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:
- During a calendar year, controls or processes personal data of 100,000 or more Colorado residents; or
- 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]
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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.
[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).
[11] C.R.S. § 6-1-1303(17)(b).
[16] C.R.S. § 6-1-1306(1)(b)-(e).
[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).
[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).
[33] C.R.S. § 6-1-1303(5), (9).
[34] C.R.S. § 6-1-1306(2)(a)-(b).
[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).
[42] C.R.S. §§ 6-1-1305(3)(a); 6-1-1308(5).
[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).
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, asouthwell@gibsondunn.com)
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Robert K. Hur – Washington, D.C. (+1 202-887-3674, rhur@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)
Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0) 20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0) 20 7071 4276, pdoris@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0) 20 7071 4203, swazen@gibsondunn.com)
Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com)
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.
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.
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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.
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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.
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, dchampion@gibsondunn.com)
Amy Forbes – Los Angeles (+1 213-229-7151, aforbes@gibsondunn.com)
Mary G. Murphy – San Francisco (+1 415-393-8257, mgmurphy@gibsondunn.com)
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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.
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, jcox@gibsondunn.com)
Georgia Derbyshire (+44 (0) 20 7071 4013, gderbyshire@gibsondunn.com)
Kathryn Edwards (+44 (0) 20 7071 4275, kedwards@gibsondunn.com)
Germany
Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com)
Jurij Müller (+49 89 189 33-162, jmueller@gibsondunn.com)
France
Nataline Fleury (+33 (0) 1 56 43 13 00, nfleury@gibsondunn.com)
Charline Cosmao (+33 (0) 1 56 43 13 00, ccosmao@gibsondunn.com)
Claire-Marie Hincelin (+33 (0) 1 56 43 13 00, chincelin@gibsondunn.com)
Léo Laumônier (+33 (0) 1 56 43 13 00, llaumonier@gibsondunn.com)
Joanna Strzelewicz (+33 (0) 1 56 43 13 00, jstrzelewicz@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
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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.
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, bevanson@gibsondunn.com)
Jessica A. Hudak – Orange County (+1 949-451-3837, jhudak@gibsondunn.com)
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, kdominguez@gibsondunn.com)
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Decided July 1, 2021
Americans for Prosperity Foundation v. Bonta, No. 19-251, consolidated with Thomas More Law Center v. Bonta, No. 19-255
Today, the Supreme Court held 6-3 that California’s requirement that non-profit organizations disclose their donor lists unconstitutionally burdens those organizations’ expressive association rights, in violation of the First Amendment.
Background:
The California Attorney General requires private charities that operate or fundraise in California to register annually with the state. Registration entails filing various tax forms, including Schedule B to IRS Form 990—which requires charitable organizations to list the names and addresses of contributors that donated more than $5,000 or 2% of the organization’s budget during the tax year. California informed charities that their Schedule B disclosures would be kept confidential; in reality, however, California law required public disclosure of these documents until 2016. The state’s asserted justification for the disclosure requirement is a law-enforcement interest in regulating non-profit activity. Two non-profit organizations challenged the disclosure requirement as unconstitutional, arguing that it chills expressive association by exposing donors to harassment and that less-restrictive means are available to California to further its asserted interest. The Ninth Circuit upheld the disclosure requirement, holding that “exacting” scrutiny—not “strict” scrutiny—applied, and the requirement was sufficiently related to an important government interest.
Issue:
(1) Whether exacting scrutiny or strict scrutiny applies to disclosure requirements that burden nonelectoral, expressive association rights; and (2) whether California’s disclosure requirement violates charities’ and their donors’ freedom of association and speech facially or as applied to Petitioners.
Court’s Holding:
(1) The Court’s holding on the standard of review was fractured: A three-Justice plurality stated that disclosure laws like California’s must satisfy exacting scrutiny. While one Justice in the majority would have applied strict scrutiny, two others declined to resolve the issue. (2) A majority of the Court held that California’s law is facially unconstitutional under exacting scrutiny. California’s interest in administrative convenience is weak, and a blanket disclosure requirement for organizations not suspected of wrongdoing is not narrowly tailored to this interest.
“There is a dramatic mismatch . . . between the interest that the Attorney General seeks to promote and the disclosure regime that he has implemented in service of that end.”
Chief Justice Roberts, writing for the Court
What It Means:
- The Court’s ruling protects the sensitive donor information of non-profit organizations, ensuring that individuals may contribute to charitable organizations without fear of harassment from compelled disclosure. The ruling also calls into question the constitutionality of similar donor disclosure requirements in the federal “For the People Act” reintroduced in January 2021, and which has passed in the House and currently awaits a vote in the Senate.
- Today’s decision may have implications for mandatory disclosure requirements beyond the associational context. In writing for the Court, the Chief Justice emphasized that “[t]he ‘government may regulate in the [First Amendment] area only with narrow specificity,’ . . . and compelled disclosure regimes are no exception.” Op. 10. The Court’s holding suggests that other compelled disclosure regimes that lack narrow tailoring could be challenged under the First Amendment. It remains to be seen how the Court will apply today’s decision to other compelled disclosures.
- The Court’s decision continues its trend of affording robust constitutional protection to non-profit organizations, but leaves the standard of review for compelled-speech cases undefined. The Court has often employed strict scrutiny in assessing other First Amendment free-speech and religious liberty-challenges brought by non-profit organizations, and the Court could find only a plurality for the “exacting scrutiny” standard of review applied here. Other members of the Court indicated that government regulation of a wide range of protected First Amendment activity generally must pass strict scrutiny.
- A plurality of the Court applied Buckley v. Valeo, 424 U.S. 1 (1976)—which applied exacting scrutiny to limits on expenditures by political campaigns—to the broader context of compelled speech, and did not cabin it to the context of elections.
- In an opinion by Justice Sotomayor, three Justices dissented on the ground that California’s disclosure requirement did not burden the donors’ First Amendment rights, and so no tailoring of the law was required.
The Court’s opinion is available here.
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 practice leaders:
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| Thomas G. Hungar +1 202.887.3784 thungar@gibsondunn.com | Douglas R. Cox +1 202.887.3531 dcox@gibsondunn.com | Jason J. Mendro +1 202.887.3726 jmendro@gibsondunn.com |
Decided June 29, 2021
Minerva Surgical Inc. v. Hologic Inc., No. 20-440
Today, the Supreme Court upheld the doctrine of assignor estoppel in patent cases, concluding in a 5-4 decision that a patent assignor cannot, with certain exceptions, subsequently challenge the patent’s validity.
Background:
Csaba Truckai co-invented the NovaSure system, a medical device that uses radiofrequency energy to perform endometrial ablations. In 1998, Truckai and his four co-inventors filed a patent application covering the NovaSure system and later assigned their interest in the patent application and any future continuing applications to Truckai’s company, Novacept. Truckai sold Novacept to Cytyc Corporation in 2004, and Hologic acquired Cytyc in 2007.
In 2008, Truckai founded Minerva and developed a new device that uses thermal energy, rather than radiofrequency energy, to perform endometrial ablations. In 2015, Hologic sued Minerva, alleging that Minerva’s device infringed one of its NovaSure patents. The district court held that the doctrine of assignor estoppel barred Minerva from challenging the patent’s validity. The Federal Circuit affirmed in relevant part, declining to abrogate the doctrine, which federal courts have applied since 1880.
Issue:
May a defendant in a patent infringement action who assigned the patent, or is in privity with an assignor of the patent, have a defense of invalidity heard on the merits?
Court’s Holding:
Sometimes. The doctrine of assignor estoppel survives, although it applies only when the invalidity defense conflicts with an explicit or implicit representation the assignor made in assigning her patent rights. Absent that kind of inconsistency, a defendant in a patent infringement action who assigned the patent may have a defense of invalidity heard on the merits.
What It Means:
- This decision marks the first time that the Supreme Court has directly considered the viability of the assignor estoppel doctrine (the Supreme Court implicitly approved of the doctrine in 1924), and it largely secures the interests of assignees who have relied on the unanimous consensus of federal courts upholding this longstanding doctrine.
- However, the Court indicated that the doctrine may have been applied too broadly in the past, and that assignors should be estopped from contesting validity only when they have made a representation regarding validity as part of the assignment.
- The Court 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 reasoned that assignor estoppel furthers patent policy goals: The doctrine gives assignees confidence in the value of what they have purchased by preventing assignors (who are “especially likely infringers because of their knowledge of the relevant technology”) from raising invalidity defenses. The Court explained that this confidence will raise the price of patent assignments and in turn may encourage invention.
The Court’s opinion is available here.
