coasts and oceans as opposed to separate bodies of water; (v) urgency of global approaches to water governance, given current pressures on the global water cycle; and (vi) international processes to ensure collective action.

Additionally, the progress made so far on the UN’s Water Action Agenda, set out in March 2023, was analyzed, and participants were prepared for COP28 which takes place in the UAE from November 30 until December 12, 2023. The COP28 UAE Presidency announced its own Water Agenda and that the Netherlands and Tajikistan will serve as COP28 Water Champions. Both of these signal that the management of global water resources will be a top priority at COP28.

2. S&P Global Ratings Drops ESG Scores

S&P Global Ratings (S&P) announced on August 4, 2023, that it will no longer give alphanumeric ESG ratings when assessing creditworthiness. The scores were originally introduced in 2021 to supplement the narrative ESG reports which S&P provide. S&P has instead determined that these narrative reports are “most effective at providing detail and transparency on ESG credit factors material to our rating analysis.” The move is seen as a response to growing pressure from international policymakers on those bodies currently providing ESG rating standards.

The dropping of the rating system does not affect the S&P’s ESG General Criteria, which is still applied by S&P when incorporating ESG factors into its credit ratings analysis.

3. International Auditing Assurance Standards Board opens consultation on proposed global sustainability assurance standards

On August 2, 2023, the International Auditing and Assurance Standards Board (IAASB) opened a consultation on proposed new global sustainability assurance standards, focused on sustainability reporting. The IAASB’s proposed standards – ‘ISSA 5000’ – are based on principles intended to apply across different sectors and regions, and include proposals such as requiring practitioners to design and perform sustainability-related risk procedures. The standards aim to be the ‘most comprehensive sustainability assurance standard available to all assurance practitioners across the globe’. The consultation is open until December 1, 2023.

4. Vanguard and Blackrock report falls in support for ESG-related proposals

The world’s two biggest investment managers revealed sharp falls in their support for ESG-related shareholder proposals during the 2023 proxy season compared to 2022. Both Vanguard and Blackrock said that many ESG-related proposals had been rejected because the risks raised were already being addressed by the recipient companies’ boards, or the proposals did not improve on existing company disclosures. The investment stewardship reports show an increase in the volume of ESG-related shareholder proposals, but suggest an overall decrease in their viability. For a deeper discussion of ESG and other shareholder proposal developments during the 2023 proxy season, please see our client alert here.

Vanguard:

On August 28, 2023, Vanguard reported that it supported only 2% of environmental and social shareholder proposals submitted to its U.S. portfolio companies in 2023, down from 12% in the previous year. Vanguard stated this decline was ‘largely attributable’ to the increasing number of such proposals and the nature of their requests. Vanguard specifically noted the impacts of the SEC’s November 2021 changes to its no-action request standards, including when a proposal addresses a “significant social policy” and cannot be excluded as relating to the company’s “ordinary business” under Rule 14a-8(i)(7) Securities Exchange Act 1934. Vanguard reported that the number of environmental shareholder proposals rose 50% from the prior year, with target-setting for greenhouse gas emissions becoming an increasingly common request.

BlackRock:

On August 18, 2023, BlackRock reported a 34% increase in environmental and social shareholder proposals submitted to U.S. companies compared to 2022. Echoing the sentiments from Vanguard, Joud Abdel Majeid, BlackRock Global Head of Investment Stewardship, commented that “[b]ecause so many shareholder proposals were over-reaching, lacking economic merit, or simply redundant, they were unlikely to help promote long-term shareholder value and received less support from shareholders, including BlackRock, than in years past.”. BlackRock supported only 7% of the environmental and social shareholder proposals submitted globally.

II. UK

1. UK Government increase in funding for renewable funding – multi-million backing for renewables

On August 3, 2023 the UK government published a press release announcing a £22m increase in the budget of the Contracts for Difference scheme, taking the total budget to £227m for this auction. The aim is to foster investment, growth, and diversity in the UK’s renewables industry and improve the UK’s energy security via reducing its exposure to potentially volatile global fossil fuel prices. The scheme is to encourage growth in established technologies such as solar and offshore wind via an increase in their budgets to £190m from £170m in the latest auction. Emerging technologies such as carbon capture are also seeing increased investment, with those increasing in budget from £35m to £37m, with a £10m ring-fenced budget for tidal stream projects. The target is to increase the proportion of the UK’s electricity generation, building on the existing trend which has seen an increase from 7% in 2010 to 42% in 2022.

2. Updates on UK moves to adopt the new ISSB Sustainability Disclosure Standards

The UK government has issued guidance on its Sustainability Disclosure Standards (SDS), which will set out corporate disclosures on the sustainability-related risks and opportunities faced by companies. They will include climate change related assessment of risks and opportunities and will be published by the Department for Business and Trade. SDS will be based on the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB). The UK-endorsed standards will only divert from the global baseline if absolutely necessary for UK-specific matters. These SDS’s may be referenced in any legal or regulatory requirements for UK entities. Decisions to require disclosure will be taken independently by the UK government, for UK registered companies and limited liability partnerships, and by the Financial Conduct Authority (FCA) for UK listed companies. By adopting a global baseline for environmental standards (as envisioned when ISSB was announced at COP26), it is hoped that this will enable globally harmonised and comparable standards and be a useful metric for decision making by investors allocating capital.

The FCA has issued its own proposed approach to the implementation of the ISSB standards, noting that it expects to open a consultation in the first half of 2024. The FCA aims to finalise its policy position by the end of 2024, with a view to bringing new requirements into force for accounting periods beginning on or after January 1, 2025. The first reporting would begin from 2026.

3. UK Government Consultation: Role of biomass in achieving net zero: call for evidence

The Department for Energy Security & Net Zero had previously sought evidence from a range of stakeholders on how sustainable biomass should best support the UK’s Net Zero target, and has now issued its detailed analysis of responses and key findings. The information gathered will be used in connection with the development of the UK government’s Biomass Strategy. The consultation received 144 responses across 4 topics. Firstly ‘Supply’, focusing on underutilised waste, forestry, and energy crops. Secondly, ‘End Uses’ covering a variety of examples from heating to transport and electricity. Thirdly, ‘Sustainability and Accounting for Emissions’, which proposed a set of criteria and ideas for monitoring in accordance with potential international standards. Finally, ‘Innovation’, which covered waste processing technologies, BECCS (bioenergy with carbon capture and storage), and the regional innovation potential of different parts of the UK.

4. UK Charity Commission guidance on investing charity money for charity trustees

The UK Charity Commission has issued updated guidance and a summary of the legal framework on investing charity money for charity trustees. The guidance is intended to assist trustees in making financial and social investment decisions, whilst fulfilling their duties as trustees. The guidance intends to streamline and clarify existing guidance on trustee responsibilities, following a 2022 High Court decision on charity trustee investment duties, which established that it was possible for charities to adopt climate-conscious investment strategies.

5. Collective action claim against water companies in the UK’s Competition Appeal Tribunal

Collective action cases have been launched with the Competition Appeal Tribunal against water companies in the UK accused of falsely reporting sewage discharges in breach of environmental regulations. Around £330 million in damages are sought from Severn Trent (ST) on behalf of ST’s eight million customers, in the first of this series of claims, with up to five more such claims expected to be launched. Law firm Leigh Day brings the claims on behalf of household customers on the basis of alleged breach of competition laws by ST, who, it claims, abused its dominant market position to mislead regulators on the environmental damage caused by sewage discharges.

III. Europe

1. AFME report for Q2 2023

The Association for Financial Markets in Europe (AFME) has published its European environmental, social and governance (ESG) finance report for the second quarter of 2023 (Q2 2023), which provides detailed data trends alongside a regulatory and supervisory snapshot of the sustainable finance market in Europe. The report includes statistics on European ESG bond and loan issuance: half year volumes for ESG-labelled bonds increased 17% year-on-year, driven by the robust green bond issuance during Q1 2023. Sustainable-linked bond market witnessed a sharp decline with a 16.3% year-on-year decrease. The report also noted that UK carbon prices have declined by 35% since December 2022 with European Union Allowance carbon prices 10% higher over the same period. Global ESG Funds are noted as decreasing marginally since Q1 2023, but increasing by 25.3% since Q2 2022. Spreads of corporate ESG bonds against non-sustainable benchmarks are reported as increasing by c. 1.6bps between April and late July 2023. A primarily UK and EU regulatory update is also provided, with a quarter-by-quarter breakdown.

2. European Commission adoption of European Sustainability Reporting Standards and EFRAG’s Response

As summarised in the Gibson Dunn ESG Update of June 2023, the European Commission is in the process of implementing a set of European Sustainability Reporting Standards (ESRS), due to come into effect January 1, 2024. The ESRS aim to provide investors and other stakeholders with granular reporting on sustainability and climate-related issues, an essential prerequisite for informing investment decisions and allocating capital in line with sustainability goals, including those of the European Green Deal and the EU Climate Law.

On 31 July, 2023, the Commission adopted the Commission Delegated Regulation supplementing the Directive, which sets out the first set of sector-agnostic ESRS – as covered in the Gibson Dunn ESG Update of July 2023.

The Commission must adopt the ESRS taking into account the technical advice provided by EFRAG, who themselves issued a press release welcoming the adoption of the first set of ESRS. EFRAG’s advice focuses on streamlining the proposed reporting obligations to reduce the potential cost burdens. In response, the Commission has included phase-in provisions for the reporting obligations of smaller companies and changed some reporting requirements from mandatory to voluntary.

Additionally, EFRAG also highlighted its continuing efforts to ensure the interoperability of the ESRS with other relevant international standards of ESG reporting, such as the International Sustainability Standards Board (ISSB) and Global Reporting Initiative (GRI) standards. The ongoing collaboration between those setting ESG reporting standards suggests the potential for further convergence of the global reporting regimes, and increased clarity for those subject to them in future.

3. Appointment of new Executive Vice-President for the European Green Deal, Maroš Šefčovič

Following the resignation of Frans Timmermans as Member of the European Commission, Maroš Šefčovič has been appointed as his replacement to become Vice-President of the European Green Deal. In connection with the appointment, European Commission President, Ursula von der Leyen, has taken the opportunity to flag the Commission’s intentions to prioritise the European Green Deal and consolidate Europe’s leadership role on global renewables and energy efficiency targets. Von der Leyen notes the requirement for ‘more intensive dialogue with industry, key stakeholders like forest owners, farmers, as well as citizens’.

4. EU announces emissions reporting rules for Carbon Border Adjustment Mechanism (CBAM)

The European Commission adopted new rules on August 17, 2023 in connection with the initial trial phase of the Carbon Border Adjustment Mechanism (CBAM). These implement carbon emissions reporting obligations for EU importers of CBAM goods and set out fines for failures to satisfy such reporting requirements. The transitional phase begins on October 1 2023 until the end of 2025, during which time, traders will not be subject to the fines or taxes on emissions envisaged by the regulation, but must report on emissions, allowing for the ‘definitive methodology to be fine-tuned by 2026’, as the Commission reports. Guidance has been published in conjunction with the CBAM implementation and initial trial phase.

5. Denmark announces new carbon capture storage project plans

The Danish Ministry of Climate, Energy and Utilities has announced it has pioneered a scheme to promote carbon capture and storage (CCS) technology, by allocating the equivalent of almost USD4bn in government subsidies to companies over a period of 15 years. The initiative is set up to enable the capture of around 2.3 million tons of CO2 per year. The scheme proposes to function with 20 per cent state ownership of future carbon storage licences, meaning Danes will share in profits of the scheme.

IV. North America

1. Companies plea for climate disclosure legislation with the return to session of California lawmakers

As California lawmakers return to session, 15 companies have written a letter to the California Assembly Appropriations Committee Chair to express their support of the proposed Climate Corporate Data Accountability Act (SB 253), which would require U.S. companies with more than $1 billion in total annual revenues and doing business in California to annually report their Scope 1, 2, and 3 greenhouse gas emissions. The companies state in their letter that ‘consistent, comparable, and reliable emissions data at scale is necessary to fully assess the global economy’s risk exposure and to navigate the path to a net-zero future. All sectors and economic actors must work together to shift the entire economy …. we need legislation like SB 253 to cover privately held and midmarket companies to better ensure economy-wide accountability and action’.

2. U.S. antitrust agencies increasing scrutiny of ‘interlocking directorates,’ raising pressure on board members at competing companies

August has seen the U.S. Government increasingly focused on directors operating on boards of competing companies, a practice that violates Section 8 of the Clayton Act, a federal law designed to promote competition and avoid contraband co-ordination.

The Federal Trade Commission (FTC) on August 16, 2023 stepped in to re-structure a deal that would have given Quantum Energy Partners a board seat at EQT, its direct competitor in the sale and production of natural gas. The FTC issued its proposed consent agreement to settle ‘alleged violations of Federal law prohibiting unfair methods of competition’.

Similarly, the Department of Justice (DOJ) announced the resignation of two Nextdoor board members who were simultaneously directors on the board of its competitor, Pinterest, following the DOJ antitrust division’s ongoing enforcement efforts relating to the Clayton Act. Deputy Assistant Attorney General Andrew Forman of the Antitrust Division noted that ‘enforcement involving interlocking directorates will continue to be one of the top priorities of the Antitrust Division’.

3. New U.S. Department of Energy initiatives

The U.S. Department of Energy has announced a number of new environmental initiatives, including the availability of $350 million in grants to help states monitor and cut methane emissions, and to provide support to reduce inefficiencies. States must apply for funding by September 30, 2023.

The Department of Energy also announced the launch of a Responsible Carbon Management Initiative, which seeks to ensure the highest standards of management required for safety, environmental stewardship, accountability, community engagement and societal benefits related to carbon management projects.

It was also announced that $1.2 billion would be made available for the development of the first direct air capture facilities in Texas and Louisiana, aiming to start a nationwide network of commercial-scale carbon removal sites to reduce emissions. The investment would be the world’s largest to date in connection with carbon removal technology.

4. Government of Canada consultation on clean electricity regulations

As part of the nation’s broader electrification and decarbonisation strategy, the Government of Canada has published a consultation on its draft Clean Electricity Regulations, aimed to reduce emissions through the modification of electricity generation units and the requirement of reporting on all eligible units. The consultation remains open until November 2, 2023.

V. APAC

1. ASEAN to establish guidelines for company climate transition

A joint statement of the ASEAN Finance Ministers and Central Bank Governors (AFMGM) was issued on August 25, 2023, affirming that regulatory authorities across ASEAN countries are working on a voluntary corporate transition framework that is estimated to be released by the end of 2023. The forthcoming guidelines will adopt a principles-based approach, combining and taking inspiration from the most effective existing frameworks internationally. The primary objective is to assist companies in developing and sustaining transparency in their climate transition strategies, and to support an ‘affordable, credible and orderly transition’.

The meeting also outlined progress of the ASEAN Taxonomy Board’s consultation on the ASEAN Taxonomy version 2, which commenced in June 2023, and which is expected to complete by November 2023 (ahead of the UN Climate Change Conference in Dubai). The consultation will assist with the implementation of and the focus on particular sectors for Version 3, which is anticipated to be released over the next two years.

2. New investors have increased the AUM of sovereign climate engagement group to $8trn

Eighteen new investors joined the Australian pilot of the Collaborative Sovereign Engagement on Climate Change, raising the combined assets under management of the programme to $8trn. The initiative consists of a network of institutional investors who aim to support Australian governments to mitigate climate change in accordance with the Paris Agreement. The initiative runs under the aegis of the United Nations-supported Principles for Responsible Investment (UNPRI). The press release of the UNPRI, which announced the new members, also laid out the four goals which investors will seek to reach by improving sovereign climate change responses: (i) narrowing the gap between ongoing efforts and a path that aligns with the emission reduction goals of the Paris Agreement; (ii) developing comprehensive and credible net zero transition plans, including supportive policies, budget allocations and investment strategies; (iii) enhancing climate resilience across the economy and society to mitigate the harm and disruption caused by environmental threats; and (iv) enhancing transparency of sovereign exposure to climate-related risks and opportunities, following global standards.

3. Net zero organisation GFANZ sets up Hong Kong Chapter

The Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of financial institutions committed to the climate transition, issued a press statement of their intention to open a Hong Kong Chapter. The Hong Kong Chapter will serve as an extension of the GFANZ’s Asia-Pacific Network with the strategic goal of collaborating with financial institutions in Greater China on matters of comprehensive transition planning, scaling transition finance, and furthering net zero efforts.

4. New ESG standards coming into effect in South Korea

South Korea implemented new ESG evaluation standards on September 1, 2023. These ‘best practices for ESG evaluation work’ have been prepared and implemented by the ESG Standards Institute, Korea ESG Research Institude, and Sustinvest, and have the support of three major South Korean ESG rating agencies (Financial Services Commission (FSC), the Korea Exchange, and the Korea Capital Market Institute). The FSC has established a council composed of these evaluation agencies to assist in overseeing and enhancing the standards going forward.

5. New carbon markets registry launched in Singapore

The Asia Carbon Institute (ACI), a voluntary carbon credit registry and carbon standards organisation was launched in Singapore on August 29, 2023. The non-profit, established by Shell trader John Lo, seeks to scrutinise sustainability initiatives in the urban- and tech-space by issuing carbon credits that represent a quantifiable and permanent reduction in greenhouse gas emissions. ACI aims to provide independent and science-based reviews of project developments and expects to register around 100 projects per year.

6. India has issued a Green Hydrogen Standard

To advance the National Green Hydrogen Mission, the Ministry of New & Renewable Energy of India (MNRE) has announced a Green Hydrogen Standard that specifies emissions thresholds which need to be met in order to classify hydrogen production as ‘green’. The scope of the definition includes both biomass-based and electrolysis-based production methods and it characterises green hydrogen as having a well-to-gate emission not exceeding an average of 2 (two) kilograms of carbon dioxide equivalent per kilogram of hydrogen produced over 12 (twelve) months. The office memorandum dated August 18, 2023, sets out that a detailed methodology for the measurement, monitoring, reporting, on-site validation and certification of green hydrogen and its derivatives will be developed by the MNRE.

7. Taiwan opens carbon trading exchange

President Tsai Ing-wen launched Taiwan’s first carbon exchange in Kaohsiung on August 7, 2023, to assist the government’s goal of achieving net-zero emissions by 2050. In its initial phase, the exchange, set up jointly by the Executive Yuan’s National Development Fund and the Taiwan Stock Exchange, aims to support local businesses with carbon consultation and training on topics such as supply chain carbon neutrality, international carbon border taxes and domestic carbon fees. It is also expected that after pertinent sub-laws regarding carbon pricing are drafted by the Environmental Protection Administration, the exchange will begin to facilitate international carbon credit trading.

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
Michael K. Murphy
Selina S. Sagayam

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

The following Gibson Dunn lawyers prepared this client update: Lauren Assaf-Holmes, Elizabeth Ising, Grace Chong, Lily Loeffler, Patricia Tan Openshaw and Selina S. Sagayam.

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) Group:
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213-229-7121, [email protected])
Ronald Kirk – Dallas (+1 214-698-3295, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, [email protected])
Patricia Tan Openshaw – Hong Kong (+852 2214-3868, [email protected])
Selina S. Sagayam – London (+44 (0) 20 7071 4263, [email protected])

With five publicized agreements, the U.S. Department of Justice (“DOJ”) resolved significantly fewer cases using non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”) in the first half of 2023 than in similar periods in previous years.[1] At the same time, DOJ continued to refine its corporate enforcement policy, which addresses the factors DOJ considers when evaluating whether to prosecute a company, and if so, what form of resolution—if any—to offer the organization. Through July 31, 2023, four of the top five largest corporate resolutions in terms of dollars were negotiated plea agreements, and there were a total of 28 corporate plea agreements. As DOJ very publicly evolves its corporate enforcement policy and priorities, our discussion of NPAs and DPAs would be remiss outside of the context of their counterparts – guilty pleas on the one hand, and declinations-with-disgorgement on the other. Thus, beginning with this publication, Gibson Dunn’s client alerts on NPAs and DPAs also will track these important members of the family of corporate resolutions.

In this client alert, we: (1) report key statistics regarding NPAs and DPAs from 2000 through the present; (2) report key statistics on corporate guilty pleas from 2023; (3) discuss recent policy statements regarding corporate enforcement; and (4) summarize the 33 agreements through July 31, 2023.

Chart 1 below reflects the NPAs and DPAs that Gibson Dunn has identified through public-source research from 2000 through the end of July. Of the five total NPAs and DPAs thus far in 2023, three are NPAs and two are DPAs. The SEC, consistent with its trend since 2016, has not entered into any NPAs or DPAs in 2023 to date.

Chart 2 reflects total monetary recoveries related to NPAs and DPAs from 2000 through the end of July. At approximately $642 million, year-to-date recoveries associated with DPAs and NPAs are trending significantly higher than they were in the same period in 2022, but remain a fraction of the recoveries by mid-year in the last half-decade. For example, by this time in 2021, DOJ had recovered approximately $3.63 billion through NPAs and DPAs in the first half of the year; in 2020, the figure was approximately $6.03 billion. At the same time, we are not seeing plea agreements take up the slack; NPAs and DPAs still took the lion’s share of DOJ’s recoveries to date, at approximately 68% of the total approximately $944.6 million. The largest resolution thus far in 2023, in terms of dollar value, was a DPA.

Chart 3 reflects the relative mix of NPAs, DPAs, and declinations-with-disgorgement since DOJ first began issuing the latter agreements under the then-FCPA Pilot Program in 2016. Thus far in 2023 DOJ has issued one public declination-with-disgorgement pursuant to its Corporate Enforcement Policy; DOJ had also issued one such agreement by the end of July last year.

Charts 4 and 5 focus on specifically 2023 through the mid-year mark and show the numbers of DPAs, NPAs, plea agreements, and declinations-with-disgorgement in 2023 and the total dollar values associated with each type of resolution. As noted above, while plea agreements represented the majority of resolutions in terms of sheer number of agreements, DPAs dominated in terms of the dollar values of the government’s recoveries.

Continued Developments in DOJ Corporate Enforcement Policy

Introduction

On September 15, 2022, Deputy Attorney General (DAG) Lisa Monaco issued a memorandum detailing several updates to DOJ’s corporate criminal enforcement policies (the “Monaco Memorandum”).[2] She also delivered a speech on the same day expanding on the memorandum’s updates.[3] The updates addressed five key areas of corporate criminal enforcement in which DOJ planned to increase its emphasis on responsible corporate behavior:

individual accountability;
prior corporate misconduct;
voluntary self-disclosures;
compliance monitors; and
compensation structure to promote compliance.

DAG Monaco also asked all DOJ components—i.e., divisions of Main Justice and the U.S. Attorneys’ Offices—to write voluntary self-disclosure policies and “to clarify the benefits of [corporations] promptly coming forward to self-report.”[4] These updates aimed to give businesses the tools they needed to promote responsible corporate behavior—in short, “empowering companies to do the right thing.”[5]

DOJ policies, speeches, and enforcement actions following the Monaco Memorandum and speech have continued to build on the message that DOJ will look favorably on corporations proactively identifying misconduct, voluntarily reporting it to DOJ, and driving the remediation process forward themselves. Companies failing to fully comply and cooperate will face harsher consequences. The message is clear that corporations hoping to benefit from these policies must keep their compliance, monitoring, self-disclosure, and remediation procedures robust and up-to-date.

Recent key changes, discussed below, include (1) the roll-out of a uniform voluntary self-disclosure program across U.S. Attorneys’ Offices; (2) updates to the Criminal Division’s Corporate Enforcement Policy; (3) a new DOJ pilot program on compensation incentives and clawbacks; (4) an increased focus on third-party communications platforms; and (5) a DOJ “resource surge” to address the intersection of national security and corporate crime.

A Uniform Program for Voluntary Self-Disclosure

On March 3, 2023, in a speech at the American Bar Association’s National Institute on White Collar Crime, DAG Monaco announced that, for the first time, DOJ has adopted a uniform self-disclosure policy, applicable across all 94 U.S. Attorney’s Offices, that is designed to put in place “an operative, predictable and transparent voluntary self-disclosure program” (the “USAO VSD”).[6] Under this policy, prosecutors generally will not seek a guilty plea where a company has voluntarily self-disclosed, cooperated, and remediated its misconduct, in the absence of aggravating factors.[7] Aggravating factors under the USAO VSD may include (but are not limited to) misconduct that “poses a grave threat to national security, public health, or the environment;” “is deeply pervasive throughout the company;” or “involved current executive management of the company.”[8]

The USAO VSD noticeably does not identify repeat misconduct as an aggravating factor, and indeed, DOJ officials have favorably cited the Criminal Division’s December 2022 DPA with ABB Ltd., a Swiss multinational engineering company, which settled an investigation into alleged violations of the Foreign Corrupt Practices Act (“FCPA”), as an example of leniency despite repeat misconduct.[9] ABB’s 2022 resolution was not its first DPA, and DOJ had previously articulated a strong disfavoring of successive agreements.[10] But, as Principal Associate Deputy Attorney General (PADAG) Marshall Miller noted in December 2022[11] and DAG Monaco reemphasized in March 2023,[12] DOJ nevertheless “assigned significant weight” to ABB’s efforts to self-disclose.[13] According to PADAG Miller, the company’s disclosure efforts, along with its commitment to further enhance its compliance program, “A+ cooperation” and extensive remediation, factored heavily into DOJ’s view that a DPA was the appropriate resolution. As noted by DAG Monaco, “had ABB not promptly come forward, the result would have been drastically different.”[14]

Updates to the Criminal Division’s Corporate Enforcement Policy

In a speech on January 17, 2023, then-Assistant Attorney General (AAG) for the Criminal Division, Kenneth Polite, announced revisions to the Criminal Division’s Corporate Enforcement Policy (CEP).[15] The revisions offer new incentives for companies to self-disclose misconduct. The policy revisions aim to incentivize companies to go “far above and beyond the bare minimum” when cooperating with DOJ. Department officials have further expanded and clarified the new CEP in subsequent speeches.

