The UK’s Competition Appeal Tribunal (the CAT) has certified the first application for a collective proceedings order (CPO) on an opt-out basis in Walter Hugh Merricks CBE v Mastercard Incorporated & Ors.

In the UK, a CPO is pre-requisite for opt-out collective actions seeking damages for breaches of competition law. Opt-out means that an action can be pursued on behalf of a class of unnamed claimants who are deemed included in the action unless they have specifically opted out. Opt-out ‘US style’ class actions have the potential to be far more complex, expensive and burdensome than traditional named party litigation.

Opt-out class actions were introduced for the first time in the UK in 2015 (see our previous alert here). Almost six years on, last week’s judgment by the CAT is therefore an important procedural step towards the first opt-out class action damages award in the UK.

As had been expected, following the Supreme Court’s judgment in December 2020 (see our previous alert here) Mastercard did not resist certification outright. As a result, the CAT’s most recent judgment provides little further clarity on how the test set out in the Supreme Court’s judgment will be applied to future applications for a CPO. However, the CAT’s recent judgment did address certain interesting questions concerning suitability to act as a class representative, whether deceased persons could be included in the proposed class and the suitability of claims for compound interest. These are discussed in more detail below.

Background

In 2017, the CAT had originally refused to grant Mr. Merricks a CPO. However, in December 2020, in Merricks v Mastercard, the UK’s Supreme Court dismissed Mastercard’s appeal against the Court of Appeal’s judgment regarding the correct certification test and remitted the case back to the CAT for reconsideration. The judgment of the Supreme Court was of seminal importance because it provided much needed clarification as to the correct approach for the CAT to take when considering whether claims are suitable for collective proceedings (see our previous alert here).

Following the Supreme Court’s clarification, Mastercard no longer challenged eligibility for collective proceedings in the remitted proceedings before the CAT. However, the CAT was still required to consider: (i) the authorisation of Mr. Merricks as the class representative in light of developments since the CAT’s original judgment in 2017; (ii) whether Mr. Merricks was entitled to include deceased persons in the proposed class; and (iii) whether Mr. Merricks’ claim for compound interest was suitable to be brought in collective proceedings.

Although the CAT reaffirmed that Mr. Merricks was suitable to act as a class representative, it held that deceased persons could not be included in the proposed class and that the claim for compound interest was not suitable to brought in collective proceedings. Whilst this will significantly reduce the damages Mastercard will be required to pay should Mr. Merricks ultimately succeed at the substantive trial, the CAT’s judgment has still paved the way for what could be the largest award of damages in English legal history.

CAT Judgment (Walter Hugh Merricks CBE v MasterCard Incorporated & Ors [2021] CAT 28)

(i)        Authorisation of the Class Representative

In relation to the suitability of Mr. Merricks to act as the class representative, two issues arose. The first related to written submissions filed by a proposed class member contending that it was not just and reasonable for Mr. Merricks to act as class representative as a result of Mr. Merricks’ handling of a historic complaint related to a property transaction involving the proposed class member. However, the CAT did not consider that this gave rise to any issue in terms of Mr. Merricks’ suitability to act as class representative.

The second related to the terms of a new litigation funding agreement (LFA) put in place by Mr. Merricks in order to document the replacement of the original funder following the CAT’s 2017 judgment. Here, the CAT made it clear that, even if no objections were raised about the terms of a LFA by a proposed defendant (i.e., Mastercard) “the Tribunal has responsibility to protect the interests of the members of the proposed class, and their interests are of course not necessarily aligned with the interests of Mastercard”.

The CAT therefore independently scrutinised the new LFA with particular focus on the provisions permitting the funder to terminate the new LFA where it ceases to be satisfied about the merits of the claims or believes that the proceedings are no longer commercially viable. The CAT was concerned that this gave the funder too broad a discretion to terminate and, during the course of the remitted hearing, it was agreed that the termination provisions would be amended to include a requirement that the funder’s views had to be based on independent legal and expert advice.

Mastercard’s only objection to the terms of the new LFA was that it had no rights to enforce the new LFA and, as such, Mastercard sought an undertaking from the funder to the CAT that it would discharge any adverse costs award that might be made against Mr. Merricks. The CAT agreed that such an undertaking should be given and directed the parties to agree the wording.

(ii)       The Deceased Persons Issue

On remittal, Mr. Merricks wanted to include deceased persons within the proposed class definition and sought to amend the definition to include “persons who have since died”.

Whilst the CAT accepted that a class definition could include the representatives of the estates of deceased persons, section 47B of the Competition Act 1998 did not permit claims to be brought by deceased persons in their own right (as Mr. Merricks’ proposed amendment was seeking to do). In any event, the Tribunal held that Mr. Merricks’ application to amend the proposed class definition was not permissible as the limitation period had already expired.

(iii)      The Compound Interest Issue

A claim for compound interest had been included in the Claim Form from the outset. It was alleged by Mr. Merricks that all class members will either have incurred borrowings or financing costs to fund the overcharge they suffered or have lost interest that they would otherwise have earned through deposit or investment of the overcharge, or some combination of the two.

The CAT held that the Canadian jurisprudence in relation to certification had been explicitly recognised by the Supreme Court in the context of the UK regime. As such, a “plausible or credible” methodology for calculating loss had to be put forward at the certification stage in order for a claim to be suitable for collective proceedings. In the case of Mr. Merricks’ claim for compound interest, the CAT held that no credible or plausible methodology had been put forward by Mr. Merricks to arrive at any estimate of the extent of the overcharge that would have been saved or used to reduce borrowings rather than spent, which is the essential basis for a claim to compound interest.

Comment

The CAT’s judgment in Merricks is significant because it is the first class action to be certified on an opt-out basis since the current regime was introduced in 2015.

The CAT’s approach to Mr. Merricks’ claim for compound interest and the requirement for a “plausible or credible” methodology is of particular interest in circumstances where the Supreme Court made it clear that there is only a very limited role for the application of a merits test at the certification stage.

The UK was comparatively slow to introduce a regime for opt-out proceedings in relation to competition law infringements and, since its introduction in 2015, the regime itself has taken some time to find its feet. But momentum has been building and there are now a large number of high value opt-out CPO applications awaiting determination by the CAT covering both follow-on claims and standalone claims. In the next few months, a number of judgments are expected in relation to applications that had been stayed pending the Supreme Court’s judgment in Merricks. These will not only provide greater clarity on the application of the Supreme Court’s judgment but also answer questions that, to date, have not been considered by the CAT. These include, for example, how a carriage dispute between two competing proposed class representatives should be resolved. There will also be significant attention paid to the procedures adopted by the CAT as Mr. Merricks’ claim progresses now that it moves beyond the certification stage.

It is increasingly clear that companies operating in the UK are now at greater risk of facing ‘US style’ class actions for breaches of competition law. In addition, for non-competition claims that fall outside the regime introduced in 2015, parallel developments in the courts raise the possibility of complex group actions. For example, in relation to alleged breaches of data protection laws, the highly anticipated Supreme Court judgment in Lloyd v Google LLC (expected in Autumn) will provide guidance on the potential for representative actions to proceed in England and Wales.

Gibson Dunn is currently instructed on a number of the largest CPO applications currently being heard by the CAT and is deeply familiar with navigating this developing regime.

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

Ali Nikpay (+44 (0) 20 7071 4273, [email protected])
Doug Watson (+44 (0) 20 7071 4217, [email protected])
Mairi McMartin (+32 2 554 72 29, [email protected])
Dan Warner (+44 (0) 20 7071 4213, [email protected])

UK Competition Litigation Group:
Philip Rocher (+44 (0) 20 7071 4202, [email protected])
Allan Neil (+44 (0) 20 7071 4296, [email protected])
Patrick Doris (+44 (0) 20 7071 4276, [email protected])
Susy Bullock (+44 (0) 20 7071 4283, [email protected])
Deirdre Taylor (+44 (0) 20 7071 4274, [email protected])
Gail Elman (+44 (0) 20 7071 4293, [email protected])
Camilla Hopkins (+44 (0) 20 7071 4076, [email protected])
Kirsty Everley (+44 (0) 20 7071 4043, [email protected])

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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On August 16, 2021, the U.S. Securities and Exchange Commission announced a settled enforcement action against Pearson plc, a U.K. educational publisher, for inadequate disclosure of a cyber intrusion. According to the settlement, following a cyberattack, which the SEC deemed to be material, Pearson failed to revise its periodic cybersecurity risk disclosure to reflect that it had experienced a material data breach. In addition, in a subsequent media statement, Pearson misstated the significance of the breach by minimizing its scope and overstating the strength of the company’s security measures. The settlement, in which Pearson agreed to pay a $1 million penalty, is the latest indication of the SEC’s continuing focus on cyber disclosures as an enforcement priority and an important signal to public companies that, particularly in the face of an environment of increasing cyberattacks, accurate public disclosure about cyber events and data privacy is critical. The SEC action also underscores the importance, as part of an overall cyber-incident response, of carefully making materiality judgments.

According to the SEC Order,[1] Pearson learned in March 2019 that a sophisticated attacker took advantage of a vulnerability in software that Pearson provided to 13,000 school, district, and university accounts to access and download user names and passwords that were protected with an outdated algorithm as well as more than 11 million rows of student data that included names, dates of birth, and email addresses. The software manufacturer had publicized the existence of the vulnerability in September 2018 and made a patch available at that time; however, Pearson did not install the patch until after learning about the breach in March 2019. Also, at that time, Pearson conducted an internal investigation and began notifying impacted customers in July 2019.

According to the SEC Order, Pearson determined that it was not necessary to issue a public disclosure of the incident. The company’s next report on Form 6-K contained the same data security risk disclosure that it had used in previous reports, stating that there was a “[r]isk” that “a data privacy incident or other failure to comply with data privacy regulations and standards and/or a weakness in information security, including a failure to prevent or detect a malicious attack on our systems, could result in a major data privacy or confidentiality breach causing damage to the customer experience and our reputational damage, a breach of regulations and financial loss” (emphasis added). Consistent with its past position that companies should not discuss risks as hypothetical if they have already materialized or are materializing,[2] the SEC viewed this statement as implying that no “major data privacy or confidentiality breach” had occurred, and determined it was therefore misleading.

A few days after it filed this Form 6-K, a journalist asked Pearson about the data breach. In response, Pearson provided a statement, which it later posted on its website, that the SEC also described as misleading. According to the SEC Order, the statement had been prepared months earlier and failed to disclose that the attacker had extracted data, not just accessed it; understated what types of data were taken; suggested that it was uncertain whether data had been taken, whereas Pearson by that time allegedly knew exactly what data had been extracted; did not state how many rows of data were involved; and stated that Pearson had “strict data protections” and had patched the vulnerability, even though Pearson had waited months to install the patch and had relied upon outdated software to encrypt passwords.

As a result of the foregoing statements, the SEC Order states that Pearson violated Sections 17(a)(2) and (a)(3) of the Securities Act, provisions which prohibit misleading statements or omissions in the context of a securities offering,[3] as well Section 13(a) of the Exchange Act. The SEC Order also finds that the conduct demonstrated that Pearson failed to maintain adequate disclosure controls and procedures in violation of Exchange Act Rule 13a-15(a).

The Pearson settlement reflects a number of instructive points. First, this settlement demonstrates the importance of carefully assessing the materiality of a cyberattack. Here, the SEC determined that the data breach was material based on, among other things, the company’s business and its user base, the nature and volume of the data exfiltrated, and the importance of data security to the company’s reputation, as reflected in the company’s existing risk disclosures. However, the order does not assert that there was any adverse impact on Pearson’s business as a result of the incident. In fact, Pearson’s subsequent filings on Form 20-F expressly stated that prior attacks “have not resulted in any material damage” to the business. Consulting with counsel in making materiality assessments can help mitigate the risk of the government second-guessing materiality judgments in hindsight. Second, this is the third recent enforcement case that the SEC has brought based on disclosures contained in reports that are “furnished,” not “filed” with the SEC and in media statements.[4] Third, this is the second enforcement case in which the SEC has found that a company’s disclosures regarding a cybersecurity incident reflected inadequate disclosure controls and procedures.[5] Collectively, these cases reiterate that the SEC is intensely focused on cybersecurity disclosure issues, that public companies should be mindful of SEC disclosure considerations when responding to or publicly commenting on a cybersecurity issue, and that companies should ensure that their disclosure controls and procedures appropriately support their cybersecurity response plans.

The Pearson settlement is the latest — and likely not the last — SEC cyber disclosure enforcement action. The SEC Enforcement Division has also taken an expansive look into cyber disclosures with a sweep related to how companies responded to the widely reported SolarWinds breach, where foreign hackers believed to be tied to Russia used SolarWinds’ software to breach numerous companies and government agencies.[6] The agency asked companies it believed were impacted to voluntarily furnish information about the attack, and offered immunity, under certain conditions, for potential disclosure failings.[7]

In addition, although SEC interpretive guidance on cybersecurity disclosures was issued in 2018,[8] additional disclosure rulemaking appears likely. According to the Unified Agenda of Regulatory and Deregulatory Actions (“Reg Flex Agenda”) made available in June 2021, the first reflecting Chair Gary Gensler’s agenda,[9] the SEC is considering whether to propose new rules to enhance issuer disclosure on “cybersecurity risk governance.”[10]

The possible new proposed rulemaking project and the increasing enforcement efforts are a clear signal of the SEC’s continuing focus on accurate cybersecurity disclosures and robust disclosure controls and procedures around cybersecurity. The recent increase in cyberattacks contributes to the focus, as does the apparent perception of a risk that companies may under-report data security incidents. The Pearson enforcement action makes plain that a company’s disclosure about the possible risk of a data breach will likely be insufficient — and even be viewed as misleading — if the company has in fact suffered a cyber breach that the SEC deems to be material. Moreover, the SEC’s actions reinforce the importance of having strong disclosure controls and procedures so that full information about data breaches and vulnerabilities are communicated to those making decisions about disclosures.

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   [1]   In re Pearson plc, Release No. 33-10963 (Aug. 16, 2021), https://www.sec.gov/litigation/admin/2021/33-10963.pdf.

   [2]   See Gibson, Dunn & Crutcher, “Considerations For Preparing Your 2019 Form 10-K” (Jan. 13, 2020), https://www.gibsondunn.com/considerations-for-preparing-your-2019-form-10-k; Gibson, Dunn & Crutcher, “Considerations For Preparing Your 2020 Form 10-K” (Feb. 3, 2021), https://www.gibsondunn.com/considerations-for-preparing-your-2020-form-10-k.

   [3]   These violations, which the SEC Order notes do not require a showing of intent, appear to be premised on the fact that Pearson had employee benefit plan equity offerings on-going that were registered on a Form S-8.

   [4]   See also In re First American Financial Corp., Release No. 34-92176 (June 14, 2021), https://www.sec.gov/litigation/admin/2021/34-92176.pdf; The Cheesecake Factory Incorporated, Release No. 34-90565 (Dec. 4, 2020), https://www.sec.gov/litigation/admin/2020/34-90565.pdf (disclosure involved two “furnished” Form 8-Ks).

   [5]   In re First American Financial Corp., Release No. 34-92176 (June 14, 2021), https://www.sec.gov/litigation/admin/2021/34-92176.pdf.  In the First American Financial Corp. case, the SEC Order alleged that company executives did not have full information about a cybersecurity vulnerability when the company issued a statement to a reporter and furnished a voluntary Form 8-K addressing the situation.  Id.

   [6]   Katanga Johnson, “U.S. SEC probing SolarWinds clients over cyber breach disclosures -sources,” Reuters (June 22, 2021), https://www.reuters.com/technology/us-sec-official-says-agency-has-begun-probe-cyber-breach-by-solarwinds-2021-06-21.

   [7]   In the Matter of Certain Cybersecurity-Related Events (HO-14225) FAQs, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/enforce/certain-cybersecurity-related-events-faqs (last modified June 25, 2021).

   [8]   Commission Statement and Guidance on Public Company Cybersecurity Disclosures, 83 Fed. Reg. 8166 (Feb. 26, 2018), https://www.govinfo.gov/content/pkg/FR-2018-02-26/pdf/2018-03858.pdf.

   [9]   Press Release, U.S. Sec. & Exch. Comm’n, SEC Announces Annual Regulatory Agenda (June 11, 2021), https://www.sec.gov/news/press-release/2021-99.

  [10]   See Gibson, Dunn & Crutcher, “Back to the Future: SEC Chair Announces Spring 2021 Reg Flex Agenda” (June 21, 2021), https://www.gibsondunn.com/back-to-the-future-sec-chair-announces-spring-2021-reg-flex-agenda.

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This alert was prepared by Alexander H. Southwell, Mark K. Schonfeld, Lori Zyskowski, Thomas J. Kim, Ron Mueller, Eric M. Hornbeck, and Terry Wong.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Privacy, Cybersecurity and Data Innovation, Securities Regulation and Corporate Governance, and Securities Enforcement practice groups, or the following authors:

Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])
Lori Zyskowski – New York (+1 212-351-2309, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Eric M. Hornbeck – New York (+1 212-351-5279, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On August 18, 2021, EPA released a final rule revoking tolerances for chlorpyrifos residues on food.[1] EPA took this action to “stop the use of the pesticide chlorpyrifos on all food to better protect human health, particularly that of children and farmworkers.”[2] The agency will also issue a Notice of Intent to Cancel under the Federal Insecticide, Fungicide, and Rodenticide Act to cancel registered food uses of the chemical associated with the revoked tolerances.

Chlorpyrifos is an “insecticide, acaricide and miticide used primarily to control foliage and soil-borne pests,” in a large variety of agricultural crops, including soybeans, fruit and nut trees, and other row crops.[3]  EPA sets “tolerances,” which represent “the maximum amount of a pesticide allowed to remain in or on a food.”[4]  Under the Federal Food, Drug, and Cosmetic Act (FFDCA), EPA “shall modify or revoke a tolerance if the Administrator determines it is not safe.”[5]

Yesterday’s revocation follows a recent order from the U.S. Court of Appeals for the Ninth Circuit instructing EPA to issue a final rule in response to a 2007 petition filed by the Pesticide Action Network North America and Natural Resources Defense Council requesting that EPA revoke all chlorpyrifos tolerances on the grounds that they were unsafe.[6] EPA previously responded to and denied the original petition and subsequent objections to its denial. A coalition of farmworker, environmental, health, and other interest groups then challenged the denials in court.[7] In April 2021, a split panel of the Ninth Circuit ruled that EPA’s failure either to make the requisite safety findings under the FFDCA or issue a final rule revoking chlorpyrifos tolerances was “in derogation of the statutory mandate to ban pesticides that have not been proven safe,” and ordered the agency to grant the 2007 petition, issue a final rule either revoking the tolerances or modifying them with a supporting safety determination, and cancel or modify the associated food-use registrations of chlorpyrifos.[8]

In response, EPA has granted the 2007 petition and issued a final rule that revokes all chlorpyrifos tolerances listed in 40 CFR 180.342.[9]  In issuing this rule, EPA noted that, based on currently available information, it “cannot make a safety finding to support leaving the current tolerances” in place.[10] The final rule becomes effective 60 days after publication in the Federal Register, and the revocation of tolerances becomes effective six months thereafter.

EPA indicated it followed the Ninth Circuit’s instruction by issuing the rule under section 408(d)(4)(A)(i) of the FFDCA, which allows issuance of a final rule “without further notice and without further period for public comment.”[11] EPA indicated its intent to review comments on the previously issued proposed interim decision, draft revised human health risk assessment, and draft ecological risk assessment for chlorpyrifos.[12] The Agency also intends to review registrations for the remaining non-food uses of the chemical.[13]

Prior to EPA’s action, certain states including Hawaii, New York, and Oregon had restricted the sale or use of the pesticide.[14] California prohibited the sale, possession, and use of chlorpyrifos for nearly all uses by the end of 2020.[15]

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[1]   U.S. EPA, Pre-Publication Notice of Final Rule re Chlorpyrifos (Aug. 18, 2021), https://www.epa.gov/system/files/documents/2021-08/pre-pub-5993-04-ocspp-fr_2021-08-18.pdf.

[2]   U.S. EPA, News Releases from Headquarters,  EPA Takes Action to Address Risk from Chlorpyrifos and Protect Children’s Health (Aug. 18, 2021), https://www.epa.gov/newsreleases/epa-takes-action-address-risk-chlorpyrifos-and-protect-childrens-health.

[3]  https://www.epa.gov/ingredients-used-pesticide-products/chlorpyrifos.

[4]  U.S. EPA, Regulation of Pesticide Residues on Food, https://www.epa.gov/pesticide-tolerances.

[5]  See 21 U.S.C. § 346a(b)(2)(a)(i) (EPA “may establish or leave in effect a tolerance for a pesticide chemical residue in or on a food only if the Administrator determines that the tolerances is safe.”).

[6]  Pre-Publication Notice of Final Rule re Chlorpyrifos at 6–7; League of United Latin Am. Citizens v. Regan, 996 F.3d 673 (9th Cir. 2021).

[7]  Pre-Publication Notice of Final Rule re Chlorpyrifos at 7.