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 practice leaders:
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| Kate Dominguez +1 212.351.2338 kdominguez@gibsondunn.com | Josh Krevitt +1 212.351.4000 jkrevitt@gibsondunn.com | Y. Ernest Hsin +1 415.393.8224 ehsin@gibsondunn.com |
| Jane M. Love, Ph.D. +1 212.351.3922 jlove@gibsondunn.com |
On this episode of the podcast, Ted Olson and Ted Boutrous talk about the landmark court cases that helped to define marriage equality in the United States, including their work in overturning California’s Proposition 8. You’ll hear them discuss the legal strategies at play and why it was important to win over the hearts and minds of the American public.
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HOSTS:
Ted Boutrous – Theodore J. Boutrous, Jr., a partner in the Los Angeles office of Gibson, Dunn & Crutcher LLP, is global Co-Chair of the firm’s Litigation Group and previously led the firm’s Appellate, Crisis Management, Transnational Litigation and Media groups. He also is a member of the firm’s Executive and Management Committees. Recognized for a decade of excellence in the legal profession, the Daily Journal in 2021 named Mr. Boutrous as a Top Lawyer of the Decade for his victories. As a tireless advocate and leader for high-stakes and high-profile cases, Mr. Boutrous was also named the 2019 “Litigator of the Year, Grand Prize Winner” by The American Lawyer.
Ted Olson – Theodore B. Olson is a Partner in Gibson, Dunn & Crutcher’s Washington, D.C. office; a founder of the Firm’s Crisis Management, Sports Law, and Appellate and Constitutional Law Practice Groups. Mr. Olson was Solicitor General of the United States during the period 2001-2004. From 1981-1984, he was Assistant Attorney General in charge of the Office of Legal Counsel in the U.S. Department of Justice. Except for those two intervals, he has been a lawyer with Gibson, Dunn & Crutcher in Los Angeles and Washington, D.C. since 1965.
Decided June 17, 2021
Fulton v. City of Philadelphia, No. 19-123
Today, the Supreme Court held 9-0 that Philadelphia violated the First Amendment by refusing to contract with a Catholic agency for declining to certify same-sex couples as foster parents.
Background:
Philadelphia contracts with private agencies to place children with foster parents. The city’s contracts incorporate a city ordinance prohibiting sexual-orientation discrimination in public accommodations. Catholic Social Services (“CSS”) contracted with the city to provide foster-care placement services. After learning that CSS would not certify same-sex couples as foster parents based on its religious beliefs regarding marriage, the city refused to renew its contract with CSS. CSS sued, alleging that the city had violated CSS’s First Amendment rights.
The Third Circuit, applying Employment Division v. Smith, 494 U.S. 872 (1990), held that the city’s nondiscrimination policy is a neutral, generally applicable law, and that CSS failed to show that the city either treated CSS differently than secular organizations or had ill will against religion.
Issue:
Whether the First Amendment prohibits the government from forcing a religious agency to comply with a non-discrimination requirement in order to participate in the foster-care system, where compliance requires the agency to take actions and make statements contrary to its religious beliefs.
Court’s Holding:
Yes, at least where, as here, the non-discrimination requirement is not generally applicable and the government fails to offer a compelling reason to deny the religious agency an exemption.
“The refusal of Philadelphia to contract with CSS for the provision of foster care services unless it agrees to certify same-sex couples as foster parents cannot survive strict scrutiny, and violates the First Amendment.”
Chief Justice Roberts, writing for the Court
What It Means:
- Today’s decision reiterates that the government must have a compelling reason to enforce a nondiscrimination policy that burdens religious exercise if the policy otherwise permits exemptions.
- Because the Court determined that strict scrutiny applied regardless of Employment Division v. Smith, it “ha[d] no occasion to reconsider that decision.” The decision thus leaves the door open to further litigation involving the intersection of faith-based organizations and government nondiscrimination policies. If a nondiscrimination policy is subject to exemptions, the government’s failure to grant religious exemptions likely will be subject to strict scrutiny.
- The Court’s narrow, fact-specific ruling leaves unanswered whether the First Amendment mandates religious exemptions to nondiscrimination policies in other contexts. Any such religious objections will have to be evaluated on their own merits under the appropriate level of scrutiny.
- Although the majority declined to address the continued viability of Employment Division v. Smith, three justices (Justices Thomas, Alito, and Gorsuch) would have overruled Smith and two more (Justices Barrett and Kavanaugh) suggested that the “textual and structural arguments against Smith” were “compelling.”
The Court’s opinion is available here.
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 practice leaders:
Appellate and Constitutional Law Practice
| Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com | Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com |
Decided June 17, 2021
Texas v. California, No. 19-1019, consolidated with California v. Texas, No. 19-840
Today, the Supreme Court rejected another challenge to the Affordable Care Act’s individual mandate because the plaintiffs lacked standing to challenge it.
Background:
In 2012, the Supreme Court rejected constitutional challenges under the Commerce Clause to the requirement in the Affordable Care Act (“ACA”) that individuals must maintain health insurance coverage. The Court reasoned that the ACA was not a command to buy health insurance—which Congress would lack the power to enact—but merely a tax for not doing so. In December 2017, Congress amended the ACA to eliminate the penalty for not buying health insurance, but Congress did not eliminate the ACA’s individual mandate to maintain health insurance coverage.
Two individuals and several states, including Texas, then challenged the individual mandate as unconstitutional, arguing that because it no longer carried a penalty, it no longer qualified as a tax. They also argued that because the individual mandate is essential to the ACA, the entire statute must be struck down. The Trump Administration refused to defend the ACA’s constitutionality. Several states, including California, intervened to defend the statute and challenge the plaintiffs’ Article III standing. The Fifth Circuit held that the plaintiffs possessed standing, held the individual mandate is unconstitutional, and directed the district court to consider an appropriate remedy on remand.
Issue:
(1) Whether the plaintiffs have Article III standing to challenge the constitutionality of the ACA’s individual mandate; (2) whether the individual mandate is unconstitutional because it no longer qualifies as a tax, and (3) if the individual mandate is unconstitutional, whether the entire ACA must be struck down.
Court’s Holding:
The individual plaintiffs do not have Article III standing to challenge the ACA’s individual mandate. Even if payments necessary to hold the insurance coverage required by the ACA were an injury, that injury is not traceable to the government, because without any penalty for noncompliance the statute is unenforceable. The states do not have Article III standing either, because they have not shown their injuries are fairly traceable to unlawful government conduct.
“Neither the individual nor the state plaintiffs have shown that the injury they will suffer or have suffered is ‘fairly traceable’ to the ‘allegedly unlawful conduct’ of which they complain.”
Justice Breyer, writing for the Court
What It Means:
- The Court’s ruling leaves unresolved the merit questions presented in the case: whether the individual mandate is constitutional or whether it is severable from the rest of the ACA. The Court will likely be asked to revisit these legal issues in the future.
- This decision is the latest of several high-profile cases this Term in which the Court has declined to reach the merits because of a lack of Article III standing. The Court similarly found a lack of Article III standing in Trump v. New York and Carney v. Adams.
- Two dissenting Justices, in an opinion written by Justice Alito and joined by Justice Gorsuch, would have held that (1) the state plaintiffs possess standing in light of the increased regulatory and financial burdens from complying with the ACA, and they did not forfeit these claims, and (2) the individual mandate is unconstitutional and not severable from the rest of the ACA.
The Court’s opinion is available here.
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 practice leaders:
Appellate and Constitutional Law Practice
| Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com | Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com | Ethan Dettmer +1 415.393.8292 edettmer@gibsondunn.com |
| Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com | Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com |
Decided June 17, 2021
Nestlé USA, Inc. v. Doe, No. 19-416, consolidated with Cargill, Inc. v. Doe, No. 19-453
Today, the Supreme Court held 8-1 that plaintiffs suing domestic corporations for aiding and abetting international law violations overseas had failed to allege a sufficient domestic nexus for the conduct to support liability under the Alien Tort Statute.
Background:
The Alien Tort Statute (“ATS”) gives federal courts jurisdiction over “any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.” 28 U.S.C. § 1350. The plaintiffs in these consolidated cases sued Nestlé USA, Inc. and Cargill, Inc.—both domestic corporations—under the ATS for allegedly aiding and abetting the use of child slavery on cocoa farms in Côte d’Ivoire. The defendants sought dismissal on the ground that the ATS reaches only domestic violations, and that the plaintiffs’ injuries were incurred entirely overseas. The defendants argued also that under Jesner v. Arab Bank, PLC, 138 S. Ct. 1386 (2018)—in which the Court held that foreign corporations may not be sued under the ATS—domestic corporations are not liable for violations of international law under the ATS.