Clarification of Declination Policy

Like the USAO VSD that followed it, the Criminal Division’s CEP provides that a company that voluntarily self-discloses misconduct, fully cooperates with DOJ, and timely and appropriately remediates enjoys a presumption that DOJ will decline to prosecute, absent any aggravating circumstances.[16] Unlike the USAO VSD, the Criminal Division CEP has always included history of prior misconduct among the list of “aggravating circumstances” that may merit a guilty plea (others include “involvement by executive management of the company in the misconduct; a significant profit to the company from the wrongdoing; [and] egregiousness or pervasiveness of the misconduct within the company”).[17]

Before January 2023, the CEP articulated aggravating circumstances as a bar to declination.[18] After January 2023, companies that have engaged in misconduct involving any of these factors still do not enjoy the presumption of a declination, but prosecutors may, in their discretion, decline to prosecute if the company can demonstrate that it:

Made a voluntary self-disclosure immediately upon becoming aware of the allegation of misconduct;
Had an effective compliance program and system of internal accounting controls in place at the time of the misconduct and disclosure that enabled the identification of the misconduct and led to voluntary self-disclosure; and
Provided extraordinary cooperation with DOJ’s investigation and undertook extraordinary remediation.[19]

Then-AAG Polite later explained in March that what constitutes “extraordinary” cooperation and remediation is subject to DOJ discretion.[20] He noted that in considering whether cooperation is “extraordinary,” DOJ evaluates the immediacy, consistency, degree, and impact of the cooperation.[21] Extraordinary remediation “includes conducting root cause analyses and taking action to prevent the misconduct from occurring, even in the face of substantial cost or pressure from the business.”[22] This can include, for example, significant organizational changes, suspensions or terminations, and recoupment of compensation.[23]

Then-AAG Polite also explained that the terms “immediate” and “extraordinary” in these revisions only apply when aggravating circumstances are present.[24] For companies without aggravating circumstances, DOJ still requires companies to voluntarily self-disclose only “within a reasonably prompt time after becoming aware of the misconduct.”[25]

DOJ has cited two recent declinations-with-disgorgement as exemplifying the Criminal Division’s current practices under the CEP. In December 2022, DOJ declined to prosecute Safran S.A., a French aerospace company, for alleged FCPA violations.[26] Safran voluntarily self-disclosed the conduct after discovering it during post-acquisition due diligence, fully cooperated, ensured remediation occurred, and disgorged ill-gotten profits.[27] Deputy Assistant Attorney General Lisa Miller pointed to the Safran declination in urging corporations to “call us before we call you.”[28] In March 2023, DOJ issued a declination-with-disgorgement to U.S.-based Corsa Coal following FCPA bribery violations.[29] Corsa fully cooperated with the investigation, remediated the misconduct by terminating a salesman involved in the scheme, disgorged a portion of the alleged ill-gotten profits (following a finding that it was unable to pay the full amount of $32.7 million), and substantially improved its compliance program and internal controls.[30]

DOJ’s message is clear that a proactive approach will best position the corporation to receive a declination under the CEP and avoid a more serious criminal resolution. A corporation that has self-identified misconduct, including conduct with aggravating circumstances present, should therefore carefully weigh the potential benefits flowing from proactively cooperating and providing DOJ with accurate information—including information otherwise unavailable to the Department.

Changes in Sentence Reductions Where Criminal Resolution is Warranted

Even where aggravating factors are too great to allow for a declination, the revised CEP provides that if a company voluntarily self-discloses, fully cooperates, and timely and appropriately remediates, the Criminal Division will accord or recommend at least 50% and up to 75% off the low end of the U.S. Sentencing Guidelines (“USSG”) fine range, except in the case of a “criminal recidivist.”[31] This is a significant increase from the previous potential maximum reduction of 50% off the Guidelines range. “Recidivist” companies that disclose, cooperate, and appropriately remediate will still be eligible for the reduction, but not off the low end of the range.[32]

The revised CEP provides for reductions even for those companies that do not voluntarily self-disclose. If such companies fully cooperate and timely and appropriately remediate, the Criminal Division will accord or recommend up to a 50% reduction off the low end of the USSG range, up from a maximum of 25% under the previous policy.[33] As in voluntary disclosure scenarios, “recidivist” companies are still eligible for this reduction, but not from the low end of the range. In his January remarks, then-AAG Polite lauded these changes as increasing the range of incentives for companies and providing prosecutors with a “greater range of options to distinguish among companies that commit crime,” but he also cautioned that a reduction of 50% will not be the new norm for companies that do not self-disclose; rather, he noted that “it will be reserved for companies that truly distinguish themselves and demonstrate extraordinary cooperation and remediation.”[34]

New DOJ Pilot Program on Compensation Incentives and Clawbacks

In an address at the ABA’s 38th Annual National Institute on White Collar Crime, DAG Monaco announced the Department’s first-ever Pilot Program on Compensation Incentives and Clawbacks, administered by the Criminal Division.[35] Then‑AAG Polite expanded on the program at the same conference the next day.[36] The two-part program, a three-year initiative that became effective March 15, 2023, fits with DOJ’s increased emphasis on corporate action in response to misconduct.

Part One requires that, as part of every criminal resolution entered into by the Criminal Division, companies shall be required to implement criteria related to compliance in their compensation and bonus systems to reward ethical behavior and to punish and deter misconduct.[37] As an example, DAG Monaco highlighted Danske’s December 2022 plea agreement, in which Danske, a Danish bank facing fraud allegations, agreed to revise its performance review and bonus system to include criteria related to compliance.[38] Part Two of the pilot program offers fine reductions for companies seeking to claw back compensation in appropriate cases.[39] These cases may include not only clawbacks from those employees who engaged in wrongdoing in connection with a given investigation, but also from those with supervisory authority over the culpable employees and who knew of, or were willfully blind to, the misconduct.[40] And the fine reductions accorded under the program equal 100% of the clawed-back compensation.[41] Moreover, even if companies are unsuccessful in clawing back compensation, prosecutors have discretion to grant a fine reduction of up to 25% of the compensation sought.[42]

The program will be in effect for three years, during which time DOJ will analyze its effectiveness. Please see our March 2023 publication on this, for further information.

Personal Devices and Communications Platforms

The Criminal Division continues to examine what revisions may be warranted to its framework for evaluating corporate compliance programs to address one of the most vexing issues facing corporate America—the use of personal devices and third-party messaging applications, including those offering ephemeral messaging.[43] The Division is focused on ensuring that DOJ can access relevant data and communications stored on these applications during investigations. In his keynote address at the ABA’s 38th Annual National Institute on White Collar Crime, then‑AAG Polite stated that DOJ will consider whether corporate policies governing these messaging applications allow business-related electronic data and communications to be preserved and accessed, along with how well companies communicate and enforce these policies.[44] If a company fails to produce data from messaging applications, prosecutors will probe the company’s ability to access such communications, whether the company stores them on corporate devices or servers, and applicable privacy laws. The company’s answers—or lack thereof—“may very well affect the offer it receives to resolve criminal liability.”[45]

Given DOJ’s increased focus on access to corporate communications, clear corporate policies regarding personal devices and third-party messaging applications, including across international borders, are becoming increasingly important, and companies would be well advised to review their corporate communications policies with an eye to preservation requirements, prohibitions on uses of off-platform communication channels, and disciplinary measures in the event of noncompliance.

Surging Resources to Address Intersection of National Security and Corporate Crime

In a May 2023 speech, PADAG Miller noted the growing link between corporate criminal enforcement and national security risks.[46] In response, DOJ is “dramatically scaling up [its] investment in fighting national security-related corporate crime.”[47] The Department will add over two dozen new prosecutors to the National Security Division (“NSD”) to focus on corporate crime, including the first-ever Chief Counsel for Corporate Enforcement. It plans to “staff[] up” the Bank Integrity Unit of the Criminal Division’s Money Laundering & Asset Recovery Section to home in on complex and cross-border sanctions cases involving financial institutions.[48] And it is issuing joint advisories with the Commerce and Treasury Departments to inform the private sector about national security-related compliance trends and expectations. For example, on July 26, 2023, those three agencies issued a “Tri-Seal Compliance Note” setting forth their respective views on voluntary self-disclosure of “potential violations of U.S. national security laws, including those governing sanctions and export controls.”[49] The document is significant not only for its detailed summaries of each agency’s self-disclosure requirements, but also for its clear statement—on behalf of all three agencies—that “[t]he benefits of VSDs are clear” and include “making companies eligible for significant mitigation.”[50]

2023 Agreements to Date

The remainder of this alert summarizes corporate resolutions through July 31, 2023. The appendix at the end of the alert provides key facts and figures regarding these resolutions, along with links to the resolution documents themselves (where available). Although we have continued to see relative consistency in the approaches taken to resolutions involving Main Justice, U.S. Attorneys’ Offices around the country continue to enter into agreements that vary widely and lack the uniformity of approach taken by Main Justice.

ABC Polymer Industries LLC (Guilty Plea)

On January 3, 2023, ABC Polymer Industries LLC (“ABC Polymer”) entered into a plea agreement with the Environment and Natural Resources Division’s Environmental Crimes Section and the U.S. Attorney’s Office for the Northern District of Alabama to resolve allegations that ABC Polymer, a manufacturer of extruded plastic products and other goods, had failed to install machine guards on the side of an equipment’s roller drums—in violation of the Occupational Health and Safety Act (“OSHA”)—leading to the death of an employee in its Alabama plant who was operating the machine.[51] OSHA requires machinery “whose operations exposes an employee to injury” to be guarded or to be designed and constructed in such a way to “prevent the operator from having any part of his [or her] body in the danger zone during the operating cycle.”[52] The agreement cited that while ABC Polymer had written policies addressing machine guards, it had trained its employees in procedures that involved lowering the guard during operations, exposing the operators to risk of injury.[53]

In connection with the plea agreement, ABC Polymer agreed to pay a criminal fine of $167,928, as well as $242,928 plus funeral expenses in restitution to the decedent’s estate.[54] ABC Polymer also agreed to serve a two-year term of probation, during which time ABC Polymer would be required to comply with an OSHA Safety Compliance Plan (“SCP”).[55] The SCP, among other things, requires ABC Polymer to designate a Safety Compliance Manager; extend a contract with its third party auditor or submit a list of qualified candidates if ABC Polymer intends to substitute a new third party auditor; maintain mechanisms for reporting safety concerns; and provide policies and training in English, Spanish, and any other language necessary to ensure all employees are able to understand.[56] Three weeks after its guilty plea, ABC Polymer was sentenced to the fine, restitution amount, and probation term set forth in the plea agreement.[57]

Aifa Seafood Inc. (Guilty Plea)

On March 8, 2023, Aifa Seafood Inc. (“Aifa”) entered into a plea agreement with the U.S. Attorney’s Office for the Southern District of Florida, to resolve allegations that Aifa violated the Lacey Act, which punishes illegal trade in fish and wildlife.[58] According to the agreement, the government alleged that Aifa engaged in false labeling of lobster imported from Haiti and bound for China, by labeling the lobster as product of the United States.[59] While the plea agreement indicates that the maximum fine Aifa could face is $500,000 per count and that Aifa could be sentenced to probation for up to five years, the agreement does not contain a recommended sentence.[60] The agreement itself also does not impose any form of reporting or monitoring requirement on Aifa.[61]

On May 23, 2023, Aifa was sentenced to a five-year term of probation, one condition of which is that it “establish and maintain an effective compliance program,” including by employing “an appropriately qualified Compliance Officer.”[62] Another condition of Aifa’s probation is that it retain an independent third‑party auditor and “fund a Court Appointed Monitor.”[63] Both the auditor and the monitor are required to submit reports to the company’s probation officer, and the monitor must submit its reports to the court as well.[64] The court sentenced Aifa to pay a $250,000 fine.[65]

American Management and Administration Corporation (Guilty Plea)

On April 13, 2023, the American Management and Administration Corporation (“AMAC”) entered a plea agreement with the U.S. Attorney’s Office for the District of Puerto Rico to resolve one count of theft of federal program funds, in relation to the alleged misappropriation of operational funds provided by the U.S. Department of Housing and Urban Development for the administration of public housing projects by Puerto Rican authorities.[66] AMAC was one of the private companies that contracted with Puerto Rican authorities to operate and maintain the public housing projects, in return for a monthly fee.[67] According to the government, AMAC knowingly and intentionally stole $3.7 million in funds from 2014 to 2022, including by diverting funds to personal bank accounts and writing checks for services not rendered.[68]

The plea agreement does not contain an agreed-upon penalty, nor does it reflect an agreement on a term of probation or impose ongoing reporting obligations.[69] Under the agreement, AMAC agreed to pay $3,712,000 in restitution.[70] At sentencing, the court imposed restitution in that amount and sentenced AMAC to three years of probation, and included as a condition of probation that AMAC report periodically to the court or its probation officer regarding its financial condition and any new investigations, litigations, or administrative proceedings commenced against AMAC.[71]

Anyclo International Inc. (Guilty Plea)

On June 12, 2023, Anyclo International Inc. (“Anyclo”), a South Korean clothing manufacturer, entered into a plea agreement with the U.S. Attorney’s Office for the District of New Jersey, to resolve charges that the company evaded customs duties on clothing it imported into the United States between 2012 and 2019.[72] According to the agreement, Anyclo prepared one accurate invoice for U.S. purchasers of the imported merchandise, and prepared another invoice for its U.S. Customs broker that falsely undervalued the goods and thus caused Anyclo to underpay customs duties.[73]

In the agreement, Anyclo and the government agreed to recommend to the court a fine of $250,000, as well as restitution of $2.05 million.[74] The parties agreed not to recommend probation to the court, and the agreement does not contain an ongoing compliance program or reporting obligation.[75] In sentencing Anyclo, the court accepted the fine recommendation but reduced the restitution amount to $1,850,000.[76] The court did not impose probation.[77]

BDF Enterprises, Inc., Michelle’s DVD Funhouse, Inc., MJR Prime LLC, and Prime Brooklyn LLC (Guilty Plea)

In January 2023, four entities, including BDF Enterprises, Inc. (“BDF”), Michelle’s DVD Funhouse, Inc., MJR Prime LLC, and Prime Brooklyn LLC separately pleaded guilty to one count each of conspiring to fix prices for DVDs and Blu-Ray discs on Amazon Marketplace, in violation of the Sherman Act, 15 U.S.C. § 1.[78] The agreements state that, from approximately October 2016 to October 2019, these Amazon Marketplace vendors and their owners colluded to sell video media at non-competitive prices to suppress and eliminate competition.[79]

Pursuant to these agreements with the Antitrust Division and the U.S. Attorney’s Office for the Eastern District of Tennessee, the companies agreed to recommended criminal fines ranging from $68,000 to $234,000.[80] The agreements did not recommend any restitution payments, in light of the availability of civil causes of action through which damages may be sought.[81] The parties also agreed to recommend that no probationary period be assessed.[82] The two individual owners of these four entities separately pleaded guilty in connection with the alleged scheme.[83]

As of the publication of this alert, only BDF has been sentenced. The court imposed a fine of $185,250, compared to the $234,000 agreed upon in BDF’s plea agreement—the result of the court applying U.S. Sentencing Guideline Section 8C3.4, which permits fine offsets for closely-held companies where one or more owners of the company have been sentenced for the same offense conduct.[84]

British American Tobacco P.L.C. (DPA)

On April 25, 2023, British American Tobacco P.L.C. (“BAT”), a UK-based corporation, entered into a three-year DPA with DOJ NSD and the U.S. Attorney’s Office for the District of Columbia,[85] resolving allegations that BAT and its Singaporean subsidiary (“BATMS”) had conspired to commit bank fraud and to violate the International Emergency Economic Powers Act (“IEEPA”), 50 U.S.C. § 1705(a), in connection with prohibited sales of tobacco products in North Korea.[86] In particular, according to the Statement of Facts attached to the DPA, in 2005 BAT purported to divest itself of a North Korean joint venture established in 2001, but instead continued to exert significant control over the entity, using it to transact business in North Korea.[87] The DPA alleges that BATMS and BAT structured transactions with this entity in a manner that obfuscated BATMS’s sales to North Korea, thereby causing U.S. banks to process improper U.S. dollar transactions for BATMS’s benefit, in violation of the bank fraud statute.[88] Some of these transactions were also made through sanctioned North Korean entities in violation of the IEEPA.[89]

As a part of the DPA, BAT agreed to joint and several liability with BATMS for over $440 million in criminal penalties and over $189.5 million in forfeiture payments.[90] The company has also implemented, and agreed to continue to implement, a corporate compliance program designed to prevent and detect violations of the Bank Secrecy Act and U.S. sanctions laws, specifically including maintaining the electronic database of SWIFT MT payment messages and documents and materials relevant to the investigation during the term of the DPA. The company must also annually report on the status of its compliance measures.[91] Additionally, if BAT breaches its obligations under the agreement, the government may extend the term of the agreement by up to one year; if, conversely, BAT demonstrates that it is no longer necessary to enforce the terms of the agreement, it may be terminated after less than three years.[92] The BAT DPA also has several related actions announced or commenced on the same day as the DPA, including a guilty plea by BATMS to the same charges, a civil action against both BAT and BATMS brought by the Department of the Treasury’s Office of Foreign Assets Control,[93] and several actions brought by DOJ against individuals alleging related conduct.[94]

Davey Tree Expert Company and Wolf Tree, Inc. (NPA)

On July 13, 2023, Davey Tree Expert Company (“Davey Tree”)—a company that provides tree-trimming services for utility companies—and its wholly-owned subsidiary, Wolf Tree, Inc. (“Wolf Tree”), jointly entered into an NPA with the U.S. Attorney’s Office for the Southern District of Georgia.[95] The agreement resolved allegations that, in connection with a tree-trimming contract for an electric utility company in Savannah, Georgia, Davey Tree and Wolf Tree illegally employed persons unlawfully in the United States.[96] The government alleged that Davey Tree and Wolf Tree provided these employees with false names and social security numbers, falsified payroll records for the employees, and paid the employees in cash in order to avoid detection.[97] One employee was allegedly killed after reporting that his supervisor was unlawfully in the United States and was hiring other undocumented individuals.[98]

Davey Tree and Wolf Tree agreed to pay $1,326,000 in restitution to the estate of the deceased employee; $21,804 in restitution to another employee for back wages; and $1,136,521 in forfeiture of the proceeds of the alleged violations.[99] The NPA also resolves civil allegations against Davey Tree and Wolf Tree, and accordingly imposes $1,500,000 in civil penalties and releases the companies from both civil and administrative liability that could otherwise be pursued by the Department of Homeland Security.[100] Although the agreement imposes cooperation obligations on Davey Tree and Wolf Tree, it does not require them to self-report to the government and it does not impose a monitor.[101]

DES International Co. Ltd. and Soltech Industry Co. Ltd. (Guilty Plea)

On March 29, 2023, DES International Co. Ltd. (“DES”) and Soltech Industry Co. Ltd. (“Soltech”), electronics companies based in Taiwan and Brunei, respectively, entered into plea agreements with the U.S. Attorney’s Office for the District of Columbia and DOJ NSD, resolving allegations of conspiracy to defraud the United States and violate the IEEPA and Iranian Transactions and Sanctions Regulations (“ITSRs”)—which restrict the trade, export, or sales of U.S.-origin goods, technology, or services to Iran.[102]

[103] According to the agreements, a sales agent of both DES and Soltech conspired and agreed with DES, Soltech, and an Iranian entity to export a U.S.-originated power amplifier and its related components, as well as cybersecurity software to the Iranian entity without a required license from the U.S. Department of the Treasury.[104] This sales agent took steps to conceal the U.S. origin of the products, such as by removing stickers with the phrase “Made in USA” from the packaging. The agent also misled the two U.S. companies exporting the goods and software to believe that the items they sold were to be used in Taiwan or Hong Kong, or used by DES or Soltech.[105]

DES and Soltech each agreed to a five-year period of corporate probation and a criminal fine of $83,769—three times the value of goods unlawfully exported to Iran—based on a consideration of several factors, including an “absence of cooperation or of any known compliance or remediation efforts,” and the lack of timely and voluntary self-disclosure.[106] At sentencing, the court imposed the penalty amounts and probation period contained in the plea agreements.[107]

Diesel Tune-Ups of RI, Inc. and M&D Transportation, Inc. (Guilty Plea)

On January 26, 2023, Diesel Tune-Ups of RI, Inc. (“Diesel Tune-Ups”) and M&D Transportation, Inc. (“M&D”) jointly entered into a plea agreement with the U.S. Attorney’s Office for the District of Rhode Island to resolve allegations that the companies conspired to violate the Clean Air Act.[108] The government alleged that between 2014 and 2019, Diesel Tune-Ups and M&D conspired among themselves and others to tamper with emission monitoring systems on diesel vehicles.[109] The alleged scheme consisted of both disabling or removing emission controls on the vehicles, and installing software in the vehicles so that the built-in monitoring systems could not detect the modifications to the controls.[110]

In the plea agreement, the parties agreed to recommend to the court that it impose a term of probation of three years.[111] As a probation condition, Diesel Tune-Ups and M&D agreed to hire a third-party independent consultant within 30 days of sentencing “to conduct an audit of all vehicles owned or operated by M&D to determine that no aftermarket emissions alterations have been made and that there has been no emissions-related tampering.”[112] No later than 60 days after sentencing, M&D must certify that all its vehicles are in compliance with the Clean Air Act’s emission-related provisions.[113] The agreement does not contain a penalty recommendation, stating instead that “[t]he parties will be free to recommend [at sentencing] whatever fine . . . they feel [is] appropriate.”[114] The agreement also explicitly states that the government and the defendants had not reached agreement on which offense level and criminal history category are appropriate for purposes of Sentencing Guidelines calculations.[115] The agreement notes that each count charged against Diesel Tune-Ups and M&D carries a maximum of $500,000 in fines.[116] Sentencing has not yet occurred in the case.

E.I. du Pont de Nemours and Company Inc. (Guilty Plea)

On April 24, 2023, E.I. du Pont de Nemours and Company Inc. (“DuPont”) entered into a plea agreement with the U.S. Attorney’s Office for the Southern District of Texas, resolving allegations that it violated the Clean Air Act by negligently releasing an extremely hazardous substance.[117] The allegations arose out of a 2014 accident that released 24,000 pounds of highly toxic, flammable gas into the air, killing four company employees, injuring others, and causing harm to surrounding areas.

The plea agreement recommends a two-year probation term, a $12 million penalty, and a $4 million community service payment to the National Fish and Wildlife Foundation (“NFWF”).[118] The agreement directs NFWF to use the community service payment for air quality-related work in areas near the western shores of Galveston Bay, Texas.[119] The agreement recommends two years of probation but does not impose a reporting obligation on DuPont.[120] The agreement also recognizes DuPont’s cooperation and prior civil settlements related to the incident at issue.[121] DuPont was sentenced on the same day as its plea, and the court imposed the penalty, community service payment, and probation term recommended in the agreement.[122]

FeelGood Natural Health Stores Ltd. (Guilty Plea)

On April 14, 2023, FeelGood Natural Health Stores Ltd. (“FeelGood”), a Canadian corporation, pleaded guilty to violating the Lacey Act, 16 U.S.C. §§ 3371-3378, which prohibits trafficking wildlife taken in violation of state wildlife protection laws. In this case, FeelGood allegedly transported and sold marine mammal products in violation of the Marine Mammal Protection Act (“MMPA”).[123] As described in the agreement, FeelGood knowingly transported and sold harp seal oil capsules in the United States as a health supplement.[124]

The agreement states that, from April 2019 to May 2021, FeelGood offered harp seal oil capsules for sale on its own webpage and through third-party marketplaces, which it then shipped either directly or via third-party distributors to the United States.[125]

The DOJ Environmental and Natural Resources Division and the U.S. Attorney’s Office for the Eastern District of Michigan, pursuant to the agreement, recommended a $20,000 fine, representing twice the gross gain that FeelGood would have realized from the illegal sales.[126] Meanwhile, FeelGood, pursuant to the agreement, recommended a $5,000 fine, representing twice the actual profits it realized as a result of the sales.[127] The parties also agreed to recommend $1,373.43 in forfeiture payments stemming from covert purchases by U.S. law enforcement, as well as a three-year probationary period, during which time FeelGood agreed to establish and maintain a compliance program, assess whether it ships any products to the United States, and seek an import license if it does.[128] Sentencing has not yet occurred.