[8]  League of United Latin Am. Citizens, 996 F.3d at 667, 703–04.

[9]  Pre-Publication Notice of Final Rule re Chlorpyrifos at 8.

[10]  Id.

[11]  League of United Latin Am. Citizens, 996 F.3d at 702; 21 U.S.C. § 346a(d)(4)(A)(1).

[12]  U.S. EPA, EPA Takes Action to Address Risk from Chlorpyrifos and Protect Children’s Health.

[13]  Id.

[14]  See Haw. S.B.3095 (Relating to Environmental Protection) (2018); N.Y. Dep’t of Environ. Conservation, Chlorpyrifos Pesticide Registration Cancellations and Adopted Regulation, https://www.dec.ny.gov/chemical/122311.html; O.A.R. 603-057-0545 (Permanent Chlorpyrifos Rule) (Dec. 15, 2020), available here.

[15]   Cal. Dep’t of Pesticide Regulation, Chlorpyrifos Cancelation https://www.cdpr.ca.gov/docs/chlorpyrifos/index.htm.

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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 Environmental Litigation and Mass Tort practice group, or the following authors:

Abbey Hudson – Los Angeles (+1 213-229-7954, [email protected])
David Fotouhi – Washington, D.C. (+1 202-955-8502, [email protected])
Joseph D. Edmonds – Orange County (+1 949-451-4053, [email protected])
Jessica M. Pearigen – Orange County (+1 949-451-3819, [email protected])

Please also feel free to contact the following practice group leaders:

Environmental Litigation and Mass Tort Group:
Stacie B. Fletcher – Washington, D.C. (+1 202-887-3627, [email protected])
Daniel W. Nelson – Washington, D.C. (+1 202-887-3687, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

This client alert provides an overview of shareholder proposals submitted to public companies during the 2021 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.

I. Top Shareholder Proposal Takeaways from the 2021 Proxy Season

As discussed in further detail below, based on the results of the 2021 proxy season, there are several key takeaways to consider for the coming year:

• Shareholder proposal submissions rose significantly. After trending downwards since 2016, the number of proposals submitted increased significantly by 11% from 2020 to 802.
• The number of social and environmental proposals also significantly increased, collectively overtaking governance proposals as the most common. Social and environmental proposals increased notably, up 37% and 13%, respectively, from 2020. In contrast, governance proposals remained steady in 2021 compared to 2020 and represented 36% of proposals submitted in 2021. Executive compensation proposal submissions also declined in 2021, down 13% from the number of such proposals submitted in 2020. The five most popular proposal topics in 2021, representing 46% of all shareholder proposal submissions, were (i) anti-discrimination and diversity, (ii) climate change, (iii) written consent, (iv) independent chair, and (v) special meetings.
• Overall no-action request success rates held steady, but the number of Staff response letters declined significantly. The number of no-action requests submitted to the Staff during the 2021 proxy season increased significantly, up 18% from 2020 and 19% from 2019. The overall success rate for no-action requests held steady at 71%, driven primarily by procedural, ordinary business, and substantial implementation arguments. However, the ongoing shift in the Staff’s practice away from providing written response letters to companies, preferring instead to note the Staff’s response to no-action requests in a brief chart format, resulted in significantly fewer written explanations, with the Staff providing response letters only 5% of the time, compared to 18% in 2020.
• Company success rates using a board analysis during this proxy season rose modestly, while inclusion of a board analysis generally remained infrequent. Fewer companies included a board analysis during this proxy season (down from 19 and 25 in 2020 and 2019, respectively, to 16 in 2021), representing only 18% of all ordinary business and economic relevance arguments in 2021. However, those that included a board analysis had greater success in 2021 compared to 2020, with the Staff concurring with the exclusion of five proposals this year where the company provided a board analysis, compared to four proposals in 2020 and just one proposal in 2019.
• Withdrawals increased significantly. The overall percentage of proposals withdrawn increased significantly to the highest level in recent years. Over 29% of shareholder proposals were withdrawn this season, compared to less than 15% in 2020. This increase is largely attributable to the withdrawal rates of both social and environmental proposals, which rose markedly in 2021 compared to 2020 (increasing to 46% and 62%, respectively).
• Overall voting support increased, including average support for social and environmental proposals. Average support for all shareholder proposals voted on was 36.2% in 2021, up from the 31.3% average in 2020 and 32.8% average in 2019. In 2021, environmental proposals overtook governance proposals to receive the highest average support at 42.3%, up from 29.2% in 2020. Support for social (non-environmental) proposals also increased significantly to 30.6%, up from 21.5% in 2020—driven primarily by a greater number of diversity-related proposals voted on with increased average levels of support. Governance proposals received 40.2% support in 2021, up from 35.3% in 2020. This year also saw a double-digit increase in the number of shareholder proposals that received majority support (74 in total, up from 50 in 2020), with an increasing number of such proposals focused on issues other than traditional governance topics.
• Fewer proponents submitted proposals despite the increase in the number of proposals. The number of shareholders submitting proposals declined this year, with approximately 276 proponents submitting proposals (compared to more than 300 in both 2020 and 2019).  Approximately 41% of proposals were submitted by individuals and 21% were submitted by the most active socially responsible investor proponents. As in prior years, John Chevedden and his associates were the most frequent proponents (filing 31% of all proposals in 2021 and accounting for 75% of proposals submitted by individuals). This year also saw the continued downward trend in five or more co-filers submitting proposals—down to 35 in 2021, from 54 in 2020 and 58 in 2019.
• Proponents continued to use exempt solicitations. Exempt solicitation filings continued to proliferate, with the number of filings reaching a record high again this year and increasing 30% over the last three years.
• Amended Rule 14a-8 in Effect. With the amendments to Rule 14a-8 now in effect for meetings held after January 1, 2022, companies should revise their procedural reviews and update their deficiency notices accordingly. However, it remains to be seen whether the new rules will lead to a decrease in proponent eligibility or result in an increase in proposals eligible for procedural or substantive exclusion, based on the new ownership and resubmission thresholds. The SEC’s recently announced Reg Flex Agenda indicates that the SEC intends to revisit Rule 14a-8 as a new rulemaking item in the near term, putting into question the future of the September 2020 amendments.

Read More

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Gibson Dunn’s lawyers are available to assist with 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, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group:

Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael Titera – Orange County, CA (+1 949-451-4365, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])
Aaron Briggs – San Francisco, CA (+1 415-393-8297, [email protected])
Courtney Haseley – Washington, D.C. (+1 202-955-8213, [email protected])
Julia Lapitskaya – New York, NY (+1 212-351-2354, [email protected])
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, [email protected])
Geoffrey E. Walter – Washington, D.C. (+1 202-887-3749, [email protected])
David Korvin – Washington, D.C. (+1 202-887-3679, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On August 5, 2021, U.S. Senate Finance Committee Chairman Ron Wyden (D-Oregon) and U.S. Senate Finance Committee member Sheldon Whitehouse (D-Rhode Island) introduced legislation entitled the “Ending the Carried Interest Loophole Act.”[1] According to a summary released by the Finance Committee, the legislation is intended to close “the entire carried interest loophole.” While this legislation is very similar to a previous proposal introduced by Chairman Wyden[2], this legislation appears to have a greater likelihood of passage given the Democratic party’s control of both chambers of Congress and the election of President Biden. The legislation may have an even greater chance of passage if it secures the support of moderate Democratic Senators who will be key to its passage through reconciliation, which is a technical procedure that would permit Democrats to pass the bill through a majority vote in the Senate.

The “Ending the Carried Interest Loophole Act” would require partners who hold carried interests in exchange for providing services to investment partnerships to recognize a specified amount of deemed compensation income each year regardless of whether the investment partnership recognizes income or gain and regardless of whether and when the service providers receive distributions in respect of their carried interests. This deemed compensation income would be subject to income tax at ordinary income rates and self-employment taxes.

This legislation goes well beyond many previously proposed bills that attempted to recharacterize certain future income from investment partnerships as ordinary income instead of capital gain. In addition, it would replace section 1061 of the Internal Revenue Code of 1986, as amended (the “Code”), which was enacted as part of the 2017 tax act,[3] and lengthened the required holding period from one year to three years for service providers to recognize long-term capital gain in respect of carried interests.

Current Treatment of “Carried Interest” Allocations

Under current law, a partnership generally can issue a partnership “profits interest” to a service provider without current tax. The service provider holds the interest as a capital asset, with both the timing of recognition and character of the partner’s share of profits from the partnership determined by reference to the timing of recognition and character of profits made by the partnership. Thus, if the partnership recognizes capital gain, the service provider’s allocable share of the gain generally would be capital gain and recognized in the same year as the partnership’s recognition of the capital gain. These partnership “profits interests” are referred to as “carried interests” in the private equity context, “incentive allocations” in the hedge fund context, or “promotes” in the real estate context. As noted above, Code section 1061 generally treats gain recognized with respect to certain partnership interests held for less than three years as short-term capital gain.

“Ending the Carried Interest Loophole Act”

The legislation introduced by Chairman Wyden and Senator Whitehouse generally would require a taxpayer who receives or acquires a partnership interest in connection with the performance of services in a trade or business that involves raising or returning capital and investing in or developing securities, commodities, real estate and certain other assets to recognize annually, on a current basis – (1) a “deemed compensation amount” as ordinary income and (2) an equivalent amount as a long-term capital loss.

The “deemed compensation amount” generally would equal the product of (a) an interest charge, referred to as the “specified rate,”[4] (b) the service provider’s maximum share of partnership profits, and (c) the partnership’s invested capital as of certain measurement dates.[5]  Conceptually, the partnership is viewed as investing a portion of its capital on behalf of the service provider via an interest free loan to the service provider. The service provider is deemed to recognize ordinary self-employment income in an amount equal to the foregone interest, calculated at the “specified rate.” Although not clear, the “specified rate” appears designed to approximate the economics of the typical preferred return rate often paid to limited partners on their contributed capital before the service provider receives any distributions from the partnership.

The offsetting long-term capital loss appears to be a proxy for tax basis that is designed to avoid a “double-counting” of income when the service provider ultimately receives allocations of income from the partnership attributable to the sale or disposition of partnership assets (or income or gain attributable to the sale or disposition of the partnership interest itself).[6] The long-term capital loss generally would only be usable in the tax year of deemed recognition if the individual taxpayer recognizes other capital gain that is available to be offset (otherwise, the long-term capital loss would be available to be carried forward to subsequent tax years).

For example, if a service provider is entitled to receive up to 20 percent of an investment fund’s profits, the investment fund receives $1 billion in capital contributions, and the “specified return” for the tax year is 12 percent, the service provider’s “deemed compensation amount” for that tax year would be $24,000,000, and the service provider would recognize an offsetting long-term capital loss of $24,000,000. Assuming relevant income thresholds are already met and that the service provider has sufficient long-term capital gain in the year of inclusion against which the long-term capital loss may be offset, based on maximum individual rates under current law, the service provider would expect to incur an incremental U.S. federal income tax rate of 17% on the “deemed compensation amount” (that is, 37 percent ordinary income tax rate less the 20 percent long-term capital gain tax rate).[7] Any long-term capital gain recognized by the service provider in excess of the “deemed compensation amount” that is attributable to the sale or disposition of partnership assets (or income or gain attributable to the sale or disposition of the partnership interest itself) would be taxed at 20 percent (or 23.8 percent if the net investment income tax is applicable).

To prevent a work-around, the legislation also would apply to any service provider who has received a loan from the partnership, from any other partner of the partnership, or from any person related to the partnership or another partner, unless the loan is fully recourse or fully secured and requires payments of interest at a stated rate not less than the “specified return.”

Other Proposed Changes and Contrast with Recent Biden Proposal

Besides the current inclusion of “deemed compensation amounts” at ordinary income rates, the legislation would alter existing law in several ways. As background, current Code section 1061 generally requires a partnership to hold capital assets for three years in order for the related capital gain to be taxed at preferential long-term capital gain rates. Earlier this year, the Administration released its fiscal year 2022 Budget, including a Greenbook with detailed proposals for changes to the federal tax law.[8] Among other things, the Greenbook proposal would eliminate the ability for partners whose taxable income (from all sources) exceed $400,000 to recognize long-term capital gain with respect to these partnership “profits interests,” but partners whose taxable income do not exceed $400,000 would continue to be subject to Code section 1061.

Under the bill, Code section 1061 would be repealed. In other words, ordinary income treatment would apply regardless of holding period and regardless of the service provider’s level of taxable income. Second, like the Greenbook proposal, under this legislation – (1) the recharacterized amount would be treated as ordinary income rather than short-term capital gain (there is currently no rate differential, but there could be sourcing and other differences), and (2) the “deemed compensation amount” would be subject to self-employment tax.

In addition, this bill also would provide for a deemed election under Code section 83(b) in the event of a transfer of a partnership interest in connection with the performance of services, unless the taxpayer makes a timely election to not have the deemed election apply. Unless a service provider elects out of the deemed election, the service provider would be required to recognize taxable income at the time of the transfer of a partnership interest in connection with the performance of services in an amount equal to the partnership interest’s fair market value. Importantly, fair market value for this purpose would equal the distributions that the service provider would receive in the event of a hypothetical liquidation of the partnership’s assets for cash (after satisfying applicable liabilities) at the time of transfer. This valuation methodology is broadly consistent with current law.

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   [1]   Ending the Carried Interest Loophole Act, S. 2617, 117th Cong. (2021).

   [2]   Ending the Carried Interest Loophole Act, S. 1639, 116th Cong. (2019).

   [3]   The 2017 tax act, commonly known as the Tax Cuts and Jobs Act, is formally titled “An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” Pub. L. No. 115-97, 131 Stat. 2045.

   [4]   The “specified rate” for a calendar year means the par yield for “5-year High Quality Market corporate bonds” for the first month of the calendar year (currently 1.21%), plus 9 percentage points.

   [5]   According to a summary prepared by the Senate Finance Committee, the legislation is not intended to treat an applicable percentage as higher in a given taxable year due to the application of a “catch-up” provision in the partnership agreement. In addition, a partner’s “invested capital” is intended to equal the partner’s book capital account maintained under the regulations under Code section 704(b) with certain modifications, including that invested capital is to be calculated without regard to untaxed gain and loss resulting from the revaluation of partnership property.

   [6]   Even though the long-term capital loss may be used to offset other capital gain income of the service provider, the legislation would still fulfill its intended purpose of ensuring that the “deemed compensation amount” is subject to tax at ordinary income rates.

   [7]   For simplicity, we have omitted self-employment tax from the computation of the “deemed compensation amount” and omitted net investment income tax from the offsetting capital loss benefit on the assumption that these will generally offset.

   [8]   The proposed changes are described here: https://www.gibsondunn.com/biden-administration-releases-fiscal-year-2022-budget-with-greenbook-and-descriptions-of-proposed-changes-to-federal-tax-law/.

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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, any member of the firm’s Tax practice group, or the following authors:

Evan M. Gusler – New York (+1 212-351-2445, [email protected])
Jennifer L. Sabin – New York (+1 212-351-5208, [email protected])
Michael J. Desmond – Los Angeles/Washington, D.C. (+1 213-229-7531, [email protected])
Pamela Lawrence Endreny – New York (+1 212-351-2474, [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])
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On July 28, 2021, the proxy advisory firm Institutional Shareholder Services (“ISS”) opened its Annual Benchmark Policy Survey (available here), covering a broad range of topics relating to non-financial environmental, social and governance (“ESG”) performance metrics, racial equity, special purpose acquisition corporations (“SPACs”) and more. In addition, noting that climate change “has emerged as one of the highest priority ESG issues” and that “many investors now identify it as a top area of focus for their stewardship activities,” this year ISS also launched a separate Climate Policy Survey (available here) focused exclusively on climate-related governance issues.

The Annual Benchmark Policy Survey includes questions regarding the following topics for companies in the U.S. and will inform changes to ISS’s benchmark policy for 2022:

• Non-financial ESG performance metrics. Citing an “upward trend” of inclusion of non-financial ESG-related metrics in executive compensation programs, a practice ISS notes “appears to have been fortified by the recent pandemic and social unrest,” the survey asks whether incorporating such metrics into executive compensation programs is an appropriate way to incentivize executives. The survey then asks which compensation components (long-term incentives, short-term incentives, both, or other) are most appropriate for inclusion of non-financial ESG-related performance metrics.
• Racial equity audits. Noting increased shareholder engagement on diversity and racial equity issues in the wake of social unrest following the death of George Floyd and others, the survey asks whether and when companies would benefit from independent racial equity audits (under any set of circumstances, only depending on certain company-specific factors, or not at all). The survey then asks respondents who indicated that a company would benefit depending on company-specific factors which factors would be relevant, including, for example, whether the company has been involved in significant racial and/or ethnic diversity–related controversies or does not provide detailed workforce diversity statistics, such as EEO-1 type data.
• Virtual-only shareholder meetings. This year’s survey seeks information on the types of practices that should be considered problematic in a virtual-only meeting setting. This question follows a “vast majority” of investor respondents indicating last year that they prefer a hybrid meeting approach absent COVID-19-related health and social restrictions. Among the potentially problematic practices ISS identifies in the survey are: the inability to ask live questions at the meeting; muting of participants during the meeting; the inability of shareholders to change votes at the meeting; advance registration requirements or other unreasonable barriers to registration; preventing shareholder proponents from presenting and explaining a shareholder proposal considered at the meeting; and management unreasonably “curating” questions to avoid addressing difficult topics. The survey also asks what would be an appropriate way for shareholders to voice concerns regarding any such problematic practices, including casting votes “against” the chair of the board or all directors or engaging with the company and/or communicating concerns.
• CEO pay quantum and mid-cycle changes to long-term incentive programs. For companies in the U.S. and Canada, ISS’s quantitative pay-for-performance screen currently includes a measure that evaluates one-year CEO pay quantum as a multiple of the median of CEO peers. The survey asks whether this screen should include a longer-term perspective (e.g., three years). The survey also seeks respondents’ views on mid-cycle changes to long-term incentive programs for companies incurring long-term negative impacts from the pandemic. ISS noted that such changes were generally viewed by ISS and investors as problematic given the view that long-term incentives should not be adjusted based on short-term market disruptions (i.e., less than one year), but it acknowledged that some industries continue to experience significant negative impacts from the pandemic.
• Companies with pre-2015 poor governance provisions – multi-class stock, classified board, supermajority vote requirements. ISS’s policy since 2015 has been to recommend votes “against” directors of newly public companies with certain poor governance provisions, including multiple classes of stock with unequal voting rights and without a reasonable sunset, classified board structure, and supermajority vote requirements for amendments to governing documents. Companies that were publicly traded before the 2015 policy change, however, were grandfathered and so are not subject to this policy. The survey asks whether ISS should consider issuing negative voting recommendations on directors at companies maintaining these provisions regardless of when the company went public, and if so, which provisions ISS should revisit and no longer grandfather.
• Recurring adverse director vote recommendations – supermajority vote requirements. For newly public companies, ISS currently recommends votes on a case-by-case basis on director nominees where certain adverse governance provisions – including supermajority voting requirements to amend governing documents – are maintained in the years subsequent to the first shareholder meeting. The survey asks whether, if a company has sought shareholder approval to eliminate supermajority vote requirements, but the company’s proposal does not receive the requisite level of shareholder support, ISS should continue making recurring adverse director vote recommendations for maintaining the supermajority vote requirements, or whether a single or multiple attempts by the company to remove the supermajority requirement would be sufficient (and if multiple attempts are sufficient, how many).
• SPAC deal votes. ISS currently evaluates SPAC transactions on a case-by-case basis, with a main driver being the market price relative to redemption value. ISS notes that the redemption feature of SPACs may be used so long as the SPAC transaction is approved; however, if the transaction is not approved, the public warrants issued in connection with the SPAC will not be exercisable and will be worthless unless sold prior to the termination date. Acknowledging that investors may redeem shares (or sell them on the open market) if they do not like the transaction prospects, and noting that these mechanics may result in little reason for an investor not to support a SPAC transaction, the survey asks whether it makes sense for investors to generally vote in favor of SPAC transactions, irrespective of the merits of the target company combination or any governance concerns. The survey also asks what issues, “dealbreakers,” or areas of concern might be reasons for an investor to vote against a SPAC transaction.
• Proposals with conditional poor governance provisions. ISS notes that one way companies impose poor governance or structural features on shareholders is by bundling or conditioning the closing of a transaction on the passing of other voting items. This practice is particularly common in the SPAC setting where shareholders are asked to approve a new governing charter (which may include features such as classified board, unequal voting structures, etc.) as a condition to consummation of the transaction. In light of these practices, the survey asks about the best course of action for a shareholder who supports an underlying transaction where closing the transaction is conditioned on approval of other ballot items containing poor governance.