The Ninth Circuit disagreed and permitted the plaintiffs to proceed with their claims. It held that the ATS covers any conduct that might constitute aiding and abetting, and that the plaintiffs’ claims were not extraterritorial under that standard because the plaintiffs had alleged that the defendants had provided personal spending money to Côte d’Ivoire farmers to maintain their loyalty. The Ninth Circuit further held that Jesner addressed only whether foreign corporations may be sued under the ATS, as suits against domestic corporations do not raise the same foreign affairs concerns.
Issue:
Does the ATS extend liability to domestic corporations?
Does the ATS extend to suits alleging that a domestic corporation aided and abetted illegal conduct by unidentified foreign actors based on corporate activity in the United States?
Court’s Holding:
The ATS does not extend to suits alleging that general corporate activity in the United States aided and abetted violations of the law that ultimately occurred overseas through unrelated, foreign third parties.
“[A]llegations of general corporate activity—like decisionmaking—cannot alone establish domestic application of the ATS.”
Justice Thomas, writing for the Court
What It Means:
- Plaintiffs bringing suit under the ATS must establish a strong, domestic nexus for their claim. It is not sufficient for plaintiffs merely to allege general corporate decisionmaking in the United States.
- Domestic corporations will have strong arguments that they cannot be held liable in suits brought under the ATS simply for participating in a global supply chain in which foreign third parties may have violated international law.
- The Court did not resolve the issue whether corporations can held liable under the ATS, although five Justices indicated their view that corporations are not immune from liability under the ATS.
- Although not decided in this case, the various separate opinions indicate disagreement among the Justices as to whether courts are empowered to recognize new causes of action under the ATS, or whether they are confined to the three specific torts (violation of safe conducts, infringement of the rights of ambassadors, and piracy) identified in Sosa v. Alvarez Machain, 542 U.S. 692 (2004).
The Court’s opinion is available here.
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 practice leaders:
Appellate and Constitutional Law Practice
| Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com | Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com | Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com |
| Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com |
Related Practice: Transnational Litigation
| Perlette Michèle Jura +1 213.229.7121 pjura@gibsondunn.com |
The People’s Republic of China is clamping down on the extraction of litigation- and investigation-related corporate and personal data from China—and this may squeeze litigants and investigation subjects in the future. Under a new data security law enacted late last week and an impending personal information protection law, China is set to constrict sharing broad swaths of personal and corporate data outside its borders. Both statutes would require companies to obtain the approval of a yet-to-be-identified branch of the Chinese government before providing data to non-Chinese judicial or law enforcement entities. As detailed below, these laws could have far-reaching implications for companies and individuals seeking to provide data to foreign courts or enforcement agencies in the context of government investigations or litigation, and appear to expand the data transfer restrictions set forth in other recent Chinese laws.[1]
Data Security Law of the People’s Republic of China
On June 10, 2021, the National People’s Congress passed the Data Security Law, which will take effect on September 1, 2021. The legislation contains sweeping requirements and severe penalties for violations. It governs not only data processing and management activities within China, but also those outside of China that “damage national security, public interest, or the legitimate interests of [China’s] citizens and organizations.”[2]
The Data Security Law generally requires entities and individuals operating within China to implement systems designed to protect in-country data. For example, entities that handle “important” data—a term not yet defined by the statute—must designate personnel responsible for data security and conduct assessments to monitor potential risks.[3] Chinese authorities may issue fines up to 500,000 CNY (approximately $78,000) and mandate remedial actions if an entity does not satisfy these requirements.[4] If the entity fails to implement required remedial actions after receiving a warning and/or its failure to implement adequate controls result in a large-scale data breach, the entity may be subject to a fine of up to 2 million CNY (approximately $313,000). Under these circumstances, authorities also may revoke the offending entity’s business licenses and issue fines to responsible individuals.[5]
The Data Security Law also states that a “violation of the national core data management system or endangering China’s national sovereignty, security, and development interests” is punishable by an additional fine up to 10 million CNY (approximately $1.56 million), suspension of business, revocation of business licenses, and in severe cases, criminal liability.[6] The Data Security Law broadly defines “core data” to include “data related to national security, national economy, the people’s welfare, and major public interests.”[7]
Most notably, Article 36 of the Data Security Law prohibits “provid[ing] data stored within the People’s Republic of China to foreign judicial or law enforcement bodies without the approval of the competent authority of the People’s Republic of China.”[8] The law does not identify the “competent authority” or outline the approval process. Failure to obtain this prior approval may subject an entity to a fine of up to 1,000,000 CNY (approximately $156,000), as well as additional fines for responsible individuals.[9] Although the Data Security Law discusses different categories of covered data elsewhere in the legislative text—referring to, for example, the “core data” discussed above[10]—Article 36, as written, appears to apply to the transfer of any data, regardless of subject matter and sensitivity, so long as it is stored in China. The final legislative text also includes additional, heavier penalties for severe violations that had not been included in prior drafts, including a fine of up to 5 million CNY (approximately $780,000), suspension of business operations, revocation of business licenses, as well as increased fines for responsible individuals. The statute does not, however, define what violations would be considered “severe.”
While the legal community in and outside of China will certainly seek additional guidance from the Chinese government, it is unclear whether the Chinese government will release implementing regulations or other guidance materials before September 1, 2021, when the law takes effect. As a point of reference, the Chinese government has not issued additional guidance on the International Criminal Judicial Assistance Law, which prohibits, among other things, unauthorized cooperation of a broad nature with foreign criminal authorities, since the law was passed in 2018. Nevertheless, given that data security and privacy are one of Beijing’s areas of focus, it is possible that the Chinese government will issue regulations, statutory interpretation, or guidance to clarify certain key requirements in the Data Security Law.
Personal Information Protection Law of the People’s Republic of China
On April 29, 2021, China released the second draft of its Personal Information Protection Law, which seeks to create a legal framework similar to the European Union’s General Data Protection Regulations (“GDPR”). The draft Personal Information Protection Law, if passed, will apply to “personal information processing entities (“PIPEs”),” defined as “an organization or individual that independently determines the purposes and means for processing of personal information.”[11] The draft Personal Information Protection Law defines processing as “the collection, storage, use, refining, transmission, provision, or public disclosure of personal information.”[12] The draft Personal Information Protection Law also defines “personal information” broadly as “various types of electronic or otherwise recorded information relating to an identified or identifiable natural person,” but excludes anonymized information.[13]
The draft Personal Information Protection Law requires PIPEs that process certain volumes of personal data to adopt protective measures, such as designating a personal information protection officer responsible for supervising the processing of applicable data.[14] PIPEs also would be required to carry out risk assessments prior to certain personal information processing and conduct regular audits.[15]
Under Article 38 of the draft Personal Information Protection Law, the Cyberspace Administration of China (“CAC”) will provide a standard contract for PIPEs to reference when entering into contracts with data recipients outside of China. The draft Personal Information Protection Law provides that PIPEs may only transfer personal information overseas if the PIPE: (1) passes a security assessment administered by the CAC; (2) obtains certification from professional institutions in accordance with the rules of the CAC; (3) enters into a transfer agreement with the transferee using the standard contract published by the CAC; or (4) adheres to other conditions set forth by law, administrative regulations, or the CAC.[16] Like the Data Security Law, the draft Personal Information Protection Law does not elaborate on this requirement, including what types of certifications would satisfy the requirement under Article 38 or what “other conditions set forth by law, administrative regulations, or the CAC” entail.
Similar to Article 36 of the Data Security Law, Article 41 of the draft Personal Information Protection Law prohibits providing personal data to judicial or law enforcement bodies outside of China without prior approval of competent Chinese authorities.[17] As with the Data Security Law, neither the “competent Chinese authority” nor the approval process is further defined, however.
The draft Personal Information Protection Law does not include penalties specifically tied to Article 41, but does set forth general penalty provisions in Article 65, which include confiscation of illegal gains, and a basic fine of up to 1 million CNY (approximately $156,000) for companies and between 10,000 CNY and 100,000 CNY (approximately $15,600 to $156,000) for responsible persons.[18] “Severe violations,” which the statute does not define, may be punishable by a fine up to 50 million CNY (approximately $7.8 million ) or up to five percent of the company’s annual revenue for the prior financial year, as well as fines between 100,000 CNY to 1 million CNY (approximately $156,000 to $1.56 million) for responsible persons. Additionally, companies found to have violated the Personal Information Protection Law may be subject to revocation of business permits or suspension of business activities entirely.