Genotox Laboratories Ltd. (DPA)

On March 21, 2023, Genotox Laboratories Ltd. (“Genotox”) entered into an eighteen-month DPA with the U.S. Attorney’s Office for the Western District of Texas, resolving allegations that Genotox had violated the Anti-Kickback Statute (“AKS”), 42 U.S.C. §§ 1320(a)-7(b), the False Claims Act (“FCA”), 31 U.S.C. §§ 3729-3733, and the Eliminating Kickbacks in Recovery Act (“EKRA”), 18 U.S.C. § 220, by using a volume-based commission incentive structure for third-party marketers and encouraging physician orders that were not medically necessary.[129]

According to the DPA, from approximately 2014 through March 2019, and at least in some instances until October 2020, Genotox paid its independent sales representatives, who were non-bona fide employees, on a commission basis to market its toxicological testing services.[130] The commission payments were calculated based on the revenue realized from billings to insurers, including Medicare and Tricare. Even after transitioning these independent sales representatives to a fixed-rate pay structure, Genotox allegedly continued tracking employee pay against the older commission structure.[131] Additionally, Genotox allegedly used form test orders to encourage test orders for patients that billed their insurance providers at the highest reimbursement categories, even if the tests were not necessary.[132]

Genotox received full cooperation credit but it did not receive voluntary disclosure credit.[133] The DPA did not assign any criminal penalty in light of Genotox’s payment of $477,774 pursuant to a parallel Civil Settlement Agreement (“CSA”) with the Civil Fraud Section, the U.S. Attorney’s Office for the Southern District of Georgia, the Office of Inspector General for the United States Department of Health and Human Services, and a qui tam relator.[134] The CSA, in addition to the $477,774 payment, imposed an additional $415,000 payment, to be made over five years. The CSA also provides for additional payments in the event that Genotox’s revenue exceeds certain thresholds, and contemplates that total payments under the agreement could exceed $29 million. The agreement states that all of these payments by Genotox are “restitution to the United States,” and the government stated in a press release that “[t]he settlement amount was based on the company’s ability to pay,” which likely explains the payment-over-time approach reflected in the agreement and the fact that some of the payments will be contingent on Genotox’s revenues.[135] Under the agreement, the government will not pay to Genotox nearly $5 million in Medicare payments that were suspended after the underlying qui tam action was filed.[136]

Notably, with respect to the DPA, the USAO for the Western District of Texas expressly retained discretion to find Genotox in breach of the DPA in the event that it breaches the parallel five-year Corporate Integrity Agreement (“CIA”) it entered into with the U.S. Department of Health and Human Services, Office of Inspector General.[137] The CIA imposed separate compliance requirements, including the retention of an Independent Review Organization – perhaps as a result, neither the CSA nor the DPA imposed an independent compliance monitor.[138]

Great Circle (NPA)

On January 27, 2023, Great Circle, a non‑profit provider of behavioral health services based in Missouri, entered into a three‑year NPA with the U.S. Attorney’s Office for the Eastern District of Missouri, resolving allegations that Great Circle made false statements in connection with the delivery of or payment for health care benefits.[139] According to the government’s allegations, Great Circle provided federally-reimbursed residential treatment services to children in the custody of the Children’s Division of the Missouri Department of Social Services.[140] Great Circle allegedly billed for services it did not provide, as well as for services that did not conform to contractual requirements.[141]

Under the agreement, Great Circle is obligated to undertake compliance program enhancements, but is not required to self-report or submit to a monitorship.[142] Great Circle entered into a parallel civil settlement with the government, in which it agreed to pay $1,866,000; apparently in recognition of that fact, the NPA does not impose a criminal penalty.[143] The NPA does not specify whether Great Circle voluntarily disclosed the alleged conduct to the government.[144]

Greater Boston Behavioral Health LLC (Guilty Plea)

On March 13, 2023, Greater Boston Behavioral Health LLC (“GBBH”) entered into a plea agreement with the U.S. Attorney’s Office for the District of Massachusetts, to resolve allegations that GBBH violated the federal Food, Drug and Cosmetic Act (“FDCA”).[145] According to the agreement, GBBH purchased Botox® that came from foreign sources and whose labels did not contain FDCA-required language indicating that the drugs were for prescription use only and explaining certain side effects.[146]

The plea agreement reflects an agreed disposition of $2,587,142 in penalties, allocated as $657,678 in fines and $1,929,464 in forfeiture.[147] The parties also agreed that GBBH should be put on probation for three years; unlike other plea agreements and many NPAs and DPAs, however, the agreement does not impose any reporting or monitor requirements on GBBH, and does not explicitly set forth any compliance or cooperation obligations.[148] The agreement does not include voluntary self-disclosure among the Sentencing Guideline factors that the government believed the court should consider at sentencing.[149]

GBBH was sentenced on May 12, 2023; the court imposed three years of probation and the same penalty and forfeiture amounts as in the plea agreement.[150]

Ground Zero Seeds International, Inc. (Guilty Plea)

On January 4, 2023, Ground Zero Seeds International, Inc. (“GZI”) entered into a plea agreement with the U.S. Attorney’s Office for the District of Oregon, to resolve one count of misprision of felony for allegedly paying kickbacks to a former employee of another company (Jacklin Seed Company) in connection with purchases of grass seed.[151] GZI allegedly paid a total of $191,790 to a former employee of the other company between April 2015 and September 2019, concealing the payments through inflated invoices.[152] In the plea agreement, the government agreed to recommend to the court a fine of $40,000 and a one-year term of probation.[153] GZI also agreed to pay restitution of $516,000, representing sales Jacklin Seed Company lost because of the kickbacks paid to its former employee.[154] Under the terms of the agreement, the government also agreed to “make available the evidence gathered in the investigation of this matter for on-site inspection,” and GZI accepted that offer—as well as the discovery the government had provided to date in the case—”in full satisfaction of the government’s discovery obligations in th[e] case.”[155]

Following the plea agreement, the court sentenced GZI to the probation, fine, and restitution terms contained in the plea agreement.[156] The plea agreement did not impose a monitor or compliance self-reporting as a condition of probation, and neither did the court in sentencing GZI.[157]

Interunity Management (Deutschland) GmbH (Guilty Plea)

On May 5, 2023, Interunity Management (Deutschland) GmbH (“Interunity”), a German shipping operator, entered into a plea agreement with the U.S. Attorney’s Office for the Southern District of California and the DOJ Environment and Natural Resources Division, to resolve allegations that Interunity failed to maintain an accurate Oil Record Book, in violation of 33 U.S.C. § 1908.[158] The government alleged that, while in U.S. waters, a vessel operated by Interunity failed to record the transfer, discharge, and disposal of oily bilge water as required by U.S. law.[159] The government learned of the alleged conduct after a crewmember on the vessel reported to the U.S. Coast Guard via email concerning a discharge of oily bilge water by the vessel directly into the sea.[160]

The agreement contains a jointly recommended sentence of $1,250,000 in penalties, which Interunity agreed represented twice what it gained as a result of the alleged conduct.[161] The penalty is comprised of $937,500 in fines and a $312,500 “community service payment” to the NFWF.[162] As the agreement notes, NFWF is a Congressionally-created nonprofit with authority to administer community service payments that advance conservation of fish, wildlife, plants, and other natural resources.[163] This plea agreement requires the NFWF to use the community service payment for conservation efforts in or around the Tijuana River National Estuarine Research Reserve.[164]

The agreement contains a recommended probation period of four years, during which Interunity would be required to implement an Environmental Compliance Plan (“ECP”).[165] The ECP requires both a third-party auditor and a court-appointed monitor. The auditor is responsible for auditing Interunity’s vessels according to a detailed set of criteria and reporting audit findings to the government, while the court-appointed monitor is responsible for reporting to the government on the adequacy of the audits and on the relationship between the auditor and Interunity.[166] Sentencing has not yet occurred in the case.

IRB Brasil Resseguros SA (NPA)

On April 20, 2023, IRB Brasil Resseguros SA (“IRB”), a Brazilian reinsurance company listed on the Brazilian stock exchange, entered into a three-year NPA with the Fraud Section.[167] The NPA resolved allegations that IRB engaged in securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff(a) and 17 C.F.R. § 240.10b-5.[168]

At the time of the relevant conduct, February through March 2020, 25% of IRB’s shareholders were U.S. investors.[169] According to the NPA, to counteract critical analyses of IRB’s financial position, IRB and its Chief Financial Officer (“CFO”) defrauded IRB’s investors by falsely claiming that Berkshire Hathaway Inc., an international conglomerate and well-known investment entity, was a shareholder.[170] The CFO allegedly furthered this scheme through falsified shareholder lists, fictitious emails between IRB and Berkshire Hathaway, and false oral statements.[171] Berkshire Hathaway issued a statement on March 3, 2020, disclaiming any relationship with IRB. On March 4, 2020, IRB’s stock price fell, causing significant losses to shareholders.[172] The CFO subsequently falsely claimed that his statements about Berkshire Hathaway had been in error.[173] IRB separated from the CFO that same day.

Pursuant to the NPA, IRB agreed to pay $5 million in shareholder compensation to the shareholders who sold IRB stock on March 4, 2020.[174] A Shareholder Payment Administrator is to be appointed to advise the Fraud Section on which shareholders should be compensated and in what amount. Similar to the process for selecting a corporate compliance monitor, the Fraud Section will select the Administrator from a pool of three candidates chosen by IRB.[175] While the NPA states that a criminal fine or penalty would be appropriate based on the law and facts, the agreement does not impose any additional criminal monetary penalties in light of IRB’s financial position.[176]

During the NPA’s term, IRB is obligated to provide periodic reports regarding the state of its compliance program.[177] As is typical of these agreements, the NPA’s term may be extended up to one year by DOJ or terminated early, as circumstances dictate.[178] One curiosity of this agreement is that it attaches executed versions of Attachments E and F, certifications by the company CEO and CFO that IRB’s reporting under various provisions of the NPA is accurate and complete. Presumably, because these reporting requirements apply for the life of the NPA, these certifications will be executed for a second time at the conclusion of the NPA’s term.

Kerry Inc. (Guilty Plea)

On February 3, 2023, Kerry Inc. (“Kerry”), a subsidiary of a manufacturing company headquartered in Ireland, pleaded guilty to one count of manufacturing breakfast cereal under insanitary conditions and introducing adulterated food into interstate commerce in violation of the FDCA, 21 U.S.C. § § 331(a) and 333(a)(1).[179] As of the date of this publication, the plea agreement remains under seal. However, as described in the Department of Justice, Civil Division’s Consumer Protection Branch’s press release, following Kerry’s guilty plea, from approximately June 2016 to June 2018, a Kerry facility in Illinois, which manufactures and distributes Kellogg’s Honey Smacks cereal, tested positive for salmonella 81 times.[180] According to the press release, the company failed to address the presence of salmonella, and the Director of Quality Assurance at the facility directed subordinates not to report the test results.[181] The press release states that the adulterated cereal manufactured by Kerry has been linked to over 130 cases of salmonellosis beginning in March 2018.[182]

In connection with this plea agreement, Kerry was sentenced to pay $10,488,000 in criminal monetary penalties and $8,740,000 million in forfeiture payments.[183] The former Director of Quality Assurance for the facility has also been charged with three misdemeanor counts.[184]

L5 Medical Holdings, LLC (Guilty Plea)

On July 26, 2023, L5 Medical Holdings, LLC d/b/a Pain Care Centers (“L5 Medical”), a medical practice and operator of pain clinics, entered into a plea agreement with the U.S. Attorney’s Office for the Western District of Virginia to resolve allegations related to a federal drug and health care fraud conspiracy.[185] According to the agreement, L5 Medical conspired with its owner and other physicians at the practice to use registration numbers that had been issued to others in the course of dispensing and distributing a controlled substance, and to execute a scheme to defraud government health care benefits programs.[186] The practice’s owner, a former mortgage broker, allegedly purchased pain clinics through L5 Medical in pursuit of a “recession proof” business model.[187] With the agreement, L5 Medical pleaded guilty to conspiracy to distribute and dispense fentanyl, hydrocodone, morphine, and oxycodone for non-legitimate purposes.[188]

In the agreement, L5 Medical and the government agreed to recommend restitution in the amount of $3.82 million to federal and state health care programs, as well as $250,000 in forfeiture.[189] The plea agreement did not include a recommended probation period, but it required L5 Medical to wind down or dissolve its business and to never again do business in the Western District of Virginia.[190]

Nine2Five, LLC (Guilty Plea)

On July 10, 2023, Nine2Five, LLC (“Nine2Five”), a Carlsbad, California–based importer and seller of herbal extract kratom, entered into a plea agreement with the U.S. Attorney’s Office for the Southern District of California, to resolve allegations that Nine2Five imported kratom using false invoices stating that it was botanical soil conditioner.[191] According to the National Institutes of Health, kratom (scientific name Mitragyna speciose) is “an herbal substance that can produce opioid- and stimulant-like effects.”[192] After importing the kratom using false invoices, Nine2Five allegedly transferred $60,000 to a bank account in Indonesia for the purpose of kratom importation.[193]

The plea agreement contains a recommendation by the government that Nine2Five be placed on probation for three years.[194] No fine is recommended in the agreement because “the parties agree that it is readily ascertainable that [Nine2Five] has no ability to pay.”[195] Sentencing has not yet occurred in the case.

Onekey, LLC (Guilty Plea)

On February 2, 2023, Onekey, LLC (“Onekey”), a New Jersey construction company, and its principal, entered into plea agreements with the U.S. Attorney’s Office for the Southern District of New York, to resolve allegations that Onekey willfully violated OSHA regulations which led to a construction worker’s death.[196] The government alleged that, at a construction site in Poughkeepsie, New York, Onekey built a concrete retaining wall alongside large quantities of dirt called “surcharges,” without consulting with a qualified engineer, as required by OSHA, to see if the wall could withstand the surcharges’ weight.[197] On August 3, 2017, the wall collapsed, resulting the death of a construction worker.[198]

As of the date of this publication, the plea agreements are not publicly available. However, as described in Onekey’s Sentencing Memorandum, the plea agreement contains a recommendation that Onekey, throughout a three-year probationary period, retain a Certified Safety Professional for current and future major projects; implement a safety and health management system designed to identify, evaluate, analyze and control workplace safety and health hazards; and notify OSHA about its major projects for enhanced oversight.[199] The government did not seek restitution, because Onekey voluntarily paid for the worker’s funeral expenses and, in settlement of a civil lawsuit, paid the worker’s family $2.5 million.[200] Additionally, Onekey paid a fine of $281,583 to the Department of Labor.[201]

OneKey was sentenced on May 12, 2023; the court imposed the three years of probation with the conditions identified in the plea agreement and ordered the company to pay a $218,417 fine.[202] The company’s principal was sentenced to three months in prison and one year of supervised release.[203]

Partridge-Sibley Industrial Services, Inc. (Guilty Plea)

On January 11, 2023, Partridge-Sibley Industrial Services, Inc. (“PSI”) entered into a plea agreement with the U.S. Attorney’s Office for the Southern District of Mississippi to resolve allegations that it supervised the transportation and disposal of industrial waste to a site in Jackson, Mississippi and caused it to be taken to a discharge point that was not designated to receive such waste, in violation of the Clean Water Act.[204] The allegations stem from charges against Rebel High Velocity Sewer Services of Jackson, Mississippi (“Rebel”), namely that Rebel conspired to illegally discharge waste into the City of Jackson’s sewer system to avoid the cost of treating the waste, evade sewer usage fees, and avoid disposing of the waste at legal facilities.[205] PSI was responsible for transporting truckloads of the city’s industrial waste to Rebel for discharge.[206] After PSI transported the waste to Rebel, Rebel allegedly discharged the waste into the city’s sewer system, despite being prohibited from doing so, resulting in the illegal dispensation of millions of gallons of industrial waste.[207] PSI pleaded guilty to Count 1 of a ten-count misdemeanor Information for “negligently introducing and causing to be discharged trucked and hauled pollutants” into the city’s wastewater system.[208]

In the plea agreement, PSI and the government agreed on a $200,000 fine and a one-year term of probation.[209] Following the plea, PSI issued a statement noting that “all of the officers, managers and directors of PSI were cleared of any wrongdoing or involvement in Rebel’s illegal discharges,” and that PSI’s alleged negligence was a result of untrue representations and assurance made by Rebel.[210] The statement further clarified that none of the wastewater PSI transported was hazardous or acidic.[211] At sentencing, the court imposed the fine and probation terms recommended in the plea agreement.[212] Neither the plea agreement nor the court’s judgment contain any explicit requirement for voluntarily compliance self-reporting by PSI.

Quick Tricks Automotive Performance, Inc. and Kloud9Nine, LLC (Guilty Pleas)

On January 31, 2023, Quick Tricks Automotive Performance, Inc. (“Quick Tricks”) and Kloud9Nine, LLC (“Kloud9Nine”) entered into plea agreements with the U.S. Attorney’s Office for the Southern District of Florida to resolve allegations that, between 2018 and 2021, the companies conspired to violate the Clean Air Act by tampering with diesel emissions control devices and “tuning” onboard monitoring systems so that they would not detect the modifications.[213] Both companies were sellers of products used for such “tuning.”[214] Each plea agreement recommends the imposition of three years of probation on the respective company, but does not reflect an agreement on a recommendation for monetary consequences of the alleged conduct.[215] All parties expressly reserved the right to advocate for an appropriate fine at sentencing.[216]

On May 5, 2023, the court sentenced both Quick Tricks and Kloud9Nine to three years of probation.[217] The conditions of both companies’ probations include establishing and maintaining effective compliance programs, as well as appointing a third-party auditor and funding a court-appointed monitor.[218] The companies are required to report, within 30 days of the third-party auditors’ reports, on the companies’ efforts to address auditors’ findings.[219] The court did not impose a fine on either company.[220]

Pure Addiction Diesel Performance, LLC (Guilty Plea)

On May 30, 2023, Pure Addiction Diesel Performance, LLC (“Pure Addiction”), a Portland, Oregon–area diesel repair shop, entered into a plea agreement with the U.S. Attorney’s Office for the District of Oregon, to resolve allegations that Pure Addiction violated the Clean Air Act by “deleting” or removing emissions controls from vehicles and “tuning” onboard monitoring systems so that they would not detect the modifications.[221] The government alleged that, between 2018 and 2020, Pure Addiction removed the emissions control systems, which are designed to reduce pollutants being emitted from vehicles, and modified on-board diagnostic systems, for approximately 245 diesel vehicles.[222] Pure Addiction allegedly collected over $400,000 for performing these services.[223]

In the plea agreement, Pure Addiction and the government stipulated to a sentence of three years of probation, and as a condition of probation agreed to pay a penalty of $148,733 to the Environmental Protection Agency (“EPA”), under the terms of a separate consent agreement.[224] The agreement did not contain a stipulated restitution obligation.

Pure Addiction was ordered to pay the $148,733 fine to the EPA, and was sentenced to three years’ probation.[225] In connection with Pure Addiction’s plea, its owner and operator pleaded guilty to being an accessory to the tampering of monitoring devices and was sentenced to six months in prison.[226]

Rhode Island Beef and Veal, Inc. (Guilty Plea)

On April 4, 2023, Rhode Island Beef and Veal, Inc. (“Rhode Island Beef and Veal”), a slaughterhouse based in Johnson, Rhode Island, entered into a plea agreement with the U.S. Attorney’s Office for the District of Rhode Island, to resolve allegations that the company violated the Federal Meat Inspection Act (“FMIA”).[227] Specifically, the government alleged that the company defrauded customers by failing to comply with FMIA inspection requirements, by falsely stating that meat had passed such inspection, and by unlawfully using the Secretary of Agriculture’s official inspection mark.[228] The plea agreement is not accompanied by a statement of facts, but according to the government’s press release, Rhode Island Beef and Veal continued to mark meat as having been inspected by the U.S. Department of Agriculture (“USDA”) for over a week after the USDA served the company with a notice of suspension and withdrew its inspector.[229]

The plea agreement does not contain a recommended fine or probation period; instead, it states that the government would recommend a fine within the applicable Sentencing Guidelines range, and that the government “is free to recommend a period of probation” within that range.[230] The agreement likewise does not specify any ongoing reporting or compliance requirements as part of Rhode Island Beef and Veal’s sentence.[231] Sentencing has not yet occurred in the case.

Sterling Bancorp, Inc. (Guilty Plea)

On March 15, 2023, Sterling Bancorp, Inc. (“Sterling”), a holding company offering residential and commercial loans and retail banking services through its wholly-owned subsidiary—Sterling Bank and Trust, F.S.B.—pleaded guilty to a charge of securities fraud for filing false securities statements relating to its initial public offering (“IPO”) in 2017, and in its annual filings in 2018 and 2019.[232] According to the agreement, from 2011 to 2019, Sterling, through its founder and certain members of senior management and loan officers, knowingly falsified and hid information causing loans to be offered to unqualified borrowers, which in turn increased Sterling’s revenue through its Advantage Loan Program (“ALP”).[233] Sterling then engaged in an IPO and subsequent securities filings, in the process making materially false statements regarding the quality of the ALP.[234] Consequently, between 2017 and 2019, the Sterling’s alleged fraud caused ALP non-insider shareholders to experience approximately $69 million in losses.[235]

Although Sterling voluntarily disclosed the ALP misconduct to the Office of Comptroller of the Currency (“OCC”) following an internal investigation, Sterling did not receive any disclosure credit because it did not voluntarily and timely disclose the fraudulent conduct to the Criminal Fraud Section.[236] Sterling did receive credit, however, for fully disclosing its findings from its internal investigation, cooperating with the Fraud Section’s investigation, and demonstrating recognition and affirmative acceptance of responsibility for its conduct, such as by engaging in extensive remedial measures including terminating the ALP and reorganizing its senior management and several related departments.[237]

Pursuant to the plea agreement, Sterling agreed to pay a criminal fine of approximately $62 million, a 25% discount off of the bottom of the USSG range based on Sterling’s cooperation and remediation.[238] After crediting Sterling’s civil monetary penalty payment to the OCC, the fine amount totaled approximately $56 million.[239] Similarly, credit was given for Sterling’s class action payments and thus restitution was calculated at approximately $56.5 million.[240] Following a finding that Sterling was unable to pay the full criminal penalty and restitution without facing bankruptcy, the Fraud Section required that only approximately $27 million be paid towards restitution.[241] The plea agreement specified that a Special Master would be appointed to oversee the proper administration and disbursement of the $27 million in restitution.[242]

As part of the agreement, Sterling will also be required to enhance its compliance program and provide quarterly reports to the Fraud Section throughout a three-year probationary period, which can be extended by up to one year if Sterling breaches its obligations.[243] In sentencing Sterling, the court imposed the probationary period and restitution obligation recommended by the plea agreement.[244]

Telefonaktiebolaget LM Ericsson (Guilty Plea)

On March 2, 2023, Telefonaktiebolaget LM Ericsson (“Ericsson”), a Swedish multinational telecommunications company, pleaded guilty to one count of conspiracy to violate the anti-bribery provisions of the FCPA, 15 U.S.C. § 78dd-1, and one count of conspiracy to violate the books and records provisions of the FCPA, 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(2)(B), and 78m(b)(5).[245] These counts were previously resolved in a 2019 DPA between Ericsson, the Fraud Section, and the U.S. Attorney’s Office for the Southern District of New York, in connection with which Ericsson paid more than $1 billion in penalties and disgorgement between the DPA and a related civil settlement with the SEC.[246] This year, DOJ determined, in its sole discretion, that Ericsson had breached the DPA by failing to promptly disclose all factual evidence and information related to certain pre-DPA conduct, as required by the DPA.[247] Accordingly, Ericsson pleaded guilty to the charges deferred by the 2019 DPA and agreed to an additional penalty of approximately $206.7 million.[248]

Zeus Lines Management S.A. (Guilty Plea)

On March 24, 2023, Zeus Lines Management S.A. (“Zeus”), a Liberian vessel operator with its principal place of business in Greece, pleaded guilty to violating the Act to Prevent Pollution from Ships (“APPS”), 33 U.S.C. § 1908, and the Ports and Waterways Safety Act (“PWSA”), 46 U.S.C. § 70036(b).[249] As to the APPS violations, the plea agreement states that, on three occasions between November 2021 and February 2022, one of Zeus’s ships illegally dumped 9,544 gallons of oily bilge water directly into the ocean, rather than through required pollution-prevention apparatus, and did not accurately report this discharge.[250] The agreement therefore states that Zeus failed to maintain accurate records as to its discharge of oily bilge water, in violation of the APPS.[251]

As to the PWSA violations, according to the agreement, Zeus did not report its discovery of an inoperable inert gas system on board on February 2, 2022.[252] The system’s failure, discovered while the ship was in the Netherlands, caused the ship’s oxygen levels to drastically exceed safe levels, posing a threat of fire and explosion.[253] The agreement states that Zeus sailed to the United States to retrieve a spare part during this time, and in so doing failed to report the system failure to the U.S. Coast Guard.[254] According to the agreement, after the Coast Guard became aware of the unsafe oxygen levels, Zeus falsified records to reflect that the oxygen levels were still safe during the ship’s voyage.[255]

Pursuant to its plea agreement with the Environmental and Natural Resources Division and the U.S. Attorney’s Office for the District of Rhode Island, Zeus agreed to a recommended criminal fine of over $1.6 million and $562,500 in community service to the NFWF.[256] Additionally, the agreement recommends a four-year probationary period, which can be extended by a period of time determined by the court if Zeus violates the agreement’s terms, during which Zeus must establish an Environmental Compliance Plan for all ships sailing to the United States.[257] Zeus must name a Compliance Manager who will report directly to Zeus’s Managing Director,[258] and retain a Third Party Auditor (“TPA”) to coordinate assessments of the fleet’s environmental safety practices and submit periodic reports to DOJ.[259] Zeus must also retain a Court Appointed Monitor that will oversee the audit process and Zeus’s compliance with applicable regulations, receiving reports from the TPA.[260] The court has not yet imposed sentence on Zeus.