The Climate Policy Survey includes questions regarding the following topics and will inform changes to both ISS’s benchmark policy as well as its specialty climate policy for 2022:

• Defining climate-related “material governance failures.” The survey seeks input on what climate-related actions (or lack thereof) demonstrate such poor climate change risk management as to constitute a “material governance failure.” Specifically, the survey asks what actions at a minimum should be expected of a company whose operations, products or services strongly contribute to climate change. Among the “minimum actions” identified by ISS are: providing clear and appropriately detailed disclosure of climate change emissions governance, strategy, risk mitigation efforts, and metrics and targets, such as that set forth by the Task Force on Climate-Related Financial Disclosure (“TCFD”); declaring a long-term ambition to be in line with Paris Agreement goals for its operations and supply chain emissions (Scopes 1, 2 & 3 targets); setting and disclosing absolute medium-term (through 2035) greenhouse gas (“GHG”) emissions reductions targets in line with Paris Agreement goals; and reporting that demonstrates that the company’s corporate and trade association lobbying activities align with (or do not contradict) Paris Agreement goals. The survey also asks whether similar minimum expectations are reasonable for companies that are viewed as not contributing as strongly to climate change.
• Say on Climate. In 2021, some companies put forward their climate transition plans for a shareholder advisory vote (referred to as “Say on Climate”) or committed to doing so in the future. The survey asks whether any of the “minimum actions” (referred to above) could be “dealbreakers” for shareholder support for approval of a management-proposed Say on Climate vote. The survey then asks whether voting on a Say on Climate proposal is the appropriate place to express investor sentiment about the adequacy of a company’s climate risk mitigation, or whether votes cast “against” directors would be appropriate in lieu of, or in addition to, Say on Climate votes. Finally, the survey asks when a shareholder proposal requesting a regular Say on Climate vote would warrant support: never (because the company should decide); never (because shareholders should instead vote against directors); case-specific (only if there are gaps in the current climate risk mitigation plan or reporting); or always (even if the board is managing risk effectively, the vote is a way to test efficacy of the company’s approach and promote positive dialogue between the company and its shareholders).
• High-impact companies. Noting that Climate Action 100+ has identified 167 companies that it views as disproportionately responsible for GHG emissions, the survey asks whether under ISS’s specialty climate policy these companies (or a similar list of such companies) should be subject to a more stringent evaluation of indicators compared to other companies that are viewed as having less of an impact on climate change.
• Net Zero initiatives. Citing increased investor interest in companies setting a goal of net zero emissions by 2050 consistent with a 1.5°C scenario (“Net Zero”), the survey asks whether the specialty climate policy should assess a company’s alignment with Net Zero goals. The survey also asks respondents to rank the importance of a number of elements in indicating a company’s alignment with Net Zero goals, including: announcement of a long-term ambition of Net Zero GHG emissions by 2050; long-term targets for reducing its GHG emissions by 2050 on a clearly defined scope of emissions; medium-term targets for reducing its GHG emissions by between 2026 and 2035 on a clearly defined scope of emissions; short-term targets for reducing its emissions up to 2025 on a clearly defined scope of emissions; a disclosed strategy and capital expenditure program in line with GHG reduction targets in line with Paris Agreement goals; commitment and disclosure showing its corporate and trade association lobbying activities align with Paris Agreement goals; clear board oversight of climate change; disclosure showing the company considers impacts from transitioning to a lower-carbon business model on its workers and communities; and a commitment to clear and appropriately detailed disclosure of its climate change emissions governance, strategy, risk mitigation efforts, and metrics and targets, such as that set forth by the TCFD framework.

While the two surveys cover a broad range of topics, they do not necessarily address every change that ISS will make in its 2022 proxy voting policies. That said, the surveys are an indication of changes ISS is considering and provide an opportunity for interested parties to express their views. Public companies and others are urged to submit their responses, as ISS considers feedback from the surveys in developing its policies.

Both surveys will close on Friday, August 20, at 5:00 p.m. ET. ISS will also solicit more input in the fall through regionally based, topic-specific roundtable discussions. Finally, as in prior years, ISS will open a public comment period on the major final proposed policy changes before releasing its final 2022 policy updates later in the year. Additional information on ISS’s policy development process is available at the ISS policy gateway (available here).

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Elizabeth Ising, Lori Zyskowski, and Cassandra Tillinghast.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance and Executive Compensation and Employee Benefits practice groups, or any of the following practice leaders and members:

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Ron Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael Titera – Orange County, CA (+1 949-451-4365, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])
Aaron Briggs – San Francisco, CA (+1 415-393-8297, [email protected])
Courtney Haseley – Washington, D.C. (+1 202-955-8213, [email protected])
Julia Lapitskaya – New York, NY (+1 212-351-2354, [email protected])
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, [email protected])

Executive Compensation and Employee Benefits Group:
Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, [email protected])
Sean C. Feller – Los Angeles (+1 310-551-8746, [email protected])
Krista Hanvey – Dallas (+ 214-698-3425, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Colorado Department of Labor and Employment (“CDLE”) has released new guidance on the Equal Pay for Equal Work Act (“EPEW”), taking a much harder line on Colorado employers whose remote job postings exclude Colorado applicants. Previously, some employers tried to avoid the most challenging aspects of the EPEW’s compensation-and-benefits posting requirements by stating that remote positions could be performed from anywhere but Colorado.

On July 21, 2021, the CDLE issued new guidance clarifying that all Colorado employers’ postings for remote jobs must comply with the EPEW’s compensation-and-benefits posting requirements, even if the postings state that the position cannot be performed in or from Colorado. See CDLE Interpretive Notice & Formal Opinion #9 (“INFO #9”). The CDLE also announced that it was sending “Compliance Assistance Letters” to all Colorado employers with remote job postings that exclude Colorado applicants and that do not include the compensation-and-benefits information required by the EPEW. See CDLE Compliance Assistance Letter (the “Letter”). The Letter gives such employers until August 10, 2021, to advise the CDLE by what date their covered job postings will include the compensation-and-benefits information the EPEW requires.

Finally, the CDLE also provided minor updates to its guidance about the compensation-and-benefits information the EPEW requires. The CDLE clarified that covered job postings need only provide a brief general description of the position’s benefits, but cannot use “open-ended” phrases such as “etc.” or “and more” to describe the position’s benefits. The CDLE also explained that, while employers can post a good-faith compensation range, the range’s bottom and top limits cannot be left unclear or open-ended. Additionally, the CDLE noted that the compensation posting requirements do not apply to “Help Wanted” signs or similar communications that do not refer to any specific positions for which the employer is hiring. Finally, the CDLE noted that job postings need not include the employer’s name to comply with the compensation posting requirements, if the employer wants to be discrete in its external job posting process.

This guidance indicates the CDLE’s “officially approved opinions and notices to employers … as to how [the CDLE] applies and interprets various statutes and rules.” INFO #9. It is not binding, for example, on a court of law. Moreover, although the prior lawsuit challenging the EPEW’s posting requirements and other “transparency rules” was voluntarily dismissed after the Colorado federal district court denied the plaintiff’s motion for a preliminary injunction, it is possible that the CDLE’s tough new stance on postings for remote jobs will lead to new challenges to these requirements.

This Client Alert expands on these issues, first addressing the CDLE’s new guidance regarding job posting requirements for remote jobs, then discussing the Compliance Assistance Letters the CDLE sent employers excluding Colorado applicants from remote jobs, and finally providing further detail on INFO #9’s updates regarding the compensation-and-benefits information the EPEW requires.

The EPEW’s Posting Requirements

The EPEW covers all public and private employers that employ at least one person in Colorado. Under the EPEW’s compensation-and-benefits posting requirements, employers are required to “disclose in each posting for each job the hourly or salary compensation, or a range of the hourly or salary compensation, and a general description of all of the benefits and other compensation to be offered to the hired applicant.” C.R.S. § 8-5-201(2). This requirement does not reach postings for “jobs to be performed entirely outside Colorado.” 7 CCR 1103-13 (4.3)(B).

Additionally, the EPEW also requires employers to “make reasonable efforts to announce, post, or otherwise make known all opportunities for promotion to all current employees on the same calendar day and prior to making a promotion decision.” C.R.S. § 8-5-201(1). This requirement applies broadly and includes only a few, very narrow exceptions.

The EPEW Posting Requirements Apply to Remote Jobs, Even If the Job Posting Excludes Colorado Applicants

The CDLE’s newly revised guidance states that the EPEW applies to “any posting by a covered employer for either (1) work tied to Colorado locations or (2) remote work performable anywhere, but not (3) work performable only at non-Colorado worksites.” INFO #9. The posting requirements’ “out-of-state exception … applies to only jobs tied to non-Colorado worksites (e.g., waitstaff at restaurant locations in other states), but not to remote work performable in Colorado or elsewhere.”  Id. (emphasis added). Thus, a “remote job posting, even if it states that the employer will not accept Colorado applicants, remains covered by the [EPEW’s] transparency requirements.” Id.

The CDLE Sent “Compliance Assistance Letters” to Employers Excluding Coloradans from Remote Jobs

Consistent with INFO #9’s guidance regarding remote jobs, the CDLE announced it was sending a “Compliance Assistance Letter” to “all covered employers with remote job postings lacking pay disclosure and excluding Coloradans.” Compliance Assistance Letter. The Letter explained that, for “any employer with any Colorado staff,” “[r]emote jobs are clearly covered by the [EPEW’s] pay disclosure requirement, regardless of an employer’s expressed intent not to hire Coloradans.” Thus, “when employers covered by the [EPEW] post remote jobs covered by the Act, declaring a preference not to hire Coloradans does not eliminate the Act’s pay disclosure duty.”

The Letter goes on to provide general, high-level guidance on how to comply with the EPEW’s compensation-and-benefits posting requirements, including the following:

1. “The required pay information can be brief,” such as just saying “$50,000 – $55,000, health insurance, and IRA.”
2. “No special form, or format” of posting “is required — as long as the posting includes the required pay and benefits information.”
3. “Pay information can be included or linked in a posting, if the employer prefers.”
4. A “flexible” compensation range “from the lowest to the highest the employer genuinely may offer for that particular position can be posted.”
5. An “out-of-range offer is allowed if the range was a good-faith expectation, but then unanticipated factors required higher or lower pay.”
6. “The employer’s name need not be included [in the posting], if it wants discretion and is posting in a third-party site or publication.”

This guidance largely conforms to the CDLE’s prior guidance on these issues.

The CDLE Has Not Imposed Any Penalties … Yet

Consistent with its prior public stances, the CDLE indicated that it is currently focused on compliance through education, rather than fines. The Letter notes that, thus far, all of the employers that the CDLE has contacted about EPEW violations have agreed to fix their postings “promptly,” and the CDLE “happily exercised its discretion to waive all potential fines in each case, believing each employer to have acted in good faith.”

In addition, the CDLE stated that it is first sending the Compliance Assistance Letter to each employer excluding Colorado applicants from remote jobs, “rather than immediately launching investigations of each” employer. The Letter also offers these employers “individualized advice” from the CDLE by phone or email about how to comply with the EPEW posting requirements. Finally, the CDLE gives each employer who receives the Letter until “Tuesday, August 10, 2021, to indicate by what date all covered job postings will include the required pay and benefits disclosures.”

Additional CDLE Guidance Regarding the Required Contents of Job Postings

In addition to explaining the posting requirements for remote jobs, the CDLE provided a few other clarifications of its prior EPEW guidance:

1. In providing the required “general description of all of the benefits the employer is offering for the position,” employers “cannot use an open-ended phrase such as ‘etc.,’ or ‘and more.’” INFO #9. However, consistent with its prior guidance, employers can simply say something brief like “$50,000 – $55,000, health insurance, and IRA.” Compliance Assistance Letter.
2. Employers continue to be allowed to post a good-faith compensation range (which employers may ultimately depart from, in limited circumstances). INFO #9. But the compensation range’s “bottom and top cannot be left unclear with open-ended phrases such as ‘[$]30,000 and up’ (with no top of the range), or ‘up to $60,000’ (with no bottom of the range).”
3. The compensation posting requirements do not apply to “Help Wanted” signs or “similar communication indicating only generally, without reference to any particular positions, that an employer is accepting applications or hiring.” INFO #9. In contrast, a job posting that must comply with the compensation-and-benefits posting requirements is “any written or printed communication (whether electronic or hard copy) that the employer has a specific job or jobs available or is accepting job applications for a particular position or positions.”  
4. Job postings need not include the employer’s name, if the employer “wants discretion and is posting in a third-party site or publication — as long as the posting includes the required pay and benefits information.” Compliance Assistance Letter. The Letter does not clarify whether a no-name posting would also comply with the EPEW’s promotion posting requirements, or just the compensation posting requirements.

Key Takeaways

This new guidance indicates that the CDLE is focused on foreclosing the methods that some employers were using to try to avoid the more challenging aspects of the EPEW’s compensation-and-benefits posting requirements. In contrast, little of the new CDLE guidance relates to the EPEW’s internal, promotion posting requirements (which in some ways may be even more challenging for Colorado employers).

Finally, the CDLE continues to indicate that it is focused on encouraging EPEW compliance through education, rather than fines, at least for now. Nonetheless, given the CDLE’s (and the public’s) continued scrutiny of compliance with this law, employers with any Colorado employees should ensure that their job postings are compliant as soon as possible. In particular, whether or not they have yet received a Compliance Assistance Letter from the CDLE, employers that had been relying on excluding Colorado applicants from remote jobs should revise their job postings to bring them into compliance with the EPEW, as interpreted by the CDLE.

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

Jessica Brown – Denver (+1 303-298-5944, [email protected])
Marie Zoglo – Denver (+1 303-298-5735, [email protected])

Please also feel free to contact any of the following practice leaders:

Labor and Employment Group:
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, [email protected])
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

This edition of Gibson Dunn’s Federal Circuit Update discusses recent Federal Circuit decisions concerning pleading requirements, obviousness, and more Western District of Texas venue issues. Also this month, the U.S. Senate voted to confirm Tiffany P. Cunningham to be United States Circuit Judge for the Federal Circuit and Federal Circuit Judge Kathleen O’Malley announced her retirement.

Federal Circuit News

Supreme Court:

The Court did not add any new cases originating at the Federal Circuit.

The following petitions are still pending:

• Biogen MA Inc. v. EMD Serono, Inc. (U.S. No. 20-1604) concerning anticipation of method-of-treatment patent claims. Gibson Dunn partner Mark A. Perry is counsel for the respondent.
• American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20‑891) concerning patent eligibility under 35 U.S.C. § 101, in which the Court has invited the Solicitor General to file a brief expressing the views of the United States.
• PersonalWeb Technologies, LLC v. Patreon, Inc. (U.S. No. 20-1394) concerning the Kessler

Other Federal Circuit News:

On July 19, 2021, the U.S. Senate voted to confirm Tiffany P. Cunningham as United States Circuit Judge for the Federal Circuit by a vote of 63-33.  Judge Cunningham was a partner at Perkins Coie LLP and was previously a partner at Kirkland & Ellis LLP. Ms. Cunningham is a graduate of Harvard Law School and she earned a Bachelor of Science in chemical engineering from the Massachusetts Institute of Technology. Ms. Cunningham clerked for Judge Dyk of the Federal Circuit.

Federal Circuit Judge Kathleen O’Malley announced her plans to retire from the bench on March 11, 2022. Judge O’Malley was appointed to the Federal Circuit by President Obama in 2010. Prior to her elevation to the Federal Circuit, Judge O’Malley was appointed to the U.S. District Court for the Northern District of Ohio by President Clinton in 1994.

Upcoming Oral Argument Calendar

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

Live streaming audio is available on the Federal Circuit’s new YouTube channel. Connection information is posted on the court’s website.

The court will resume in-person arguments starting with the September 2021 court sitting.

Key Case Summaries (July 2021)

Bot M8 LLC v. Sony Corporation of America (Fed. Cir. No. 20-2218): Bot M8 LLC (“Bot M8”) sued Sony Corporation of America (“Sony”) for infringement of various patents. The district court sua sponte directed Bot M8 to file an amended complaint requiring Bot M8 to specify how every element of every claim is infringed and to reverse engineer the PS4 (the accused product) if it was able to. Bot M8 agreed to do so. After Bot M8 filed its First Amended Complaint (“FAC”), Sony filed a motion to dismiss, which the court granted. In a discovery hearing two days later, Bot M8 raised for the first time that in order to reverse engineer the PS4 and view the underlying code, it would have to “jailbreak” the system, which is a violation of the Digital Millennium Copyright Act (“DMCA”) and other anti-hacking statutes. In response, Sony gave Bot M8 permission to jailbreak the system. Bot M8 then sought leave of the court to file its Second Amended Complaint (“SAC”). The court denied Bot M8’s request citing lack of diligence. Bot M8 appealed the district court’s dismissal.

The panel (O’Malley, J., joined by Linn and Dyk, J.J.) affirmed-in-part, reversed-in-part, and remanded, holding that the district court was correct in dismissing two of the patents, but that it required “too much” with respect to the other two patents. The panel reaffirmed that “[a] plaintiff is not required to plead infringement on an element-by-element basis.”

For the first two patents, the panel affirmed the district court finding it did not err in dismissing the claims for insufficiently pleading a plausible claim because (1) the factual allegations were inconsistent and contradicted infringement, and (2) the allegations were conclusory. With respect to the second two patents, the panel reversed the district court determining that Bot M8 had supported its “assertions with specific factual allegations” and that the district court “demand[ed] too much” by dismissing these claims. The panel also affirmed the district court’s decision to deny Bot M8’s motion for leave to amend for lack of diligence. The panel noted that although it may have granted Bot M8’s motion if deciding it in the first instance, it found no abuse of discretion. While the district court should not have required reverse engineering of Sony’s products, Bot M8 waived its objections by telling the court it was happy to undertake the exercise. Moreover, Bot M8 failed to raise any concerns regarding its ability to reverse engineer the PS4 under the DMCA until after the court had issued its decision on Sony’s motion to dismiss.

Chemours Company v. Daikin Industries (Fed. Cir. No. 20-1289): The case involved two IPR final written decisions of the PTAB, which determined that claims directed to a polymer with a high melt flow rate are obvious. The Board relied on a prior art patent (“Kaulbach”) that disclosed a lower melt flow rate and a “very narrow molecular weight distribution.” The Board concluded that a POSA would be motivated to increase Kaulbach’s melt flow rate to the claimed range, even though doing so would broaden molecular weight distribution.

A majority of the panel (Reyna, J., joined by Newman, J.) reversed, holding that Kaulbach taught away from broadening molecular weight distribution and that, therefore, the Board’s proposed modification would necessarily alter Kaulbach’s inventive concept. Judge Dyk dissented in part on this issue, arguing that Kaulbach did not teach away from broadening molecular weight distribution, but only offered better alternatives. According to Judge Dyk, the Court’s precedent makes clear that an inferior combination may still be used for obviousness purposes. Judge Dyk also noted that increasing Kaulbach’s melt flow rate to the claimed range would not have necessarily broadened the molecular weight distribution beyond levels Kaulbach taught were acceptable.

In the unanimous part of the opinion, the panel also rejected the Board’s commercial success analysis, holding that the Board made three errors. First, the panel held that the Board erred by concluding that there could be no nexus between the claimed invention and the alleged commercial success because all elements of the challenged claims were present in Kaulbach or other prior art. The Court explained that where an invention is a unique combination of known elements, “separate disclosure of individual limitations . . . does not negate a nexus.” Next, the Court disagreed with the Board’s decision to require market share data, holding that sales data alone may be sufficient to show commercial success. Lastly, the Court rejected the Board’s finding that the proffered commercial success evidence was weak because the patents at issue were “blocking patents.” The Court held that “the challenged patent, which covers the claimed invention at issue, cannot act as a blocking patent.”

In re: Uber Technologies, Inc. (Fed Cir. No. 21-150) (nonprecedential): Uber sought a writ of mandamus ordering the United States District Court for the Western District of Texas to transfer the underlying actions to the United States District Court for the Northern District of California. The panel (Dyk, J., joined by Lourie and Reyna, J.J.) granted the petition. Gibson Dunn is counsel for Uber.

The panel explained that it had recently granted mandamus to direct the district court to transfer in two other actions filed by the plaintiffs asserting infringement of two of the same patents against different defendants, in In re Samsung Electronics Co., Nos. 2021-139, -140 (see our June 2021 update). In that case, the Federal Circuit rejected the district court’s determination that the plaintiffs’ actions could not have been brought in the transferee venue because the presence of the Texas plaintiff “is plainly recent, ephemeral, and artificial—just the sort of maneuver in anticipation of litigation that has been routinely rejected.” Noting that the district court itself recognized that the issues presented here are identical to those in plaintiffs’ other cases, the panel held that, as in Samsung, the district court erred in concluding that Uber had failed to satisfy the threshold question for venue.

With respect to the district court’s analysis of the traditional public and private factors, the court explained that this case involved very similar facts to those in Samsung, where the Court found that the district court erred by 1) “giving little weight to the presence of identified party witnesses in the Northern District of California despite no witness being identified in or near the Western District of Texas”; 2) “simply presuming that few, if any, party and non-party identified witnesses will likely testify at trial despite the defendants’ submitting evidence and argument to the contrary”; and 3) finding that “there was a strong public interest in retaining the case in the district based on Ikorongo’s other pending infringement action against Bumble Trading, LLC.” The court concluded that there was no basis for a disposition different from the one reached in Samsung. It noted that the reasons for not finding that judicial economy to override the clear convenience of the transferee venue apply with even more force here, given that the court had already directed the Samsung and LG actions to be transferred to Northern California in In re Samsung. The panel also found that the district court clearly erred in negating the transferee venue’s strong local interest by relying merely on the fact that the plaintiffs alleged infringement in the Western District of Texas.