The Data Security Law and Personal Information Protection Law in Context
The Data Security Law and, if enacted, the Personal Information Protection Law add to a growing list of Chinese laws that restrict the provision of data to foreign governments. For example:
- The International Criminal Judicial Assistance Law bars entities and individuals in China from providing foreign enforcement authorities with evidence, materials, or assistance in connection with criminal cases without the consent of the Chinese government.[19]
- Article 177 of the China Securities Law (2019 Revision), prohibits “foreign regulators from directly conducting investigations and collecting evidence” in China and restricts Chinese companies from transferring documents related to their securities activities outside of China unless they obtain prior approval from the China Securities Regulatory Commission.
- The newly released draft amendment to China’s Anti-Money Laundering Law contains disclosure and pre-approval requirements for Chinese companies responding to data requests by foreign regulators.
- As Gibson Dunn has previously covered, the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, issued by the Ministry of Commerce of the PRC in January 2021, established a mechanism for the government to designate specific foreign laws as “unjustified extraterritorial applications,” and subsequently issue prohibitions against compliance with these foreign laws.
The Data Security Law and draft Personal Information Protection Law, however, appear to surpass these prior prohibitions in several key respects. In contrast to the International Criminal Judicial Assistance Law, for example, the Data Security Law and draft Personal Information Protection Law do not require the data to be provided in the context of a criminal investigation for the transfer prohibitions to apply. The new restrictions ostensibly apply to data transfers in connection with a civil enforcement action or investigation, such as those conducted by the U.S. Securities and Exchange Commission. (They might also create yet another impediment to the provision of audit work papers by China-based accounting firms to the SEC and the Public Company Accounting Oversight Board.) As written, the Data Security Law and draft Personal Information Protection Law prohibitions also would also apply to Chinese parties in civil litigation before foreign courts that may need to submit evidence in connection with ongoing cases. In fact, the current language could be read to prohibit non-Chinese citizens residing in China from providing information about themselves to their own government regulators, so long as the data is “stored in China.” The Data Security Law does not explain when data is “stored in China,” or how to address potential scenarios in which entities or individuals may have a legal obligation to submit information to foreign judicial or law enforcement authorities.
The Data Security Law, draft Personal Information Protection Law and earlier laws restricting data transfers create a great deal of uncertainty for companies operating in China. Because these laws do not specify the process for obtaining government approvals, the criteria for approval, or the responsible government agency, it has become increasingly difficult for companies to determine how to respond to foreign regulators’ demands to produce data that may be stored in China, conduct internal investigations in China in the context of an ongoing enforcement action or foreign government investigation, or comply with disclosure and cooperation obligations under various forms of settlement agreements with foreign authorities such as deferred prosecution agreements. Companies considering self-reporting potential legal violations in China to their foreign regulators, as well as cooperating in ensuing investigations conducted by those regulators, also will need to consider whether any of the relevant data was previously “stored in China,” and if so, whether they are permitted to submit such data to foreign authorities without approval by Chinese authorities. The new statutes also raise concerns for professional services organizations, such as law firms, accounting and forensic firms, litigation experts, and others whose work product may reflect data that was “stored in China.” The new laws do not make clear how they might apply to work product that is simply based on, reflects or incorporates data stored in China, and whether professional services firms are required to seek approval from relevant Chinese authorities before sharing such work product in foreign judicial proceedings or with enforcement authorities.
Gibson Dunn will continue to closely monitor these developments, as should companies operating in China, in order to minimize the risks associated with being caught in the vice of inconsistent legal obligations.
________________________
[1] Please note that the discussions of Chinese law in this publication are advisory only.
[2] Data Security Law, Art. 1 and 2.
[3] Data Security Law, Art. 27, 29, 30.
[4] Data Security Law, Art. 45
[5] Data Security Law, Art. 45.
[6] Data Security Law, Art. 45.
[7] Data Security Law, Art. 21.
[8] Data Security Law, Art. 36.
[9] Data Security Law, Art. 48.
[10] Data Security Law, Art. 21.
[11] Draft Personal Information Protection Law Art. 4, 72.
[12] Draft Personal Information Protection Law, Art. 4.
[14] Draft Personal Information Protection Law, Art. 52.
[15] Draft Personal Information Protection Law, Art. 54, 55.
[16] Draft Personal Information Protection Law, Art. 38
[17] Draft Personal Information Protection Law, Art. 41.
[18] Draft Personal Information Protection Law, Art. 65.
[19] International Criminal Judicial Assistance Law, Art. 4.
The following Gibson Dunn lawyers assisted in preparing this client update: Patrick F. Stokes, Oliver Welch, Nicole Lee, Ning Ning, Kelly S. Austin, Judith Alison Lee, Adam M. Smith, John D.W. Partridge, F. Joseph Warin, Joel M. Cohen, Ryan T. Bergsieker, Stephanie Brooker, John W.F. Chesley, Connell O’Neill, Richard Roeder, Michael Scanlon, Benno Schwarz, Alexander H. Southwell, and Michael Walther.
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On March 31, 2021, President Biden unveiled the American Jobs Plan (“Jobs Plan”), a sweeping $2.25 trillion proposal designed to create jobs through upgrading public infrastructure, revitalizing manufacturing, prioritizing workforce training, and expanding long-term health care services. The Jobs Plan, one of the most ambitious federal spending proposals in American history, is the first of a two-part package to revive the economy from the COVID-19 recession. The second portion—the American Families Plan (“Families Plan”)—which President Biden released on April 28, 2021, is a $1.8 trillion investment to expand health insurance coverage, childcare subsidies, and education access, among other proposals.[1]
The Jobs Plan and Families Plan would be historic investments. The Jobs Plan combines spending and tax credits to modernize the nation’s infrastructure, including the construction of roads, bridges, and ports, and also invests in climate change-related and racial equity priorities. The Jobs Plan encompasses four categories of investments: (1) transportation infrastructure; (2) utilities infrastructure; (3) care infrastructure; and (4) investments in manufacturing, innovation and the workforce. The Families Plan (1) adds at least four years of free education to community colleges; (2) provides direct support to children and families; and (3) extends tax cuts for families with children and American workers, restoring the highest income tax bracket to 39 percent and implementing income tax rates on capital gains for high-income earners.
To offset the costs of both proposals, the Biden administration released the Made in America Tax Plan (“Tax Plan”) on April 7, 2021. The Tax Plan generally sets forth tax proposals to pay for the infrastructure investments. It would raise the corporate tax rate and global minimum tax, measures that would largely reverse the 2017 Trump administration’s tax plan. The Tax Plan increases corporate tax rates from 21 percent to 28 percent and proposes a minimum tax on multinational corporations. The Biden administration projects that the Tax Plan’s overhaul of corporate tax policy would generate $2 trillion over the next 15 years.
Passing these Plans through Congress has been a challenge, particularly in an equally divided, Democratically controlled Senate. Republicans opposed the Jobs Plan due to its breadth, cost, and reliance on corporate tax increases. Furthermore, dueling infrastructure proposals exist after Senate Republicans released several counterproposals of their own infrastructure plan, which narrowly focus on physical infrastructure and cost less than the Jobs Plan, all of which were rejected by the Biden White House.[2] As of this week, it remains unclear which proposal could achieve the 60 votes required to overcome a filibuster in the Senate.
On June 10, 2021, a bipartisan group of Senators reached a compromise on infrastructure, which would spend $1.2 trillion over eight years, a key step towards achieving an infrastructure bill that can pass Congress and be signed into law by the President. The deal still needs to be approved by the White House and Senate Republican Conference and the legislative text must still be approved by all the parties as well. While light exists at the end of the tunnel, challenges remain as the infrastructure deal has received bipartisan criticism—Republicans are concerned about the deal’s cost being too large, its tax increases are controversial, and the prospect of a major legislative accomplishment for a Biden administration and Democrats are concerned that the deal’s cost is too small, the strategies to pay for it are problematic, and the deal fails to address climate change—and it may not achieve a filibuster-proof supermajority in the Senate.
If the bipartisan deal in the Senate breaks down, Democrats may pass the Jobs Plan on their own, using a legislative process known as reconciliation that permits the passage of certain legislation with only a majority of votes. Alternatively, Democrats may decide to move a physical infrastructure-focused bill with Republican support and use reconciliation to move their broader policy priorities, like climate change, at a later date.
1. Overview of the American Jobs Plan
The Jobs Plan seeks to rejuvenate the American economy by prioritizing investments in green infrastructure while addressing climate change, racial inequities, and employees’ rights.
a. Common Themes
Consistent among the various types of investments in the Jobs Plan is a focus on green infrastructure. Indeed, around 56 percent of the Jobs Plan’s expenditures can fairly be said to relate to climate change.[3] Of the various provisions in the Jobs Plan, improvements to transportation infrastructure, including a wide-scale investment in electric power, are mostly climate-driven. Tackling both mass transit and electric vehicles, the Jobs Plan allocates $85 billion for public transit and $80 billion for Amtrak in an effort to make public transport options more reliable and accessible, thus encouraging people to transition away from single-occupancy vehicles, which are a major source of greenhouse gas emissions. The Jobs Plan also directs $174 billion to electric vehicles to build up charging infrastructure and provide point-of-sales rebates and tax incentives to customers buying electric vehicles.