The ship’s captain and chief engineer also pleaded guilty to charges under the APPS and PWSA.[261]

Appendix

The chart below summarizes the agreements concluded by DOJ through July 2023. The complete text of each publicly available agreement in hyperlinked in the chart.

The figures for “Monetary Recoveries” may include amounts not strictly limited to an NPA, DPA, or guilty plea, such as fines, penalties, forfeitures, and restitution requirements imposed by other regulators and enforcement agencies, as well as amounts from related settlement agreements, all of which may be part of a global resolution in connection with the NPA or DPA, paid by the named entity and/or subsidiaries. The term “Monitoring & Reporting” includes traditional compliance monitors, self-reporting arrangements, and other monitorship arrangements found in resolution agreements.

U.S. Deferred Prosecution Agreements, Non-Prosecution Agreements, and Plea Agreements in 2023 YTD
Company	Agency	Alleged Violation	Type	Monetary Recoveries	Monitoring & Reporting	Term of Agreement (Months)
ABC Polymer Industries, LLC	N.D. Ala.; DOJ ENRD	OSHA	Guilty Plea	$410,856	Yes	24
Aifa Seafood Inc.	S.D. Fla.	Lacey Act	Guilty Plea	$0	No	N/A
American Management and Administration Corporation	D.P.R.	Theft of Federal Funds	Guilty Plea	$3,712,000	No	N/A
Anyclo International, Inc.	D.N.J.	Entry of Goods by Means of False Statements	Guilty Plea	$2,300,000	No	N/A
BDF Enterprises, Inc.	E.D. Tenn.; DOJ, Antitrust Division	Sherman Act	Guilty Plea	$234,000	No	0
British American Tobacco	D.D.C.; DOJ NSD	Fraud (Bank)	DPA	$629,891,853	Yes	36
Davey Tree Expert Company and Wolf Tree, Inc.	S.D. Ga.	Immigration Violations	NPA	$3,984,325	No	N/A
DES International Co., Ltd.	D.D.C.; DOJ NSD	IEEPA	Guilty Plea	$83,769	No	60
Diesel Tune-Ups of RI, Inc.	D.R.I.	Clean Air Act	Guilty Plea	$0	Yes	36
E.I. Dupont de Nemours and Co.	S.D. Tex.	Clean Air Act	Guilty Plea	$16,000,000	No	24
FeelGood Natural Health Stores, Ltd.	E.D. Mich.; DOJ ENRD	Lacey Act	Guilty Plea	$21,373	Yes	36
Genotox Laboratories Ltd.[262]	W.D. Tex.; S.D. Ga.	Anti-Kickback Statute	DPA	$892,784	No	18
Great Circle	E.D. Mo.	Fraud (Healthcare)	NPA	$1,866,000	No	36
Greater Boston Behavioral Health LLC	D. Mass.	FDCA	Guilty Plea	$2,587,142	No	36
Ground Zero International Seeds, Inc.	D. Or.	Misprision of Felony	Guilty Plea	$556,000	No	12
Interunity Management (Deutschland) GMBH	S.D. Cal.; DOJ ENRD	Failure to Maintain an Accurate Oil Record Book	Guilty Plea	$1,250,000	Yes	48
IRB Brasil Resseguros	DOJ Fraud	Fraud (Securities)	NPA	$5,000,000	Yes	36
Kerry Inc.	DOJ CPB; C.D. Ill.	FDCA	Guilty Plea	$19,228,000	Unknown	Unknown
L5 Medical Holdings, LLC	W.D. Va.	Healthcare fraud	Guilty Plea	$4,070,000	No	N/A
M&D Transportation, Inc.	D.R.I.	Clean Air Act	Guilty Plea	$0	Yes	36
Michelle’s DVD Funhouse, Inc.	E.D. Tenn.; DOJ, Antitrust Division	Sherman Act	Guilty plea	$184,000	No	N/A
MJR Prime LLC	E.D. Tenn.; DOJ, Antitrust Division	Sherman Act	Guilty plea	$130,000	No	N/A
Nine2Five, LLC	S.D. Cal.	Money Laundering	Guilty Plea	$0	No	36
Onekey, LLC	S.D.N.Y.	OSHA	Guilty Plea	$218,417	Unknown	36
Partridge-Sibley Industrial Services, Inc.	S.D. Miss.	Clean Water Act	Guilty Plea	$200,000	No	12
Prime Brooklyn LLC	E.D. Tenn.; DOJ, Antitrust Division	Sherman Act	Guilty Plea	$68,000	No	N/A
Pure Addiction Diesel Performance, LLC	D. Or.	Clean Air Act	Guilty Plea	$148,733	No	36
Quick Tricks Automotive Performance, Inc. and Kloud9Nine, LLC	S.D. Fla.	Clean Air Act	Guilty Plea	$0	No	36
Rhode Island Beef and Veal, Inc.	D.R.I.	Federal Meat Inspection Act	Guilty Plea	$0	No	N/A
Soltech Industry Co., Ltd.	D.D.C.; DOJ NSD	IEEPA	Guilty Plea	$83,769	No	60
Sterling Bancorp, Inc.	DOJ Fraud	Fraud (Securities)	Guilty Plea	$39,739,000	Yes	36
Telefonaktiebolaget LM Ericsson	DOJ Fraud; S.D.N.Y.	FCPA	Guilty Plea	$206,728,848	Yes	12
Zeus Lines Management S.A.	D.R.I.; DOJ ENRD	Failure to Maintain Accurate Oil Record Book	Guilty Plea	$2,250,000	Yes	48

__________________________________________________________

[1] This update addresses developments and statistics through July 31, 2023. NPAs and DPAs are two kinds of voluntary, pre-trial agreements between a corporation and the government, most commonly used by DOJ. They are standard methods to resolve investigations into corporate criminal misconduct and are designed to avoid the severe consequences, both direct and collateral, that conviction would have on a company, its shareholders, and its employees. Though NPAs and DPAs differ procedurally—a DPA, unlike an NPA, is formally filed with a court along with charging documents—both usually require an admission of wrongdoing, payment of fines and penalties, cooperation with the government during the pendency of the agreement, and remedial efforts, such as enhancing a compliance program or cooperating with a monitor who reports to the government. Although NPAs and DPAs are used by multiple agencies, since Gibson Dunn began tracking corporate NPAs and DPAs in 2000, we have identified over 600 agreements initiated by DOJ, and 10 initiated by the U.S. Securities and Exchange Commission (“SEC”).

[2] Memorandum from Lisa O. Monaco, Deputy Attorney General, U.S. Dep’t of Justice, to Assistant Attorney General, Criminal Division, et al., Further Revisions to Corporate Criminal Enforcement Policies Following Discussions with Corporate Crime Advisory Group (Sept. 15, 2022), https://www.justice.gov/opa/speech/file/1535301/download.

[3] Deputy Attorney General Lisa O. Monaco Delivers Remarks on Corporate Criminal Enforcement (Sept. 15, 2022), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-o-monaco-delivers-remarks-corporate-criminal-enforcement.

[4] Id.

[5] Id.

[6] Deputy Attorney General Lisa Monaco Delivers Remarks at American Bar Association National Institute on White Collar Crime (Mar. 2, 2023), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-remarks-american-bar-association-national; see also DOJ, United States Attorneys’ Offices Voluntary Self-Disclosure Policy, https://www.justice.gov/d9/2023-03/usao_voluntary_self-disclosure_policy_2.21.23.pdf.

[7] Memorandum from DAG Monaco to DOJ on Further Revisions to Corporate Criminal Enforcement Policies (Sept. 15, 2022), https://www.justice.gov/opa/speech/file/1535301/download.

[8] DOJ, United States Attorneys’ Offices Voluntary Self-Disclosure Policy at 4, chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.justice.gov/d9/2023-03/usao_voluntary_self-disclosure_policy_2.21.23.pdf

[9] Press Release, ABB Agrees to Pay Over $315 Million to Resolve Coordinated Global Foreign Bribery Case (Dec. 2, 2022), https://www.justice.gov/opa/pr/abb-agrees-pay-over-315-million-resolve-coordinated-global-foreign-bribery-case.

[10] Memorandum from DAG Monaco to DOJ on Further Revisions to Corporate Criminal Enforcement Policies (Sept. 15, 2022), https://www.justice.gov/opa/speech/file/1535301/download.

[11] Principal Associate Deputy Attorney General Marshall Miller Delivers Remarks at the American Bankers Association Financial Crimes Enforcement Conference (Dec. 6, 2022), https://www.justice.gov/opa/speech/principal-associate-deputy-attorney-general-marshall-miller-delivers-remarks-american.

[12] Deputy Attorney General Lisa Monaco Delivers Remarks at American Bar Association National Institute on White Collar Crime (Mar. 2, 2023), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-remarks-american-bar-association-national.

[13] Principal Associate Deputy Attorney General Marshall Miller Delivers Remarks at the American Bankers Association Financial Crimes Enforcement Conference (Dec. 6, 2022), https://www.justice.gov/opa/speech/principal-associate-deputy-attorney-general-marshall-miller-delivers-remarks-american.

[14] Deputy Attorney General Lisa Monaco Delivers Remarks at American Bar Association National Institute on White Collar Crime (Mar. 2, 2023), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-remarks-american-bar-association-national.

[15] Assistant Attorney General Kenneth A. Polite, Jr. Delivers Remarks on Revisions to the Criminal Division’s Corporate Enforcement Policy (Jan. 17, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-remarks-georgetown-university-law; see also, U.S. Dep’t of Justice, Criminal Division Corporate Enforcement and Voluntary Self-Disclosure Policy, https://www.justice.gov/criminal-fraud/file/1562831/download.

[16] Assistant Attorney General Kenneth A. Polite, Jr. Delivers Remarks on Revisions to the Criminal Division’s Corporate Enforcement Policy (Jan. 17, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-remarks-georgetown-university-law.

[17] Id.

[18] Justice Manual § 9-47.120(1) (Nov. 2019).

[19] Id.

[20] Assistant Attorney General Kenneth A. Polite, Jr. Delivers Keynote Address at the Global Investigations Review Live: DC Spring Conference (Mar. 23, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-keynote-address-global.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Letter from Glenn S. Leon, Chief, U.S. Dep’t of Justice, Fraud Section & E. Martin Estrada, U.S. Attorney for the Central District of California, to Peter Spivack, Counsel for Safran S.A. (Dec. 21, 2022), https://www.justice.gov/criminal-fraud/file/1559236/download.

[27] Id.

[28] Deputy Assistant Attorney General Lisa H. Miller Delivers Remarks at the University of Southern California Gould School of Law on Corporate Enforcement and Compliance (Feb. 16, 2023), https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-lisa-h-miller-delivers-remarks-university-southern.

[29] Letter from Glenn S. Leon, Chief, U.S. Dep’t of Justice, Fraud Section & Troy Rivetti, Acting U.S. Attorney for the Western District of Pennsylvania, to Brian E. Spears et al., Counsel for Corsa Coal Corporation (Mar. 8, 2023), https://www.justice.gov/criminal-fraud/file/1573526/download.

[30] Id.; Assistant Attorney General Kenneth A. Polite, Jr. Delivers Keynote Address at the Global Investigations Review Live: DC Spring Conference (Mar. 23, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-keynote-address-global.

[31] JM 9-47.120(2); see also Assistant Attorney General Kenneth A. Polite, Jr. Delivers Remarks on Revisions to the Criminal Division’s Corporate Enforcement Policy (Jan. 17, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-remarks-georgetown-university-law.

[32] Id.

[33] Id.

[34] Assistant Attorney General Kenneth A. Polite, Jr. Delivers Remarks on Revisions to the Criminal Division’s Corporate Enforcement Policy (Jan. 17, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-remarks-georgetown-university-law.

[35] Deputy Attorney General Lisa Monaco Delivers Remarks at American Bar Association National Institute on White Collar Crime (Mar. 2, 2023), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-remarks-american-bar-association-national.

[36] Assistant Attorney General Kenneth A. Polite, Jr. Delivers Keynote at the ABA’s 38th Annual National Institute on White Collar Crime (Mar. 3, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-keynote-aba-s-38th-annual-national.

[37] Id.; The Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks (Mar. 3, 2023), chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.justice.gov/criminal-fraud/file/1571941/download.

[38] Deputy Attorney General Lisa Monaco Delivers Remarks at American Bar Association National Institute on White Collar Crime (Mar. 2, 2023), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-remarks-american-bar-association-national.

[39] Assistant Attorney General Kenneth A. Polite, Jr. Delivers Keynote at the ABA’s 38th Annual National Institute on White Collar Crime (Mar. 3, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-keynote-aba-s-38th-annual-national.

[40] Id.; The Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks 2 (Mar. 3, 2023).

[41] Id.

[42] Id.

[43] See Deputy Assistant Attorney General Lisa H. Miller Delivers Remarks at the University of Southern California Gould School of Law on Corporate Enforcement and Compliance (Feb. 16, 2023), https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-lisa-h-miller-delivers-remarks-university-southern; Assistant Attorney General Kenneth A. Polite, Jr. Delivers Keynote at the ABA’s 38th Annual National Institute on White Collar Crime (Mar. 3, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-keynote-aba-s-38th-annual-national; Assistant Attorney General Kenneth A. Polite, Jr. Delivers Keynote Address at the Global Investigations Review Live: DC Spring Conference (Mar. 23, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-keynote-address-global.

[44] Assistant Attorney General Kenneth A. Polite, Jr. Delivers Keynote at the ABA’s 38th Annual National Institute on White Collar Crime (Mar. 3, 2023), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-keynote-aba-s-38th-annual-national.

[45] Id.

[46] Principal Associate Deputy Attorney General Marshall Miller Delivers Remarks at the Ethics and Compliance Initiative IMPACT Conference (May 3, 2023), https://www.justice.gov/opa/speech/principal-associate-deputy-attorney-general-marshall-miller-delivers-remarks-ethics-and.

[47] Id.

[48] Id.

[49] Dep’t of Commerce, Dep’t of the Treasury, and Dep’t of Justice Tri-Seal Compliance Note: Voluntary Self-Disclosure of Potential Violations (July 26, 2023), https://ofac.treasury.gov/media/932036/download?inline.

[50] Id. at 5.

[51] Plea Agreement, United States v. ABC Polymer Indus., LLC, No. 22-cr-294 (N.D. Ala. Jan. 9, 2023), at 2-6.).

[52] Id. at 3 (citing 29 C.F.R. § 1910.212(a)(3)(ii)).).

[53] Id. at 5.

[54] Id. at 1, 7.

[55] Id.

[56] Id., Attach. A at 2-8.

[57] Press Release, U.S. Dep’t of Justice, Alabama Company Sentenced in Worker Death Case (Jan. 24, 2023), https://www.justice.gov/usao-ndal/pr/alabama-company-sentenced-worker-death-case.

[58] Plea Agreement, United States v. Aifa Seafood Inc., No. 1:22-CR-20479-FAMCR (S.D. Fla. Mar. 8, 2023).

[59] Id. at I.A.

[60] See id. at B.

[61] See generally id.

[62] Judgment, United States v. Aifa Seafood Inc., No. 1:22-CR-20479-FAM (S.D. Fla. May 25, 2023).

[63] Id.

[64] Id.

[65] Id.

[66] Plea Agreement, United States v. AMAC, No. 3:23-CR-00148-CVR (D.P.R. Apr. 13, 2023), at 13–19.

[67] Id.

[68] Id. at 17–18.

[69] See generally id.

[70] Id. at 3.

[71] Judgment, United States v. AMAC, No. 23-cr-00148-CVR (D.P.R. July 13, 2023).

[72] Plea Agreement, United States v. Anyclo Int’l, Inc., No. 23-cr-00419-ES (D.N.J. Feb. 6, 2023), at Sched. A.

[73] Id.

[74] Id. at 2.

[75] Id.

[76] Judgment, United States v. Anyclo Int’l, Inc., No. 23-cr-00419-ES (D.N.J. June 12, 2023).

[77] Id.

[78] Press Release, U.S. Dep’t of Justice, Two Amazon Marketplace Sellers and Four Companies Plead Guilty to Price Fixing DVDs and Blu-Ray Discs (Feb. 13, 2023), at 1, https://www.justice.gov/opa/pr/two-amazon-marketplace-sellers-and-four-companies-plead-guilty-price-fixing-dvds-and-blu-ray (hereinafter “BDF Enterprises et al. Press Release”).

[79] Plea Agreement, United States v. BDF Enterprises, Inc., No. 3:22-cr-24 (E.D. Tenn. Jan. 11, 2023), ¶ 5(a) – (e) (“BDF Plea Agreement”); Plea Agreement, United States v. Prime Brooklyn, LLC, No. 3:22-cr-24 (E.D. Tenn. Jan. 11, 2023), ¶ 5(a) – (e) (“Prime Brooklyn Plea Agreement”); Plea Agreement, United States v. Michelle’s DVD Funhouse, Inc., No. 3:22-cr-24 (E.D. Tenn. Jan. 11, 2023), ¶ 5(a) – (c) (“Michelle’s DVD Plea Agreement”); Plea Agreement, United States v. MJR Prime, LLC, No. 3:22-cr-24 (E.D. Tenn. Jan. 11, 2023), ¶ 5(a) – (c) (“MJR Prime Plea Agreement”).

[80] BDF Plea Agreement ¶ 10; Prime Brooklyn Plea Agreement ¶ 10; Michelle’s DVD Plea Agreement ¶ 10; MJR Prime Plea Agreement ¶ 10.

[81] BDF Plea Agreement ¶ 13; Prime Brooklyn Plea Agreement ¶ 14; Michelle’s DVD Plea Agreement ¶ 14; MJR Prime Plea Agreement ¶ 14.

[82] BDF Plea Agreement ¶ 10; Prime Brooklyn Plea Agreement ¶ 10; Michelle’s DVD Plea Agreement ¶ 10; MJR Prime Plea Agreement ¶ 10.

[83] BDF Enterprises et al. Press Release.

[84] Judgment, United States v. BDF Enters., Inc., No. 22-cr-00024-KAC-DCP (E.D. Tenn. July 24, 2023); U.S.S.G. § 8C3.4.

[85] Deferred Prosecution Agreement, United States v. Brit. Am. Tobacco P.L.C., No. 23-cr-118 (D.D.C. Apr. 25, 2023), at ¶ 1.

[86] Id.

[87] Id., at Attach. A ¶¶ 31, 36-41.

[88] Id., at Attach. A ¶¶ 30-31.

[89] Id., at Attach. A ¶¶ 4-11, 59-73.

[90] Id. at ¶ 7.

[91] Id. at ¶¶ 12-17.

[92] Id. at ¶ 3.

[93] OFAC Enforcement Release (Apr. 25, 2022), chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://ofac.treasury.gov/media/931666/download?inline.

[94] See DOJ Press Release, “British American Tobacco to Pay $629 Million in Fines for N. Korean Tobacco Sales; Charges Unsealed Against Tobacco Facilitators” (Apr. 25, 2023), https://www.justice.gov/usao-dc/pr/british-american-tobacco-pay-629-million-fines-n-korean-tobacco-sales-charges-unsealed.

[95] Non-Prosecution Agreement, Davey Tree and Wolf Tree, Inc. (July 13, 2023).

[96] Id. at 3–4.

[97] Id. at 4.

[98] Id. at 5.

[99] Id. at 6–7.

[100] Id. at 7.

[101] Id. at 10.

[102] Plea Agreement, United States v. Des International Co., Ltd., 1:23-cr-00107 (D.D.C. Mar., 23, 2023) (hereinafter “DES Plea Agreement”); Plea Agreement, United States v. Soltech Industry Co. Ltd., 1:23-cr-00107 (D.D.C. Mar., 23, 2023) (hereinafter “Soltech Plea Agreement”).

[103] Statement of Offense, DES Plea Agreement at 3–4; Statement of Offense, Soltech Plea Agreement at 3–4.

[104] Statement of Offense, DES Plea Agreement at 2, 4–8; Statement of Offense, Soltech Plea Agreement at 2, 4–8. Id. at 2, 4.

[105] Statement of Offense, DES Plea Agreement at 4–8; Statement of Offense, Soltech Plea Agreement at 4–8. Id. at 4–8.

[106] DES Plea Agreement at 4; Soltech Plea Agreement at 4.

[107] Judgment, United States v. Soltech Indus. Co., Ltd., No. 23-cr-00107-JMC (D.D.C. Apr. 26, 2023); Judgment, United States v. DES Int’l Co., Ltd., No. 23-cr-00107-JMC (D.D.C. Apr. 26, 2023).

[108] Plea Agreement, United States v. M&D Transp., Inc. & Diesel Tune-Ups of RI, Inc., No. 23-cr-00008-MSM-LDA (D.R.I. Jan. 26, 2023).),

[109] Id. at 8.

[110] Id. at 8–9.

[111] Id. at ¶ 5.

[112] Id.

[113] Id.

[114] Id.

[115] Id. at ¶ 6.

[116] Id. at ¶ 4.

[117] Plea Agreement, United States v. E.I. Du Pont De Nemours and Co. (April 24, 2023) (hereinafter “DuPont Plea Agreement”); Press Release, U.S. Dep’t of Justice, DuPont and former employee sentenced for gas release that killed four (April 24, 2023), https://www.justice.gov/usao-sdtx/pr/dupont-and-former-employee-sentenced-gas-release-killed-four.

[118] DuPont Plea Agreement at 2-3.

[119] Id. at 3.

[120] Id.

[121] Id. at 11.

[122] Judgment, United States v. E.I. Du Pont De Nemours and Co., No. 21-cr-00016 (S.D. Tex. May 2, 2023).

[123] 16 U.S.C. §§ 3372(a)(1), 3372(a)(4), and 3373(d)(1)(B); see also Press Release, U.S. Dep’t of Justice, Canadian Company Pleads Guilty to Selling Harp Seal Oil in the United States (June 5, 2023), at 1, https://www.justice.gov/opa/pr/canadian-company-pleads-guilty-illegally-selling-harp-seal-oil-united-states#:~:text=All%20News-,Canadian%20Company%20Pleads%20Guilty%20to%20Illegally%20Selling,Oil%20in%20the%20United%20States&text=FeelGood%20Natural%20Health%20Stores%20Ltd,Mammal%20Protection%20Act%20(MMPA).

[124] Plea Agreement, United States v. FeelGood Natural Health Stores, No. 2:23-cr-20189 (E.D.M.I. June 5, 2023), ¶¶ 4(1)-(5).

[125] Id. ¶¶ 5(B), (C).

[126] Id. ¶ 9(D)(a).

[127] Id.

[128] Id. ¶¶ 9(D)(a), (b)(i)-(ii).

[129] Deferred Prosecution Agreement, United States v. Genotox Lab’ys Ltd., No. 1:23-cr-00062 (W.D. Tex. Apr. 5, 2023), at 1 (hereinafter “Genotox DPA”).

[130] Id. at 2-3.

[131] Id.

[132] Id. at 4-5; see also DOJ Press Release, “Texas Laboratory Agrees to Pay $5.9 Million to Settle Allegations of Kickbacks to Third Party Marketers and Unnecessary Drug Tests” (Apr. 4, 2023), https://www.justice.gov/opa/pr/texas-laboratory-agrees-pay-59-million-settle-allegations-kickbacks-third-party-marketers-and.

[133] Genotox DPA at 13.

[134] Id. at 15.

[135] Settlement Agreement, United States v. Genotox Lab’ys Ltd., No. 2:20-cv-97 (S.D. Ga. Mar. 19, 2023), at 5 (hereinafter “Genotox Settlement Agreement”); Press Release, U.S. Dep’t of Justice, Texas Laboratory Agrees to Pay $5.9 Million to Settle Allegations of Kickbacks to Third Party Marketers and Unnecessary Drug Tests (Apr. 4, 2023), https://www.justice.gov/opa/pr/texas-laboratory-agrees-pay-59-million-settle-allegations-kickbacks-third-party-marketers-and.

[136] Genotox Settlement Agreement at 1, 3-5.

[137] Id. at 14.

[138] Genotox Settlement Agreement at 7, 12.

[139] Non-Prosecution Agreement, Great Circle (Jan. 27, 2023), at 1–2.

[140] Id., Statement of Facts, at ¶ 2.

[141] See id., Statement of Facts, at ¶¶ 3–6.

[142] See id., Attach. B.

[143] See id. at 1.

[144] See generally id.

[145] Plea Agreement, United States v. Greater Boston Behavioral Health LLC, No. 23-cr-10112-DLC (Mar. 13, 2023).

[146] Id., Statement of Facts, at ¶ 4–5.

[147] Id. at 3–4.

[148] Id. at 4.

[149] See id. at 2–3.

[150] Judgment, United States v. Greater Boston Behavioral Health, No. 23-cr-10112-DLC (D. Mass. May 16, 2023).