In re: TCO AS (Fed. Cir. No. 21-158) (nonprecedential): NCS Multistage, Inc., a Canadian corporation, and NCS Multistage LLC, its Houston, Texas based subsidiary, sued TCO AS, a Norwegian company, for patent infringement in the Western District of Texas. TCO moved to transfer the case to the Southern District of Texas pursuant to 28 U.S.C. § 1404(a). The district court denied the motion, finding that TCO had failed to show the transferee venue was clearly more convenient.

TCO petitioned for a writ of mandamus, which the Federal Circuit (Taranto, Hughes, Stoll, JJ.) denied. Stressing the “highly deferential standard” for resolving a mandamus petition, the Federal Circuit could not “say that TCO has a clear and indisputable right to relief, particularly in light of the fact that several potential witnesses are located out-side of the proposed transferee venue, including some in the Western District of Texas, and the fact that the only party headquartered in the proposed transferee venue elected to litigate this case in the Western District of Texas.”

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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 alert:

Blaine H. Evanson – Orange County (+1 949-451-3805, [email protected])
Jessica A. Hudak – Orange County (+1 949-451-3837, [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:
Allyson N. Ho – Dallas (+1 214-698-3233, [email protected])
Mark A. Perry – Washington, D.C. (+1 202-887-3667, [email protected])

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])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On July 28, 2021, certain Democratic members of Congress, primarily in response to the $4.325 billion contribution made by the Sackler family to fund the settlement underpinning Purdue Pharma’s chapter 11 plan, introduced the Nondebtor Release Prohibition Act of 2021 (the “NRPA”), which proposes to amend the Bankruptcy Code to (i) prohibit the use of non-consensual third party releases in chapter 11 plans, (ii) limit so-called “Section 105” injunctions to stay lawsuits against third parties to a period no greater than 90 days after the commencement of a bankruptcy case, and (iii) provide a ground for dismissing a bankruptcy case commenced by a debtor that was formed within 10 years prior to such case via a divisional merger that separated material assets from liabilities.

The proposed elimination of the important bankruptcy tools of non-consensual third party releases and Section 105 injunctions – each of which is extraordinary in nature and only permitted in the rarest of circumstances – is a blunt force measure that threatens to vitiate the longstanding bankruptcy policy of favoring settlements over interminable value-destructive litigation. Moreover, the loss of these tools may cause inequitable disruption in currently pending cases and stymie the implementation of critical creditor-supported strategies to resolve the most difficult cases going forward. Additionally, while the disincentive against divisional mergers would affect a far more limited set of cases, it appears that the harm raised by some divisional mergers that are followed by bankruptcy may be adequately addressed through clarifying the applicability of fraudulent transfer law to challenge these transactions.

I. Bankruptcy Tools Impacted by the Proposed Legislation

At the heart of corporate chapter 11 bankruptcies are an array of tools that serve to preserve the value of a debtor’s estate for the benefit of all stakeholders. Certain tools promote the “breathing spell” necessary for a debtor to formulate and propose a plan, while others, such as the power to reject executory contracts, allow debtors to restructure their operations to emerge from bankruptcy stronger and with greater prospects to succeed than when it filed for bankruptcy.

a. Non-Consensual Third Party Releases

Non-consensual releases of third parties are not common and typically arise as a provision in a chapter 11 plan in which the release of the applicable third party in question is essential to a reorganization in light of, among other considerations, the identity of interest of such third party and the debtor and the substantial economic contribution made to the chapter 11 plan by such third party.

Section 105 of the Bankruptcy Code is often cited as a statutory basis for such releases. Section 105 permits a bankruptcy court to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions” of the Bankruptcy Code.

These releases are distinct from voluntary releases that are commonly featured in corporate chapter 11 plans, whereby creditors are given an opportunity to “opt out” of such releases. A key contextual distinction between these two types of releases is that in the rarer instances in which non-consensual third party releases are sought, the economic contribution of the released third party is so substantial and vital to a chapter 11 plan as to require as a condition to such contribution that all claims against such third party be released, without regard to whether a subset of holdout creditors desire not to provide the release.

Currently, there is a federal circuit split among the courts that have ruled on the permissibility of non-consensual third party releases in connection with a chapter 11 plan. Notably, the Ninth and Tenth Circuits prohibit such releases, while the Second, Third, Fourth, Sixth, Seventh, and Eleventh Circuits permit such releases, with the Fifth Circuit taking a more restrictive approach short of a flat prohibition.

In the circuits where non-consensual third party releases are permitted, a debtor must satisfy a high evidentiary bar to obtain approval of such releases. The factors a bankruptcy court must consider in such circuits include (i) the identity of interests between the debtor and the third party, such that a suit against the non-debtor is akin to a suit against the debtor due to, for example, an indemnity obligation that may deplete the debtor’s assets; (ii) whether the non-debtor has contributed substantial assets to the reorganization; (iii) whether the release is essential to reorganization; (iv) whether the impacted classes of claims have overwhelmingly accepted the plan in question; and (v) whether the bankruptcy court has made a record of specific factual findings to support such releases.

The application of this standard typically requires the released third party to make a substantial financial contribution to a chapter 11 plan, which, in turn, has received extensive creditor support. In essence, these releases serve as an integrated component of a comprehensive economic settlement of claims accepted widely by the creditor body and without which a debtor likely could not reorganize.

Notably, the American Bankruptcy Institute’s exhaustive 2014 report and recommendations on bankruptcy reform recommended the use of non-consensual third party releases based on a consideration of the above-referenced fact-intensive standard and discouraged the imposition of a blanket prohibition against such releases.

b. Injunctions Against Third-Party Lawsuits

Similar to non-consensual third party releases, bankruptcy courts have used their authority under Section 105 of the Bankruptcy Code to preliminarily stay lawsuits against third parties in furtherance of the debtor’s reorganizational efforts. These injunctions constitute extraordinary relief and thus are not routine in corporate chapter 11 cases.

When such injunctions are requested, a debtor must satisfy a multi-factor standard that in most jurisdictions requires consideration of the likelihood of a successful reorganization, the balance of harms, and the public interest in the injunction. These injunctions are typically limited to 60 to 90 days, but have been of longer duration in certain limited cases. For example, the Section 105 injunction in the Purdue Pharma case enjoining litigation against the Sacklers has persisted for a longer period given the central role such injunction has played in fostering the global multi-billion dollar settlement that was ultimately reached.

II. Commentary

While the NRPA may be the product of valid frustrations some parties may have experienced in certain contentious and emotionally charged bankruptcy cases, its passage will likely do more harm than good.

Implicit in the testimony supporting passage of the NRPA is the premise that litigation against third parties should be preserved in all cases despite substantial creditor support that may otherwise exist for the settlement of such claims and the resulting emergence of the debtor from chapter 11. Eliminating the judicial discretion available in certain jurisdictions to implement this tool and elevating the rights of holdout creditors in its stead could lead to value-destructive liquidation outcomes in difficult cases that could otherwise be salvaged through settlements supported by a supermajority of the creditor body that include non-consensual releases of contributing third parties.

The NRPA’s policy preference for preserving litigation claims against third parties who may play a role in plan formulation means that, in cases where a financial contribution is no longer viable due to such mandatory preservation of litigation claims, tort claimants may receive less of a recovery than they would have under the current state of the law and possibly no recovery at all in many cases.

When viewed against the backdrop of current complex chapter 11 practice, this proposed legislation is misguided and elevates the interests of a minority of creditors in contravention of the vaunted bankruptcy principle of binding intransigent holdout creditors through supermajority support for a chapter 11 plan.

Moreover, the bankruptcy tool of preliminary “Section 105” injunctions similarly must satisfy a high evidentiary bar, and bankruptcy courts in practice do not grant these injunctions lightly. These injunctions, which stay suits against individuals and entities that are vital to ongoing reorganization efforts, serve a valuable function in providing the debtor with a limited temporal window within which to negotiate comprehensive settlements with protected parties and, thereby, maximize the chances of a successful reorganization. These injunctions are usually relatively short in duration and subject to dissolution in the event the ultimate reorganization purpose underpinning them is no longer being served.

The NRPA’s disincentivizing of divisional mergers, such as are available under Texas law, is a creative attempt at curbing a perceived abuse in a limited subset of cases. Contrary to the rhetoric of the bill’s supporters, such divisional mergers, which are actually more akin to reverse mergers, are not exclusively followed by bankruptcy and have independent purposes under state law, which include providing a measure of successor liability protection to entities implementing such mergers.

Notably, a divisional merger is not the only means of corporate separation. Companies frequently separate assets and liabilities in corporate “spinoffs” and “splitoffs.” Indeed, when these types of separation transactions are followed by bankruptcy, they have frequently come under vigorous attack. In such cases, fraudulent transfer law has played a vital role in preserving the claims related to such transactions, either as a means of fostering settlement (e.g, Peabody Energy’s spinoff of Patriot Coal) or through post-confirmation litigation (e.g., Kerr-McGee’s spinoff of Tronox, which resulted in fraudulent transfer litigation that led to a multi-billion dollar damages award). In order to neuter any argument that a divisional merger is immune from fraudulent transfer law, clarifying language to the Bankruptcy Code to that effect may be a more direct solution than permitting dismissal of any case filed by a debtor within 10 years of its formation via divisional merger.

Procedurally, the NRPA still needs to move through the Congressional committee process and, based on the current composition of the Senate, will ultimately require some measure of Republican support in order to become law.

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Gibson Dunn lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization practice group, or the following authors:

Michael J. Cohen – New York (+1 212-351-5299, [email protected])
Michael A. Rosenthal – New York (+1 212-351-3969, [email protected])
Matthew J. Williams – New York (+1 212-351-2322, [email protected])

Please also feel free to contact the following practice leaders:

Business Restructuring and Reorganization Group:
David M. Feldman – New York (+1 212-351-2366, [email protected])
Scott J. Greenberg – New York (+1 212-351-5298, [email protected])
Robert A. Klyman – Los Angeles (+1 213-229-7562, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On July 23, 2021, the California Office of Environmental Health Hazard Assessment (OEHHA) released an Initial Statement of Reasons (ISOR) and proposed text for new regulations concerning safe harbor warnings under California’s Safe Drinking Water and Toxics Enforcement Act of 1986 (Proposition 65) for consumer products containing the herbicide, glyphosate. Glyphosate is the active ingredient in Monsanto Company’s Roundup, which is used worldwide in agriculture and other applications.

Proposition 65 generally requires consumer products sold in California to bear a warning label if they expose consumers to chemicals listed by the state as causing cancer or reproductive or developmental toxicity. Glyphosate was added to the list of chemicals causing cancer in 2017 based on the International Agency for Research on Cancer (IARC)’s determination that it is a “probable” human carcinogen.[1]

Despite glyphosate’s listing as a carcinogen under Proposition 65, the issue of glyphosate’s carcinogenicity has proven highly controversial, with major public authorities on carcinogens reaching conflicting conclusions. US EPA, for example, has concluded that glyphosate is “not likely to be carcinogenic to humans.”[2] A number of recent high-profile personal injury actions against Monsanto have resulted in massive jury verdicts for plaintiffs who claimed that exposure to glyphosate in Roundup caused their cancers.[3]

Monsanto’s legal challenge to glyphosate’s addition to the Proposition 65 list was unsuccessful,[4] but, in June 2020, the U.S. District Court for the Eastern District of California issued a permanent injunction against enforcement of Proposition 65 warnings for glyphosate.[5] The court held that the standard safe harbor warning language—including that glyphosate is “known to the State of California to cause cancer”—violated glyphosate sellers’ First Amendment rights against compelled speech, because it would force them to take one side of a controversial issue, despite “the great weight of evidence indicating that glyphosate is not known to cause cancer.”[6]

The ISOR for the proposed regulations discusses the scientific and legal controversy surrounding glyphosate,[7] which has plainly motivated and shaped the text of the proposed regulations. Indeed, the new warning language proposed for glyphosate appears crafted to avoid the First Amendment problems that gave rise to the preliminary injunction in Wheat Growers, though the ISOR notes that the injunction remains in effect, so “no enforcement actions can be taken against businesses who do not provide warnings for significant exposures to [glyphosate].”[8] The ISOR further explains that glyphosate presents “an unusual case because several regulatory agencies did not reach a similar conclusion as IARC,” and, therefore, “[t]he standard Proposition 65 safe harbor warning language . . . is not the best fit in this situation.”[9]

OEHHA proposes to add section 25607.49 to title 27 of the California Code of Regulations, which would provide:

(a) A warning for exposure to glyphosate from consumer products meets the requirements of this subarticle if it is provided using the methods required in Section 25607.48 and includes the following elements:

(1) The symbol required in Section 25603(a)(1)

(2) The words “CALIFORNIA PROPOSITION 65 WARNING” in all capital letters and bold print.

(3) The words, “Using this product can expose you to glyphosate. The International Agency for Research on Cancer classified glyphosate as probably carcinogenic to humans. Other authorities, including USEPA, have determined that glyphosate is unlikely to cause cancer, or that the evidence is inconclusive. A wide variety of factors affect your personal cancer risk, including the level and duration of exposure to the chemical. For more information, including ways to reduce your exposure, go to www.P65Warnings.ca.gov/glyphosate.”

(b) Notwithstanding subsection (a), and pursuant to Section 25603(d), where the warning is provided on the product label, and the label is regulated by the United States Environmental Protection Agency under the Federal Insecticide, Fungicide, and Rodenticide Act, Title 40 Code of Federal Regulations, Part 156; and by the California Department of Pesticide Regulation under Food and Agricultural Code section 14005, and Cal. Code Regs., title 3, section 6242; the word ATTENTION” or “NOTICE” in capital letters and bold type may be substituted for the words “CALIFORNIA PROPOSITION 65 WARNING.”

Section 25607.48 would also be added to make clear that the warning must be provided using a method listed in Section 25602.

Adoption of these regulations may trigger an effort to alter or lift the Wheat Growers injunction, though the district court rejected several alternative warning formulations that are similar to OEHHA’s current proposal.[10] If the injunction is modified, businesses involved in distribution, sale, or use of glyphosate-containing products in California would not be required to use the new warning language, since it is merely a safe harbor, but doing so would be sufficient to avoid violation of Proposition 65’s warning requirement.[11]

OEHHA’s announcement, the proposed text of the new regulations, and the ISOR are linked below. OEEHA will receive public comments on the proposed regulations until September 7, 2021.:

https://oehha.ca.gov/proposition-65/crnr/notice-proposed-rulemaking-warnings-exposures-glyphosate-consumer-products-new

Regulation text

Initial Statement of Reasons

__________________________

   [1]   https://oehha.ca.gov/proposition-65/chemicals/glyphosate

   [2]   https://www.epa.gov/ingredients-used-pesticide-products/glyphosate

   [3]   See, e.g., Hardeman v. Monsanto Co, No. 16-cv-00525-VC (E.D. Cal. filed Feb. 1, 2016); Pilliod v. Monsanto Co., No. RG17862702, JCCP No. 4953 (Cal. Super. Ct. Alameda Cty. filed Jun 2, 2017).

   [4]   Monsanto Co. v. Office of Environmental Health Hazard Assessment, 22 Cal. App. 5th 534 (2018).

   [5]   Nat’l Ass’n of Wheat Growers v. Becerra, 468 F. Supp. 3d 1247, 1266 (E.D. Cal. 2020) (on appeal to the Ninth Circuit Court of Appeals, Case No. 20-16758).

   [6]   Id. at 1260.

   [7]   Initial Statement of Reasons, July 23, 2021, at pp. 5-6, 12.

   [8]   Id. at 12.

   [9]   Id. at 6.

  [10]   Wheat Growers, 468 F. Supp. 3d at 1262-63.

  [11]   Cal. Health & Safety Code § 25249.6

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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 Environmental Litigation and Mass Tort practice group, or the following authors:

Abbey Hudson – Los Angeles (+1 213-229-7954, [email protected])
Alexander P. Swanson – Los Angeles (+1 213-229-7907, [email protected])

Please also feel free to contact the following practice group leaders:

Environmental Litigation and Mass Tort Group:
Stacie B. Fletcher – Washington, D.C. (+1 202-887-3627, [email protected])
Daniel W. Nelson – Washington, D.C. (+1 202-887-3687, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

One of the most common provisions in an acquisition agreement is the “effect of termination” provision. As its name implies, the provision expresses the agreement of the parties regarding what, if any, liability each party will have to the other after the agreement is terminated. It is common for the provision to state that, if the agreement is terminated, neither party will have any liability to the other except with respect to certain other provisions of the agreement, such as the confidentiality, governing law, interpretive and other boilerplate provisions, that are necessary to maintain the confidentiality of each party’s information after the agreement is terminated and to maintain the governing terms of the agreement in the event of a post-termination contractual dispute or a dispute regarding the validity of the termination itself. It is also common for the effect of termination provision to include a carve-out stating that termination of the agreement will not relieve the parties from certain pre-termination breaches of the agreement.

The scope of the pre-termination breaches subject to the carve-out typically is, and should be, scrutinized in transactions in which there is significant risk of the deal being terminated, such as due to a failure to receive regulatory approval or a debt financing failure. For example, in transactions in which the buyer is a financial sponsor and is relying on the availability of debt financing to pay the purchase price, the seller typically wants to ensure that, if the buyer fails to close the acquisition when required by the agreement, it has the ability to (i) keep the agreement in place and seek specific performance of the agreement to force the buyer to close, which may be limited to circumstances in which the buyer’s debt financing is available (i.e., a synthetic debt financing condition), or (ii) terminate the agreement and recover damages, often in the form of a reverse termination fee, from the buyer. The effect of termination provision should not purport to foreclose recovery of the reverse termination fee, which in some transactions serves as liquidated damages and a cap on the buyer’s liability for pre-termination breaches. In other transactions, the effect of termination provision may also permit the seller to recover damages beyond or irrespective of a reverse termination fee, frequently limited to circumstances in which there was an “intentional” or “willful” pre-termination breach by the buyer of its obligations.

In an increasingly competitive M&A market, it has become more common for buyers to agree to bear regulatory approval risk and for financial buyers to agree to backstop payment of the entire purchase price with equity in lieu of the synthetic debt financing condition or reverse termination fee construct described above. In these contexts, continued and careful consideration of a buyer’s liability for pre-termination breaches of a purchase agreement is critical. The scope of liability for pre-termination breaches also deserves attention in light of the now widespread use of representation and warranty insurance and transaction structures in which sellers may not expect any liability for breaches of representations and warranties, absent fraud.

The following is a summary of issues for buyers and sellers to consider when negotiating these issues in light of current and evolving M&A market dynamics.

Defining the Appropriate Pre-Termination Breach Standard

Although it is common for the effect of termination provision to include a carve-out stating that termination of the agreement will not relieve the parties from pre-termination breaches of the agreement, the relevant standard for defining the scope of those pre-termination breaches is often inconsistent in practice. Some agreements define the standard as any pre-termination breach that is “intentional and willful,” “knowing and intentional,” “intentional,” “willful and material,” or “willful.” Sometimes these terms are defined, sometimes not. Sometimes the standard distinguishes breaches of covenants, on the one hand, from breaches of representations and warranties, on the other hand, and sometimes it does not. Finally, some agreements do not contain a specific standard and provide that “any” pre-termination breach is carved-out from the effect of termination provision.

This lack of uniformity, coupled with contending interpretations after a broken transaction, can lead to unpredictable or undesirable outcomes. For example, in Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008), the Delaware Court of Chancery interpreted a “knowing and intentional” breach of a merger agreement as a deliberate act that in and of itself is a breach of the agreement “even if breaching was not the conscious object of the act.” This could lead to an undesirable outcome for buyers, who are wary of unintentionally breaching their obligations to obtain regulatory approvals or debt financing that can be ripe for second-guessing in the context of a broken transaction. They should consider defining the standard to include only an action taken with the actual knowledge that the action would result in a breach of the agreement.

Sellers, on the other hand, should consider defining the standard to include specifically the failure of the buyer to close the transaction when required by the agreement or, if the transaction involves a reverse termination fee that does not serve as liquidated damages, the failure of the buyer to close the transaction if the debt financing is available. In transactions with a financial buyer, the importance of this issue and the relevant standard may be overlooked if there is a last minute change to a full equity backstop structure in lieu of a traditional reverse termination fee structure.

Distinguishing Breaches of Covenants from Breaches of Representations and Warranties

As stated earlier, effect of termination provisions often do not distinguish between liability for pre-termination breaches of covenants and breaches of representations and warranties. But if the parties have negotiated a “willful” breach or similar standard to define the scope of their liability for pre-termination breaches, what does it mean to “willfully” breach a representation and warranty? As the Delaware court did in Hexion, some may interpret the term “willful” to imply a deliberate action, which may better describe a breach of a covenant, rather than a breach of a representation or warranty. As a result, the parties should consider distinguishing breaches of covenants from breaches of representations and warranties when formulating the appropriate standard.