Beyond transportation investments, another green infrastructure investment is the $100 billion set aside for electric grid infrastructure and the extension and expansion of renewable energy tax credits. The Jobs Plan creates a “Clean Electricity Standard,” a federal mandate requiring that a certain percentage of electricity in the United States be generated by zero-carbon energy sources, such as wind and solar. The Jobs Plan also puts aside $35 billion toward clean-energy technology, new methods for reducing emissions, and other broad-based climate research.
Also embedded throughout the Jobs Plan is an emphasis on closing racial gaps in the economy, which according to administration officials have been created or exacerbated by previous federal spending efforts, such as interstate highway developments that have cleaved communities of color or air pollution that affects a majority of Black and Latino communities near power plants. These inequities have become even more pronounced during the coronavirus pandemic. For example, Black and Latino households are less likely to have access to home broadband Internet than White households. Addressing this disparity, the Jobs Plan prioritizes building broadband infrastructure in unserved and underserved areas to ensure the country reaches comprehensive high-speed broadband coverage. The Jobs Plan’s investments in workforce development also seek to advance racial equity, setting aside $100 million in workforce development programs that specifically target support services for communities of color. And, in order to boost minority-owned manufacturing, the Jobs Plan markedly increases support for the Manufacturing Extensions Partnership, which will increase the involvement of minority-owned and rurally located small- and medium-size enterprises.
The Jobs Plan also seeks to strengthen unions and collective bargaining rights for employees, including guaranteeing union and bargaining rights for public service workers.[4] President Biden has signaled his support for the Protecting the Right to Organize (PRO) Act,[5] which would make sweeping changes to federal labor law. Moreover, the Jobs Plan invests $10 billion to strengthen the capacity of labor enforcement agencies, and imposes increased penalties for employers who violate workplace safety and health rules.[6]
b. Transportation Infrastructure
The plurality of the $2 trillion dollar Jobs Plan package, approximately $620 billion, will be dedicated to transportation infrastructure, including:
- $174 billion in grants and other incentives to encourage state and local governments to partner with the private sector to build electric vehicle (“EV”) charging infrastructure, incentivize EV purchases, and support the transition away from diesel transit vehicles. The Jobs Plan would electrify 20 percent of the nation’s fleet of yellow school buses and would convert the entire U.S. Postal Service fleet to electric;
- $115 billion to revamp 20,000 miles of highways and roads, including improvements to 10 of the most economically important bridges across the country, as well as to thousands of smaller bridges in need of reconstruction;
- $85 billion to modernize and expand bus, rapid transit and rail services in order to reduce congestion and improve equitable access to these modes of transportation;
- $80 billion targeted to address Amtrak’s repair backlog and modernize the busy Northeast Corridor, as well as improve and expand existing corridors and enhance passenger and freight rail safety;
- $50 billion in grants and tax incentives to improve infrastructure resilience by safeguarding critical infrastructure and services from extreme weather events;
- $25 billion to upgrade airports and support a new program that aims to renovate terminals, as well as additional funding for the Airport Improvement Program, Federal Aviation Administration assets;
- $20 billion to incentivize new programs increase access and opportunity and work toward racial equity and environmental justice;
- $20 billion to improve road safety for cyclists and pedestrians, including the Safe Streets for All Program, which funds state and local “vision zero” plans to reduce crashes and fatalities; and
- $17 billion to improve inland waterways and shipping ports.
c. Investment in “How We Live at Home”
The Jobs Plan’s second major category of investments focuses on how Americans live at home. Among other things, the President’s proposal calls upon Congress to dedicate billions to improve the nation’s affordable housing supply, power infrastructure, clean water, broadband access, schools and childcare facilities, and the manufacturing sector.
i. Affordable Housing
With an eye towards addressing the “severe shortage of affordable housing in America,”[7] the Jobs Plan allocates $213 billion to address the nation’s affordable housing shortage using primarily a two-pronged approach: (1) building, preserving, and retrofitting more than two million commercial buildings and homes; and (2) eliminating state and local exclusionary zoning laws through a competitive grant program.
Building and Improving Housing Stock
Key to the Jobs Plan’s proposed increase in the amount of affordable housing in the nation is to build, renovate, and retrofit part of our current housing and commercial building stock. Specifically, the President’s plan calls upon Congress to pass the Neighborhood Home Investment Act (“NHIA”), which would offer $20 billion in tax credits over the next five years towards renovating or building 500,000 homes in distressed areas.
The NHIA is a centerpiece of the President’s affordable housing plan and already has bipartisan support. U.S. Senators Ben Cardin (D-Md) and Rob Portman (R-Ohio) have introduced the NHIA in the Senate as S. 98,[8] while Representative Brian Higgins has introduced the accompanying bill in the House of Representatives, H.R. 2143.[9] Under the NHIA proposal, states would establish a Neighborhood Homes Credit Agency which would allocate the tax credits to qualified home builds or renovations.[10] Project sponsors—such as developers—would be responsible for developing or rehabilitating the home, condominium, or qualified cooperative, receiving a tax credit once the home or project has been sold to a qualified buyer.[11] Qualified projects must be certified by a Neighborhood Homes Credit Agency and located in a qualified census tract where certain conditions are met.[12] Specifically, the project must be in a census tract where (1) the median gross income which does not exceed 80 percent of the applicable area median gross income; (2) the poverty rate that is not less than 130 percent of the applicable area poverty rate; and (3) a median value for owner-occupied homes does not exceed the applicable area median value for owner-occupied homes.[13] To receive the tax credit, the project must be sold to a qualified buyer, who are individuals that will use the qualified residence as their principal residence and whose income does not exceed 140 percent of the applicable area median gross income for where the home is located.[14]
The tax credit awarded would cover the gap between development cost and sales price of new homes, but is capped at 35 percent of the cost of construction or 35 percent of 80 percent of the national median sale price for new homes as determined according to the most recent census data, whichever is less.[15] For homes that are rehabilitated, the NHIA tax credit would cover the gap between the rehabilitation cost and the homeowner’s contribution, for up to 35% of the rehabilitation cost.[16]
The Jobs Plan uses block grant programs, the Department of Energy’s Weatherization Assistance Program,[17] and commercial efficiency tax credits, to renovate additional structures. The proposal also creates a $27 billion Clean Energy and Sustainability Accelerator to mobilize private investment into energy resources, retrofits of residential, commercial and municipal buildings, and clean transportation. The American Jobs Plan also tackles public housing, asking Congress to invest $40 billion to improve public housing in the country.
Eliminating State and Local Exclusionary Zoning Laws
The Jobs Plan also calls upon Congress to enact a new competitive grant program that awards funding to jurisdictions willing to eliminate “exclusionary zoning laws” that have prevented the creation of more homes. The Jobs Plan provides examples of such exclusionary laws, suggesting that “minimum lot sizes [requirements], mandatory parking requirements, and prohibitions on multifamily housing” have “inflated housing and construction costs and locked families out of areas with more opportunities.”[18]
ii. Upgrading and Reorienting Power Infrastructure
Modernizing Power Infrastructure
Another key aspect of the proposal is to reenergize America’s power infrastructure. As part of this effort, the Jobs Plan calls on Congress to invest $100 billion in investment tax credits to incentivize the buildout of, at minimum, 20 gigawatts of high-voltage capacity power lines and to mobilize private capital into re-energization efforts. The Jobs Plan also establishes the Grid Deployment Authority at the Department of Energy, designed to better utilize existing right-of-ways that can help create additional transmission lines as well as support financing tools for those kinds of projects. Additionally, the Jobs Plan proposes a 10-year extension and phasedown of an expanded direct-pay investment tax credit and production tax credit for clean energy and storage. States and local governments will also have access to clean energy block grants if they prioritize power grid modernization, which can be used to support clean energy, worker empowerment, and environmental justice programs.