[151] Plea Agreement, United States v. Ground Zero Seeds Int’l, Inc., No. 3:22-cr-00073-IM (D. Or.) (hereinafter “GZI Plea Agreement”), at 2–3.

[152] Id.

[153] Id. at 3.

[154] Id. at 4.

[155] Id. at 3.

[156] See Judgment, United States v. Ground Zero Seeds Int’l, Inc., No. 3:22-cr-00073-IM (D. Or.).

[157] See generally id.; GZI Plea Agreement.

[158] Plea Agreement, United States v. Interunity Mgmt. (Deutschland) GmbH, No. 23-cr-01044-TWR (S.D. Cal. May 30, 2023) (hereinafter “Interunity Plea Agreement”), at 3.

[159] Id. at 4.

[160] Id. at 6.

[161] Id. at 14.

[162] Id. at 12.

[163] Id. at 13.

[164] Id.

[165] Id. at Attach. A.

[166] Id. at Attach. A., at 16.

[167] Non-Prosecution Agreement, United States v. IRB Brasil Resseguors SA (Apr. 20, 2023), at ¶ 1.

[168] Id. at ¶ 4.

[169] Id., Attach. A at A-1.

[170] Id., Attach. A at A-2.

[171] Id., Attach. A at A-3.

[172] Id., Attach. A at A-3, A-4.

[173] Id., Attach. A at A-3.

[174] Id. at ¶ 3.

[175] Id. at ¶¶ 11-13.

[176] Id. at ¶ 3.

[177] Id., Attach. C ¶¶ 1-15.

[178] Id. at ¶¶ 5, 15.

[179] Press Release, U.S. Dep’t of Justice, Kerry Inc. Pleads Guilty and Agrees to Pay $19.228 Million in Connection with Insanitary Plant Conditions Linked to 2018 Salmonella Poisoning Outbreak (Feb. 3, 2023), https://www.justice.gov/opa/pr/kerry-inc-pleads-guilty-and-agrees-pay-19228-million-connection-insanitary-plant-conditions (hereinafter “Kerry Press Release”).

[180] Id.

[181] Id.

[182] Id.

[183] Judgment, United States v. Kerry, Inc., No. 22-cr-10051-001 (C.D. Ill. Mar. 23, 2023) at 1, 3.

[184] Kerry Press Release.

[185] Plea Agreement, United States v. L5 Medical Holdings, LLC, d/b/a/ Pain Care Centers, No. 6:23-cr-12 (W.D. Va. (July 26, 2023) (hereinafter “L5 Medical Plea Agreement”).

[186] Id. at 1.

[187] See DOJ Press Release, “Pain Clinic Owner, L5 Medical Holdings Plead Guilty-Agree to Pay $4 Million in Restitution,” (July. 28, 2023), https://www.justice.gov/usao-wdva/pr/pain-clinic-owner-l5-medical-holdings-plead-guilty-agree-pay-4-million-restitution.

[188] Id.; see also L5 Medical Plea Agreement at 1.

[189] L5 Medical Plea Agreement at 4.

[190] Id. at 7.

[191] Plea Agreement, United States v. Nine2Five, LLC, No. 23-cr-179-TWR (July 10, 2023) (hereinafter “Nine2Five Plea Agreement”), at 3.

[192] Kratom, National Institute on Drug Abuse (March 25, 2022), https://nida.nih.gov/research-topics/kratom.

[193] Nine2Five Plea Agreement at 3.

[194] Id. at 8.

[195] Id. at 7.

[196] Press Release, U.S. Dep’t of Justice, General Contractor and Real Estate Developer Plead Guilty In Connection With Worker Death On Construction Site In Poughkeepsie (Feb. 2, 2023), https://www.justice.gov/usao-sdny/pr/general-contractor-and-real-estate-developer-plead-guilty-connection-worker-death.

[197] Id.

[198] Id.

[199] Sentencing Memorandum on Behalf of Onekey, LLC, United States v. Onekey LLC et al., No. 22-cr-000414 (PED) (S.D.N.Y. Apr. 28, 2023), at 2, 7.

[200] Id. at 1–2.

[201] Id. at 2.

[202] Judgment, United States v. One Key, LLC et al., No. 7:22-cr-00414-VR (S.D.N.Y. May 17, 2023); see also Press Release, U.S. Dep’t of Justice, Construction Company Principal Sentenced To Three Months In Prison In Connection With Worker Death On Construction Site In Poughkeepsie (May 12, 2023), https://www.justice.gov/usao-sdny/pr/construction-company-principal-sentenced-three-months-prison-connection-worker-death.

[203] Judgment, United States v. Finbar O’Neill, No. 7:22-cr-00414-VR (S.D.N.Y. May 12, 2023).

[204] See Press Release, U.S. Dep’t of Justice, “Mississippi Wastewater Hauling Business Pleads Guilty to Clean Water Act Violation,” (Jan. 11, 2023), https://www.justice.gov/usao-sdms/pr/mississippi-wastewater-hauling-business-pleads-guilty-clean-water-act-violation.

[205] See Press Release, U.S. Dep’t of Justice, “Owner of Jackson Business Pleads Guilty to Illegally Discharging Industrial Waste into Jackson’s Sewer System,” (Jan. 27, 2021), https://www.justice.gov/usao-sdms/pr/owner-jackson-business-pleads-guilty-illegally-discharging-industrial-waste-jackson-s.

[206] Information, United States v. Partridge-Sibley Industrial Services, Inc., No. 3:22-cr-131-CWR-FKB, at 3 (Dec. 19, 2022).

[207] See Press Release, U.S. Dep’t of Justice, “Owner of Jackson Business Pleads Guilty to Illegally Discharging Industrial Waste into Jackson’s Sewer System,” (Jan. 27, 2021), https://www.justice.gov/usao-sdms/pr/owner-jackson-business-pleads-guilty-illegally-discharging-industrial-waste-jackson-s.

[208] Plea Agreement, United States v. Partridge-Sibley Industrial Services, Inc., No. 3:22-cr-131-CWR-FKB, at 1 (Jan. 11, 2023, S.D. Miss.).

[209] Id. at 4.

[210] See Press Release, PSI, “Response to Gold Coast Commodities and Rebel High Velocity Case,” http://partridgesibley.com/downloads/Partridge_Sibley_Press_Release.pdf.

[211] Id.

[212] Judgment, United States v. Partridge-Sibley Indus. Servs., Inc., No. 22-cr-00131-FKB (S.D. Miss. Feb. 17, 2023).

[213] Plea Agreement, United States v. Quick Tricks Automotive Performance, Inc., 22-20516-CR-Williams (S.D. Fla. Jan. 27, 2023); Plea Agreement, United States v. Kloud9Nine, LLC, 22-20516-CR-Williams (S.D. Fla. Jan. 27, 2023) (hereinafter jointly “Quick Tricks and Kloud9Nine Plea Agreement”).

[214] Joint Statement of Facts, United States v. Quick Tricks Automotive Performance, Inc., 22-20516-CR-Williams (S.D. Fla. Jan. 27, 2023), at 4–5 (hereinafter “Quick Tricks and Kloud9Nine Joint Statement of Facts”). Id. at 4–5.

[215] Quick Tricks and Kloud9Nine Plea Agreements, at 5.

[216] Id.

[217] Judgment, United States v. Quick Tricks Auto. Perf., Inc., 22-cr-20516-KMW (S.D. Fla. May 10, 2023) (hereinafter “QuickTricks Judgment”); Judgment, United States v. Kloud9Nine, LLC, 22-cr-20516-KMW (S.D. Fla. June 13, 2023) (hereinafter “Kloud9Nine Judgment”).

[218] QuickTricks Judgment; Kloud9Nine Judgment.

[219] QuickTricks Judgment; Kloud9Nine Judgment.

[220] QuickTricks Judgment; Kloud9Nine Judgment.

[221] Plea Agreement, United States v. Pure Addiction Diesel Performance, LLC, No. 3:23-cr-00189-SI (D. Or. May 30, 2023).

[222] Id. at 2-3.

[223] Id. at 3.

[224] Id. at 3–4.

[225] Id.

[226] Plea Agreement, United States v. Travis Turner, No. 3:23-cr-00189-SI (D. Or. May 30, 2023).

[227] Plea Agreement, United States v. Rhode Island Beef and Veal, No. 20-cr-00093-MSM-PAS (D.R.I. Apr. 4, 2023) (hereinafter “Rhode Island Beef and Veal Plea Agreement”).).

[228] Id. at 1.

[229] Press Release, U.S. Dep’t of Justice, Rhode Island Beef Slaughterhouse, Owner Admit to Violating the Federal Meat Inspection Act (June 8, 2023), https://www.justice.gov/usao-ri/pr/rhode-island-beef-slaughterhouse-owner-admit-violating-federal-meat-inspection-act.

[230] Rhode Island Beef and Veal Plea Agreement at 2.

[231] Id.

[232] Plea Agreement, United States v. Sterling Bancorp, Inc., 5:23-CR-20174 (E.D. Mich. Mar. 15, 2023) (hereinafter “Sterling Plea Agreement”).).

[233] Id. at 4–5; Attach. A-4–A-6.

[234] Id.

[235] Sterling Plea Agreement at 4–5; Attach. A-4–A-6.

[236] Id.

[237] Id. at 6–7.

[238] Id. at 21.

[239] Id.

[240] Id. at 22.

[241] Id. at 23–24.

[242] Id. at 25.

[243] Id. at 7–8.

[244] Judgment, United States v. Sterling Bancorp, Inc., No. 23-cr-20174-LVP-DRG (July 21, 2023), ECF No. 14.

[245] Plea Agreement, United States v. Telefonaktiebolaget LM Ericsson, No. 1:19-CR-00884-LTS (S.D.N.Y. Mar. 20, 2023), at ¶ 2 (hereinafter “Ericsson Plea Agreement”).

[246] Id., Attach. A-1, Factual Basis for Breach.

[247] Id.

[248] Ericsson Plea Agreement at 19.

[249] Plea Agreement, United States v. Zeus Lines Management S.A., No. 1:23-CR-00028-MSM-LDA-01 (D.R.I. Mar. 24, 2023), (hereinafter “Zeus Plea Agreement”).

[250] Id. at 8-9.

[251] Id. at 3-4.

[252] Id. at 6-7.

[253] Id. at 7.

[254] Id. at 3-4.

[255] Id. at 8-9.

[256] Press Release, U.S. Dep’t of Justice, Vessel Operator, Captain and Chief Engineer Convicted of Environmental Crimes (May 3, 2023), at 2, https://www.justice.gov/opa/pr/vessel-operator-captain-and-chief-engineer-convicted-environmental-crimes.

[257] Zeus Plea Agreement, at 16.

[258] See id., Attach A, at 2.

[259] Id., Attach A, at 4-5.

[260] Id., Attach A, at 10.

[261] Press Release, U.S. Dep’t of Justice, United States v. Zeus Lines Mgmt. S.A. et al., No. 1:23-CR-00028 (May 10, 2023), https://www.justice.gov/enrd/case/united-states-v-zeus-lines-management-sa-et-al.

[262] As discussed in this alert’s full summary of the Genotox resolutions, the Genotox civil resolution included $4,995,278.85 as a “suspended” amount. While the settlement agreement refers to Genotox’s “payments” to the government as “restitution to the United States,” the suspended amount is not a payment by Genotox but rather is a sum the government retained after the underlying lawsuit was filed. See Genotox CSA at 1, 3–5. Accordingly, we have not counted the “suspended” amount in the total monetary recoveries for the Genotox resolutions. Similarly, the Genotox CSA calls for additional, contingent restitution depending upon Genotox’s future revenues. Id. at 4–5. Because of the contingent nature of those obligations, we have not accounted for them in the total monetary recoveries figure for Genotox.

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Daniel P. Chung (+1 202-887-3729, [email protected])
M. Kendall Day (+1 202-955-8220, [email protected])
David Debold (+1 202-955-8551, [email protected])
Michael S. Diamant (+1 202-887-3604, [email protected])
Gustav W. Eyler (+1 202-955-8610, [email protected])
Richard W. Grime (+1 202-955-8219, [email protected])
Scott D. Hammond (+1 202-887-3684, [email protected])
George J. Hazel (+1 202-887-3674, [email protected])
Judith A. Lee (+1 202-887-3591, [email protected])
Adam M. Smith (+1 202-887-3547, [email protected])
Patrick F. Stokes (+1 202-955-8504, [email protected])
Oleh Vretsona (+1 202-887-3779, [email protected])
Amy Feagles (+1 202-887-3699, [email protected])
David C. Ware (+1 202-887-3652, [email protected])
Ella Alves Capone (+1 202-887-3511, [email protected])
Nick Murphy (+1 202-777-9504, [email protected])
Melissa Farrar (+1 202-887-3579, [email protected])
Nicole Lee (+1 202-887-3717, [email protected])
Jason H. Smith (+1 202-887-3576, [email protected])
Pedro G. Soto (+1 202-955-8661, [email protected])

New York
Zainab N. Ahmad (+1 212-351-2609, [email protected])
Reed Brodsky (+1 212-351-5334, [email protected])
Mylan L. Denerstein (+1 212-351-3850, [email protected])
Barry R. Goldsmith (+1 212-351-2440, [email protected])
Karin Portlock (+1 212-351-2666, [email protected])
Mark K. Schonfeld (+1 212-351-2433, [email protected])
Orin Snyder (+1 212-351-2400, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Brendan Stewart (+1 212-351-6393, [email protected])

Denver
Ryan T. Bergsieker (+1 303-298-5774, [email protected])
Robert C. Blume (+1 303-298-5758, [email protected])
John D.W. Partridge (+1 303-298-5931, [email protected])
Laura M. Sturges (+1 303-298-5929, [email protected])

Houston
Gregg J. Costa (+1 346-718-6649, [email protected])

Los Angeles
Michael H. Dore (+1 213-229-7652, [email protected])
Michael M. Farhang (+1 213-229-7005, [email protected])
Diana M. Feinstein (+1 213-229-7351, [email protected])
Douglas Fuchs (+1 213-229-7605, [email protected])
Nicola T. Hanna (+1 213-229-7269, [email protected])
Poonam G. Kumar (+1 213-229-7554, [email protected])
Marcellus McRae (+1 213-229-7675, [email protected])
Eric D. Vandevelde (+1 213-229-7186, [email protected])
Debra Wong Yang (+1 213-229-7472, [email protected])

San Francisco
Winston Y. Chan (+1 415-393-8362, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
Michael Li-Ming Wong (+1 415-393-8333, [email protected])

Palo Alto
Benjamin Wagner (+1 650-849-5395, [email protected])

London
Patrick Doris (+44 20 7071 4276, [email protected])
Sacha Harber-Kelly (+44 20 7071 4205, [email protected])
Michelle Kirschner (+44 20 7071 4212, [email protected])
Matthew Nunan (+44 20 7071 4201, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])

Paris
Benoît Fleury (+33 1 56 43 13 00, [email protected])
Bernard Grinspan (+33 1 56 43 13 00, [email protected])

Frankfurt
Finn Zeidler (+49 69 247 411 530, [email protected])

Munich
Katharina Humphrey (+49 89 189 33 155, [email protected])
Benno Schwarz (+49 89 189 33 110, [email protected])
Mark Zimmer (+49 89 189 33 115, [email protected])

Hong Kong
Kelly Austin (+852 2214 3788/+1 303-298-5980, [email protected])
Oliver D. Welch (+852 2214 3716, [email protected])

Singapore
Joerg Biswas-Bartz (+65 6507 3635, [email protected])

Lawdragon named 44 Gibson Dunn partners to its 500 Leading Litigators in America 2024 guide, featuring the “advisors you want to send into battle.” The partners named as Leading Litigators are: Trey Cox and Veronica Moyé in Dallas; Monica Loseman in Denver; Gregg Costa and Collin Cox in Houston; Lauren Blas, Theodore Boutrous Jr., Christopher Chorba, Scott Edelman, Theane Evangelis, Perlette Michèle Jura, Sam Liversidge, Marcellus McRae, Ilissa Samplin, Julian Poon, Deborah Stein, Daniel Swanson, and Debra Wong Yang in Los Angeles; Reed Brodsky, Anne Champion, Lauren Goldman, Benjamin Hershkowitz, Charlotte Jacobsen, Josh Krevitt, Adam Offenhartz, Orin Snyder, Eric Stock, and Lawrence Zweifach in New York; Ashlie Beringer in Palo Alto; Rachel Brass, Kristin Linsley, and Rosemarie Ring in San Francisco; and Svetlana Gans, Scott Hammond, Joshua Lipshutz, Joshua Lipton, Matthew McGill, Ted Olson, Elizabeth Papez, Michael Perry, Cynthia Richman, Helgi Walker, F. Joseph Warin, and Stephen Weissman in Washington, D.C. The list was published September 8, 2023.

The National Law Journal named Gibson Dunn to its 2023 Appellate Hot List, which “highlights law firms that have handled exemplary appellate matters.” The list was published on August 31, 2023.

The Gibson Dunn Appellate and Constitutional Law Practice Group’s lawyers participate in appeals in all 13 federal courts of appeals and state appellate courts throughout the United States and have presented arguments in front of the Supreme Court of the United States nearly 160 times. The group has broad experience in complex appellate litigation at all levels of the U.S. federal and state court systems and has been involved in matters that cover a wide array of constitutional, statutory, regulatory and common-law issues.

The Los Angeles Superior Court has granted a two-year domestic violence restraining order in favor of Gibson Dunn’s pro bono client, a low-income mother of a developmentally delayed child, who suffered years of physical, psychological and financial abuse from her husband. Before Gibson Dunn joined the case, our client’s temporary restraining order did not include a move-out order against her husband or an order for possession of her vehicle, leaving our client without stable housing or reliable transportation. Our team successfully amended the request for a temporary restraining order to seek the additional relief.

At the evidentiary hearing, our lawyers presented compelling evidence that our client suffered abuse from her husband throughout their 11-year marriage. After the hearing, including cross-examination of the husband—who testified that he had never physically or otherwise abused our client, and attempted to argue that our client was the abuser—the court sided with our client, concluding that she was more credible than her husband. In addition to the restraining order against her husband, the court awarded our client sole legal and physical custody of their child, exclusive use of the residence and immediate return of her vehicle. The court also ordered limited professionally monitored child visitation with the husband.

Los Angeles associate Summer Wall led the team and conducted the examinations, with valuable assistance from associates Camille Houle and Chelsea D’Olivo (Washington, D.C.), and supervision from partner Michael Holecek and senior associate Patrick Murray. The team received outstanding support from our pro bono partners at the Los Angeles Center for Law and Justice and from Gibson Dunn support staff, including Austin Kang.

Originally published by PLI Chronicle

Much ink has been spilled about the role of artificial intelligence (AI) in employment, especially in light of the developing menagerie of laws seeking to govern automated decision tools in the workplace. And rightly so—this is a burgeoning area with daily developments that must be carefully monitored. From enforcement of New York City’s AI employment law beginning on July 5, 2023 to a barrage of proposed bills like U.S. Senator Casey’s No Robot Bosses Act, there has seldom been a dull moment in 2023. However, amidst all of the buzz around automation in the workplace, privacy regulations have emerged as yet another piece of the employment puzzle.

Where Does Privacy Come In?

Privacy regulations play a key role in the effective governance of AI in the workplace. AI systems are increasingly processing personal data—ranging from demographic data to biometric data—by using algorithms to analyze and extract insights from various types of information to make predictions, recommendations, or even decisions for an employer. By implementing an AI system that collects and processes this personal data, the employer may be responsible for ensuring compliance with the evolving patchwork of laws governing the use of AI in employment decision making but also with many existing data protection laws, depending on their geographical scope and use.

Read More

Reproduced with permission. Originally published in PLI Chronicle: Insights and Perspectives for the Legal Community (August 2023).

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 Artificial Intelligence, Labor & Employment, or Privacy, Cybersecurity & Data Innovation practice groups, or the authors:

Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])

Emily Maxim Lamm – Washington, D.C. (+1 202-955-8255, [email protected])

Ms. X fled to the U.S. from El Salvador in 2016 to escape targeted gang violence. Her family staunchly and vocally opposed the gang’s control of their community and reported the gang’s activities to the police. In retaliation, the gang threatened the family with death. One of Ms. X’s cousins was murdered and dismembered by gang members, and Ms. X herself was directly threatened. After being assaulted by the gang’s local leader, Ms. X fled to the U.S.

Over the next seven years, Gibson Dunn represented Ms. X in partnership with Kids In Need of Defense (KIND). Her case was shuffled among three different judges at three different immigration courts.

Gibson Dunn faced difficult strategic choices along the way. In particular, the team learned that neither of Ms. X’s primary persecutors remained in El Salvador: one had been killed by the police, and one had traveled to the U.S. The team disclosed this information to the Court and burnished Ms. X’s asylum application with the testimony of two expert witnesses who detailed the risk of persecution Ms. X would still face at the hands of gang members who remained in El Salvador.

El Salvador’s recent Régimen de Excepción (State of Exception) also raised unexpected challenges. Under the State of Exception, the Salvadoran military has arrested and detained more than 68,000 purported gang members, often solely on the basis of anonymous tips. In the wake of these mass arrests, the Department of Homeland Security (DHS) has begun arguing that El Salvador no longer has a gang problem and that asylum seekers who fled gang-based violence, like Ms. X, should be returned to El Salvador. In fact, the opposite is true: individuals like Ms. X now face two separate persecutors—the gangs, and the Salvadoran government itself, which has been arresting deportees and individuals previously targeted by gangs for so-called “association” or “collaboration” with the very gangs that persecuted them.

On the day of the hearing, Ms. X provided powerful direct-examination and cross-examination testimony, and Gibson Dunn secured DHS’s stipulation to refrain from challenging her experts’ testimony and, notably, her application for asylum. The court entered an oral grant of asylum from the bench, and DHS waived its right to appeal.

Washington, D.C. associate Tessa Gellerson was the lead attorney during the individual merits hearing, with Joseph West as supervising partner. The team, which included former associates Ariel Fishman, Nicholas Fuenzalida, Haley Morrisson, Alison Friberg, and Nanding Chen, received outstanding support from its pro bono partners at KIND and several members of the Gibson Dunn support staff, including Ileana Rivera and Sandra Andrade, who provided invaluable assistance with translation, and the D.C. Copy Center team, who saved the day more than once with monumental printing requests.

On August 30, 2023, the IRS and Treasury published proposed Treasury regulations (the “Proposed Regulations”) providing expansive guidance on the prevailing wage and apprenticeship requirements (the “PWA Requirements”) that taxpayers must[1] satisfy to receive the full credit amount[2] available under various revised and new tax credits provided for in the Inflation Reduction Act of 2022 (the “IRA”).[3] Taxpayers are permitted to rely on the Proposed Regulations with respect to a facility[4] on which construction began on or after January 29, 2023 but before final regulations are published.[5]

The Proposed Regulations are detailed, and a comprehensive discussion of them is beyond the scope of this alert. Instead, this alert begins with some background regarding these requirements, then provides a short summary of the Prevailing Wage Requirement and the Apprentice Requirements (including, with respect to each requirement, a short description of the consequences of noncompliance, remediation opportunities, and recordkeeping obligations), and concludes with observations regarding key implications of the guidance for market participants.

Background

The IRA introduced the PWA Requirements with the intent of “creating good-paying union jobs” in the clean energy, manufacturing, and construction sectors.[6] At a high level, the “Prevailing Wage Requirement” requires that all laborers and mechanics employed by a taxpayer (or a contractor or subcontractor of such taxpayer) claiming an applicable credit[7] are paid wages for construction, alteration, or repair of the applicable facility that are not less that the “prevailing” wage for that type of work. The Apprenticeship Requirements (as defined below) are focused on making sure that project developers make on-the-job training opportunities available to the next generation of skilled tradesmen.

Key Prevailing Wage Requirements

The Proposed Regulations provide substantial practical guidance on compliance with the Prevailing Wage Requirement. The Proposed Regulations clarify which workers must be paid prevailing wages, describe the types of work that constitutes construction, alteration, or repair of a facility, and explain how to determine and pay prevailing wages. The subsections below describe some of the most significant aspects of the guidance on these topics.

Workers Subject to the Prevailing Wage Requirement

Workers engaging in construction, alteration, or repair of a facility (described below) must be paid at or above the prevailing wage if they are laborers or mechanics employed by the taxpayer or its contractor or subcontractor. The Proposed Regulations provide clarity on the meaning of these terms.

A laborer or mechanic is any worker whose duties are manual or physical in nature and includes apprentices and helpers. Generally, this definition excludes individuals with roles that are primarily administrative, executive, or clerical. The IRS and Treasury are seeking comments regarding the treatment of persons whose roles are not primarily physical in nature, such as a foreperson, owner, or administrator, but who perform certain duties that are physical in nature.[8]

A person is employed if the person performs the duties of a laborer, mechanic, contractor, or subcontractor. The term “employed” is intended to be significantly broader in the prevailing wage context than in the employment tax context.[9] Accordingly, workers, regardless of whether they would be viewed as employees or independent contractors for other purposes of the Code, may be “employed” by the taxpayer, its contractor, or its subcontractor.