Aligning Expectations in Transactions with Representation and Warranty Insurance

In addition, in transactions involving representation and warranty insurance, it has become increasingly common for sellers to expect no liability for breaches of their representations and warranties in the purchase agreement, absent fraud. That expectation drives the parties to scrutinize the survival or non-survival of the representations and warranties if the transaction closes, but the parties may overlook the effect of termination provision, which would apply in a broken transaction. A seller who expects no liability for breaches of representations and warranties may insist that the effect of termination carve-out not only distinguish breaches of covenants from breaches of representations and warranties, but also provide that liability for pre-termination breaches of representations and warranties will be limited to only instances of fraud.

In summary, although the effect of termination provision may often be considered akin to boilerplate provisions in a contract, astute dealmakers should focus on the carve-outs and ensure that they best serve their client’s interests under the particular circumstances of the transaction.

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

Robert B. Little – Dallas (+1 214-698-3260, [email protected])
Joseph A. Orien – Dallas (+1 214-698-3310, [email protected])

Please also feel free to contact the following practice group leaders:

Mergers and Acquisitions Group:
Eduardo Gallardo – New York (+1 212.351.3847, [email protected])
Robert B. Little – Dallas (+1 214-698-3260, [email protected])
Saee Muzumdar – New York (+1 212.351.3966, [email protected])

Private Equity Group:
Richard J. Birns – New York (+1 212-351-4032, [email protected])
Scott Jalowayski – Hong Kong (+852 2214 3727, [email protected])
Ari Lanin – Los Angeles (+1 310-552-8581, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On July 15, 2021, the California Supreme Court in Ferra v. Loews Hollywood Hotel, LLC adopted a new formula for calculating the one extra hour of premium pay that employees are owed if an employer fails to provide a compliant meal period or rest break. Specifically, the Court held that those premium payments must include the hourly value of any nondiscretionary earnings (such as a nondiscretionary bonuses), and cannot simply be paid an employee’s base hourly rate. This holding aligns the formula for calculating meal period and rest break premium payments with the formula for calculating overtime payments under California law.

The Ferra decision represents a change in the law, as the California Court of Appeal and several federal district courts had previously held that California Labor Code section 226.7’s use of the term “regular rate of compensation” meant that premium payments for failures to provide meal periods or rest breaks should be calculated using an employee’s base hourly rate. Despite this shift, however, the California Supreme Court held that its decision applies retroactively.

In light of Ferra, employers should take steps to evaluate whether their calculation of premium payments for the non-provision of meal periods and rest breaks includes nondiscretionary payments, as well as assess the impact of the decision on any pending meal period or rest break litigation.

Ferra Holds That Nondiscretionary Earnings Must Be Included in the Calculation of Meal Period and Rest Break Premiums

California courts have long held that premium wages for calculating overtime pay must factor in the hourly value of nondiscretionary earnings. At issue in Ferra was whether that same formula applied to premium payments that are owed to employees when an employer fails to provide a meal period or rest break. Specifically, the California Supreme Court answered the following question: “Did the Legislature intend the term ‘regular rate of compensation’ in Labor Code section 226.7, which requires employers to pay a wage premium if they fail to provide a legally compliant meal period or rest break, to have the same meaning and require the same calculations as the term ‘regular rate of pay’ under Labor Code section 510(a), which requires employers to pay a wage premium for each overtime hour?”

The California Supreme Court held that “regular rate of compensation” and “regular rate of pay” are interchangeable terms, and therefore “premium pay for a noncompliant meal, rest, or recovery period, like the calculation of overtime pay, must account for not only hourly wages but also other non-discretionary payments for work performed by the employee.”

The Court explained that, in enacting Labor Code section 226.7, the California Legislature did so with an understanding that the federal Fair Labor Standards Act’s use of the phrase “regular rate” has been “consistently understood . . . to encompass all nondiscretionary payments, not just base hourly rates.” With this context, the Court concluded that “regular rate” was the “operative term” in the statute, and that the modifiers “of pay” and “of compensation” were intended to be used interchangeably.

The Court also held that its decision applies retroactively, emphasizing that it had not previously issued a definitive decision on the issue.

Ferra’s Impact on Employers

Employers should review their how they are calculating any meal period or rest break premium payments to ensure that they include the value of any nondiscretionary earnings during the relevant pay period.

As for litigation regarding the improper calculation of meal period and rest break premiums, Ferra does not eliminate all defenses to such claims or ensure that class certification will be granted in such cases. While Ferra clarifies how meal period and rest break premiums must be calculated, it says nothing at all regarding whether or not such premiums are owed in the first place. This means, as Ferra itself recognized, that an “employer may defend against” a claim that it has failed to provide meal periods or rest breaks “as it has always done.” In other words, plaintiffs pursuing Ferra-based claims will still need to establish an entitlement to a premium in the first place, and under Brinker Restaurant Corp. v. Superior Court, 53 Cal. 4th 1004 (2012), this means plaintiffs must establish that a compliant meal period or rest break was not provided. And in a putative class action, plaintiffs must show that this threshold question can be resolved on a classwide basis.   

Some plaintiffs may attempt to skip over this important threshold requirement by pointing to the fact that an employer voluntarily made meal period or rest break premium payments, and argue that such payments are evidence that they were not provided with compliant breaks. But the fact that an employer may have made a meal period or rest break premium is not dispositive evidence that a compliant meal period or rest break was not provided. Employers often pay such premiums proactively and out of an abundance of caution, even where a premium was not in fact due.  In other words, employers do not need to concede that the payment of a premium establishes that an employee was entitled to it. And this will mean that, in many cases, determining whether a compliant meal period or rest break was provided, and thus whether a premium was owed in the first, is a question that is not capable of classwide resolution.

Moreover, even if a plaintiff can show that they were entitled to a meal period or rest break premium, they must also prove that they earned a form of nondiscretionary pay during that same pay period that must be included in calculating the amount of the premium under Ferra. Whether a particular payment was discretionary or nondiscretionary is also often a highly fact-dependent inquiry, and thus may not be suitable for resolution on a classwide basis.

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This alert was prepared by Jason Schwartz, Michele Maryott, Katherine Smith, Brad Hamburger, Lauren Blas, Megan Cooney, Katie Magallanes, Amber McKonly, Nick Thomas, Nick Barba, and Rebecca Lamp.

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

Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, [email protected])
Michele L. Maryott – Orange County (+1 949-451-3945, [email protected])
Katherine V.A. Smith – Co-Chair, Los Angeles (+1 213-229-7107, [email protected])
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, [email protected])
Lauren M. Blas – Los Angeles (+1 213-229-7503, [email protected])
Megan Cooney – Orange County (+1 949-451-4087, [email protected])
Katie Magallanes – Orange County (+1 949-451-4045, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On July 13, 2021, the Securities and Exchange Commission (“SEC”) announced a partially settled enforcement action against a Special Purpose Acquisition Company (“SPAC”), the SPAC sponsor and the CEO of the SPAC, as well as the proposed merger target and the former CEO of the target for misstatements in a registration statement and amendments concerning the target’s technology and business risks.[1] As of the date of the enforcement action, the registration statement had not been declared effective and the proxy statement/prospectus had not been mailed to the SPAC shareholders. This action is notable because the allegations against the SPAC, its sponsor and its CEO are premised on a purported negligent deficiency in their due diligence, which failed to uncover alleged misrepresentations and omissions by the target and its former CEO. This action has important implications for SPACs, their sponsors and executives for their diligence on proposed acquisition targets.

Overview of the Action

In a settled administrative order, in which the respondents neither admit nor deny the allegations, the Commission alleged that disclosures contained in a Form S-4 filed by the SPAC were inaccurate because they both overstated the commercial viability of the target’s key product, and understated the risk pertaining to the target’s former CEO and a previous regulatory action regarding national security.

The settled administrative action against the target and the civil complaint against its former CEO, who is a Russian national, are premised on allegations of fraud: specifically, that the target and its former CEO (1) misrepresented that the target had “successfully tested” its key technology, when in fact a prior test did not meet criteria for success; and (2) omitted or made misstatements concerning the U.S. government’s concerns with national security and foreign ownership risks posed by the target CEO including concerns related to his affiliation with the target.

The target consented to a settlement finding a violation of the anti-fraud provisions of the securities laws, including Section 10(b) of the Securities Exchange Act and agreeing to pay a penalty of $7 million. In the separate civil complaint against the target’s former CEO, the Commission alleges violations of the same anti-fraud provisions.

Of greater significance is the settled action against the SPAC, its sponsor and CEO, which is premised on allegations of negligence in the conduct of their due diligence on the target, which failed to uncover the misrepresentations by the target and its former CEO and thus resulted in those misstatements or omissions being repeated in the proxy materials, even though those proxy materials had not yet been mailed to shareholders. The settled order alleges that: (1) although the SPAC engaged a technology consulting firm to conduct diligence on the target’s technology, the SPAC did not ask the consulting firm to review the target’s prior product test; and (2) although the SPAC was aware that the U.S. government had previously ordered the target CEO to divest from another unrelated technology company, and requested documentation from the target relating to the order, and was falsely told by the target that it did not have such documents, the SPAC nevertheless proceeded with the executing the merger agreement and filing the registration statement.

The SPAC, its sponsor and its CEO consented to violations (or causing violations) of the negligence-based anti-fraud provisions, including those relating to proxy solicitations – Sections 17(a)(3) of the Securities Act and 14(a) of the Securities Exchange Act and Rule 14a-9. The SPAC agreed to pay a penalty of $1 million and the CEO agreed to pay a penalty of $40,000. The SPAC’s sponsor also agreed to forfeit 250,000 of its founder shares in the event the merger receives shareholder approval. The SPAC and the target also agreed to offer PIPE investors in the SPAC the opportunity to terminate their subscription agreement.

Key Takeaways — Implications for SPAC and Acquiror Diligence

This latest enforcement action comes on the heels of a string of pronouncements by senior SEC officials earlier this year concerning the risks posed by the explosion of SPAC initial public offerings in 2020 and early 2021, including a potential misalignment of interests and incentives between SPAC sponsors and shareholders.[2]

In the press release announcing this enforcement action, SEC Chairman Gary Gensler took the unusual step of providing comments that echoed the concerns of senior officials and sent a clear message that even when the SPAC is “lied to” by the target, the SPAC and its executives are at risk for liability under the securities laws if their diligence fails to uncover misrepresentations or omissions by the target. Chairman Gensler stated, “This case illustrates risks inherent to SPAC transactions, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors. . . .  The fact that [the target] lied to [the SPAC] does not absolve [the SPAC] of its failure to undertake adequate due diligence to protect shareholders. Today’s actions will prevent the wrongdoers from benefitting at the expense of investors and help to better align the incentives of parties to a SPAC transaction with those of investors relying on truthful information to make investment decisions.”

The SEC’s action has important implications for SPAC sponsors, as well as any acquiror conducting diligence on a prospective merger target.

• First, the SEC took action with respect to the initial Form S-4, filed on November 2, 2020, and two amendments, filed on December 14, 2020 and March 8, 2021, even though the Form S-4 has been subsequently amended (and presumably corrected) and has not yet been declared effective. The combined proxy statement/consent solicitation statement/prospectus contained in the Form S-4 has not yet been mailed to shareholders since it remains in preliminary form.
• Second, in view of the unusual posture of this case, it is clear that the SEC intends this to be a message case to SPAC sponsors on the level of scrutiny that will be imposed on their diligence of acquisition targets. Diligence should be reasonable under the circumstances. However, in an investigation, the government reviews the reasonableness of diligence with the dual benefits of hindsight and subpoena power not available to private enterprises engaged in commercial transactions. Moreover, the SEC is well-versed in conducting these types of investigations and the securities law provisions used here are the same well-established provisions used in typical negligent fraud actions filed by the Commission. Thus the lessons of this action are not limited to SPACs, but also apply to diligence conducted by any acquiror on a potential target where the merger will be subject to disclosure and shareholder approval.
• Third, when conducting diligence on potential targets, sponsors should keep in mind that, in the event a target’s business turns out not to be as represented, the reasonableness of the SPAC’s diligence may be reviewed under a harsh government spotlight. This action highlights the need for blank check companies and their founders to conduct and document thorough legal, financial and accounting due diligence review of potential targets, as well as industry-specific due diligence focused on a target’s business. Sponsors should also follow up appropriately on potential red flags identified during the due diligence process, including assessing the accuracy of, and basis for, factual statements about the target in public filings and investor materials and to identify risks related to the target’s business to investors. Ultimately, in the event open questions remain, sponsors will need to evaluate the feasibility of proceeding with a transaction or whether adequate disclosures can be made to address the attendant risks.
• Fourth, sponsors also may want to consider the inclusion of seller indemnification provisions or the use of representations and warranties insurance to protect the SPAC from losses resulting from the inaccuracy of the target’s representations and warranties in the acquisition agreement. Such provisions and the use of insurance are less typical in de-SPAC transactions than in traditional private M&A transactions. In fact, the SPAC in this Enforcement action and the target amended their merger agreement on June 29, 2021, among other things, to add a limited seller indemnity related to untrue statements of a material fact in the information provided by or on behalf of the target for inclusion in the SPAC’s SEC filings, or any omission of a material fact therein relating to the target.
• Fifth, this action is also notable for the SPAC sponsor’s agreement to forfeit a portion of its founder shares and the opportunity given to PIPE investors to terminate their subscription. These remedies may have been driven, in part, by the limited amount of cash working capital at the SPAC available for a settlement and also highlights the SEC’s desire to hold founders accountable for the actions of the SPAC, with such founder shares representing a significant value to a SPAC’s sponsor. Furthermore, the ability of PIPE investors to terminate their subscription agreements could meaningfully impact the SPAC’s ability to close its pending transaction without the additional financing to backstop potential redemptions by the SPAC’s public investors.
• Finally, this action is also notable because the SEC charged the SPAC, the SPAC sponsor and the CEO of the SPAC with violating the proxy rules, including Rule 14a-9, at the preliminary proxy statement stage. In other words, the SEC could have, but chose not to, simply allowed the SPAC to correct its misstatements and omissions in subsequent filings so that the definitive proxy statement that is mailed to SPAC shareholders is materially accurate.

The SEC’s decision to intervene in the middle of the de-SPAC process with an Enforcement action and a suite of remedial actions that includes requiring the target to engage an independent compliance consultant to conduct a comprehensive ethics and compliance program assessment of the target’s disclosure practices underscores the priority of the Enforcement Division’s continuing focus on SPACs.

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   [1]   Press Release, Securities and Exchange Commission, SEC Charges SPAC, Sponsor Merger Target, and CEOs for Misleading Disclosures Ahead of Proposed Business Combination (July 13, 2021), available at https://www.sec.gov/news/press-release/2021-124.

   [2]   March 31, 2021 Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies, available at https://www.sec.gov/news/public-statement/division-cf-spac-2021-03-31.

       March 31, 2021 Public Statement: Financial Reporting and Auditing Considerations of Companies Merging with SPACs, available at https://www.sec.gov/news/public-statement/munter-spac-20200331.

       Apr. 8, 2021 Public Statement: SPACs, IPOs and Liability Risk under the Securities Laws, available at  https://www.sec.gov/news/public-statement/spacs-ipos-liability-risk-under-securities-laws

       Apr. 12, 2021 Public Statement: Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), available at https://www.sec.gov/news/public-statement/accounting-reporting-warrants-issued-spacs.

       SEC Official Warns on Growth of Blank-Check Firms, Wall St. Journal (Apr. 7, 2021), available at https://www.wsj.com/articles/sec-official-warns-on-growth-of-blank-check-firms-11617804892.

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Gibson, Dunn and Crutcher’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 Securities Enforcement, Securities Regulation and Corporate Governance, Capital Markets, or Mergers and Acquisitions practice groups, or the following authors:

Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])
Evan M. D’Amico – Washington, D.C. (+1 202-887-3613, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Jonathan M. Whalen – Dallas (+1 214-698-3196, [email protected])
Tina Samanta – New York (+1 212-351-2469, [email protected])
Timothy M. Zimmerman – Denver (+1 303-298-5721, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

In the last several years, M&A transaction planners have become increasingly focused on cybersecurity, privacy, and data protection risks, as technology advances and the regulatory regimes evolve. This recorded webcast focuses on how to design and manage an effective cybersecurity and privacy diligence plan. A group of experts, including US and European cybersecurity, privacy, and data protection lawyers, as well as M&A lawyers, discuss, among other things:

• The principal risks under relevant U.S. and European law
• The impact of the target company’s industry sector on the scope of the exercise
• The role of the buyer’s and seller’s internal experts, as well as outside consultants.
• Red flags that suggest the possibility of significant issues
• Key practice pointers

View Slides (PDF)

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PANELISTS:

Ahmed Baladi is a partner in the Paris office and Co-Chair of the firm’s Privacy, Cybersecurity and Data Innovation Practice Group. His practice focuses on a wide range of privacy and cybersecurity matters including compliance, investigations and procedures before data protection authorities. He also advises companies and private equity clients in connection with all privacy and cybersecurity aspects of their cross-border M&A transactions.

Stephen Glover is a partner in the Washington, D.C. office and a member of the firm’s Mergers and Acquisitions Practice Group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, including SPACs, spin-offs and related transactions, as well as other corporate matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others.

Saee Muzumdar is a partner in the New York office and a member of the firm’s Mergers and Acquisitions Practice Group. Ms. Muzumdar is a corporate transactional lawyer whose practice includes representing both strategic companies and private equity clients (including their portfolio companies) in connection with all aspects of their domestic and cross-border M&A activities and general corporate counseling.

Alexander H. Southwell is a partner in the New York office and Co-Chair of the firm’s Privacy, Cybersecurity and Data Innovation Practice Group.  He is a Chambers-ranked former federal prosecutor and was named a “Cybersecurity and Data Privacy Trailblazer” by The National Law Journal. Mr. Southwell’s practice focuses on privacy, information technology, data breach, theft of trade secrets and intellectual property, computer fraud, national security, and network and data security issues, including handling investigations, enforcement defense, and litigation. He regularly advises companies and private equity firms on privacy and cybersecurity diligence and compliance.

Cassandra Gaedt-Sheckter is of counsel in the Palo Alto office where her practice focuses on data privacy, cybersecurity and data regulatory litigation, enforcement, transactional, and counseling representations. She has substantial experience advising companies on legal and regulatory compliance, diligence, and risks in transactions, particularly with respect to CCPA and CPRA as one of the leads of the firm’s CCPA/CPRA Task Force; GDPR; Children’s Online Privacy Protection Rules (COPPA); and other federal and state laws and regulations.

Vera Lukic is of counsel in the Paris office where her practice focuses on a broad range of privacy and cybersecurity matters, including assisting clients with multinational operations on their global privacy compliance programs, cross-border data transfers and data security issues, as well as representing clients in investigations, enforcement actions and litigation before the French data protection authority and administrative courts. She also regularly advises on data privacy aspects of M&A transactions, including with respect to carve-out and transition issues.

Lisa Zivkovic, Ph.D is an associate in the New York Office. She is a member of the Firm’s Privacy, Cybersecurity and Data Innovation, Technology Transactions, and Litigation practices groups. Ms. Zivkovic’s doctorate is a comparative history of data privacy in the US and European Union. She advises a wide range of clients, including technology, financial services, data aggregation and analytics, vehicle, and telematics companies, on new and complex legal and policy issues regarding global data privacy, cybersecurity, artificial intelligence, Internet of Things, and big data.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hours, of which 1.0 credit hours may be applied toward the areas of professional practice requirement.

This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an affirmation form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

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

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

Today, July 9, 2021, President Biden issued a sweeping Executive Order directing federal regulatory agencies to take a variety of steps that, if completed and upheld by the courts, would effect a sea change in the government’s regulation of businesses’ competitive practices.[1]

The Executive Order itself will have little immediate impact on regulated parties, although its tenor and objectives send an important message about the Administration’s perception of the business climate and enforcement priorities. The Order’s principal purpose is to set in motion a variety of proceedings before regulatory agencies. Interested parties will often (but not always) have the opportunity to participate in notice and comment rulemaking before the agencies. If the agencies exceed their statutory authority or fail to follow proper regulatory procedures, their actions typically will be subject to challenge in the courts.

General Overview of the Executive Order

The Executive Order is expansive—addressing 72 initiatives involving more than a dozen federal agencies. The Order’s premise is that the size and consolidation of American businesses has restricted competition and harmed consumers and workers. A White House “fact sheet” accompanying the Order expresses concern that “[f]or decades, corporate consolidation has been accelerating,” including in healthcare, financial services, agriculture, and other sectors.[2] The Order asserts this has resulted in higher prices and lower wages, along with reduced “growth and innovation.” In the technology sector, the Order states, “a small number of dominant Internet platforms use their power to exclude market entrants, to extract monopoly profits, and to gather intimate personal information that they can exploit for their own advantage.” “When past presidents faced similar threats from growing corporate power,” the accompanying fact sheet says, “they took bold action,” such as trust-busting by Theodore Roosevelt and “supercharged antitrust enforcement” under Franklin Roosevelt. The fact sheet then lays out the “decisive,” “whole-of-government effort” directed by President Biden in the Order.