Eliminating Hazardous Energy-Related Sites
The proposal also makes key investments in improving energy-related sites throughout the country. For example, the proposal invests $16 billion to plug hundreds of thousands of former orphan oil and gas wells, along with abandoned mines, which pose serious safety hazards and can be a source of environmental harm. The Jobs Plan also calls for a $5 billion investment in the remediation and redevelopment of former industrial and energy sites that contain hazardous substances (known as Brownfield and Superfund sites). The Jobs Plan also calls for further aide to communities around such sites, through investments to the Economic Development Agency’s Public Works program, lifting the cap on projects. Additionally, the proposal asks for additional economic development efforts through the Appalachian Regional Commission’s Partnerships for Opportunity and Workforce and Economic Revitalization (“POWER”) grant program, which aids regions affected by job losses in coal mining, coal power plant operations, and coal-related supply chain industries. The Jobs Plan also invests in the Department of Energy’s retooling grants for idle factories through Section 132 of the Energy Independence and Security Act, which has never been funded. Section 132’s grant program was designed “to encourage domestic production and sales of efficient hybrid and advanced diesel vehicles” with “priority . . . given to the refurbishment or retooling of manufacturing facilities that have recently ceased operation or will cease operation in the near future.”[19]
Energy-Related Goals and Financial Commitments
President Biden’s proposal makes significant energy-related commitments. Among them is the creation of the Energy Efficiency and Clean Electricity Standards, aimed at cutting electricity bills and pollution, to move toward “100 percent carbon-pollution free [sic] power by 2035.” President Biden has also pledged that the federal government will purchase 24/7 clean power for federal buildings to help support these efforts.
iii. Clean Water
The Jobs Plan also invests $111 billion to replace all of the nation’s lead pipes and service lines, to ensure that lead pipes do not deliver drinking water to any home in the country. To accomplish this goal, President Biden’s Plan calls on Congress to invest $45 billion in the Environmental Protection Agency’s Drinking Water State Revolving Fund and in Water Infrastructure Improvements for the Nation Act (“WIIN”) grants. The Jobs Plan also allocates $56 billion to help modernize the country’s aging water systems, providing grants and low-cost flexible loans to states. An additional $10 billion is dedicated to monitoring and remediating per- and polyfluoroalkyl substances (“PFAs”) in drinking water and to invest in rural small water systems and household well and wastewater systems, including drainage fields.
iv. Expanding Broadband Access
Recognizing the Internet as “the new electricity,” the Jobs Plan also pledges $100 billion to expand broadband access to everyone, including to Americans living in areas with no broadband infrastructure with minimal access to the Internet. The money will go towards building high-speed broadband infrastructure and providing temporary, short-term subsidies to cover the costs of overpriced Internet services. However, President Biden also pledges in his proposal to work with Congress to find a permanent solution to reduce Internet prices for everyone and “hold providers accountable.”
v. Investment in Repairs of Schools, Community Colleges, Childcare Facilities, Federal Buildings, and the Veteran Hospital System
Improvements in Public Schools and Community Colleges
The Jobs Plan also sets aside $100 billion to upgrade and build new public schools, $50 billion of which will be provided in direct grants and the other $50 billion in bonds. The funding is designed to improve school safety, make technological improvements to schools, and create more energy-efficient school buildings. The Jobs Plan also calls for $12 billion dedicated to expanding the nation’s community college infrastructure, giving states the ability to address existing physical and technological infrastructure needs.
Improvements to, and the Creation of, Childcare Facilities
The Jobs Plan dedicates $25 billion to a Child Care Growth and Innovation Fund, which states it will use to upgrade childcare facilities and build additional childcare facilities in high-need areas. The Jobs Plan also expands tax credits to encourage businesses to build childcare facilities. Under the proposal, employers will receive 50 percent of the first $1 million of construction costs per facility to create on-site childcare.
Additionally, the Jobs Plan calls for $18 billion dedicated to the modernization of Veterans Affairs hospitals and clinics. An additional $10 billion will go towards a Federal Capital Revolving Fund to support investment in a major purchase, construction or renovation of federal facilities.
vi. Manufacturing and Strengthening of Supply Chains as Well as Increasing Access to Capital for Domestic Manufacturers
President Biden’s Plan also dedicates $300 billion to revitalize American manufacturing and supply chains. Specifically, the proposal calls for $50 billion in semiconductor manufacturing and research dollars; $30 billion in pandemic-ready-related manufacturing and research and development; and $36 billion towards the manufacture of “clean” cars, ports, pumps, along with advanced nuclear reactor sand fuel. Additionally, President Biden proposes that Congress invest more than $52 billion in domestic manufacturers, expanding their access to capital. The Jobs Plan also calls for modernizing supply chains, including the auto sector, through specific programs, such as extending the Advanced Energy Manufacturing Tax Credit Program, also known as the “48C tax credit,” which helps promote clean energy projects. The Jobs Plan also contains an additional $31 billion in investments designed to give small business manufacturers access to credit, venture capital, and R&D dollars, to increase their ability “to compete in a system that is so often titled in favor of large corporations and wealthy individuals.”
d. Care Infrastructure
The third major category of investments focuses on expanding access to home and community-based services to bolster America’s “care economy.” The Jobs Plan sets out to address the current “caregiving crisis” by improving access to, and quality of, home care for individuals who qualify under Medicaid, creating additional home care jobs, and supporting home care workers. To do so, the Jobs Plan asks Congress to put $400 billion toward “expanding access to quality, affordable home-or community-based care for aging relatives and people with disabilities.” In addition to facilitating access to care, these investments are intended to increase the pay and benefits for those in the caregiving industry and create an opportunity for these workers “to organize or join a union and collectively bargain.”
The Jobs Plan sets forth a two-pronged approach to accomplish these objectives: (1) expand access to long-term care services under Medicaid and (2) put in place an infrastructure to create middle-class jobs with the opportunity to participate in collective bargaining. The Jobs Plan will expand access to home- and community-based services (“HCBS”) and extend existing Medicaid long-term care programs such as the “Money Follows the Person” program, which is designed to move nursing home residents out of nursing homes and back into their own homes, or the home of family members. The HCBS expansion will be designed to support well-paying caregiving jobs and permit joining a union, in an effort to “improve wages and quality of life for essential homecare workers and yield significant economic benefits for low-income communities and communities of color.”[20]
e. Investments in Jobs, Manufacturing, and Innovation
i. Research and Development
The Jobs Plan envisions investment in research and development (“R&D”) as serving multiple administration priorities, not the least of which is keeping pace with—and pushing back against—China on advanced and emerging technologies. That strain runs throughout this section of the Jobs Plan, which first notes, “[c]ountries like China are investing aggressively in R&D” before proposing $180 billion in investment to “win the 21st century economy” by “investing in the researchers, laboratories, and universities across our nation.” Specific to these emerging technologies, the Jobs Plan proposes $50 billion for the National Science Foundation; $30 billion for generalized innovation and job creation, including in rural areas; and $40 billion to upgrade research infrastructure across various government agencies.
It is clear that the Jobs Plan envisions investment in R&D as a way to advance other aspects of the Biden Agenda. For example, the Jobs Plan calls for “$35 billion in the full range of solutions needed to achieve technology breakthroughs that address the climate crisis and position America as the global leader in clean energy technology and clean energy jobs.” This includes launching “APRA-C,” a climate-focused counterpart to the Defense Advanced Research Projects Agency (“DARPA”), along with other projects focused on energy storage, carbon capture, hydrogen and nuclear technologies, wind, biofuel, quantum computing and electric vehicles. In addition, the Jobs Plan views R&D as a means by which to confront racial and gender inequities, stating: “Persistent inequities in access to R&D dollars and to careers in innovation industries prevents [sic] the U.S. economy from reaching its full potential.” Accordingly, the Jobs Plan proposes $10 billion in funding for R&D investment at Historically Black Colleges and Universities (“HBCUs”) and $15 billion to create research incubators at HBCUs and other minority-serving institutions.
ii. Domestic Production
In seeking an additional $300 billion in funding for domestic manufacturing—“a critical node that helps convert research and innovation into sustained economic growth”—the Jobs Plan attempts to bolster the middle class and reinforce union support while expanding growth to rural areas. Proposed funding under this category likewise reflects the administration’s focus on the COVID-19 recovery, supply chain independence, and combating climate change. The Jobs Plan calls for $50 billion to advance semiconductor manufacturing and research along with $30 billion to address job losses caused by the pandemic and to “shore up our nation’s strategic national stockpile,” including funding for measures designed to address a future pandemic, such as prototype vaccines and therapeutic treatments.