The taxpayer[10] can be any person subject to taxation under the Internal Revenue Code (including a partnership and an entity that is permitted to make a “direct pay” election under section 6417[11]).

A contractor is any person that enters into a contract with the taxpayer for construction, alteration, or repair of a qualified facility and a subcontractor is any person that agrees to perform or be responsible for any part of such a contract.

Scope of Construction, Alteration, or Repair of the Facility

The Proposed Regulations clarify that “construction, alteration, or repair” (i.e., the types of work covered by the Prevailing Wage Requirement) should be construed expansively, but do clarify that ordinary maintenance work (i.e., work that is intended to sustain the existing functionality of the facility) is not covered by the Prevailing Wage Requirement.[12] In addition, work that would fit within the broad definition of “construction, alteration, or repair” is subject to the Prevailing Wage Requirement only if the physical work occurs at the physical site of the facility (including any adjacent or virtually adjacent dedicated support site) or at a secondary site that is established specifically for or dedicated exclusively to the construction of such facility for a meaningful time.[13]

For example, if a taxpayer builds a wind farm, the construction at the site where the wind farm will be located would be subject to the Prevailing Wage Requirement. If a significant portion of the facility is constructed at an off-site warehouse that was established specifically to assist with, or dedicated exclusively for a specific period of time to, the construction of the wind farm, work completed at the off-site warehouse also would be subject to the Prevailing Wage Requirement. However, if the step-up transformer is constructed at an off-site location that (during the transformer’s construction) is building transformers for other wind farms, the labor performed on the transformer at that location is generally not subject to the Prevailing Wage Requirement, at least with respect to the construction of the taxpayer’s wind farm.

How to Determine Prevailing Wages

The Wage and Hour Division of the Department of Labor is responsible for making prevailing wage determinations. The prevailing wage is based on the type of construction, the type of labor performed, and the geographic area in which the labor is performed. The Proposed Regulations indicate that, when a taxpayer plans to construct, alter, or repair a facility, the taxpayer (and its contractors or subcontractors) will be able to find the prevailing wage for the applicable type of construction and location for each type of labor they expect to require on a website approved by the Department of Labor (currently www.sam.gov), rather than being required to seek an individualized, project-specific ruling.

In general, taxpayers can pay registered apprentices less than the prevailing wage rate that would need to be paid to a journeyworker[14] performing the same type of work, but not less than the rate (and fringe benefits) specified by the registered apprenticeship program.[15] For any hours worked by an apprentice in excess of the ratio permitted by the Ratio Requirement (a requirement described below requiring an appropriate ratio of apprentices to more experienced workers), the Proposed Regulations provide that the apprentice must be paid not less than the wage rate that would need to be paid to a journeyworker for the same type of work.

As noted above, the IRS and Treasury expect that prevailing wages will be available from the website approved by the Department of Labor. The Proposed Regulations make clear, however, that a supplemental, facility-specific wage determination can be requested from the Department of Labor if (i) the facility spans more than one geographic area,[16] (ii) there is no general wage determination currently available for a particular geographic area or type of work, or (iii) the wages for certain labor classifications are not listed on the generalized Department of Labor website.[17] If a taxpayer only discovers that it has not paid prevailing wages when the Department of Labor subsequently makes a determination of the prevailing wage rate, the taxpayer has 30 days from the date of determination to remediate the failure by making “catch-up” payments to the laborers and mechanics who have received insufficient wages.

The Proposed Regulations helpfully clarify that, in general, applicable prevailing wages are required to be determined only at the outset of the work, although wage rates must be refreshed if a contract is expanded to cover additional work not within its original scope. In addition, for any alteration or repair work on a facility that occurs after the facility is placed in service, taxpayers must use the prevailing wage in effect at the time the alteration or repair work begins.

How to Pay and How Long to Pay the Prevailing Wage

After determining both which workers are subject to the Prevailing Wage Requirement and the prevailing wage rates applicable to those workers, employers must pay workers prevailing wages through regular payroll practices, without subsequent deduction or rebate of any kind (except as required by law or permitted by regulations issued by the Secretary of Labor). For production tax credit facilities, the Prevailing Wage Requirement generally applies during the life of the production tax credit, whereas for an investment tax credit facility the relevant period is, in general, five years (i.e., the recapture period).

Apprenticeship Requirements

In addition to the Prevailing Wage Requirement, taxpayers must abide by three apprenticeship requirements (the “Apprenticeship Requirements”) in connection with construction, alteration, or repair of a facility to receive full tax amounts for certain tax credits.[18] First, the “Labor Hours Requirement” specifies the required percentage of labor hours that must be performed by qualified apprentices.[19] Second, the “Ratio Requirement” mandates that the taxpayer abide by the applicable apprentice-to-journeyworker ratio, as determined by the Department of Labor or applicable state apprenticeship agency. Third, under the “Participation Requirement,” each taxpayer, contractor, or subcontractor that employs four or more individuals to perform construction, alteration, or repair work with respect to the construction of the qualified facility must employ one or more qualified apprentices to perform that work. The Proposed Regulations clarify the relationship among the Apprenticeship Requirements and provide further explanation and rules that generally tighten the requirements.

Labor Hours Requirement

The Proposed Regulations reiterate that, under the Labor Hours Requirement, the “applicable percentage”[20] of total labor hours must be performed by qualified apprentices.[21] The Proposed Regulations make clear that the Labor Hours Requirement is subject to the Ratio Requirement, meaning that hours worked by a qualified apprentice that do not comply with the Ratio Requirement will not be counted as labor hours by a qualified apprentice for purposes of meeting the Labor Hours Requirement.

Ratio Requirement

The Ratio Requirement is intended to ensure there are sufficient supervising journeyworkers onsite.[22] The applicable apprentice-to-journeyworker ratio for a particular apprentice will be determined by the registered apprenticeship program in which that apprentice is participating, and also would be subject to the requirements of the Department of Labor and applicable state apprenticeship agencies. The Proposed Regulations clarify that the Ratio Requirement applies on a daily basis.

Participation Requirement

The Participation Requirement requires that each taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work with respect to the construction of a qualified facility must employ one or more qualified apprentices to perform such work. The Proposed Regulations clarify that the Participation Requirement is not a daily requirement. Because the Participation Requirement is designed to prevent taxpayers from satisfying the Labor Hours Requirement by only hiring apprentices to perform one type of work, the Proposed Regulations provide that the Participation Requirement must be satisfied separately by the taxpayer and each contractor and subcontractor (if any such person has four or more employees who perform relevant work on the facility); however, the taxpayer ultimately must ensure that each of its contractors and subcontractors (if applicable) has satisfied the Participation Requirement.

Noncompliance Rules and Remedies

Prevailing Wage Requirement – Penalties and Correction Payments

Under the Proposed Regulations, if a taxpayer fails to satisfy the Prevailing Wage Requirement, the taxpayer may cure that failure and retain the credit by making a correction payment to all impacted laborers and mechanics, as well as paying any applicable penalties.

For any period during which a laborer or mechanic was paid wages that failed to satisfy the Prevailing Wage Requirement, the correction payment is calculated as the difference between the wages that should have been paid under the Prevailing Wage Requirement and all wages paid to that laborer or mechanic for the period, plus interest.[23] The Proposed Regulations require that a correction payment must be made even if the taxpayer is not able to locate one or more of the impacted laborers or mechanics, requiring taxpayers to comply with, for example, state-administered unclaimed wage programs.

In addition to any back wages and interest, taxpayers are required to pay a $5,000 penalty for each laborer or mechanic who was underpaid for each applicable year. Helpfully, the Proposed Regulations provided that this penalty is waived automatically in certain quickly discovered and corrected situations. The automatic waiver has two conditions:

The taxpayer makes the correction payment not later than the earlier of (i) 30 days after the date taxpayer becomes aware of the error and (ii) the date on which the tax return claiming the credit is filed; and

Either (i) the laborer or mechanic was underpaid for not more than 10 percent of all relevant periods or (ii) the underpayment was not greater than 2.5 percent of what the laborer or mechanic should have been paid under the Prevailing Wage Requirements.

If the IRS determines that any failure to satisfy the Prevailing Wage Requirements was due to intentional disregard, the required correction payment amount is increased by a multiple of three and the penalty rate is increased from $5,000 to $10,000.[24] The Proposed Regulations provide a non-exclusive list of facts that might be considered in the determination of whether a failure to meet the Prevailing Wage Requirements is due to intentional disregard, including whether (i) the failure to pay prevailing wages by the taxpayer is part of a pattern of conduct, (ii) the taxpayer promptly cured any failures to pay prevailing wages, (iii) the taxpayer included (and caused to be included) provisions in contracts with contractors and subcontractors ensuring compliance with the Prevailing Wage Requirement, and (iv) the taxpayer provided notice to laborers and mechanics of the Prevailing Wage Requirement (such as by posting information prominently at the site of work). Notably, the Proposed Regulations provide a rebuttable presumption that a failure was not intentional with respect to the Prevailing Wage Requirements if the taxpayer makes all correction and penalty payments before receiving a notice from the IRS, giving taxpayers a meaningful incentive to take steps proactively to monitor compliance with the Prevailing Wage Requirement.[25]

The Proposed Regulations also clarify that, for credits sold pursuant to section 6418, credit sellers would be responsible for any correction payments and penalties with respect to the Prevailing Wage Requirements, although credit buyers would still remain liable for any resulting excessive credit transfer tax resulting from the failure to meet the Prevailing Wage Requirements.

Apprenticeship Requirements – Penalties

If a taxpayer does not satisfy the Apprenticeship Requirements or the Good Faith Effort Exception (discussed below), the taxpayer may still receive the full tax credit amount if the taxpayer pays a $50 penalty ($500 for intentional disregard) for each labor hour for which the taxpayer failed to meet the Labor Hours Requirement or the Participation Requirement. For the Labor Hours Requirement, the penalty is applied to the shortfall by which the “applicable percentage” of labor hours exceeded the hours actually worked by qualified apprentices (a single aggregate computation). For the Participation Requirement, the penalty is computed separately for the taxpayer and each of its contractor(s) and subcontractor(s) (but the penalty is payable only by the taxpayer) and is applied to the quotient of the total number of relevant labor hours worked by all individuals employed by the non-compliant employer divided by the total number of such individuals employed by such non-compliant employer.

Similar to the Prevailing Wage Requirement, the Proposed Regulations provide a non-exclusive list of facts that might be considered in the determination of whether a failure to meet the Apprenticeship Requirements is due to intentional disregard, including whether (i) the failure was part of a pattern of conduct by the taxpayer, (ii) the taxpayer promptly cured the failure, (iii) the taxpayer included (and caused to be included) provisions in contracts with contractors and subcontractors ensuring compliance with the Apprenticeship Requirements, and (iv) the taxpayer had been required to make a penalty payment in respect of the Apprenticeship Requirements in prior tax years. As with the Prevailing Wage Requirements, the Proposed Regulations also provide a rebuttable presumption that a failure was not intentional if the taxpayer makes all penalty payments before receiving a notice from the IRS.

As is the case for the Prevailing Wage Requirements, credit sellers under section 6418 would be responsible for any penalties with respect to the Apprenticeship Requirement, but credit buyers would still remain liable for any resulting excessive credit transfer tax resulting from the failure to meet the Apprenticeship Requirements.

Qualifying Project Labor Agreement

The Proposed Regulations would provide that penalty payments will not be required if there is a Qualifying Project Labor Agreement in place and if a correction payment is paid to a laborer or mechanic on or prior to the date on which the tax credit is claimed. In general, a Qualifying Project Labor Agreement is a pre-hire collective bargaining agreement with one or more labor organizations for a specific construction project that meets criteria detailed in the Proposed Regulations.[26]

Good Faith Effort Exception

The Code excuses taxpayers from complying with the Apprenticeship Requirements if they have requested qualified apprentices from a registered apprenticeship program and either the request is denied for a reason other than noncompliance with the standards or requirements of the program or the program does not acknowledge receipt of the request or otherwise respond to the taxpayer within five business days after receiving a request (the “Good Faith Effort Exception”).[27]

Generally, the Proposed Regulations would require additional effort by a taxpayer to satisfy the Good Faith Effort Exception. One key modification is that the Proposed Regulations would require a written request be made to at least one registered apprenticeship program that trains apprentices in the necessary occupation(s) and has a customary business practice of entering into agreements with employers to place apprentices in their trained occupation.[28] In addition, the registered apprenticeship program to which the taxpayer submits the written request either must (i) operate within the geographic area that includes the location of the facility or (ii) reasonably be expected to be able to provide apprentices to the facility’s location. The IRS expects that taxpayers may need to submit requests to multiple apprenticeship programs, depending on the number of occupations involved in the project and the anticipated number of required apprentice labor hours.

Under the Proposed Regulations, a denial of a written request from a registered apprenticeship program, or a non-response to such a written request, will permit a taxpayer to rely on the Good Faith Effort Exception only for 120 days after the date on which the request was submitted. Thereafter, the taxpayer would be required to submit an additional request to continue to rely on the Good Faith Effort Exception. As a result, to continue to rely on the Good Faith Effort Exception, a taxpayer would have to submit requests to a registered apprenticeship program and have those requests be denied by the registered apprenticeship program on a rolling 120-day basis. Further, a partially denied request is to be treated as a denial solely with respect to that part of the request that is denied.

Recordkeeping and Reporting Requirements

The Proposed Regulations specify certain records that taxpayers must maintain to substantiate that the Prevailing Wage Requirement and Apprenticeship Requirements have been satisfied, including (at a minimum) payroll records that reflect the wages paid to laborers, mechanics and qualified apprentices engaged in the construction, alteration, or repair of the facility, regardless of whether the laborers and mechanics are employed by the taxpayer, a contractor, or a subcontractor.

For the Prevailing Wage Requirement, sufficient records “may include” the labor classification(s) used for determining the prevailing wage rate (and documentation supporting the applicable classification), the hourly rate(s) of wages paid for each applicable labor classification, records supporting fringe benefit calculations (detailed in the Proposed Regulations), the total number of labor hours worked and wages paid per pay period, records to support wages paid to any apprentices (including records reflecting the registration of the apprentices, the applicable wage rates and apprentice-to-journeyworker ratios), and the amount and timing of any correction payments (and documentation reflecting their calculation).

For the Apprenticeship Requirements, records sufficient to establish compliance may include copies of any written requests for apprentices, any agreements with a registered apprenticeship program, documents verifying participation in a registered apprenticeship program by each apprentice, and the payroll records for any work performed by apprentices. Like the Prevailing Wage Requirement, the Proposed Regulations would provide that it is the responsibility of the taxpayer to maintain the relevant records for each apprentice, regardless of whether the apprentice is employed by the taxpayer, a contractor, or a subcontractor.

The Proposed Regulations do not include detailed reporting requirements, but the preamble indicates that the IRS and Treasury expect that taxpayers will be required to report, at the time of filing a return: (i) the location and type of qualified facility; (ii) the applicable wage determinations for the type and location of the facility; (iii) the wages paid (including any correction payments) and hours worked for each of the laborer or mechanic classifications engaged in the construction, alteration, or repair of the facility; (iv) the number of workers who received correction payments; (v) the wages paid and hours worked by qualified apprentices for each of the laborer or mechanic classifications engaged in the construction, alteration, or repair of the facility; (vi) the total labor hours for the construction, alteration, or repair of the facility by any laborer or mechanic employed by the taxpayer or any contractor or subcontractor; and (vii) the total credit claimed.[29]

Commentary

Many aspects of the Proposed Regulations will facilitate efficient administration of the IRA, though other aspects of the guidance could be clarified further to provide taxpayers with greater guidance as to their obligations under the PWA Requirements.

Allocation of Legal Responsibility for PWA Requirements. The Proposed Regulations make clear that the taxpayers who claim or transfer tax credits (and not the contractors or subcontractors of those taxpayers) are ultimately responsible for complying with the PWA Requirements. Thus, the onus is on the taxpayer to carefully monitor compliance with the PWA Requirements, ensure its contractors and subcontractors comply with the PWA Requirements, and maintain adequate records demonstrating compliance with the PWA Requirements. Well-advised taxpayers likely will seek to include provisions in their agreements with contractors to ensure that the PWA Requirements are satisfied and that necessary records and information substantiating the satisfaction of those requirements is maintained.

Incentives for Self-Policing. The Proposed Regulations encourage taxpayers to carefully monitor failures to meet the PWA Requirements, proactively report these failures to the IRS, and then affirmatively and timely make correction payments. If taxpayers take these steps, as long as the noncompliance is relatively minor, then the Proposed Regulations generally allow taxpayers to avoid the application of penalties. Given these benefits, taxpayers will want to put in place procedures for monitoring compliance, including compliance by contractors and their subcontractors.

Useful Begun Construction Rule, with Limits. Under the Proposed Regulations, prevailing wage determinations generally have to be made only once, in connection with the commencement of construction. This rule does not apply, however, if there is a change in the scope of work originally envisioned. Given that scope changes are relatively common in the course of constructing a facility, this exception could apply relatively frequently. It would be useful if the exception were adjusted to apply in more limited circumstances (g., to major changes that result in a more than 10 percent adjustment to the contract price).[30]

Enhanced Apprenticeship Requirements. The Proposed Regulations would tighten significantly the rules applicable to the Apprenticeship Requirements, including by limiting the scope of the Good Faith Effort Exception by providing that denial of a request for qualified apprentices lasts only 120 days after the submission of the request. This rule will make it necessary for developers to approach registered apprenticeship programs repeatedly. The IRS and Treasury’s further clarification that it may be necessary to make inquiries to multiple registered apprenticeship programs suggests that the IRS and Treasury are very focused on making sure that apprentices receive training opportunities, even if doing so imposes incremental compliance burdens.

Incentives for Entering into Qualifying Project Labor Agreement. Under the Proposed Regulations, if a Qualifying Project Labor Agreement (e.g., collective bargaining agreement meeting certain criteria) is entered into, various penalties can be eliminated as long as any needed correction payment is made before the credit is claimed. This rule will provide some level of incentive for developers to pursue these types of agreements.

Helpful Rule for Offshore Wind Projects. The Proposed Regulations include a helpful convention for offshore wind projects. Rather than requiring that each offshore wind project make a request for an individualized supplemental wage determination (given that general Department of Labor data is unlikely to cover offshore sites), the Proposed Regulations allow use of the generalized information prepared by the Department of Labor for the closest geographical area.

Scope of Apprenticeship Requirements. The Code contains an ambiguity concerning whether the Labor Hours Requirement and Participation Requirements apply only to the “construction” of a facility (as opposed to the Prevailing Wage Requirements, which apply to both the construction phase of a facility and alteration and repair work performed after the construction phase with respect to the facility). Interestingly, the Proposed Regulations suggest that the Participation Requirement would apply only to the construction phase of a facility (but would apply to all alteration and repair work, if any, occurring during that construction phase). In contrast, the Proposed Regulations suggest that the Labor Hours Requirement would apply to both the construction of the facility and alteration and repair work performed after the construction phase with respect to the facility. It would be helpful for the IRS and Treasury to state its interpretation explicitly and to clarify this apparent discrepancy in the preamble to the final regulations. Further, more examples of the application of these and other rules that are more fact-intensive in application (including, for example, the secondary site rule) would be especially helpful.

____________________________

[1] Compliance with the prevailing wage and apprenticeship requirements is not required for facilities (i) that have a maximum net output or storage capacity of less than one megawatt or (ii) the construction of which began before January 29, 2023.

[2] Technically, the baseline tax credit is multiplied by five if the PWA Requirements are met, resulting in a tax credit amount that traditionally has been considered the full amount of the federal income tax credits that may be claimed in respect of clean energy technologies. This full credit amount also can be increased by so-called adders, such as the domestic content adder and the energy community adder. Please see our prior client alerts on these adders, which can be found here and here, respectively.

[3] As was the case with the so-called Tax Cuts and Jobs Act, the Senate’s reconciliation rules prevented Senators from changing the Act’s name, and the formal name of the so-called Inflation Reduction Act is actually “An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14.” In addition to tax credit guidance, the proposed regulations also include guidance regarding the PWA Requirements under section 179D, which provides a deduction for the cost of energy efficient commercial building property placed in service during the taxable year.

[4] Depending on the type of credit at issue, the applicable facility may be a qualified facility, property, project, or certain other equipment or facilities. For the purposes of this alert, we use the term “facility” to refer generally to those assets in respect of which a taxpayer is permitted to claim an applicable credit.

[5] Unless indicated otherwise, all section references are to the Internal Revenue Code of 1986, as amended (the “Code”).

[6] See Fact Sheet: One Year In, President Biden’s Inflation Reduction Act is Driving Historic Climate Action and Investing in America to Create Good Paying Jobs and Reduce Costs, The White House, Aug. 16, 2023, here.

[7] Tax credits with a prevailing wage or apprenticeship requirement include those credits provided for under sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, and 48E.

[8] Under the Proposed Regulations, working forepersons who devote more than 20 percent of their time during a workweek to laborer or mechanic duties, and who do not meet the criteria for exemption of 29 CFR part 541, would be considered laborers and mechanics for the time spent conducting laborer and mechanic duties.

[9] The preamble to the Proposed Regulations expressly provides that the term “employed,” as used in connection with the PWA Requirements, is not intended to apply for other purposes of the Code.

[10] In the case of any credits that were transferred pursuant to section 6418, the “taxpayer” is the credit transferor, not the transferee. Please see our prior alert on the proposed regulations on credit transferability, which is found here.

[11] Please see our prior client alert on the proposed regulations on direct pay, found here.

[12] The Proposed Regulations provide that maintenance expressly does not include work that improves a facility, adapts it for a different use, or restores functionality as a result of inoperability.

[13] The Proposed Regulations clarify that the work performed by a manufacturer that focuses on constructing components for a particular facility for some limited period of time (measured in hours or days) in order to meet a deadline is not subjected to the Prevailing Wage Requirement. A longer period of exclusive dedication (measured in weeks or months) to the preparation of products made to specifications would potentially subject this type of work to the Prevailing Wage Requirement.

[14] For these purposes, a journeyworker is an individual who has attained a level of skill, abilities, and competencies recognized within an industry as having mastered the skills and competencies required for the occupation (regardless as to whether such skills are acquired through formal apprenticeship or through practical on-the-job experience and formal training).

[15] Registered apprentices are those employed pursuant to an apprenticeship program registered with the Department of Labor’s Office of Apprenticeship (or with a state apprenticeship agency recognized by that office). If the apprenticeship program does not require the payment of bona fide fringe benefits, then the Proposed Regulations would require that apprentices be paid the full amount of bona fide fringe benefits listed on the applicable wage determination.

[16] If, however, construction, alteration, or repair of a facility occurs in more than one geographic area, then the Proposed Regulations generally would require that the applicable wage determination for the work performed in each geographic area be used for the work performed in that area, though the preamble to the Proposed Regulations suggests that taxpayers can ensure compliance with the Prevailing Wage Requirement by paying the highest rate for each classification in both geographic areas. The Proposed Regulations also include an important rule that benefits developers of offshore wind projects, providing that taxpayers may rely on the general wage determination for the relevant category of construction that is applicable in the geographic area closest to the location of the facility.

[17] The IRS and Treasury generally expect that supplemental wage determinations would be requested no more than 90 days before the beginning of construction, alteration, or repair of a facility.

[18] Section 45L (new energy efficient home credit) and section 45U (zero-emission nuclear power production credit) do not have apprenticeship requirements.

[19] Under the Proposed Regulations, a “qualified apprentice” is “an individual who is employed by the taxpayer or by any contractor or subcontractor and who is participating in a registered apprenticeship program.” The preamble to the Proposed Regulations indicate that participants in pre-apprenticeship programs would not be considered “qualified apprentices.”

[20] For a facility on which construction begins during 2023, the applicable percentage is 12.5 percent. For a facility on which construction begins in 2024 or later, the applicable percentage is 15 percent.

[21] Under the Proposed Regulations, “labor hours” means the total number of hours devoted to the performance of construction, alteration, or repair work by any individual employed by the taxpayer or by any contractor or subcontractor. Labor hours would not include hours worked by foremen, superintendents, owners, or persons employed in bona fide executive, administrative, or professional capacities.

[22] Under the Proposed Regulations, a journeyworker is any laborer or mechanic that has mastered the skills and competencies required for the applicable occupation. A journeyworker can acquire these skills and competencies either through experience or through a formal apprenticeship.

[23] Interest is imposed at the federal short-term rate as determined under section 6621, but substituting “6 percentage points” for “3 percentage points” in section 6621(a)(2).

[24] The Proposed Regulations do not address specifically whether an automatic waiver of the penalty would potentially be available in the case of intentional disregard, although in practice we do not anticipate automatic waiver relief would be available in that case.

[25] A taxpayer generally is not be permitted to cure non-compliance with the Prevailing Wage Requirement if the taxpayer does not make the penalty payment on or prior to the date that is 180 days after the IRS makes a final determination that a penalty is due.

[26] The agreement needs (i) to be a collective bargaining agreement with a labor organization (i.e., a union), (ii) to include provisions obligating taxpayers to pay prevailing wages and to use qualified apprentices to perform work, and (iii) to provide guarantees against strikes, lockouts, and other similar job disruptions.