The Order addresses matters as diverse as the cost of hearing aids, airline payments for delayed baggage, the price of beef, and international shipping fees. It “directs” executive branch agencies like the Department of Transportation (“DOT”) to take certain action and “encourages” independent agencies like the Federal Trade Commission (“FTC”) to consider others. Nonetheless, independent agencies like the FTC should be expected to pursue each of the actions the Order identifies. Indeed, some of the initiatives outlined in the Order relate to matters for which agencies are already engaging in rulemakings.

Initiatives in the Order include:

Agriculture

1. The Order directs the United States Department of Agriculture (“USDA”) to consider issuing new rules regulating competition in the farming industry.
2. The Order “encourages” the Federal Trade Commission (“FTC”) to address restrictions on third-party repair or self-repair, such as restrictions prohibiting farmers from repairing their own tractors.

Healthcare

3. The Order encourages the FTC to consider a rule addressing agreements in the prescription drug industries, such as settlements of patent litigation to delay the market entry of generic drugs or biosimilars.
4. The Order directs the United States Department of Health and Human Services (“HHS”) to consider issuing proposed rules allowing hearing aids to be sold over the counter.

Labor Markets

5. The Order encourages the FTC “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
6. The Order encourages the FTC to consider a rule addressing occupational licensing restrictions.
7. The Order encourages the FTC and the Department of Justice (“DOJ”) to revise existing antitrust guidance to “better protect workers from wage collusion.”

Merger Review

8. The Order encourages the FTC and DOJ “to review the horizontal and vertical merger guidelines and consider whether to revise those guidelines.”

Technology

9. The Order encourages the FTC to consider a rule addressing data collection and surveillance practices.
10. The Order encourages the FTC to consider a rule addressing “unfair competition in major Internet marketplaces.”

Transportation

11. The Order directs the DOT to “publish for notice and comment a proposed rule requiring airlines to refund baggage fees when a passenger’s luggage is substantially delayed and other ancillary fees when passengers pay for a service that is not provided.”
12. The Order encourages the Federal Maritime Commission to consider a rule “to improve detention and demurrage practices and enforcement of related Shipping Act prohibitions.”

Next Steps, and Implications for Our Clients

The Order is a significant and bold pronouncement of the Administration’s position on competition matters and business practices generally. However, its ultimate importance will depend principally on agencies’ success in implementing the changes the Order identifies. Many of the changes sought by the Order will require notice and comment rulemaking, a process that often takes years. In rulemakings, agencies must conduct appropriate analyses; draft and issue a proposed rule; invite and consider the public’s comments on the proposal; and then revise and finalize the rule in light of those comments and the evidence in the record. A hasty, sloppy rule—or one that gives insufficient attention to important problems identified by commenters, such as the absence of statutory authority or constitutional problems—is legally vulnerable.

Agencies must base and justify their regulatory action on their own statutory authority; the Order is not a basis for an agency to take actions that are not statutorily authorized by Congress.

Companies concerned about specific directives in the Order should begin making plans now to ensure those concerns are amply documented before the agency when rulemaking proceedings begin. Substantial, evidence-based rulemaking comments—whether submitted directly by a company, or by a trade association—are often very helpful to agencies in identifying changes they should make to their initial proposals. And, if those comments are ignored, they can provide a strong foundation for a successful legal challenge.

Focus on the FTC

The FTC will be responsible for some of the Order’s most significant directives. For the FTC to simultaneously address such a large number of competition initiatives would be a historical novelty—the FTC has only issued one competition rule in its entire history.[3] That rule was issued in the 1960s, never enforced, and later withdrawn.[4]

Procedurally, the FTC recently streamlined its rulemaking procedures and gave the Chair more control over the process.[5]  FTC Commissioner Wilson, who dissented from the procedural changes, expressed concern that they compromised the impartiality of the rulemaking process and unduly limited public input. And substantively, while any rulemaking must be based on a factual record, several of the initiatives outlined in the Order appear inconsistent with longstanding FTC enforcement policy and governing law. For example, the fact sheet accompanying the Order objects that “rapid[] consolidation” in the shipping industry has resulted in 10 shippers controlling 80% of the market. But under the long-standing Horizontal Merger Guidelines of the Department of Justice and Federal Trade Commission that are cited regularly by the courts, such a market likely would be considered “unconcentrated.”[6] To the extent the FTC takes actions that conflict with courts’ interpretation of antitrust law, or that constitute a significant and unexplained deviation from existing enforcement policies, its initiatives may be subject to legal challenge.

Similarly, while the fact sheet accompanying the Order suggests the FTC is to “ban” non-compete agreements, such a sweeping rule by the agency likely would be invalidated in court. The Order therefore more modestly encourages the agency to “curtail” non-compete “clauses” and agreements “that may unfairly limit worker mobility”; still, even a rule adopting this narrower approach would be subject to legal challenge, particularly if not drawn with great care and precision. Indeed, given that many states already require non-compete agreements to be reasonable in their scope, it is unclear how—if at all—a federal effort to curtail such agreements that “unfairly” limit worker mobility would change the legal landscape.

Expansive rulemaking could also expose the FTC to legal challenges under the constitutional “nondelegation doctrine,” which limits the extent to which Congress may delegate lawmaking power to administrative agencies. Although the nondelegation doctrine has seldom been invoked by the Supreme Court since the New Deal Era, in 2019 five Supreme Court justices expressed interest in reviving the doctrine.[7] Those five justices constitute a majority of the current Supreme Court.  The FTC Act, which delegates to the FTC the authority to regulate “unfair” behavior, may be susceptible to a challenge on the grounds that Congress must provide concrete guidance to cabin the FTC’s exercise of its delegated power.

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[1] Executive Order on Promoting Competition in the American Economy (July 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.

[2] FACT SHEET: Executive Order on Promoting Competition in the American Economy, (July 9, 2021), https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/.

[3] FTC Commissioner Noah Joshua Phillips, Non-Compete Clauses in the Workplace: Examining Antitrust and Consumer Protection Issues, (Jan. 9, 2021), available here.

[4] Id.

[5] Statement of FTC Commissioner Rebecca Kelly Slaughter (July 1, 2021), available here.

[6] U.S. Dept. of Justice and the Federal Trade Commission, Horizontal Merger Guidelines, (Aug. 19, 2010), https://www.ftc.gov/sites/default/files/attachments/merger-review/100819hmg.pdf (explaining that a Herfindahl-Hirschman Index of less than 1500 is “[u]nconcentrated”).

[7] Gundy v. United States,  139 S. Ct. 2116 (2019) (Gorsuch J., dissenting) (joined by Chief Justice Roberts and Justice Thomas); Id. at 2131 (Alito, J., concurring); Paul v. United States, 140 S. Ct. 342 (2019) (Kavanaugh, J., concurring in denial of certiorari).

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The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Helgi Walker, Rachel Brass, Kristen Limarzi, Michael Perry, Stephen Weissman, Jason Schwartz, Katherine Smith, and Chad Squitieri.

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, or any of the following in the firm’s Administrative Law and Regulatory, Antitrust and Competition or Labor and Employment practice groups.

Administrative Law and Regulatory Group:
Eugene Scalia – Washington, D.C. (+1 202-955-8543,[email protected])
Helgi C. Walker – Washington, D.C. (+1 202-887-3599, [email protected])

Antitrust and Competition Group:
Rachel S. Brass – San Francisco (+1 415-393-8293, [email protected])
Kristen C. Limarzi – Washington, D.C. (+1 202-887-3518, [email protected])
Michael J. Perry – Washington, D.C. (+1 202-887-3558, [email protected])
Stephen Weissman – Washington, D.C. (+1 202-955-8678, [email protected])

Labor and Employment Group:
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, [email protected])
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On July 7, 2021, Colorado Governor Jared Polis signed into law the Colorado Privacy Act (“CPA”), making Colorado the third state to pass comprehensive consumer privacy legislation, following California and Virginia.

The CPA will go into effect on July 1, 2023.[1]  In many ways, the CPA is similar—but not identical—to the models set out by its California and Virginia predecessors the California Consumer Privacy Act (“CCPA”), the California Privacy Rights Enforcement Act (“CPRA”) and the Virginia Consumer Data Protection Act (“VCDPA”). The CPA will grant Colorado residents the right to access, correct, and delete the personal data held by organizations subject to the law. It also will give Colorado residents the right to opt-out of the processing of their personal data for purposes of targeted advertising, sale of their personal data, and profiling in furtherance of decisions that produce legal or similarly significant effects on the consumer. In ensuring that they are prepared to comply with the CPA, many companies should be able to build upon the compliance measures they have developed for the California and Virginia laws to a significant extent.

The CPA does, however, contain a few notable distinctions when compared to its California and Virginia counterparts. First, the CPA applies to nonprofit entities that meet certain thresholds described more fully below, whereas the California and Virginia laws exempt nonprofit organizations. Similar to the VCDPA and unlike the CPRA—the California law slated to replace the CCPA in 2023—the CPA does not apply to employee or business-to-business data. Like the VCDPA, the CPA will not provide a private right of action.[2]  Instead, it is enforceable only by the Colorado Attorney General or state district attorneys. The laws in all three states differ with respect to the required process for responding to a consumer privacy request and the applicable exceptions for responding to such requests.

Finally, in addition to adopting certain terminology such as “personal data,” “controller” and “processor,” most commonly used in privacy legislation outside the United States, the CPA applies certain obligations modeled after the European Union’s General Data Protection Regulation (“GDPR”), including the requirement to conduct data protection assessments. Further, the CPA imposes certain obligations on data processors, including requirements to assist the controller in meeting its obligations under the statute and to provide the controller with audit rights, deletion rights, and the ability to object to subprocessors. Companies that have undergone GDPR compliance work thus will have a leg up with respect to these obligations.

The CPA gives the Attorney General rulemaking authority to fill some notable gaps in the statute. Among them are how businesses should implement the requirement that consumers have a universal mechanism to easily opt out of the sale of their personal data or its use for targeted advertising, which must be implemented by July 1, 2023. In addition, as Governor Polis noted in a signing statement, the Colorado General Assembly already is engaged in conversations around enacting “clean-up” legislation to further refine the CPA.[3]

The following is a detailed overview of the CPA’s provisions.

I. CPA’s Key Rights and Provisions

A. Scope of Covered Businesses, Personal Data, and Exemptions

1. Who Must Comply with the CPA?

The CPA applies to any legal entity that “conducts business in Colorado or produces or delivers commercial products or services that are intentionally targeted to residents of Colorado” and that satisfies one or both of the following thresholds:

1. During a calendar year, controls or processes personal data of 100,000 or more Colorado residents; or
2. Both derives revenue or receives discounts from selling personal data and processes or controls the personal data of 25,000 or more Colorado residents.[4]

In other words, the CPA will likely apply to companies that interact with Colorado residents, or process personal data of Colorado residents on a relatively large scale, including non-profit organizations. Like the California and Virginia laws, the CPA does not define what it means to “conduct business” in Colorado. However, in the absence of further guidance from the Attorney General, businesses can assume that economic activity that triggers tax liability or personal jurisdiction in Colorado likely will trigger CPA applicability.

Notably, like the VCDPA (and unlike the CCPA), the statute does not include a standalone revenue threshold for determining applicability separate from the above thresholds regarding contacts with Colorado. Therefore, even large businesses will not be subject to the CPA unless they fall within one of the two categories above, which focus on the number of Colorado residents affected by the business’s processing or control of personal data.

The CPA contains a number of exclusions, including both entity-level and data-specific exemptions. For instance, it does not apply to certain entities, including  air carriers[5] and national securities associations.[6] Employment records and certain data held by public utilities, state government, and public institutions of higher education are also exempt.[7] The CPA also exempts data subject to various state and federal laws and regulations, including the Gramm-Leach-Bliley Act (“GLBA”), Health Insurance Portability and Accountability Act (“HIPAA”), Fair Credit Reporting Act (“FCRA”), and the Children’s Online Privacy Protection Act (“COPPA”).[8] Like the California and Virginia laws, however, these latter exemptions do not apply at the entity level and instead only apply to data that is governed by and processed in accordance with such laws.

The CPA also explicitly exempts a wide variety of activities in which controllers and processors might engage, such as responding to identity theft, protecting public health, or engaging in internal product-development research.[9]

2. Definition of “Personal Data” and “Sensitive Data”

The CPA defines personal data as “information that is linked or reasonably linkable to an identified or identifiable individual,” but excludes “de-identified data or publicly available information.”[10] The CPA defines “publicly available information” as information that is “lawfully made available from federal, state, or local government records” or that “a controller has a reasonable basis to believe the consumer has lawfully made available to the general public.”[11] The CPA further does not apply to data “maintained for employment records purposes.”[12]

As discussed below, opt-out rights apply to certain processing of personal data, while opt-in consent must be obtained prior to processing categories of data that are “sensitive.” The statute defines “sensitive data” to mean “(a) personal data revealing racial or ethnic origin, religious beliefs, a mental or physical health condition or diagnosis, sex life or sexual orientation, or citizenship or citizenship status; (b) genetic or biometric data that may be processed for the purpose of uniquely identifying an individual; or (c) personal data from a known child.”[13]

B. Consumer Rights Under the Colorado Privacy Act

A “consumer” under the CPA is a Colorado resident who is “acting only in an individual or household context.”[14] Like the VCDPA, the CPA expressly exempts individuals acting in a “commercial or employment context,” such as a job applicant, from the definition of “consumer.”[15] This contrasts with the CPRA, which does not exempt business-to-business and employee data, and the CCPA’s exemptions for such data that are set to expire in 2023.

1. Access, correction, deletion, and data portability rights

The CPA gives Colorado consumers the right to access, correct, delete, or obtain a copy of their personal data in a portable format.[16]

Controllers must provide consumers with “a reasonably accessible, clear, and meaningful privacy notice.”[17] Those notices must tell consumers what types of data controllers collect, how they use it and what personal data is shared with third parties, with whom they share it, and “how and where” consumers can exercise their rights.[18]

To exercise their rights over their personal data, consumers must submit a request to the controller.[19] Controllers cannot require consumers to create an account to make a request about their data,[20] and they also cannot discriminate against consumers for exercising their rights, such as by increasing prices or reducing access to products or services.[21] However, they can still offer discounts and perks that are part of loyalty and club-card programs.[22]

2. Right to opt-out of sale of personal data, targeted advertising, and profiling

As under the VCDPA, under the CPA consumers have the right to opt out of the processing of their non-sensitive personal data for purposes of targeted advertising, the sale of personal data, or “profiling in furtherance of decisions that produce legal or similarly significant effects.”[23] The CPA, like the CCPA, adopts a broad definition of “sale” of personal data to mean “the exchange of personal data for monetary or other valuable consideration by a controller to a third party.”[24] However, the CPA contains some broader exemptions from the definition of “sale” than the CCPA, including for the transfer of personal data to an affiliate or to a processor or when a consumer directs disclosure through interactions with a third party or makes personal data publicly available.[25]

If the controller sells personal data or uses it for targeted advertising, the controller’s privacy notice must “clearly and conspicuously” disclose that fact and how consumers can opt out.[26] In addition, controllers must provide that opt-out information in a “readily accessible location outside the privacy notice.”[27] However, the CPA, like the VCDPA, does not specify how controllers must present consumers with these opt-out rights.

The CPA permits consumers to communicate this opt out through technological means, such as a browser or device setting.[28] By July 1, 2024, consumers must be allowed to opt out of the sale of their data or its use for targeted advertising through a “user-selected universal opt-out mechanism.”[29] Opting-out of profiling, however, does not appear to be explicitly addressed by this mechanism. Exactly what the universal opt-out mechanism will look like will be up to the Attorney General, who will be tasked with defining the technical requirements of such a mechanism by July 1, 2023.[30]

3. New rights to opt-in to the processing of “sensitive” data and to appeal

a. Right to opt-in to the processing of “sensitive” data”

Similar to the VCDPA, controllers must first obtain a consumer’s opt-in consent before processing “sensitive data,” which includes children’s data; genetic or biometric data used to uniquely identify a person; and “personal data revealing racial or ethnic origin, religious beliefs, a mental or physical health condition or diagnosis, sex life or sexual orientation, or citizenship or citizenship status.”[31] Unlike the VCDPA, however, the CPA does not define “biometric” data.

Consent can be given only with a “clear, affirmative act signifying a consumer’s freely given, specific, informed, and unambiguous agreement,” such as an electronic statement.[32] Like its California counterparts, the CPA further specifies that consent does not include acceptance of broad or general terms, “hovering over, muting, pausing, or closing a given piece of content,” or consent obtained through the use of “dark patterns,” which are “user interface[s] designed or manipulated with the substantial effect of subverting or impairing user autonomy, decision making, or choice.”[33]

b. Right to appeal

Like its counterparts, the CPA provides that controllers must respond to requests to exercise the consumer rights granted by the statute within 45 days, which the controller may extend once for an additional 45-day period if it provides notice to the requesting consumer explaining the reason for the delay.[34] A controller cannot charge the consumer for the first such request the consumer makes in any one-year period, but can charge for additional requests in that year. [35] The CPA, like the VCDPA (but unlike the CCPA/CPRA), requires controllers to establish an internal appeals process for consumers when the controller does not take action on their request.[36] The appeals process must be “conspicuously available and as easy to use as the process for submitting the request.”[37] Once controllers act on the appeal—which they must do within 45 days, subject to an additional extension of 60 days if necessary—they must also tell consumers how to contact the Attorney General’s Office if the consumer has concerns about the result of the appeal.[38]

C. Business Obligations

1. Data Minimization and technical safeguards requirements

Like the California and Virginia laws, the CPA limits businesses’ collection and use of personal data and requires the implementation of technical safeguards.[39] The CPA explicitly limits the collection and processing by controllers of personal data to that which is reasonably necessary and compatible with the purposes previously disclosed to consumers.[40] Relatedly, controllers must obtain consent from consumers before processing personal data collected for another stated purpose.[41] Also, under the CPA controllers and processors must take reasonable measures to keep personal data confidential and to adopt security measures to protect the data from “unauthorized acquisition” that are “appropriate to the volume, scope, and nature” of the data and the controller’s business.[42]

2. GDPR-like requirements – data protection assessments, data processing agreements, restrictions on processing personal data

The CPA, like the VCDPA, requires controllers to conduct “data protection assessments,” similar to the data protection impact assessments required under the GDPR, to evaluate the risks associated with certain processing activities that pose a heightened risk – such as those related to sensitive data and personal data for targeted advertising and profiling that present a reasonably foreseeable risk of unfair or deceptive treatment or unlawful disparate impact to consumers – and the sale of personal data.[43] Unlike the GDPR, however, the CPA does not specify the frequency with which these assessments must occur. The CPA requires controllers to make these assessments available to the Attorney General upon request.[44]

The CPA also requires controllers and processors to contractually define their relationship. These contracts must include provisions related to, among other things, audits of the processor’s actions and the confidentiality, duration, deletion, and technical security requirements of the personal data to be processed.[45]

D. Enforcement

The CPA is enforceable by Colorado’s Attorney General and state district attorneys, subject to a 60-day cure period for any alleged violation until 2025 (in contrast to the 30-day cure period under the CCPA and VCDPA and the CPRA’s elimination of any cure period).[46] Local laws are pre-empted and consumers have no private right of action.[47] A violation of the CPA constitutes a deceptive trade practice for purposes of the Colorado Consumer Protection Act, with violations punishable by civil penalties of up to $20,000 per violation (with a “violation” measured per consumer and per transaction).[48] The Attorney General or district attorney may enforce the CPA by seeking injunctive relief.

In addition to rulemaking authority to specify  the universal opt-out mechanism, the Colorado Attorney General is authorized to “adopt rules that govern the process of issuing opinion letters and interpretive guidance to develop an operational framework for business that includes a good faith reliance defense of an action that may otherwise constitute a violation” of the CPA.[49]

* * * *

As we counsel our clients through GDPR, CCPA, CPRA, VCDPA, and CPA compliance, we understand what a major undertaking it is and has been for many companies. As discussed above, the CPA resembles the VCDPA in several respects, including by requiring opt-in consent for the processing of “sensitive data,” permitting appeal of decisions by companies to deny consumer requests, as well as by imposing certain GDPR-style obligations such as the requirement to conduct data protection assessments. Because many of the privacy rights and obligations in the CPA are similar to those in the GDPR, CCPA, CPRA, and/or VCDPA, companies should be able to strategically leverage many of their existing or in-progress compliance efforts to ease their compliance burden under the CPA.

In light of this sweeping new law, we will continue to monitor developments, and are available to discuss these issues as applied to your particular business.

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   [1]   Sec. 7(1), Colorado Privacy Act, Senate Bill 21-190, 73d Leg., 2021 Regular Sess. (Colo. 2021), to be codified in Colo. Rev. Stat. (“C.R.S.”) Title 6.