The Jobs Plan also sees a role for clean energy manufacturing—“[t]o meet the President’s goals of achieving net-zero emissions by 2050, the United States will need more electric vehicles, charging ports, and electric heat pumps for residential heating and commercial buildings.” To these and related projects, the Jobs Plan proposes $46 billion. A further $20 billion is proposed under this category for investment in regional innovation hubs to “leverage private investment to fuel technology development, link urban and rural economics, and create new business in regions beyond the current handful of high-growth centers.” The Jobs Plan also specifically addresses rural and Tribal communities, proposing $5 billion for a Rural Partnership Program to “build on their unique assets and realize their vision for inclusive community and economic development.”
iii. Workforce Development
The Jobs Plan seeks a further $100 billion for a range of workforce development initiatives. This would include next-generation training programs, $40 billion to address sector-based and dislocated worker training and $12 billion in targeted workforce development in underserved communities, $5 billion of which would go toward community violence prevention programs. The Jobs Plan also calls for $48 billion for apprenticeships, career pathway programs in middle and high schools prioritizing STEM careers, and community college partnerships.
f. Strengthening Employee Rights
The Jobs Plan guarantees that public service workers will have collective bargaining rights.[21] Moreover, the Jobs Plan calls upon Congress to pass the Protecting the Right to Organize (“PRO”) Act.[22] A version of the PRO Act has already passed the House of Representatives, with five Republicans joining Democrats in favor of it.[23] If enacted, the House version of the PRO Act would make significant changes to federal labor law. Some of these changes include invalidating state right-to-work laws and limiting arbitration agreements between employers and employees.[24] While an increasing number of Senate Democrats have come out in support of the PRO Act, it is unlikely that bill can generate enough support to overcome a filibuster and ultimately pass in the Senate.[25]
II. Made in America Corporate Tax Reform Plan
The Tax Plan overhauls corporate and international taxation.[26] The Tax Plan includes proposals to raise the U.S. federal corporate income tax rate, establish an international agreement on global taxation, dis-incentivize inversions and offshore profit shifting to low-tax countries, incentive domestic spending, and enact minimum corporate taxes.[27] The Tax Plan is expected to raise over $2 trillion over the next 15 years,[28] which would fully fund the American Jobs Plan.[29]
a. Increase Federal Corporate Income Tax Rate to 28 Percent
One of the most noteworthy aspects of the Tax Plan is the increase in the U.S. federal corporate income tax rate. The Tax Plan would raise the corporate income tax rate from 21 percent to 28 percent.[30] This proposal would reverse the reduction in the corporate income tax rate in the 2017 Tax Cuts and Jobs Act (“TCJA”), which lowered the rate from 35 percent to 21 percent.[31] Revenues from the tax increase would help fund investments in infrastructure, clean energy, and research and development.[32]
The Tax Plan’s proposed tax hike on corporate income tax is drawing resistance, even from members of President Biden’s own political party. Senator Joe Manchin of West Virginia, who holds a key moderate vote in a 50-50 Senate, has come out in opposition of the proposal.[33] A compromised corporate income tax rate increase to 25 percent will likely appease the White House and moderate Democrats.[34]
b. Strengthen the Global Minimum Tax on U.S. Multinational Corporations
The Tax Plan would revise the “global intangible low taxed income” (“GILTI”) regime that was enacted as part of the TCJA.[35] The GILTI regime was intended to discourage moving intangible assets and related profits outside the United States.[36] U.S.-controlled foreign corporations are given a tax exemption on the first 10 percent of returns on foreign tangible assets,[37] and GILTI is taxed at approximately half of the corporate tax rate (10.5 percent).[38] Under the current regime, GILTI tax liabilities are currently calculated on a global basis.[39]
President Biden’s Tax Plan would revise the GILTI regime in the following manner:
- Eliminate the tax exemption on the first ten percent of returns on foreign tangible assets;[40]
- Increase the GILTI minimum tax on U.S. corporations to 21 percent;[41] and
- Calculate the GILTI minimum tax on a country-to-country basis to prevent corporations from shifting profits to low-tax countries.[42]
c. Negotiating Multilateral Agreement on International Minimum Taxes
The Tax Plan indicates that the United States will lead a multilateral effort to impose a global minimum tax and strengthen anti-inversion provisions.[43] Pursuant to the Organisation for Economic Co-operation and Development/G20 Inclusive Framework on Base Erosion and Profit, the United States and the international community are negotiating a global agreement that would enact minimum tax rules worldwide.[44] This agreement would allow home countries of multinational corporations to apply a minimum tax when offshore affiliates are taxed below an agreed-upon minimum tax rate.[45] Foreign corporations based in countries that do not adopt a strong minimum tax would be denied deductions on payments that could allow them to strip profits out of the United States.[46] These proposals would repeal and replace the Base Erosion and Anti-Abuse Tax (“BEAT”),[47] which was enacted under the TCJA.[48]
The Tax Plan would also strengthen anti-inversion provisions to prevent U.S. corporations from inverting.[49] Corporations that merge while retaining management and operations in the United States would be treated and taxed as a U.S. company.[50] More specific details regarding anti-inversion provisions will likely emerge as negotiations on the proposed legislation continue.
d. Eliminate Deductions for “Offshoring” Jobs and Credit Expenses for “Onboarding” Jobs
The Tax Plan would eliminate deductions for expenses arising from offshoring jobs and provide tax credits for on-shoring jobs.[51] Currently, the Tax Plan does not provide additional details on this proposal.
e. Repeal TCJA’s Foreign Derived Intangible Income (“FDII”) Deduction
The FDII deduction was introduced as part of the 2017 TCJA.[52] FDII is income that comes from exporting products tied to intangible assets held in the United States.[53] FDII is currently taxed at a reduced rate of 13.125 percent, rather than the regular 21 percent.[54] This reduced rate was meant to encourage U.S. corporations to export more goods and services, and locate more intangible assets in the United States.[55]
The Tax Plan would repeal the FDII regime in its entirety,[56] and use the generated revenues to incentivize research and development directly,[57] which would include providing stronger tax-based incentives to increase research and development in the United States.[58]
f. Corporate Minimum Taxation
The Tax Plan would enact a 15 percent minimum tax on the income corporations use to report to their investors—which the Tax Plan refers to as “book income.”[59] Under this proposal, corporations that report high profits would be required to make an additional payment to the IRS for the excess of up to 15 percent on their book income over their regular tax liability.[60] This tax would “apply only to the very largest corporations”[61]—but there is currently no further guidance on which corporations would be subjected to this tax.
III. The American Families Plan
President Biden’s Families Plan provides billions of dollars designed to improve childcare opportunities, expand access to early-childhood education and higher education, create a national paid leave program, improve school nutrition, and modernize the unemployment system. The Jobs Plan also makes key revisions to the tax code, restoring the highest income tax bracket to 39 percent and ending capital gains rates for high-income earners, among other things. Specifically, the Jobs Plan calls for $200 billion for free universal preschool for all three- and four-year-olds; $109 billion for two years of free community college; $80 billion towards Pell Grants; $62 billion to strengthen retention rates at community colleges; $46 billion in Historically Black Colleges and Universities (“HBCUs”), Tribal Colleges and Universities (“TCU”), and Minority Serving Institutions (“MSIs”); and $9 billion to train, equip, and diversify teachers.
a. Direct Support to Children and Families
Under President Biden’s plan, low- and middle-income families will pay no more than seven percent of their income on high-quality childcare. Specifically, the Jobs Plan invests $225 billion so that low-income families pay nothing for childcare while those families earning 1.5 times their state median income will pay no more than seven percent of their income to childcare. The Jobs Plan also invests in childcare providers to help them cover the costs associated with early childhood care and provide inclusive curriculums. The Jobs Plan also ensures a $15 minimum wage for early childhood staff.
b. Paid Leave
President Biden’s plan calls for the creation of a national paid family and medical leave program, that will build over ten years. By year 10, the program will guarantee twelve weeks of paid parental, family, and personal illness leave. The Jobs Plan also ensures that workers get three days of bereavement leave per year starting in year one. The leave will provide workers with up to $4,000 a month, with a minimum of two-thirds of average weekly wages replaced, rising to 80 percent for the lowest-wage workers. The Jobs Plan is projected to cost $225 billion over a decade.
c. Nutrition
President Biden’s plan is also calling upon Congress to invest $45 billion to expand summer EBT Demonstrations. Seventeen billion of this will go towards expanding free meals for children in the highest-poverty districts. Another $1 billion will go towards launching a healthy-foods incentive demonstration to help schools expand healthy food offerings, allowing schools that adopt specified measures that exceed current school meal standards to receive an enhanced reimbursement rate.
d. Unemployment Insurance Reform
President Biden’s plan also calls upon the Rescue Plan’s $2 billion allocation that was put towards Unemployment Insurance system modernization. The Jobs Plan also calls for investments to ensure equitable access to the unemployment insurance system, along with fraud prevention efforts. President Biden also calls upon Congress to automatically adjust the length and amount of unemployment insurance benefits unemployed workers receive depending on economic conditions.
e. Tax Reforms
i. Expanding Tax Credits
President Biden’s plan also makes changes to the current tax code, expanding certain credits and revising tax rates in key areas. Specifically, President Biden’s plan would:
- Invest $200 billion in health care premium reductions;
- Extend the Child Tax Credit, allowing for $3,000 per child (6 years old and above), and $3,600 per child for children under 6; make 17-year-olds eligible for the first time; and make the credit fully refundable to be paid on a regular basis;
- Make permanent the temporary Child and Dependent Care Tax Credit (“CDCTC”) expansion enacted in the American Rescue Plan. Families will receive a tax credit for as much as half of their spending on qualified childcare for children under age 13, up to a total of $4,000 for one child, or $8,000 for two or more. A 50 percent reimbursement will also be available to families making less than $125,000 a year, with families making between $125,000 and $400,000 receiving a partial credit;
- Make the Earned Income Credit Expansion for childless workers permanent; and
- Give IRS the authority to regulate paid tax preparers.
ii. Tax Code Revisions
In an effort to ensure more oversight over the tax liability of higher earners, President Biden’s plan also requires financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting more like wages. The Jobs Plan also increases investment in the IRS to help ready enforcement “against those with the highest incomes, rather than Americans with actual income less than $400,000.” The Jobs Plan is projected to raise $700 billion over 10 years.