[27] Under the Proposed Regulations, a “registered apprenticeship program” is defined as “a program that has been registered by the U.S. Department of Labor’s Office of Apprenticeship or a recognized State apprenticeship agency, pursuant to the National Apprenticeship Act and its implementing regulations for registered apprenticeship at 29 CFR parts 29 and 30, as meeting the basic standards and requirements of the Department of Labor for approval of such program for Federal purposes.”

[28] The Proposed Regulations also provide additional specificity as to what the contents of such a written request would need to be.

[29] The IRS and Treasury affirmatively decided not to require certified weekly reporting of payroll records.

[30] There is precedent for using a ten percent standard in determining whether a contract modification is significant. See, e.g., PLR 8930013 (concluding that a taxpayer was eligible for transitional relief provisions in the Tax Reform Act of 1986 that exempted property from new depreciation and investment tax credit rules if that property was constructed, reconstructed, or acquired pursuant to a written contract binding on March 1, 1986, notwithstanding later adjustments to the contract that increased its cost by 10.02 percent, relying on legislative history suggesting design changes made for reasons of technical or economic efficiencies of operation that caused an insignificant increase in cost nevertheless were treated as insignificant).

This alert was prepared by Mike Cannon, Matt Donnelly, Josiah Bethards, Alissa Fromkin Freltz, Blake Hoerster, and Hayden Theis.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Tax or Power and Renewables practice groups, or the following authors:

Tax Group:
Michael Q. Cannon – Dallas (+1 214-698-3232, [email protected])
Matt Donnelly – Washington, D.C. (+1 202-887-3567, [email protected])
Josiah Bethards – Dallas (+1 214-698-3354, [email protected])
Alissa Fromkin Freltz – Washington, D.C. (+1 202-777-9572, [email protected])
Blake Hoerster – Dallas (+1 214-698-3180, [email protected])
Hayden Theis – Houston (+1 346-718-6695, [email protected])

Power and Renewables Group:
Peter J. Hanlon – New York (+1 212-351-2425, [email protected])
Nicholas H. Politan, Jr. – New York (+1 212-351-2616, [email protected])

This edition of Gibson Dunn’s Federal Circuit Update summarizes the current status of several petitions pending before the Supreme Court, additional materials released from the ongoing investigation by the Judicial Council of the Federal Circuit, and recent Federal Circuit decisions concerning claim construction, secondary considerations, and obviousness-type double patenting.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

A couple potentially impactful petitions were filed before the Supreme Court in August 2023:

Intel Corp. v. Vidal (US No. 23-135): “The question presented is whether 35 U.S.C. § 314(d), which bars judicial review of “[t]he determination … whether to institute an inter partes review,” applies even when no institution decision is challenged to preclude review of [the United States Patent & Trademark Office] rules setting standards governing institution decisions.”

HIP, Inc. v. Hormel Foods Corp. (US No. 23-185): The questions presented are: “1. Whether joint inventorship requires anything more than a contribution to conception that is stated in a patent claim. Whether, under Section 116(a), a claimed and enabled contribution to conception can be deemed insignificant in quality based on the quantity of disclosure in the specification.” The Federal Circuit opinion being petitioned was summarized in our May 2023 update.

As we summarized in our July 2023 update, the Court will consider Killian v. Vidal (US No. 22-1220) and Ingenio, Inc. v. Click-to-Call Technologies, LP (US No. 22-873) during its September 26, 2023 conference. In CareDx Inc. v. Natera, Inc. (US No. 22-1066), after the respondents waived their right to file a response, retired Federal Circuit Judge Paul R. Michel and Professor John F. Duffy filed an amici curiae brief in support of Petitioners. The Court thereafter requested a response, which was filed on August 9, 2023. The Court will also consider this petition during its September 26, 2023 conference.

Other Federal Circuit News:

Report and Recommendation in Judicial Investigation. As we summarized in our July 2023 update, there is an ongoing proceeding by the Judicial Council of the Federal Circuit under the Judicial Conduct and Disability Act and the implementing Rules involving Judge Pauline Newman. On August 16, 2023, the Special Committee released additional materials in the investigation. The materials may be accessed here.

Upcoming Oral Argument Calendar

The list of upcoming arguments at the Federal Circuit is available on the court’s website.

Key Case Summaries (August 2023)

Axonics, Inc. v. Medtronic, Inc., Nos. 22-1532, 22-1533 (Fed. Cir. Aug. 7, 2023): Axonics filed petitions for inter partes review (“IPR”) challenging Medtronic’s patents directed to transcutaneous (through the skin) charging of implanted medical devices through inductive coupling. After institution, Medtronic advanced for the first time a construction of a claim term in its Patent Owner Response, which Axonics disagreed with, and argued in reply that the claims would be unpatentable even under Medtronic’s construction. Medtronic then argued in its sur-reply that it would be prejudicial for the Board to consider Axonics’s new reply arguments. The Board agreed with Medtronic and refused to consider Axonics’s new reply arguments, because these arguments had not been made in its petition.

The Federal Circuit (Dyk, J., joined by Lourie and Taranto, JJ.) vacated and remanded. The Court explained that, under the Board’s rules and the Supreme Court’s decision in SAS Inst., Inc. v. Iancu, 138 S. Ct. 1348, 1345 (2018), a petitioner is entitled to respond to new arguments made in a patent owner response. Additionally, under the Administrative Procedure Act (“APA”), the Board may adopt a new construction after institution, if it gives the petitioner an opportunity to respond to constructions that are not sufficiently similar to one disputed by the parties. Consistent with this precedent, the Court held that the petitioner must have adequate notice and an opportunity to respond to post-institution claim constructions, including a reasonable opportunity in reply to present argument and evidence under that new construction.

Rembrandt Diagnostics, LP v. Alere, Inc., No. 21-1796 (Fed. Cir. Aug. 11, 2023): Alere sought an IPR challenging Rembrandt’s patent directed to test assay devices and methods for testing biological fluids. Alere initially identified “efficiency” as a reason that a relevant artisan would have been motivated to combine the asserted prior art. In response, Rembrandt challenged Alere’s motivation arguments, but did not submit expert testimony. In reply, Alere submitted an expert declaration and argued that combining the prior art references would save cost and time, and that there was thus a motivation to combine them, as well as a reasonable expectation of success. The Board found all the claims unpatentable, relying on Alere’s cost and time savings arguments and unrebutted expert testimony.

The Federal Circuit (Reyna, J., joined by Moore, C.J., and Dyk, J.) affirmed. Rembrandt argued that Alere improperly raised the benefit of cost and time savings for the first time in its reply. However, the Court determined that Rembrandt had forfeited this argument by only lodging a “generic objection” to Alere’s reply generally and not to that specific benefit argument, which was insufficient to constitute a proper objection. The Court also held that Alere’s cost and time savings arguments were not new arguments raised for the first time in its reply, but arguments that responded to Rembrandt’s opposition and also properly expands on and is a fair extension of its efficiency arguments raised in the petition.

Volvo Penta of the Americas, LLC v. Brunswick Corp., No. 22-1765 (Fed. Cir. Aug. 24, 2023): In 2015, Volvo launched the Forward Drive embodying its patent directed to a tractor-type stern drive for a boat. In 2020, Brunswick launched a similar product called the Bravo Four S, and on the same day as its launch, filed an IPR petition challenging Volvo’s patent. The Board determined that the challenged claims would have been obvious over the asserted prior art. The Board also found a lack of nexus with the embodying products, but determined that even if there had been nexus, Brunswick’s strong evidence of obviousness outweighed Volvo’s evidence of nonobviousness.

The Federal Circuit (Lourie, J., joined by Moore, C.J. and Cunningham, J.) vacated and remanded. The Court explained that there were two ways to prove nexus: (1) via a presumption of nexus or (2) via a showing that the evidence is a direct result of the unique characteristics of the claimed invention. While the Court agreed that Volvo’s arguments regarding presumption were insufficient, the Court determined that Volvo had put forth evidence that Brunswick recognized the success of Forward Drive was directly tied to the unique characteristics of the claimed tractor-type stern drive. Indeed, the Court noted that the Board found that boat manufacturers strongly desired Volvo’s Forward Drive and urged Brunswick to bring a similar product to market. The Court therefore concluded that there was a nexus between the unique features of the claimed invention and the evidence of secondary considerations.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this update:

Blaine H. Evanson – Orange County (+1 949-451-3805, [email protected])
Audrey Yang – Dallas (+1 214-698-3215, [email protected])

Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:

Appellate and Constitutional Law Group:
Thomas H. Dupree Jr. – Washington, D.C. (+1 202-955-8547, [email protected])
Allyson N. Ho – Dallas (+1 214-698-3233, [email protected])
Julian W. Poon – Los Angeles (+ 213-229-7758, jpoon@gibsondunn.com)

Intellectual Property Group:
Kate Dominguez – New York (+1 212-351-2338, [email protected])
Y. Ernest Hsin – San Francisco (+1 415-393-8224, [email protected])
Josh Krevitt – New York (+1 212-351-4000, [email protected])
Jane M. Love, Ph.D. – New York (+1 212-351-3922, [email protected])

On August 29, 2023, the federal banking agencies (the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”)) issued a joint notice of proposed rulemaking that would require certain large banking organizations to issue and maintain minimum amounts of long-term debt (“LTD”).[1] The Proposed Rule represents another major step in the federal banking agencies’ continued efforts to impose heightened enhanced prudential standards on banking organizations with $100 billion or more in total consolidated assets and align those enhanced prudential standards with those currently applicable to global systemically important banking organizations (“GSIBs”).

As anticipated, the Proposed Rule would require Category II, III and IV bank holding companies (“BHCs”), savings and loan holding companies (“SLHCs”) and U.S. intermediate holding companies (“IHCs”) of foreign banking organizations (“FBOs”) that are not GSIBs (collectively, “covered entities”) to issue and maintain minimum amounts of LTD that satisfies certain requirements.[2]

The Proposed Rule also would require four categories of insured depository institutions (“IDIs”) that are not consolidated subsidiaries of U.S. GSIBs to issue and maintain minimum amounts of LTD. Those “covered IDIs” are:

any IDI that has at least $100 billion in total consolidated assets and that is a consolidated subsidiary of a covered entity or a U.S. IHC of a foreign GSIB;
any IDI that has at least $100 billion in total consolidated assets and is not controlled by a parent entity;
any IDI that has at least $100 billion in total consolidated assets and (i) is a consolidated subsidiary of a company that is not a covered entity, a U.S. GSIB or a foreign GSIB subject to the Federal Reserve’s total loss-absorbing capacity (“TLAC”) rule or (ii) is controlled but not consolidated by another company; and
any IDI (regardless of size) that is affiliated with an IDI in one of the foregoing three categories.[3]

IDIs that are consolidated subsidiaries of U.S. GSIBs would not be subject to the Proposed Rule because their parent holding companies are subject to LTD requirements under the Federal Reserve’s TLAC rule and the most stringent capital, liquidity and other enhanced prudential standards.[4] However, covered IDIs that are consolidated subsidiaries of U.S. IHCs controlled by foreign GSIBs would be subject to the Proposed Rule and would be required to issue and maintain minimum amounts of LTD.

The Proposed Rule follows closely the federal banking agencies’ release of the Basel III endgame reforms in July 2023 (see our prior Client Alert). The Basel III endgame proposal would significantly reduce the differences that apply across the four categories established by the federal banking agencies in 2019 for determining the applicability and stringency of regulatory capital requirements for large banking organizations. Like the Basel III endgame proposal, the Proposed Rule would align LTD requirements applicable to large banking organizations with total assets of $100 billion or more in a similar manner across the four categories—although, as noted above, IDIs that are consolidated subsidiaries of U.S. GSIBs would not be subject to the Proposed Rule.

Unlike the Basel III endgame proposal, the Proposed Rule was adopted unanimously. However, Federal Reserve Governors Bowman and Waller raised concerns with the Proposed Rule, including concerns that the Proposed Rule, like the Basel III endgame proposal, would not comply with the tailoring requirements of Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), as amended by the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”).[5]

As with prior rulemakings, the Proposed Rule, if finalized, would include a three-year transition period and the LTD requirements under any final rule would be fully phased in over that three-year period. Entities that become subject to the Proposed Rule after the effective date also would benefit from a three-year transition period. The Proposed Rule also would allow banking organizations to include, as part of the required minimum amounts, certain “grandfathered” existing LTD.

Comments on the Proposed Rule are due by November 30, 2023 – the same date that comments to the Basel III endgame proposal are due.[6] The agencies have included 67 questions as prompts (almost all of which include multiple related sub-prompts) to solicit comments on all aspects of the Proposed Rule.

I. Key Aspects of the Proposed Rule

Scope of Application. The Proposed Rule would apply to all non-U.S. GSIBs with $100 billion or more in total consolidated assets. Large banking organizations subject to the Proposed Rule would be required to comply with LTD requirements at both the holding company level and IDI level. U.S. GSIBs would not be subject to the LTD requirements at the IDI level, though IDI subsidiaries of U.S. IHCs controlled by foreign GSIBs would be subject to the Proposed Rule.

Application of the Proposed Rule
U.S. GSIBs and their IDI subsidiaries	Category II, III and IV BHCs and SLHCs and their IDI subsidiaries	Category II, III and IV U.S. IHCs and their IDI subsidiaries
U.S. GSIBs are already subject to LTD requirements under the TLAC rule.	Category II, III and IV BHCs and SLHCs would be subject to the LTD requirements.	Category II, III and IV U.S. IHCs of FBOs would be subject to the LTD requirements. U.S. IHCs controlled by foreign GSIBs are already subject to LTD requirements under the TLAC rule.
IDIs that are consolidated subsidiaries of U.S. GSIBs would not be subject to the LTD requirements.	IDIs with at least $100 billion in total consolidated assets and their affiliated IDIs would be subject to the LTD requirements. IDI subsidiaries of U.S. IHCs controlled by foreign GSIBs would be subject to the LTD requirements.

Minimum LTD Levels. Under the Proposed Rule, covered entities and covered IDIs would be subject to the same minimum LTD levels as U.S. IHCs of foreign GSIBs under the TLAC rule:

Minimum LTD Levels

U.S. GSIBs under TLAC Rule

U.S. IHCs of foreign GSIBs under TLAC Rule

Covered Entities and Covered IDIs under Proposed Rule

Outstanding eligible external LTD in an amount not less than the greater of:

– 6% of total risk-weighted assets plus the surcharge applicable under the GSIB surcharge rule; and

– 4.5% of total leverage exposure.

Outstanding eligible external LTD in an amount not less than the greater of:

– 6% of total risk-weighted assets;

– 3.5% of average total consolidated assets; and

– 2.5% of total leverage exposure if subject to the supplementary leverage ratio (“SLR”).

Outstanding eligible LTD in an amount not less than the greater of:

– 6% of total risk-weighted assets;

– 3.5% of average total consolidated assets; and

– 2.5% of total leverage exposure if subject to the SLR.

As with the LTD requirements applicable to U.S. GSIBs and the U.S. IHCs of foreign GSIBs, the Proposed Rule’s eligible LTD requirement was calibrated primarily on the basis of a “capital refill” framework. The Proposed Rule would not tailor the LTD requirements for Category II, III or IV banking organizations or their IDI subsidiaries.

The Proposed Rule would prohibit a covered entity from redeeming or repurchasing any outstanding eligible LTD without the prior approval of the Federal Reserve if after the redemption or repurchase the covered entity would not meet its minimum LTD requirement. Additionally, the Proposed Rule would authorize the agencies, after providing an external LTD issuer with notice and an opportunity to respond, to order the external issuer to exclude from its outstanding eligible LTD amount any otherwise eligible debt securities “with features that would significantly impair the ability of such debt securities to absorb losses in resolution.”[7]

Externally/Internally Issued LTD. Under the Proposed Rule, certain covered entities and covered IDIs would be required or permitted to issue eligible LTD externally, while others would be required or permitted to issue eligible LTD internally.

Externally/Internally Issued LTD
Covered U.S. Holding Companies	May only issue eligible “external” LTD
Covered IHCs of FBOs	“Resolution IHCs”[8] may issue eligible “internal” or “external” LTD “Non-resolution IHCs”[9] may only issue eligible “internal” LTD
Covered IDIs	Covered IDIs that are consolidated subsidiaries of covered entities or a foreign GSIB IHC may only issue eligible “internal” LTD Covered IDIs that are not controlled subsidiaries of a parent entity may only issue eligible “external” LTD Covered IDIs that are consolidated subsidiaries of a parent entity that is not a covered entity or that are controlled but not consolidated by a covered entity or foreign GSIB IHC entity may issue eligible “internal” or “external” LTD

Eligible External and Internal LTD. The Proposed Rule would generally align the requirements for externally issued LTD with the requirements for eligible LTD under the Federal Reserve’s TLAC rule.

Eligible External LTD
Category II, III and IV BHCs and SLHCs, covered IDIs required or permitted to issue external LTD and “resolution IHCs”
Paid in and issued directly by the external issuer (debt instruments issued by a subsidiary of a covered entity or covered IDI would not qualify as eligible external LTD) Held by a non-affiliate (except that a covered IDI may issue eligible external LTD to an affiliate that controls but does not consolidate the covered IDI)[10] Unsecured, not guaranteed by the issuer or a subsidiary or an affiliate of the issuer, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument (such as a credit enhancement provided by an affiliate) Maturity of greater than or equal to one year from the date of issuance “Plain vanilla” features Excluded from treatment as eligible external LTD if instruments are: (i) structured notes, (ii) have a credit-sensitive feature, (iii) include a contractual provision for conversion into or exchange for equity in the issuer, or (iv) include a provision that gives the holder a contractual right to accelerate payment (including automatic acceleration) Permissible acceleration rights include rights exercisable: (i) on one or more dates specified in the instrument, (ii) in the event of the issuer entering into insolvency or resolution proceedings, or (iii) upon the issuer’s failure to pay principal or interest on the instrument and which remains uncured for 30 days or more[11] In the case of eligible external LTD issued by a covered IDI, instrument must be contractually subordinated so that the claim represented by the LTD in the receivership of the IDI would be junior to deposit and general unsecured claims Issued in a minimum principal denomination of $400,000 Governed by U.S. law or the laws of any state

Principal due to be paid on eligible external LTD in one year or more and less than two years would be subject to a 50% haircut for purposes of the external LTD requirement and principal due to be paid on eligible external LTD in less than one year would not count toward the external LTD requirement.

Eligible Internal LTD
Covered IDIs required or permitted to issue internal LTD and “non-resolution IHCs”
The requirements for eligible internal LTD are generally the same as those for eligible external LTD, with two principal differences: eligible internal LTD issued by a covered IDI must be issued to and remain held by a company that consolidates the covered IDI, generally an upstream parent; and no minimum principal denomination requirement Eligible internal LTD issued by a covered IHC would be required to include a contractual conversion trigger approved by the Federal Reserve pursuant to which the Federal Reserve could require the covered IHC, under certain circumstances, to convert or exchange some or all of the internal LTD into common equity tier 1 capital of the covered IHC without the covered IHC’s entry into a resolution proceeding and would not include a prohibition against credit sensitive features[12] Non-resolution IHCs would be required to issue eligible internal LTD to a foreign company that directly or indirectly controls the covered IHC, or to a wholly owned subsidiary of a controlling foreign company For a covered IDI that is a consolidated subsidiary of a covered IHC, the Proposed Rule would require that eligible internal LTD of the covered IDI be issued to the covered IHC, or a subsidiary of the covered IHC that consolidates the IDI (the LTD could not be directly issued to a foreign affiliate that controls the IDI)

Grandfathering of Legacy External LTD. The Proposed Rule would permit some legacy external LTD to count towards the minimum LTD requirements, even where such legacy external LTD does not meet certain eligibility requirements:

instruments that contain impermissible acceleration clauses;
instruments issued with principal denominations that are less than the proposed $400,000 minimum amount; and
in the case of legacy instruments issued externally by a covered IDI, are not contractually subordinated to general unsecured creditors (collectively, “eligible legacy external LTD”).

Notably, eligible legacy external LTD issued by a consolidated subsidiary IDI of a covered entity may be used to satisfy the minimum external LTD requirement applicable to both its covered parent holding company or covered resolution IHC and any internal LTD requirement applicable to the subsidiary IDI itself. However, eligible legacy external LTD cannot be used to satisfy the internal LTD requirement for non-resolution covered IHCs. To qualify as “eligible legacy external LTD,” an instrument must be issued prior to the date that notice of the final rule is published in the Federal Register. The Proposed Rule would authorize the federal banking agencies, after providing a covered entity or covered IDI with notice and an opportunity to respond, to order the covered entity or covered IDI to exclude from its outstanding eligible LTD amount any eligible legacy external LTD.[13]

Transition Period. The Proposed Rule would provide a transition period for covered entities and covered IDIs that would be subject to the rule upon its effectiveness, and a transition period for covered entities and covered IDIs that become subject to the rule after it becomes effective. Over that three-year period, covered entities and covered IDIs would need to meet:

25% of their LTD requirements by one year after the effective date of the final rule (or one year after becoming subject to the rule);
50% after two years of the effective date of the final rule (or two years after becoming subject to the rule); and
100% after three years of the effective date of the final rule (or three years after becoming subject to the rule).

The federal banking agencies would be authorized to accelerate or extend the transition period. The transition period would not re-start for a covered IDI that converts its charter or any holding company thereof. Finally, covered entities that transition from being subject to the final rule to the Federal Reserve’s TLAC rule would have three years to comply with the requirements imposed under the TLAC rule.[14]

Clean Holding Company Requirements. The Proposed Rule also would include “clean holding company” requirements like those that apply to U.S. GSIBs and U.S. IHCs of foreign GSIBs subject to the Federal Reserve’s TLAC rule. In particular, the Proposed Rule would prohibit covered entities from:

externally issuing short-term debt instruments (i.e., instruments with an original maturity of less than one year);
entering into qualified financial contracts, or “QFCs”, with third parties;[15]
guaranteeing (including by providing credit support for) a subsidiary’s liabilities with an external counterparty if the covered entity’s insolvency or entry into a resolution proceeding (other than resolution under Title II of the Dodd-Frank Act) would create default rights for a counterparty of the subsidiary; and
having outstanding liabilities that are guaranteed by a subsidiary of the covered entity or that are subject to rights that would allow a third party to offset its debt to a subsidiary upon the covered entity’s default on an obligation owed to the third party.

The Proposed Rule would amend the QFC prohibition of the clean holding company requirements so that holding companies subject to the TLAC rule may enter into underwriting agreements, fully paid structured share repurchase agreements and employee and director compensation agreements. These changes also would be applied to the clean holding company requirements proposed for covered BHCs and SLHCs (not covered IHCs) under the Proposed Rule. The Proposed Rule would authorize the Federal Reserve to determine that additional agreements would not be subject to the QFC prohibition.

Capital Deduction Framework. Under the current capital rule, U.S. GSIBs, their subsidiary depository institutions and Category II banking organizations are required to deduct investments in LTD issued by banking organizations that are required to issue LTD to the extent that aggregate investments by the investing banking organization in the capital and LTD of other financial institutions exceed a specified threshold. The Proposed Rule would expand the existing capital deduction framework for LTD issued by U.S. GSIBs and the IHCs of foreign GSIBs to include external LTD issued by covered entities and external LTD issued by covered IDIs by amending the capital rule’s definition of “covered debt instrument.” The Proposed Rule would not otherwise amend the capital rule’s deduction framework.

Notably, the Basel III endgame proposal would subject Category III and IV banking organizations to the LTD deduction framework that currently only applies to U.S. GSIBs, their subsidiary depository institutions and Category II banking organizations and would apply a heightened risk weight to investments in LTD that are not deducted.

Changes to the Existing TLAC Rule. The Proposed Rule would make conforming and certain other changes to the TLAC rule, including:

conforming changes to require minimum denominations for eligible LTD;[16]
changes to the haircuts that are applied to eligible LTD for purposes of compliance with the TLAC requirement to conform to haircuts that apply for purposes of the LTD requirement – accordingly, the Proposed Rule would allow only 50% of the amount of eligible LTD with a maturity of one year or more but less than two years to count towards the TLAC requirement;
clarifications to the clean holding company requirements so that U.S. GSIBs and U.S. IHCs of foreign GSIBs may enter into underwriting agreements, fully paid structured share repurchase agreements and employee and director compensation agreements; and
enhanced disclosure requirements.

Finally, the Proposed Rule would authorize the Federal Reserve to require LTD and TLAC levels greater than or less than the minimum requirement currently required under the TLAC rule.[17]

II. Issues with the Proposed Rule

As they did with the Basel III endgame proposal, each of Federal Reserve Governors Bowman and Waller—although voting in support of the Proposed Rule—raised concerns with the authority for the Proposed Rule being in conflict with the tailoring requirements under Section 165 of the Dodd-Frank Act, as amended by EGRRCPA, and the federal banking agencies’ tailoring rules implementing Section 165. These statements raise the prospects that the Proposed Rule could be subject to challenge if adopted substantially as proposed.