   [2]   E.g.,C.R.S. §§  6-1-1311(1); 6-1-108(1).

   [3]   SB 21-190 Signing Statement, available at https://drive.google.com/file/d/1GaxgDH_sgwTETfcLAFK9EExPa1TeLxse/view.

   [4]   C.R.S. §  6-1-1304(1).

   [5]   C.R.S. § 6-1-1304(2)(l).

   [6]   C.R.S. § 6-1-1304(2)(m).

   [7]   C.R.S. § 6-1-1304(2)(k), (n), (o).

   [8]   E.g., C.R.S. §§ 6-1-1304(2)(e), (i)(II), (j)(IV), (q).

   [9]   C.R.S. § 6-1-1304(3)(a).

  [10]   C.R.S. § 6-1-1303(17).

  [11]   C.R.S. § 6-1-1303(17)(b).

  [12]   C.R.S. § 601-1304(2)(k).

  [13]   C.R.S. § 6-1-1303(24).

  [14]   C.R.S. § 6-1-1303(6)(a).

  [15]   C.R.S. § 6-1-1303(6)(b).

  [16]   C.R.S. § 6-1-1306(1)(b)-(e).

  [17]   C.R.S. § 6-1-1308(1)(a).

  [18]   C.R.S. § 6-1-1308(1)(a).

  [19]   C.R.S. § 6-1-1306(1).

  [20]   C.R.S. §§ 6-1-1306(1); 6-1-1308(1)(c)(I).

  [21]   C.R.S. § 6-1-1308(1)(c)(II), (6).

  [22]   C.R.S. § 6-1-1308(1)(d).

  [23]   C.R.S. § 6-1-1306(1)(a)(I).

  [24]   C.R.S. § 6-1-1303(23)(a) (emphasis added).

  [25]   C.R.S. § 6-1-1303(23)(b).

  [26]   C.R.S. § 6-1-1308(1)(b); see also 6-1-1306(1)(a)(III), 6-1-1306(1)(a)(IV)(C).

  [27]   C.R.S. § 6-1-1306(1)(a)(III).

  [28]   C.R.S. § 6-1-1306(1)(a)(II).

  [29]   C.R.S. § 6-1-1306((1)(a)(IV).

  [30]   C.R.S. § 6-1-1306((1)(a)(IV)(B).

  [31]   C.R.S. § 6-1-1303(24).

  [32]   C.R.S. § 6-1-1303(5).

  [33]   C.R.S. § 6-1-1303(5), (9).

  [34]   C.R.S. § 6-1-1306(2)(a)-(b).

  [35]   C.R.S. § 6-1-1306(2)(c).

  [36]   C.R.S. § 6-1-1306(3)(a).

  [37]   C.R.S. § 6-1-1306(3)(a)-(b).

  [38]   C.R.S. § 6-1-1306(3)(b)-(c).

  [39]   See generally C.R.S. §§ 6-1-1305, 6-1-1308(2)-(5).

  [40]   C.R.S. § 6-1-1308(2)-(4).

  [41]   C.R.S. § 6-1-1308(4).

  [42]   C.R.S. §§ 6-1-1305(3)(a); 6-1-1308(5).

  [43]   C.R.S. § 6-1-1309.

  [44]   C.R.S. § 6-1-1309(4).

  [45]   C.R.S. § 6-1-1305(3)-(5).

  [46]   C.R.S. §§ 6-1-1311(1)(a), (d).

  [47]   C.R.S. §§ 6-1-1311(1)(b); 6-1-1312.

  [48]   C.R.S. § 6-1-1311(1)(c); see C.R.S. § 6-1-112(a).

  [49]   C.R.S. § 6-1-1313(3).

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This alert was prepared by Ryan Bergsieker, Sarah Erickson, Lisa Zivkovic, and Eric Hornbeck.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any member of the firm’s Privacy, Cybersecurity and Data Innovation practice group.

Privacy, Cybersecurity and Data Innovation Group:

United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, [email protected])
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, [email protected])
Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])
Matthew Benjamin – New York (+1 212-351-4079, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [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])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Robert K. Hur – Washington, D.C. (+1 202-887-3674, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
Kristin A. Linsley – San Francisco (+1 415-393-8395, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Ashley Rogers – Dallas (+1 214-698-3316, [email protected])
Deborah L. Stein – Los Angeles (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])

Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, [email protected])
James A. Cox – London (+44 (0) 20 7071 4250, [email protected])
Patrick Doris – London (+44 (0) 20 7071 4276, [email protected])
Kai Gesing – Munich (+49 89 189 33-180, [email protected])
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, [email protected])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Alejandro Guerrero – Brussels (+32 2 554 7218, [email protected])
Vera Lukic – Paris (+33 (0)1 56 43 13 00, [email protected])
Sarah Wazen – London (+44 (0) 20 7071 4203, [email protected])

Asia
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Connell O’Neill – Hong Kong (+852 2214 3812, [email protected])
Jai S. Pathak – Singapore (+65 6507 3683, [email protected])

Gibson Dunn’s Supreme Court Round-Up provides summaries of the Court’s opinions from this Term, a preview of cases set to be argued next Term, and other key developments on the Court’s docket. In the October 2020 Term, the Court heard argument in 57 cases, including 2 original-jurisdiction cases, and Gibson Dunn was counsel or co-counsel for a party in 4 of those cases.

Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions. The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions. The Round-Up provides a concise, substantive analysis of the Court’s actions. Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next. The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions.

To view the Round-Up, click here.

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Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 15 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the areas of intellectual property, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 32 petitions for certiorari since 2006.

*   *   *  *

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group.

Theodore B. Olson (+1 202.955.8500, [email protected])
Amir C. Tayrani (+1 202.887.3692, [email protected])
Jacob T. Spencer (+1 202.887.3792, [email protected])
Joshua M. Wesneski (+1 202.887.3598, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On June 23, 2021, the U.S. Supreme Court held 6-3 that a California regulation granting labor organizations a right of access to agricultural employers’ property to solicit support for unionization, constitutes a “per se” physical taking under the Fifth Amendment. Finding that “the regulation here is not transformed from a physical taking into a use restriction just because the access granted is restricted to union organizers, for a narrow purpose, and for a limited time” the Court’s decision in Cedar Point Nursery v. Hassid arguably signals an expanded definition of physical takings which potentially could encompass additional government regulations. The Court’s analysis, however, was strongly influenced by the relative intrusiveness and persistence of the intrusions authorized by the California regulation before it—which the Court analogized to a traditional “easement”— and which it distinguished from  more limited tortious intrusions akin to trespasses and from traditional health and safety inspections, neither of which raise takings issues. It is therefore too soon to know whether Cedar Point will markedly alter takings jurisprudence.

I. Background

The California Agricultural Labor Relations Act of 1975 grants union organizers a right to take access to the property of agricultural employers for the purposes of soliciting the support of agricultural workers by filing written notice with the state’s Agricultural Labor Relations Board and providing a copy of the notice to the employer. Under the regulation, agricultural employers must allow the organizers to enter and remain on the premises for up to three hours per day, 120 days per year. Agricultural employers who interfere with the organizers’ right of entry onto their property may be subjected to sanctions for unfair labor practices.

In 2015, organizers from the United Farm Workers sought entry into Cedar Point Nursery and Fowler Packing Company without providing written notice. After the organizers entered Cedar Point and engaged in disruptive behavior, Cedar Point filed a charge against the union for entering the property without notice; the union responded with its own charge against Cedar Point for committing an unfair labor practice. The union filed a similar charge against Fowler Packing Company, from which they were as been blocked from accessing altogether.

The District Court dismissed the employers’ complaints, rejecting their argument that the regulation constituted a per se physical taking. The Court of Appeals affirmed, evaluating the claims under the multi-prong balancing test that applies to use restrictions. The U.S. Supreme Court disagreed with the lower courts and reversed, finding that the regulation did qualify as a per se physical taking because it granted a formal entitlement to enter the employers’ property that was analogous to an easement, thereby appropriating a right of access for union organizers to physically invade the land, and impair the property owner’s “right to exclude” people from its property.

II. Issues & Holding

The U.S. Constitution requires the government to provide just compensation whenever it effects a taking of property. Under a straightforward application of takings doctrine, just compensation will always be required when the government commits a per se physical taking by physically occupying or possessing property without acquiring title. Takings claims arising from regulations that restrict an owner’s ability to use their property are less clear-cut. Such claims will be evaluated under a multi-prong balancing test, and just compensation is only required if it is determined that the regulation “goes too far” as a regulatory taking.

The outcome of this particular case turned on whether the Court viewed the California regulation as a per se physical taking, for which just compensation  generally is required, or as a “regulatory” taking, the doctrine applied to use restrictions and under which compensation is required only if the restriction “goes too far.” The Court found that the California access provision qualified as a per se physical taking because it did not merely restrict how the owner used its own property, but it appropriated the owner’s “right to exclude” for the government itself or for a third party by granting organizers the right physically to enter and occupy the land for periods of time. Under the Court’s holding, the fact that the physical appropriation arose from a regulation was immaterial to its classification as a per se taking. As the Court explained, although use restrictions are often analyzed as “regulatory takings,” “[t]he essential question is not whether the government action at issue comes garbed as a regulation (or statute, or ordinance, or miscellaneous decree). It is whether the government has physically taken property for itself or someone else—by whatever means—or ha instead restricted a property owner’s ability to use his own property.”

The Court supported its holding with past takings jurisprudence. Under the landmark case Loretto v. Teleprompter Manhattan CATV Corp., any regulation that authorizes a permanent physical invasion of property qualifies as a taking. 458 U.S. 419 (1982). The Court clarified that Loretto did not require a finding that a per se physical taking had not occurred since the invasion was only temporary and intermittent rather than permanent and ongoing, because the key element of a taking under Loretto is the physical invasion itself. While the duration and frequency of the physical invasion may bear on the amount of compensation due, it does not alter its classification as a per se taking. By authorizing third parties to physically invade agricultural employers’ property, the California regulation amounted to the government having taken a property interest analogous to a servitude or easement, and such actions have historically been treated as per se physical takings. The Court also made clear that a physical invasion need not match precisely the definition of “easement” under state law to qualify as a  taking.

The Court also considered the seminal case of PruneYard Shopping Center v. Robins, in which the California Supreme Court used the multi-factor balancing test to find that a restriction on a privately owned shopping center’s right to exclude leafleting was not a taking. 447 U.S. 74 (1980). The Court pointed out that unlike the California agricultural property, the shopping center in PruneYard was open to the public. Finding a significant difference between “limitations on how a business generally open to the public may treat individuals on the premises” and “regulations granting a right to invade property closed to the public,” the Court rejected the argument that PruneYard stood for the proposition that limitations on a property owner’s right to exclude must always be evaluated as regulatory rather than per se takings.

Finally, the Court confirmed that its holding would not disturb ordinary government regulations. The Court noted that isolated physical invasions are properly analyzed as torts (trespasses), and not takings, that many government-authorized restrictions simply reflect longstanding common limitations on property rights (such as ruled requiring property owners to abate nuisances), and, most importantly, that its analysis would not affect traditional health and safety inspections that require entry onto private property will generally not constitute a taking. Such inspections are generally permitted on the theory that the government could have refused to license the commercial activity in question, and that an access requirement is thus proportional to that “benefit” and constitutional.

III. Takeaways

The decision does not expand the scope of per se takings to encompass regulations which merely restrict the use of property without physically invading the land. Legislative restrictions that do not involve a physical invasion will still be evaluated under the multi-prong balancing test before just compensation is required. This decision does not alter the legality of certain categories of government-authorized physical invasions, such government health and safety inspections. It is however a reaffirmation that there are limits to the government’s ability to mandate public access to private property.

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The following Gibson Dunn attorneys prepared this client update: Amy Forbes.

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, the author, or any of the following leaders and members of the firm’s Land Use and Development or Real Estate practice groups in California:

Doug Champion – Los Angeles (+1 213-229-7128, [email protected])
Amy Forbes – Los Angeles (+1 213-229-7151, [email protected])
Mary G. Murphy – San Francisco (+1 415-393-8257, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

In this update, we look at the key employment law considerations our clients face across the UK, France and Germany connected to a return to the workplace in the near future, including: (i) ensuring a “Covid-secure” workplace’ and whether to continue to offer flexible working arrangements in the future; (ii) whether to implement an employee Covid-19 vaccination policy (and if so, whether it should be compulsory or voluntary); and (iii) vaccination certification logistics and the facilitation of Covid-19 testing for employees. The legal and commercial issues around Covid-19 continue to be fast-developing, alongside guidance from governments and national authorities, which employers and lawyers alike will continue to monitor closely in the coming months.

1.   A return to the workplace

UK

On 5 July 2021, the Prime Minister announced the UK government’s plans to lift the remaining Covid-19 legal restrictions in England from 19 July 2021 following a further review of the health crisis on 12 July 2021 (with varying timeframes across the other nations of the United Kingdom). Should the lifting of restrictions be confirmed on 12 July, it is expected that there will no longer be legal limits on social contact or social distancing, or mandatory face covering requirements except in certain specific settings (such as healthcare settings). Event and venue capacity caps are also expected to be dropped and venues such as nightclubs should be permitted to reopen. UK employers are therefore anticipating a return to the workplace over the next few months, with the government’s message of “work from home where you can” expected to be removed from 19 July 2021.

With a safe return to the workplace in mind, to the extent they have not done so already, employers should be ensuring their workplaces are “Covid-secure” and risk assessments have been conducted in line with the UK’s Health and Safety Executive’s regularly updated guidelines which are scheduled for further review on 19 July 2021. Practical measures to be put in place will vary depending on the nature of the workplace and industry-specific guidelines, but employers may need to (or wish to) produce policy documents to outline protocols covering meetings, hand washing, mask-wearing, shielding and self-isolation in the event of exposure to Covid-19. In terms of the practical logistics of a return to the workplace, employers should consider whether they wish to continue flexible working arrangements that may currently be in place for their workforce including working from home, the rotation of teams with allocated days to attend the workplace and even specifying arrival and departure times to avoid “bottle necks” in reception areas. UK employers have a duty to consult with employees on matters concerning health and safety at work so will need to engage with their workforce and any relevant unions in good time in advance of a return to the workplace.

Some UK employers will also be preparing for the anticipated end of UK government financial support towards employer costs through the Coronavirus Job Retention Scheme (which is currently set to run until the end of September 2021), the reintegration of furloughed employees, managing levels of accrued untaken annual leave which employers may seek to require their employees take at specific times to ensure it is well distributed, the management of employees who are reluctant to return to the workplace and their options in terms of disciplinary processes and navigating potential employment claims associated with any such processes, as well as potential headcount reductions and redundancies.

Germany

The home office regulations in Germany were tightened in spring of this year, ending in June. Unlike the UK, Germany had to face a serious “third wave” of Covid-19 infections in spring. Until April 2021, German law only stipulated an obligation for employers to provide working-from-home opportunities whenever possible. However, after intense public discussions, the government imposed an additional and enforceable obligation for employees to actually make use of such offers. Due to the rapidly falling numbers of infections in Germany during early summer, the government announced that the working-from-home obligation shall cease from the end of June.

However, a fast return to the status before the pandemic is still highly unlikely. Many large entities have already announced that they will provide non-mandatory work-from-home  opportunities to their employees after the end of June in order to allow all employees to return to the office when they feel comfortable doing so. Some entities may no longer have the capacity to provide office space to all employees every day, five days per week.

Due to the recent and unpredictable development of the Delta variant and generally possible increasing infections in autumn, employers are well advised to keep the work-from-home infrastructure for a potential mandatory return to the home office in place.

France

The health crisis has led employers in France to adopt strict measures to prevent the spread of Covid-19 which have varied in intensity depending on the period of the pandemic in question. These measures have required a great deal of work by Human Resources personnel, who have had to adapt to many recommendations from the French government including the National Health Protocol for companies (hereinafter the “Health Protocol”) – a driving force which is regularly updated according to the ever-evolving health situation.

On Thursday, 29 April 2021, President Emmanuel Macron unveiled a 4-step plan to ease lockdown in France, with key dates on 3 May 2021, 19 May 2021, 9 June 2021, and 30 June 2021, which is progressively accompanied by an easing of the Health Protocol. As of 9 June 2021, working from home is no longer the rule for all workplaces and, where applicable, it is now up to the employer to prescribe a minimum number of days per week for employees to work from home or from the workplace within the framework of local social dialogue. In this way, the easing of the Health Protocol is slowly handing back  decision-making authority to employers by allowing them to determine the right proportion of at home/onsite days for their employees. However, all hygiene and social distancing rules must continue to be followed by employers, as well as the promotion of remote meetings where possible.

As the physical risks of returning to the workplace reduce, employers must continue to monitor and account for the psychosocial risks, insofar as a return to the workplace may be a source of anxiety for employees (such as the fear of having lost their professional reflexes or the fear of physical contamination). Employers must therefore remain vigilant on these issues as they manage the return of their workforce.

2.   Vaccination policies

UK

The UK government’s Department of Health and Social Care has said that it is aiming to have offered a Covid-19 vaccination to all adults in the UK by the end of July 2021, although the vaccination is not mandatory. In his 5 July 2021 announcement, the Prime Minister confirmed that the government plans to recognise the protection afforded to fully-vaccinated individuals in relation to self-isolation requirements upon return from travel abroad or contact with an individual who has tested positive for Covid-19. Employers are therefore considering some of the following issues with respect to the vaccination of their workforce:

(i) Whether to introduce voluntary vaccination policy or vaccination as a contractual obligation or pre-requisite to employment for new recruits: UK health and safety legislation requires employers to take reasonable steps to reduce workplace risks, and some employers will be of the view that requiring (or encouraging) employee vaccination is a reasonable step to take towards protecting their workforce from the risks of Covid-19 in the workplace. This assessment is likely to depend largely on the nature of the work being done, the workforce (its interaction generally and with third parties) and the nature of the workplace.

Proposed amendments to the Health and Social Care Act 2008 (Regulated Activities) Regulations 2014 (SI 2014/2936) will make it mandatory from October 2021 for anyone working in a regulated care home in England to be fully vaccinated against Covid-19 (subject to a grace period). This includes all workers, agency workers, independent contractors and volunteers who may work onsite. The government is currently considering whether this mandatory vaccination policy should apply to other healthcare and domiciliary care settings. In the meantime, many employers who are not bound by this policy are nevertheless considering introducing a vaccination policy, whether voluntary or compulsory. Any vaccination policy must be implemented carefully and thoughtfully.

(ii) Employees who refuse the Covid-19 vaccination: Employees may be reluctant or refuse to have the Covid-19 vaccination for a variety of reasons such as their health, religious beliefs or simply personal choice. Depending on whether employers choose to encourage their employees to have the vaccination through a voluntary policy, or make vaccination a mandatory contractual requirement, where employees decline vaccination, employers will need to consider: (a) whether they need to take additional steps to protect the health and safety of those unvaccinated employees or others, including addressing any measures to ensure the workplace is “Covid-secure” or extending working-from-home flexibility for unvaccinated employees; (b) whether disciplinary action (including dismissal) is an option; and (c) how best to manage the risk of potential employment claims.

Employers will be seeking to balance their obligations to protect their workforce under health and safety legislation (which may in part be achieved through high levels of workforce vaccination), reporting obligations in respect of diseases appearing in the workplace (which include Covid-19) and their general duty of care towards employees on the one hand, with employees’ right to refuse the vaccination and the risk of potential employment claims on the other.

(iii) Data protection implications: Employers who collect information relating to whether their employees have been vaccinated will be processing special category personal data, which means they must comply with the requirements of the UK data protection laws in respect of such processing. As such, employers processing vaccination data will need a lawful basis to do so under Article 6(1) of the UK GDPR as well as meeting one of the conditions for processing under Article 9. Furthermore, any such processing must be done in a transparent way so relevant privacy notices will need to be updated and employers must ensure that they also take account of data minimisation and data security obligations.  Specifically, they should ensure they do not retain the information for longer than necessary or record more information than they need for the purpose for which it is collected (i.e., protecting the workforce), as well as ensuring any such data remains accurate and safe from data breaches.

Whether an employer has a legal basis for processing this special category personal data will depend on the context of their employees’ work, the relevant industry and other factors such as the interaction of their workforce with each other as well as clients or other third parties.

Germany

The German government lifted its vaccination prioritization system on 7 June 2021. Most recently, occupational doctors (Betriebsärzte) have been involved in the vaccination campaign as well in order to accelerate it.

Employers may be interested in reaching the highest possible vaccination rate amongst their employees. There are not only economic reasons for such an approach (e.g., to mitigate the risk of disrupted production as a result of quarantine measurements), employers also have a legal obligation towards their employees to protect them and create a safe work environment. In this regard, however, there are crucial points to consider:

(i) So far, there is no indication for the lawfulness of an obligatory vaccination: It is quite clear that there is no justification for the state to make vaccination mandatory for its citizens – mainly for constitutional reasons. The legality of a contractual vaccination obligation imposed by the employer is also widely opposed in Germany.