Governor Bowman: “Today’s proposal would weaken the current risk-based, tailored approach to regulation by applying the same regulatory requirements to firms from $100 billion to $1 trillion regardless of their activities and potential risks to the financial system. I am concerned that collapsing Categories II, III, and IV into a single prudential category may call into question whether the Federal Reserve is complying with the statutory requirements to tailor prudential requirements for large firms.[2] … In 2017, when the rules addressing total loss-absorbing capacity and long-term debt for GSIBs and the U.S. intermediate holding companies of foreign GSIBs were adopted, the [Federal Reserve] expressly noted that the application of the rules were limited, ‘in keeping with the Dodd-Frank Act’s mandate that more stringent prudential standards be applied to the most systemically important bank holding companies.’[3] In my view, there is a legitimate question about whether the proposal meets the statutory bar for tailoring the stringency of enhanced prudential standards, and applying such standards to banks with $100 billion to $250 billion in assets. I look forward to receiving feedback from commenters on this issue.”[18]
Governor Waller: “More importantly, I am concerned that our regulatory framework for large banks is moving in a direction that does not tailor requirements in a manner consistent with the spirit of the Dodd-Frank Act, as amended by Congress in 2018.”[19]

Governor Bowman also focused on the potential impacts of the Proposed Rule on competition and highlighted that the joint implementation of the Basel III endgame proposal and LTD requirements would have unclear effects. On competition, she noted:

In my view, as the differences between the regulatory requirements for GSIBs and firms with more than $100 billion in assets continue to be eroded, it will become less economically rational for firms to remain in Category IV and creates an even steeper “cliff” effect for regional banks that seek to grow into this category. Ultimately, the cumulative effect of these proposals and others to be considered in the coming months could exacerbate the pressure on banks to grow larger through acquisition resulting in harmful effects on competition, the reduction of banking options in some geographic or product markets, and rendering some institutions competitively unviable.[20]

Governor Bowman has long stressed that enhanced supervision should be the federal banking agencies’ focus, consistently highlighting that the Dodd-Frank Act provides regulators the toolkit they need to supervise banking organizations through the cycle, and that as banks grow, those tools are in place for supervision and regulation to become more stringent. In her statement accompanying the release of the Proposed Rule, she again reiterated the need for enhanced supervision, rather than a “belt, suspenders, and elastic waistband approach” to regulatory reform.[21]

Finally, as the federal banking agencies acknowledge in the preamble to the Proposed Rule, “there is a risk that efforts by covered entities and covered IDIs to issue a large volume of LTD over a limited period could strain the market capacity to absorb the full amount of such issuance if issuance volume exceeds debt market appetite for LTD instruments,” particularly in periods of adverse funding market conditions.[22] In recent years, a number of large banking organizations have been issuing LTD instruments in the market in anticipation of LTD requirements similar to those imposed on U.S. GSIBs under the TLAC rule being imposed on firms with $100 billion in more in total assets. It will be important for organizations that could become subject to the Proposed Rule to contemplate further LTD issuances in anticipation of the Proposed Rule being adopted substantially as proposed and taking advantage of the grandfathering provisions for eligible legacy external LTD and the Proposed Rule’s three-year transition period to satisfy expected LTD requirements going forward.

III. Conclusions

As with the Basel III endgame proposal, it is imperative that all stakeholders actively engage in the rulemaking process with the federal banking agencies and other policymakers to facilitate a thoughtful approach to the final rule. The comment process will play a critical role in shaping the substance of the final rule and the federal banking agencies’ consideration of the myriad issues raised by the Proposed Rule, its interaction with the Basel III endgame proposal, its potentially broader unintended consequences, including impacts on competition, and may also form the basis for any future legal challenges to the federal banking agencies’ final rule.

________________________

[1] Federal Reserve, FDIC, OCC, Long-term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions (July 27, 2023), available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20230829a1.pdf (the “Proposed Rule”). The Proposed Rule follows an advance notice of proposed rulemaking issued in October 2022 by the Federal Reserve and FDIC seeking input on a long-term debt requirement for certain large banking organizations that are not GSIBs. See Federal Reserve, FDIC, Resolution-Related Resource Requirements for Large Banking Organizations, 87 Fed. Reg. 64170 (Oct. 24, 2022).

[2] Proposed Rule, p. 9. This part of the Proposed Rule is issued by the Federal Reserve.

[3] Proposed Rule, p. 10. This part of the Proposed Rule is issued by the Federal Reserve, FDIC and OCC.

[4] Proposed Rule, p. 9, n. 2.

[5] See 12 U.S.C. § 5365(a)(1), (2)(A), (2)(C). As it relates to covered IDIs, Director Chopra argued in his statement in support of the Proposed Rule that the proposal “for an [IDI] to issue minimum amounts of long-term debt is not a Dodd-Frank Act Section 165 ‘enhanced prudential standard,’ and is therefore not tied to the [EGRRCPA’s] $100 billion asset threshold.” Statement of CFPB Director Rohit Chopra Member, FDIC Board of Directors Regarding Proposals to Improve the FDIC’s Options for Managing Large Bank Failures (Aug. 29, 2023), available at: https://www.consumerfinance.gov/about-us/newsroom/statement-of-cfpb-director-rohit-chopra-member-fdic-board-of-directors-regarding-proposals-to-improve-the-fdics-options-for-managing-large-bank-failures/#6 (“Director Chopra Statement”).

[6] The Basel III endgame proposal provided for a 126-day comment period; the Proposed Rule provides for a 93-day comment period.

[7] See Proposed Rule, p. 42.

[8] “Resolution IHCs” are “covered IHCs of FBOs with a top-tier group-level resolution plan that contemplates their covered IHCs or subsidiaries of their covered IHCs entering into resolution, receivership, insolvency, or similar proceedings in the United States.” Proposed Rule, p. 60.

[9] “Non-resolution IHCs” are “covered IHCs of FBOs with top-tier group-level resolution plans that do not contemplate their covered IHCs or the subsidiaries of their covered IHCs entering into resolution, receivership, insolvency, or similar proceedings.” Proposed Rule, p. 60.

[10] See Proposed Rule, pp. 43-44.

[11] Eligible external LTD instruments would be permitted to give the holder a put right as of a future date certain (such an instrument would be treated as if it were due to be paid on the day on which it first became subject to the put right, regardless of whether the put right would be exercisable on that date only if another event occurred (e.g., a credit rating downgrade)). See Proposed Rule, p. 52, n. 48.

[12] The conversion provision may be triggered if both (a) the Federal Reserve determines that the covered IHC is “in default or in danger of default,” and (b) any of the following circumstances apply: (i) the top-tier FBO or any subsidiary of the top-tier FBO has been placed into resolution proceedings in its home country; (ii) the home country supervisory authority consents to the conversion or exchange or does not object to the conversion or exchange following 24 hours’ notice; or (iii) the Federal Reserve makes a written recommendation to the Secretary of the Treasury that the FDIC should be appointed as receiver of the covered IHC under the “orderly liquidation authority” under Title II of the Dodd-Frank Act. The terms of the contractual conversion provision in the debt instrument would have to be approved by the Federal Reserve. See Proposed Rule, p. 63.

[13] See Proposed Rule, pp. 65-66.

[14] See Proposed Rule, pp. 83-85.

[15] The proposed requirement would only apply prospectively to new agreements entered into after the post-transition period effective date of a final rule. See Proposed Rule, p. 73.

[16] Question 59 asks: “Should the [Federal Reserve] impose a higher minimum denomination for TLAC companies subject to the TLAC rule? Should the minimum denomination be higher (e.g., $1 million) for companies subject to the TLAC rule than for covered entities subject to the newly proposed LTD requirement?” Proposed Rule, p. 90.

[17] See Proposed Rule, pp. 86-97.

[18] Statement by Federal Reserve Governor by Michelle W. Bowman (August 29, 2023), available at: https://www.federalreserve.gov/newsevents/pressreleases/bowman-statement-20230829.htm. (citing to 12 U.S.C. § 5365(a)(1), (2)(C) and 82 Fed. Reg. 8266, 8288 (Jan. 24, 2017), respectively) (“Governor Bowman Statement”).

[19] Statement by Federal Reserve Governor Christopher J. Waller (August 29, 2023), available at: https://www.federalreserve.gov/newsevents/pressreleases/waller-statement-20230829.htm. In contrast, Director Chopra proposed whether “we should determine whether institutions below $100 billion, such as those with high levels of ‘uninsured’ deposits or those that have grown very rapidly, should also be subjected to a similar requirement.” Director Chopra Statement.

[20] Governor Bowman Statement.

[21] See id.

[22] See Proposed Rule, p. 114.

Gibson Dunn’s Distressed Banks Resource Center provides resources and regular updates to our clients. Please check the Resource Center for the latest developments.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of Gibson Dunn’s Global Financial Regulatory, Financial Institutions, Capital Markets, Securities Regulation and Corporate Governance, Public Policy or Administrative Law and Regulatory practice groups, or the following authors:

Jason J. Cabral – New York (+1 212-351-6267, [email protected])
Zach Silvers – Washington, D.C. (+1 202-887-3774, [email protected])

On August 30, 2023, the U.S. Department of Labor issued a proposed rule to revise its regulations implementing minimum wage and overtime exemptions for executive, administrative, and professional employees, among others, under the Fair Labor Standards Act (“FLSA”). The proposal, if finalized, would revise the minimum wage and overtime exemptions issued by the Trump Administration in 2019, which have been in effect since January 1, 2020.

Among other things, the proposal would increase the compensation thresholds that are used when determining whether an employee qualifies for the executive, administrative, or professional exemptions. Under the Department’s existing regulations an employee qualifies for an exemption if: (1) she is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid meets a minimum specified amount; and (3) her job duties are primarily executive, administrative, or professional. The Department has periodically revised the minimum salary component of the test, most recently in 2019, when it set the minimum salary at $684 per week ($35,568 on an annual basis).

The Department’s proposal would increase the salary threshold substantially. The Department proposes to increase the threshold to at least $1,059 per week, which is approximately $55,000 per year, representing a nearly 55 percent increase over the current threshold. The proposal also leaves open the possibility that the Department might use more recent wage data when it finalizes the rule, which means the compensation thresholds could easily be as high as $1,140 or $1,158 per week, or approximately $60,000 per year. (A higher threshold applies under state law in only a handful of states, such as California which requires that exempt employees earn at least $1,240 per week.) These increases are the result of the Department’s proposal to tie the compensation thresholds to the 35th percentile of wage survey data of full-time salaried workers in the lowest-wage Census Region—as opposed to 20th percentile of wage survey data of full-time salaried workers in the lowest-wage Census Region and of retail workers nationally.

The proposal would also increase the compensation threshold for the highly compensated employees exemption. Employees earning at least $107,432 annually currently qualify for this exemption if they regularly perform at least one executive, administrative, or professional duty. The Department proposes to increase the compensation threshold to $143,988, an increase of approximately 34 percent.

These changes to the Department’s compensation thresholds would, if implemented, have significant consequences for many employers. It is estimated that the changes will expand the number of workers who would be eligible for overtime wages by at least 3.6 million.

The Department also proposes to automatically increase the compensation thresholds every three years to account for changes in wage survey data collected by the Bureau of Labor Statistics. If implemented, the automatic increase mechanism would likely result in significantly higher compensation thresholds in the coming years.

Increases to the compensation threshold, including automatic increases, were included in the Obama Administration’s 2016 rule. That rule, which would have increased the compensation threshold to $913 per week ($47,476 on an annual basis), was enjoined before it took effect. It was later struck down by the U.S. District Court for the Eastern District of Texas on the grounds that the Department’s reliance on salary thresholds to the exclusion of an analysis of employees’ job duties exceeded the Department’s authority under the statute. A similar challenge should be expected to any final rule resulting from the Department’s new rulemaking, particularly in light of Justice Kavanaugh’s dissent in Helix Energy Solutions Group, Inc. v. Hewitt, 598 U.S. 39 (2023), which suggested that the Department’s compensation threshold test may be inconsistent with the FLSA.

Interested parties will have 60 days to submit comments on the proposed rule after it is published in the Federal Register. The Department may issue a final rule as soon as early-to-mid 2024. As noted, legal challenges are possible once a final rule is adopted.

The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Jason Schwartz, Katherine Smith, Andrew Kilberg, and Blake Lanning.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment or Administrative Law and Regulatory practice groups, or the following authors and practice leaders:

Eugene Scalia – Co-Chair, Administrative Law & Regulatory Group, Washington, D.C.
(+1 202-955-8210, [email protected])

Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C.
(+1 202-955-8242, [email protected])

Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles
(+1 213-229-7107, [email protected])

Helgi C. Walker – Co-Chair, Administrative Law & Regulatory Group, Washington, D.C.
(+1 202-887-3599, [email protected])

Gibson Dunn has secured a six-figure settlement awarding attorneys’ fees for its representation of the New Jersey Chapter of the American Immigration Lawyers Association (AILA-NJ) against the federal Executive Office for Immigration Review (EOIR) in the District of New Jersey.

The settlement follows a February 2023 ruling that held that immigration judges at the Newark Immigration Court violated a stipulation by failing to timely adjudicate motions made by immigration attorneys to appear remotely and neglecting to provide adequate reasoning when denying those motions. The judge dismissed EOIR’s explanation that “bandwidth issues” compelled the Newark Immigration Court’s sudden switch to default in-person hearings or justified denying motions for WebEx hearings, finding that it was unsupported by the evidence.

After stipulating in February 2021 to timely adjudicate requests to appear remotely, EOIR abruptly changed course in August 2022, citing “bandwidth issues” at the court. The Gibson Dunn team filed an Emergency Motion to Enforce the Stipulation in October 2022, alleging that the policy change was a violation of EOIR’s commitment. At a two-day evidentiary hearing, the Gibson Dunn team presented two witnesses, AILA-NJ’s Chapter President and a Department of Homeland Security attorney and union representative. Both testified that their members faced an impossible choice between representing their clients in person or risking their or their immunocompromised loved ones’ safety. The Gibson Dunn team also cross-examined the government’s IT expert, who conceded that there was no factual basis for EOIR’s “bandwidth issues” rationale.

In its March 2023 Final Order, the Court granted AILA-NJ permission to file a motion for attorneys’ fees as the prevailing party. Following negotiations, EOIR then agreed to a substantial settlement.

The Gibson Dunn team included partner Akiva Shapiro and associates Seton Hartnett O’Brien, Salah Hawkins, Dasha Dubinsky, Tawkir Chowdhury, and Edmund Bannister.

Because of an expiring transition rule, a partner that currently relies on a “bottom dollar guarantee” to support an allocation of liabilities may be required to recognize gain under section 731(a) unless that partner takes action before October 4, 2023.[1] After a brief overview and discussion of the applicable Treasury regulations, we describe the action that should be taken.

I. Overview

In October 2019, the IRS and Treasury issued final regulations (the “2019 Regulations”) that provide that “bottom dollar payment obligations” (commonly referred to as “bottom dollar guarantees”) do not cause a partnership’s liabilities to be treated as recourse with respect to the partner providing the guarantee. The result of this rule is that a bottom dollar guarantee does not cause the guaranteed liability to be allocated to the partner providing the guarantee.[2] The absence of such an allocation may cause the partner providing the guarantee to recognize gain in an amount up to the amount of the liabilities. The 2019 Regulations are effective for partnership liabilities incurred and guarantees entered into on or after October 5, 2016.

The 2019 Regulations include a seven-year transition rule for a partner that had a “negative tax capital account” immediately before October 5, 2016 and was relying on an allocation of recourse liabilities to avoid gain recognition. In general, a partner would have a “negative tax capital account” to the extent that the partner has previously been allocated losses or deductions or received distributions from the partnership in excess of the partner’s capital investment in the partnership (i.e., capital contributions to the partnership and previous allocations of income or gain by the partnership to the partner). The transition rule also applies to liabilities incurred and payment obligations entered into before October 5, 2016 that were subsequently refinanced or modified.

When the transition rule expires on October 4, 2023, bottom dollar guarantees will no longer be effective to cause partnership liabilities to be treated as recourse with respect to the partner providing the guarantee. As a result, absent other action, the partner may recognize gain under section 731(a) to the extent of the partner’s remaining “negative tax capital account.”

II. Discussion

A. Background on the Allocation of Partnership Liabilities

An entity that is classified as a partnership for U.S. federal income tax purposes allocates its liabilities among its partners in accordance with section 752 and the regulations interpreting section 752. Any liability that is allocated to a partner increases that partner’s basis in its partnership interest. A partner with a share of liabilities may, therefore, be able to receive greater distributions of money from the partnership without recognizing gain under section 731(a) or claim deductions for a greater amount of partnership deductions than would be possible without the share of liabilities.

When a partner’s share of a liability decreases—whether because the liability is repaid or because it is allocated to a different partner—the partner whose share decreases is treated as receiving a distribution of money in an amount equal to the reduction. If the amount of the reduction exceeds the partner’s basis in its interest, the partner recognizes taxable gain under section 731(a).

Whether a partnership liability is allocated to a particular partner depends, in the first instance, on whether the liability is “recourse” or “nonrecourse.” A liability that is “recourse” to a particular partner is allocated to that partner. A liability that is not recourse to any particular partner is considered “nonrecourse” and generally is allocated among all partners (though, in many cases, there is substantial flexibility with respect to the allocation of nonrecourse liabilities under Treas. Reg. § 1.752-3).

For this purpose, a liability is a recourse liability when a partner or related person bears the “economic risk of loss” with respect to that liability. To determine whether any partner or related person bears the economic risk of loss with respect to a liability, the Treasury regulations require the partnership to determine whether any partner would have a “payment obligation” if all of the assets of the partnership (including cash) became worthless and the liabilities became due (this is sometimes referred to as the “atom bomb test”).[3]

B. Use of Guarantees to Cause Allocations of Liabilities

A partner that wishes to be allocated a share of partnership liabilities in excess of its share of nonrecourse liabilities sometimes will guarantee repayment of some or all of the partnership’s liabilities. For example, if a partner with a $0 basis in its interest is entitled to a distribution of money from the partnership, and the partner does not want to recognize taxable gain on the distribution, the partner might guarantee a partnership liability before the distribution. If the amount of the guarantee is at least equal to the amount of money to be distributed, the distribution does not cause the partner to recognize gain under section 731(a) because the liability “supports” the distribution by providing additional basis.

This well-understood and perfectly acceptable planning technique, of course, is not without economic risk; a partner that guarantees a liability may be called upon to satisfy that guarantee. With lower-leverage partnerships, this can be relatively low risk. In a higher-leverage partnership—for example, certain real estate joint ventures—however, the risk can be more significant.

Before the issuance of temporary Treasury regulations in October 2016, a partner that sought to be allocated a share of liabilities while reducing the associated economic exposure sometimes entered into a so-called “bottom dollar guarantee.” Unlike other guarantees (in which the guarantor is liable for the amount guaranteed beginning with the first dollar of the unsatisfied outstanding principal balance), a bottom dollar guarantee requires the guarantor to make a payment only to the extent that the lender ultimately collects less than the amount guaranteed. That is, a bottom dollar guarantee exposes the guarantor to the last dollars of loss rather than the first. A bottom dollar guarantee thus caused a liability to be a recourse liability that exposed the guarantor to lower risk while still constituting sufficient risk exposure to support an allocation of liabilities (in an amount equal to the guarantee). This allowed the partner providing the guarantee to avoid gain recognition to the extent of the associated liabilities.

C. IRS and Treasury Response to Bottom Dollar Guarantees

The IRS and Treasury perceived bottom dollar guarantees as lacking commercial substance and, in January 2014, proposed an initial set of regulations seeking to curb their use. Under the final 2019 Regulations, “bottom dollar payment obligations” are not recognized (i.e., a bottom dollar guarantee does not result in the guarantor partner being treated as having the economic risk of loss with respect to the liability). Under the regulations, a bottom dollar payment obligation generally includes any payment obligation under a guarantee or similar arrangement with respect to which the partner (or a related person) is not liable for up to the full amount of the payment obligation in the event of non-payment by the partnership. In other words, the lender must be able to recover from the guarantor beginning with the lender’s first dollar of loss. In determining whether a guarantee meets the definition of a bottom dollar payment obligation, and, relatedly, whether the partner (or a related person) bears the economic risk of loss, every aspect of the guarantee must be considered, including whether, by reason of contract, state law, or common law, the partner has a reimbursement or contribution right (for example, by claiming reimbursement or contribution from the joint venture on a priority basis relative to the other partners, from the other partners, or from third parties).

The determination of whether a particular guarantee meets the definition of “bottom dollar payment obligation” is, therefore, a mixed issue of law and transaction-specific facts.

D. Special Rule for “Vertical Slice” Guarantees

One important clarification of the bottom dollar guarantee rules is the rule for so-called “vertical slice” guarantees. The 2019 Regulations provide that a guarantee is not a bottom dollar guarantee if the guaranteed obligation equates to a fixed percentage of every dollar of the guaranteed partnership liability. That is, a partner does not need to guarantee the entire liability but rather can guarantee a “vertical slice” of the entire liability. For example, suppose a partner agrees to guarantee ten percent of a $100 million partnership liability, which would be $10 million. In a typical guarantee, the partner would be liable for the first $10 million of the lender’s losses—that is, if the lender recovers less than $100 million, the guarantor is liable for up to $10 million. If, however, the partner enters into a “vertical slice guarantee” for ten percent of the lender’s loss up to the same $10 million amount, the partner would be liable for ten percent of each dollar of the lender’s loss, thus reducing its effective economic exposure in the event of a loss. That is, if the lender recovered only $60 million from the partnership, the guarantor would be liable for $4 million (ten percent of the $40 million loss). Unlike a bottom dollar guarantee (which, in the example, would not have resulted in a payment obligation because the lender recovered in excess of the $10 million guaranteed amount), a “vertical slice guarantee” exposes a guarantor partner to liability from the first dollar of loss.

Accordingly, a partner seeking to provide a guarantee of only a portion of a partnership liability may be able to use a “vertical slice guarantee” to accomplish this goal while reducing economic exposure in the event of a loss.

E. Anti-Abuse Rule

The 2019 Regulations contain an anti-abuse rule pursuant to which a payment obligation is disregarded if the facts and circumstances indicate a plan to circumvent or avoid the obligation. Factors cited by the regulations as evidence of such a plan include the partner (or a related person) not being subject to commercially reasonable contractual restrictions that protect the likelihood of payment and that the terms of the partnership liability would be substantially the same had the partner (or related person) not agreed to provide the guarantee. These rules should be considered if entering into a guarantee or other payment obligation.

III. How May The Expiration Of The Transition Rule Impact You?

If you:

are a partner in an entity classified as a partnership for U.S. federal income tax purposes;
guaranteed one or more partnership liabilities before October 5, 2016; and
your share of partnership liabilities exceeded your basis in your partnership interest at that time;

then you should consult your tax lawyers to determine whether the guarantee is a bottom dollar payment obligation. If it is, the transition rule described above will expire on October 4, 2023, and you should consider whether to take any action before that date. Actions that can be taken include entering into a replacement guarantee that complies with the 2019 Regulations before October 4, 2023. If you do not, you may recognize gain equal to all or a portion of your current “negative tax capital account,” either in 2023 or later.

____________________________

[1] Unless indicated otherwise, all “section” references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg. §” references are to the Treasury regulations promulgated under the Code.

[2] The 2019 Regulations finalized temporary regulations promulgated in T.D. 9788 on October 5, 2016.

[3] There is a special rule for liabilities with respect to which the lender may look only to specific partnership assets. In that case, the liability is treated as satisfied by transferring the property to the lender.

This alert was prepared by Emily Leduc Gagné,* Evan M. Gusler, James Jennings, Andrew Lance, and Eric B. Sloan.

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 of the following leaders and members of the firm’s Tax or Real Estate practice groups:

Tax Group:
Dora Arash – Los Angeles (+1 213-229-7134, [email protected])
Sandy Bhogal – Co-Chair, London (+44 (0) 20 7071 4266, [email protected])
Michael Q. Cannon – Dallas (+1 214-698-3232, [email protected])
Jérôme Delaurière – Paris (+33 (0) 1 56 43 13 00, [email protected])
Michael J. Desmond – Los Angeles/Washington, D.C. (+1 213-229-7531, [email protected])
Anne Devereaux* – Los Angeles (+1 213-229-7616, [email protected])
Matt Donnelly – Washington, D.C. (+1 202-887-3567, [email protected])
Pamela Lawrence Endreny – New York (+1 212-351-2474, [email protected])
Benjamin Fryer – London (+44 (0) 20 7071 4232, [email protected])
Kathryn A. Kelly – New York (+1 212-351-3876, [email protected])
Brian W. Kniesly – New York (+1 212-351-2379, [email protected])
Loren Lembo – New York (+1 212-351-3986, [email protected])
Jennifer Sabin – New York (+1 212-351-5208, [email protected])
Hans Martin Schmid – Munich (+49 89 189 33 110, [email protected])
Eric B. Sloan – Co-Chair, New York (+1 212-351-2340, [email protected])
Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224 /+1 212-351-2344), [email protected])
Edward S. Wei – New York (+1 212-351-3925, [email protected])
Lorna Wilson – Los Angeles (+1 213-229-7547, [email protected])
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])
Emily Leduc Gagné* – New York (+1 212-351-6387, [email protected])
Evan M. Gusler – New York (+1 212-351-2445, [email protected])
James Jennings – New York (+1 212-351-3967, [email protected])

Real Estate Group:
Andrew Lance – New York (+1 212-351-3871, [email protected])

*Anne Devereaux is of counsel in the firm’s Los Angeles office who is admitted only in Washington, D.C.; Emily Leduc Gagné is an associate in the firm’s New York office who is admitted in Ontario, Canada.