(ii) Alternatively – and less risky from a legal perspective –,  employers may consider a cooperative approach to achieve a high percentage of vaccinated employees: This could include different measures to increase willingness to be vaccinated amongst the workforce, e.g.,  by providing information about the vaccine, highlighting the advantages, or offering the vaccination through the company’s medical provider. A more controversial method  is to consider rewards for vaccinated employees. There is no case law yet on the issue of whether employers can legally grant such bonuses. However, an incentive will most likely be considered lawful if the bonus stays within a reasonable range. Only in such a case, a completely voluntary decision for each employee to decide for or against a vaccination can be assumed. Even negative incentives can be justified under special circumstances. Therefore, absent any statutory rules on this issue it seems reasonable and appropriate to deny non-vaccinated employees access to common areas like close-area production areas, warehouses, or the cafeteria in order to avoid a spread of infections. On the other hand, it is not admissible to threaten an employee with termination if that employee decides against vaccination.

(iii) Data protection implications: Given the fact that the new UK GDPR is an almost verbatim adoption of the EU GDPR, the data protection implications for the UK and the EU, including Germany and France, are basically identical. Articles 6 and 22 of the EU GDPR can provide the necessary basis to legally handle the processing of health data like the vaccination status. Nonetheless, employers will have to make sure this is done in a transparent fashion and the information is not kept longer than absolutely necessary.

In the event that employers offer bonuses to employees for getting vaccinated, compliance with the EU GDPR is less problematic as the employees will likely provide their personal data on a voluntary basis. However, to comply with the EU GDPR, employers must ensure they have explicit consent for the data processing.

France

In France, vaccination against Covid-19 has been progressively extended to new audiences in stages and in line with accelerated vaccine deliveries. Since 31 May 2021, vaccination has been available to all over 18 years’ old including those without underlying health conditions. As of 15 June 2021, it has been available to all young people aged  between 12 to 18 years’ old.

(i) No obligation to get vaccinated: Employees are encouraged to be vaccinated as part of the vaccination strategy set out by France’s health authorities. However vaccination against Covid-19 remains voluntary and there should be no consequences from an employer if an employee refuses vaccination. Indeed, the mandatory or simply recommended nature of any occupational vaccination is decided by the French Ministry of Health (Ministère de la Santé) following the opinion of the French High Authority of Health (Haute Autorité de Santé). In the case of Covid-19, the mandatory nature of the vaccination has not yet been confirmed. Therefore, employers cannot request employees get vaccinated as a condition of returning to the workplace. In the same way, vaccinated employees will not be able to refuse to return to the workplace on the grounds that their colleagues have not been vaccinated.

As an employer cannot force an employee to be vaccinated, one big question arises in relation to those employees whose  jobs require them to travel abroad regularly, particularly to countries where entry is allowed or denied according to Covid-19 vaccination status. Although no position has been taken in France on this subject for the moment, it seems likely that an employer will be able to require such an employee to prove that they has been vaccinated before allowing them to travel on company business.

(ii) Compliance with strict confidentiality and the EU GDPR: An employer cannot disclose information relating to an employee’s vaccination status, nor their willingness to be vaccinated, to another person under the EU GDPR. It is therefore, not possible for an employer to organise for a vaccination invitation to be sent to individual employees identified as vulnerable or whose job requires proof of vaccination. Indeed, such a process would allow the employer to obtain confidential information concerning the health of the employees in question, which is contrary to medical secrecy and which data is considered “sensitive” health data under the EU GDPR.

(iii) Involvement of occupational health services: The Covid-19 vaccination may be performed by occupational health services. If an employee chooses to go through this service, they are allowed to be absent from work during their working hours. No sick leave is required and the employer cannot object to their absence. In other situations, in particular if an employee chooses to be vaccinated in a vaccinodrome or at their doctor’s practice, there is no right to leave. However, in our opinion, the employer must facilitate the vaccination of employees in order to comply with its health and safety obligations.

3.   Vaccination certification and Covid testing

UK

Vaccination certification

The UK government has introduced a Covid-19 vaccination status certification system known as the “NHS COVID Pass”. The Pass can be downloaded onto the NHS App on an individual’s smartphone and be used within the UK and abroad by those who have received a Covid-19 vaccination to demonstrate their vaccination status. In his 5 July 2021 announcement, the Prime Minister confirmed that a Covid-19 vaccination certificate will not be legally required as a condition of entry to any venue or event in the UK, but businesses may make use of the NHS Covid Pass certification if they wish to do so. Employers may therefore ask their employees to show their NHS Covid Pass as a condition to returning to the workplace or particiating in certain activites, but to the extent they do so, the employment and data privacy issues noted above will need to be considered in advance to ensure employers do not expose themselves to risk of claims.

Covid testing

Since April 2021, the UK government has made Covid-19 lateral flow tests available at no cost to everyone in England. Under its current workplace testing scheme, free rapid lateral flow tests will continue to be made available until the end of July 2021. UK government guidance encourages employers to offer regular (twice weekly) testing to their on-site employees to reduce the risk of Covid-19 transmission in the workplace, although such testing programs are voluntary. Employers who propose introducing Covid-19 testing for their workforce will need to consider the risks and implications of doing so, including: (i) the terms of any policy around Covid-19 testing, including whether testing will be mandatory or voluntary and the extent to which they need to consult with the workforce ahead of introducing such policy; and (ii) how to manage employee reluctance to submit to testing, and whether disciplinary proceedings will be appropriate or feasible, taking into account the risk of claims from their employees.

Germany

Vaccination certification

On 17 March 2021, the European Commission presented its proposal to create a Digital Green Certificate. It aims to standardize the mechanism by which a vaccination certificate is verified throughout the EU and to facilitate the right of free movement for EU citizens. Germany recently presented a new digital application for this certificate, the “CovPass-App”. Additionally, the newest version of the “Corona Warn App” is also capable of saving and displaying an individual’s vaccination certificate. It is possible to check their immunization status by scanning a QR-code on “the CovPassCheck App” and users are able to get their certificate uploaded to the application on their smartphone at selected pharmacies and doctors.

Regardless of the abstract possibilities of verification, employers in Germany and the EU will have to consider if and how they would like to use these tools. For instance, certificates might open up options to release employees from potential test obligations or work-from-home orders. At the same time, employers will have to observe aforementioned data protection implications and avoid unlawful discrimination or indirect vaccination obligations.

Covid testing

In Germany, rapid testing is currently free of charge and widely available. In addition, employers are required to offer at least two rapid tests a week for employees that are required to work onsite. The German government has declared that whilst employers’ no longer have an obligation to offer work-from-home opportunities, their obligation to offer rapid tests to employees will remain after the end of June. However, employees are not legally required to make use of this offer. This raises the question for employers whether or not they should make these tests mandatory. The legality of mandatory testing has not been assessed  by a German court yet. It will depend primarily on the outcome of the balancing of the conflicting interests of employers and employees. While employees may claim a general right of privacy and cannot be required to undergo medical testing, employers can argue that they have a legal obligation to ensure the safety of their other employees.

Currently, one can argue that, due to the current extraordinary pandemic situation, the interests of the employer generally outweigh reservations of the employee against being tested or testing themselves. However, this might very well change when the number of cases continues to drop and the vaccination rate rises. Thus, employers electing to apply such measures are well-advised to monitor the nationwide and even local epidemiological developments closely and adapt their policies accordingly.

Again, the test results are “health data” that fall within the scope of the EU GDPR. Therefore, the data protection implications mentioned above apply accordingly. In the event that entities are having a works council, potential questions of co-determination rights according to the Works Constitution Act (BetrVG) have to be considered as well.

France

Vaccination certification

The French government has deployed a new application feature called TousAntiCovid-Carnet, which is part of the European work on the Digital Green Certificate. It is a digital “notebook” that allows electronic storage of test result certificates as well as vaccination certificates. For the French Data Protection Authority (“CNIL”), the voluntary nature of the use of this application must remain an essential guarantee of the system. Consequently, its use must not constitute a condition for the free movement of persons, subject to a few exceptions. Employers are therefore (in line with the health and safety obligations) invited to publicize this system and to encourage employees to download the application, but they cannot make it compulsory, either through internal regulations or by any other means. Any attempts to do so would be vitiated by illegality. Moreover, if the application is installed on a work phone, the employer will not be able to access the declared data, according to the French Ministry of Labor (Ministère du Travail).

In any case, if a French law that required people to have a vaccination passport and/or to download an application was to enacted, each employer would have to ensure compliance with such a law. But, until then, this is not the case.

Covid testing

Companies may carry out Covid-19 screening operations with antigenic tests at their own expense, on a voluntary basis and in compliance with medical confidentiality. They may also provide their employees with self-tests in compliance with the same rules, along with  instructions provided by a health professional. On the one hand, employee rights to privacy prevent a negative test result from being communicated to the employer – an employee does not have to inform their employer that they have taken a test at all in such a situation. On the other hand, in the event of a positive test, an employee must inform their employer of the positive result – an employee, like an employer, has a health and safety obligation to take care of their own health and safety, which in turn impacts his colleagues.

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We are looking forward to navigating these issues with our clients in the coming months and would be pleased to discuss any of the points raised in this alert.

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The following Gibson Dunn attorneys assisted in preparing this client update: James Cox, Nataline Fleury, Mark Zimmer, Heather Gibbons, Georgia Derbyshire, Jurij Müller, and Joanna Strzelewicz.

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

United Kingdom
James A. Cox (+44 (0) 20 7071 4250, [email protected])
Georgia Derbyshire (+44 (0) 20 7071 4013, [email protected])
Kathryn Edwards (+44 (0) 20 7071 4275, [email protected])

Germany
Mark Zimmer (+49 89 189 33 130, [email protected])
Jurij Müller (+49 89 189 33-162, [email protected])

France
Nataline Fleury (+33 (0) 1 56 43 13 00, [email protected])
Charline Cosmao (+33 (0) 1 56 43 13 00, [email protected])
Claire-Marie Hincelin (+33 (0) 1 56 43 13 00, [email protected])
Léo Laumônier (+33 (0) 1 56 43 13 00, [email protected])
Joanna Strzelewicz (+33 (0) 1 56 43 13 00, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

This edition of Gibson Dunn’s Federal Circuit Update summarizes the Supreme Court’s decisions in Arthrex and Minerva Surgical. It also discusses recent Federal Circuit decisions concerning patent eligibility, subject matter jurisdiction, prosecution laches, and more Western District of Texas venue issues. The Federal Circuit announced that it will resume in-person arguments in September.

Federal Circuit News

Supreme Court:

United States v. Arthrex, Inc. (U.S. Nos. 19-1434, 19-1452, 19-1458): As we summarized in our June 21, 2021 client alert, the Supreme Court held 5-4 that the Appointments Clause does not permit administrative patent judges (APJs) to exercise executive power unreviewed by any Executive Branch official. The Director therefore has the authority to unilaterally review any Patent Trial and Appeal Board (PTAB) decision. The Court held 7-2 that 35 U.S.C. § 6(c) is unenforceable as applied to the Director and that the appropriate remedy is a limited remand to the Acting Director to decide whether to rehear the inter partes review petition, rather than a hearing before a new panel of APJs. Gibson Dunn partner Mark A. Perry is co-counsel for Smith & Nephew, and argued the case before the Supreme Court.

In response to the Court’s decision, the Federal Circuit issued an order requiring supplemental briefing in Arthrex-related cases. In addition, the PTAB implemented an interim Director review process. Review may now be initiated sua sponte by the Director or may be requested by a party to a PTAB proceeding. The PTAB published “Arthrex Q&As,” which provides more details on the interim Director review process.

Minerva Surgical Inc. v. Hologic Inc. (U.S. No. 20-440): As we summarized in our June 30, 2021 client alert, the Supreme Court upheld the doctrine of assignor estoppel in patent infringement actions, concluding in a 5-4 decision that a patent assignor cannot, with certain exceptions, subsequently challenge the patent’s validity. The Court indicated that the doctrine may have been applied too broadly in the past and provided three examples of when an assignor has an invalidity defense: (1) when an employee assigns to her employer patent rights to future inventions before she can possibly make a warranty of validity as to specific patent claims, (2) when a later legal development renders irrelevant the assignor’s warranty of validity at the time of assignment, and (3) when the patent claims change after assignment and render irrelevant the assignor’s validity warranty.

The Court did not add any new cases originating at the Federal Circuit.

The Court denied the petition in Warsaw Orthopedic v. Sasso (U.S. No. 20-1284) concerning state versus federal court jurisdiction.

The following petitions are still pending:

• Biogen MA Inc. v. EMD Serono, Inc. (U.S. No. 20-1604) concerning anticipation of method-of-treatment patent claims. Gibson Dunn partner Mark A. Perry is counsel for the respondent.
• American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20‑891) concerning patent eligibility under 35 U.S.C. § 101, in which the Court has invited the Solicitor General to file a brief expressing the views of the United States.
• PersonalWeb Technologies, LLC v. Patreon, Inc. (U.S. No. 20-1394) concerning the Kessler

Other Federal Circuit News:

The Federal Circuit announced that, starting with the September 2021 court sitting, the court will resume in-person arguments. The court has issued Protocols for In-Person Argument, as well as a new administrative order implementing these changes, which are available on the court’s website.

Upcoming Oral Argument Calendar

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

Live streaming audio is available on the Federal Circuit’s new YouTube channel. Connection information is posted on the court’s website.

Key Case Summaries (June 2021)

Yu v. Samsung Electronics Co. (Fed. Cir. No. 20-1760): Yu appealed a district court’s order finding that the asserted claims of Yu’s patent (titled “Digital Cameras Using Multiple Sensors with Multiple Lenses”) were ineligible under 35 U.S.C. § 101.

The district court granted the defendants’ motion to dismiss under § 101 on the basis that the asserted claims were directed to “the abstract idea of taking two pictures and using those pictures to enhance each other in some way.”

The Federal Circuit (Prost, J., joined by Taranto, J.) affirmed. At Step 1 of the Alice analysis, the majority “agree[d] with the district court that claim 1 is directed to the abstract idea of taking two pictures (which may be at different exposures) and using one picture to enhance the other in some way,” noting that “the idea and practice of using multiple pictures to enhance each other has been known by photographers for over a century.” At Step 2, the majority “conclude[d] that claim 1 does not include an inventive concept sufficient to transform the claimed abstract idea into a patent-eligible invention” because “claim 1 is recited at a high level of generality and merely invokes well-understood, routine, conventional components to apply the abstract idea.” In so concluding, the majority stated that the recitation of “novel subject matter . . . is insufficient by itself to confer eligibility.”

Judge Newman dissented, writing that the camera at issue “is a mechanical and electronic device of defined structure and mechanism; it is not an ‘abstract idea.’”

Chandler v. Phoenix Services (Fed. Cir. No. 20-1848): The panel (Hughes, J., joined by Chen and Wallach, J.J.) held that because Chandler’s cause of action arises under the Sherman Act, rather than patent law, and because the claims do not depend on a resolution of a substantial question of patent law, the Court lacked subject matter jurisdiction. The Court discussed a recent decision, Xitronix I, in which the Court found it lacked jurisdiction. There, the Court held that a Walker Process claim does not inherently present a substantial issue of patent law. Further, in this case, there was a prior decision that found the ’993 patent unenforceable. Thus, the transferee appellate court would have little need to discuss patent law issues. This case would not alter the validity of the ’993 patent and any discussion of the patent would be “merely hypothetical.” Thus, the Court stated this was an antitrust case and there was not proper jurisdiction simply because a now unenforceable patent was once involved in the dispute.

Hyatt v. Hirshfeld (Fed. Cir. No. 18-2390): Hyatt, the patent applicant, filed a 35 U.S.C. § 145 action against the Patent Office with respect to four patent applications. The Patent Office appealed the District Court of the District of Columbia’s judgment that the Patent Office failed to carry its burden of proving prosecution laches.

The panel (Reyna, J., joined by Wallach and Hughes, J.J.) held that the Patent Office can assert a prosecution laches defense in an action brought by the patentee under 35 U.S.C. § 145, reasoning that the language of § 282 demonstrates Congress’s desire to make affirmative defenses, including prosecution laches, broadly available. Further, the Court stated the Patent Office can assert the prosecution laches defense in a § 145 action even if it did not previously issue rejections based on, or warnings regarding, prosecution laches during the prosecution of the application. Still, the PTO’s failure to previously warn an applicant or reject claims based on prosecution laches may be part of the totality of the circumstances analysis in determining prosecution laches.

The Court found that the Patent Office’s prosecution laches evidence and arguments presented at trial shifted the burden to Hyatt to show by a preponderance of evidence he had a legitimate, affirmative reason for his delay, and the Court remanded the case to afford Hyatt an opportunity to present such evidence.

Amgen Inc. v. Sanofi (Fed. Cir. No. 20-1074): On June 21, 2021, the court denied Amgen’s petition for panel rehearing and rehearing en banc. The panel wrote separately to explain that it had not created a new test for enablement.

As we summarized in our February alert, the panel had held that the claims at issue were not enabled because undue experimentation would be required to practice the full scope of the claims. The panel had explained that there are “high hurdles in fulfilling the enablement requirement for claims with broad functional language.”

In re:  Samsung Electronics Co., Ltd. (Fed Cir. No. 21-139): Samsung and LG sought writs of mandamus ordering the United States District Court for the Western District of Texas to transfer the underlying actions to the United States District Court for the Northern District of California. The panel (Dyk, J., joined by Lourie and Reyna, J.J.) granted the petition.

The panel first held that plaintiffs’ venue manipulation tactics must be disregarded and so venue in the Northern District of California would have been proper under § 1400(b). The panel explained that the presence of the Texas plaintiff “is plainly recent, ephemeral, and artificial—just the sort of maneuver in anticipation of litigation that has been routinely rejected.”

With respect to the merits of the transfer motion, the panel explained that the district court (1) “clearly assigned too little weight to the relative convenience of the Northern District of California,” (2) “provided no sound basis to diminish the[] conveniences” of willing witnesses in the Northern District of California, and (3) “overstated the concern about waste of judicial resources and risk of inconsistent results in light of plaintiffs’ separate infringement suit … in the Western District of Texas.” With respect to local interest, the panel rejected the district court’s position that “‘it is generally a fiction that patent cases give rise to local controversy or interest.’” It also explained that “[t]he fact that infringement is alleged in the Western District of Texas gives that venue no more of a local interest than the Northern District of California or any other venue.” Finally, with respect to court congestion, the panel stated that “even if the court’s speculation is accurate that it could more quickly resolve these cases based on the transferee venue’s more congested docket, … rapid disposition of the case [was not] important enough to be assigned significant weight in the transfer analysis here.”

In re: Freelancer Ltd. (Fed. Cir. No. 21-151) (nonprecedential): Freelancer Limited petitioned for a writ of mandamus instructing Judge Albright in the Western District of Texas to stay proceedings until Freelancer’s motion to dismiss is resolved. Freelancer’s motion was fully briefed as of March 4, 2021. Freelancer subsequently filed a motion to stay proceedings pending resolution of the motion to dismiss, and the stay motion was fully briefed as of April 21, 2021. A scheduling order has been entered in the case, and the plaintiff’s opening claim construction brief was filed on May 27, 2021. Freelancer then filed its mandamus petition. Neither of Freelancer’s motions has been resolved.

The Federal Circuit (Taranto, J., Hughes, J., and Stoll, J.) denied the petition. The court stated that “Freelancer has identified no authority establishing a clear legal right to a stay of all proceedings premised solely on the filing of a motion to dismiss the complaint.” The court further stated that “any delay in failing to resolve either of Freelancer’s pending motions to dismiss and stay proceedings is [not] so unreasonable or egregious as to warrant mandamus relief.” The court noted, however, that any “significant additional delay may alter [its] assessment of the mandamus factors in the future,” made clear that it “expect[ed] . . . that the district court w[ould] soon address the pending motion to dismiss or alternatively grant a stay.”

In re:  Volkswagen Group of America, Inc. (Fed. Cir. No. 21-149) (nonprecedential): Volkswagen petitioned for a writ of mandamus directing the United States District Court for the Western District of Texas to dismiss or to transfer to the United States District Court for the Eastern District of Michigan. Alternatively, Volkswagen sought to stay all deadlines unrelated to venue until the district court rules on the pending motion to dismiss or transfer.

The Federal Circuit (Taranto, J., Hughes, J., and Stoll, J.) denied the petition. Because the district court had indicated that it will resolve that motion before it conducts a Markman hearing in this case, Volkswagen was unable to show that it is unable to obtain a ruling on its venue motion in a timely fashion without mandamus. The Court noted, however, that the district court’s failure to issue a ruling on Volkswagen’s venue motion before a Markman hearing may alter our assessment of the mandamus factors.

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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 alert:

Blaine H. Evanson – Orange County (+1 949-451-3805, [email protected])
Jessica A. Hudak – Orange County (+1 949-451-3837, [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:

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])

Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, [email protected])
Mark A. Perry – Washington, D.C. (+1 202-887-3667, [email protected])

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