In a key change, President Biden’s plan also returns the top income tax rate to 39.6 percent from the current 37 percent rate. With respect to capital income, households making over $1 million will pay the 39.6 percent rate on all their income, equalizing the rate paid on investment returns and wages. Additionally, the Jobs Plan ends the ability of accumulated gains to be passed down across generations untaxed, ending the practice of “stepping-up” the basis for gains in excess of $1 million. Additionally, hedge fund partners will be required to pay ordinary income rates on their income. Finally, the Jobs Plan ends the special real estate tax break that allows real estate investors to defer taxation when they exchange property.
IV. Political Landscape
Infrastructure has long been a bipartisan issue in Washington, but the parties differ over the scope of what should be included in an infrastructure package and how to pay for it. President Biden’s Jobs Plan represents a sprawling, ambitious proposal to overhaul the country’s infrastructure, from how electricity is generated to the quality of the country’s drinking water, to the breadth and speed of Internet connectivity. The Families Plan is also a massive package that extends or makes permanent federal investments in education, childcare and paid family leave. While the Jobs Plan includes major physical infrastructure improvements that both major political parties have long supported, it is far from certain the Jobs Plan will be signed into law.
As detailed below, a bipartisan deal has been struck in principle that may allow for an infrastructure bill to move in Congress, at least on physical infrastructure. But if that deal breaks down for any reason, which remains a real possibility given the bipartisan concerns about the compromise, then President Biden will need to overcome a host of challenges in order to achieve a legislative win on infrastructure this year.
First, the President will have to navigate the challenges of moving legislation via the budget process of reconciliation, which would allow him to pass a bill through Congress by a majority vote and avoid Republican support. But adopting that path requires navigating complex, and time-consuming procedural rules that make reconciliation a difficult option to choose.
Second, the President will have to negotiate a deal that allows him to keep his caucus together and pursue a one-party bill that may be difficult to achieve given the intra-party ideological concerns from his own party and from industry. Or the President will have to pursue a bipartisan option that may cause him to lose support from his own party.
Third, given the reality of a 50-50 Senate and bipartisan concerns over the Senate deal, moving the infrastructure plan through reconciliation may be a realistic option for Democrats to achieve a major legislative victory on infrastructure.
a. Reconciliation Challenges
President Biden has stated a desire for the Jobs Plan to garner bipartisan support. While the President campaigned on restoring bipartisanship to Washington, D.C., garnering Republican support would also obviate the need for Democrats to use budget reconciliation to pass the infrastructure package. Most legislation requires 60 votes to advance in the Senate, which is a substantial hurdle. Reconciliation is a procedural maneuver that allows Congress to fast-track, via a simple majority vote, revenue and spending measures to align with the annual budget resolution. In practice, this means Congress can pass legislation on taxes, spending, and the debt limit with only a majority (51 votes, or 50 votes if Vice President Harris breaks a tie) in the Senate, avoiding a filibuster, which would require 60 votes to overcome.[62]
Democrats now control the political branches—the Executive Branch and both chambers of Congress by a slim majority—which unlocks the reconciliation tool as a potential vehicle to pass legislation along partisan lines. Hence, Democrats could use reconciliation to push through the infrastructure package, which is a major part of President Biden’s Build back Better agenda, thus it is not surprising Congressional Democrats are eyeing the budget process once again to pass major legislation.
Even so, in order to pass the infrastructure package via reconciliation, Democrats would need to revise portions of the bill to ensure it complies with the complex reconciliation procedures. The Byrd Rule limits legislation that can be passed under reconciliation. The “Byrd Rule,” named after then-Senator Robert C. Byrd (D-WV), was intended to prevent majority parties from abusing the reconciliation process by ramming through non-budgetary legislation that could not otherwise pass under regular order and prevent major policy changes from being undertaken through the use of this filibuster-circumventing maneuver. Specially, the Byrd Rule prohibits a reconciliation bill from containing proposals that are “extraneous” to the budget.[63]
The Byrd Rule’s ban on extraneous policy language outlines six possible violations, including having no budgetary impact, having a “merely incidental” budget impact, or being outside the reporting committees’ jurisdiction.[64] Policy proposals in the infrastructure plan that may be considered extraneous—and thus be unable to pass through reconciliation procedures—include the PRO Act and strengthening collective bargaining rights for employees, since these proposals are not budgetary in nature.
Even if Senate Democrats resign themselves to using the reconciliation procedures, there reconciliation is by no means a quick process. While the Senate floor consideration of an infrastructure bill under reconciliation can be expedited with debate limited to 20 hours on the bill and 10 hours on the conference report, actually getting legislation to the floor is a multi-stage process that can take months. First, Congress must pass a budget resolution that instructs specific committees to produce legislation that either increases or reduces the deficit. Second, committees then markup their reconciliation text in business meetings and report it to the Budget Committee. Third, the Budget Committee compiles the committee approved bills and reports the combined legislation to the chamber floor. Fourth, the House and Senate debate and pass their respective reconciliation bills. Fifth, the chambers convene a conference committee to reach agreement on legislative text. Sixth, the House and Senate must pass identical versions of the resulting conference report. And lastly, the measure is sent to the President for signature. This is a time-consuming, complex process that can drag on for months and cause delay.[65]
Furthermore, a recent decision by the Senate Parliamentarian has added an additional barrier that may make it difficult for Democrats to pass an infrastructure bill through reconciliation and without the support of Senate Republicans. Generally, Congress can only use reconciliation twice in a two-year Congress, one for each fiscal year.[66] Senate Democrats already used one reconciliation vehicle associated with one fiscal year to pass the $1.9 trillion COVID relief package earlier this year. So Congress could use only the second reconciliation for the upcoming fiscal year for infrastructure. But passing a budget resolution this year in an equally divided Senate is not an easy task.
Senate Democrats came up with an unprecedented solution. Because the plain text of Section 304 of the Budget Act, which governs reconciliation, says that Congress “may” include reconciliation directives, such as “revises” the budget “concurrent resolution for the fiscal year already agreed to,”[67] Senate Democrats asked the Senate Parliamentarian if they could use the same reconciliation vehicle that passed earlier this year on multiple occasions to trigger the fast-track reconciliation process rather than deal with a new reconciliation package for infrastructure. No prior Congress has ever tried to use a reconciliation measure twice in one year.
On April 5, 2021, the Senate Parliamentarian reportedly advised Senate Democrats that the Budget Act could be used to create multiple reconciliation bills within one fiscal year,[68] which would allow Senate Democrats multiple bites at the apple to pass legislation, like infrastructure, through the Senate on a majority vote.
On May 28, 2021, the Senate Parliamentarian made a second decision that could effectively thwart Senate Democrats from using reconciliation to achieve its infrastructure goals. The Senate Parliamentarian reportedly advised that a revised budget reconciliation measure must pass through “regular order,” meaning it must go through committee and have floor amendment votes during a “vote-a-rama.”[69] A “vote-a-rama” is a lengthy process that forces Senators to take challenging partisan votes on a wide variety of issues.
The effect of both rulings by the Senate Parliamentarian mean that, even though Senate Democrats may revamp the old reconciliation vehicle used for the coronavirus relief package, the process will be just as onerous for two reasons.
First, by the Senate Parliamentarian ruling that a revised budget resolution must go through committee (as opposed to being automatically discharged from committee) that means Senate Democrats would need at least one Republican on the evenly divided, 11-11, Senate Budget Committee to vote with them, which is not an easy task.
Second, by the Senate Parliamentarian signaling that Senate Democrats must go through a “vote-a-rama” that means potentially exposing moderate Democrats who are up for re-election next year to tough votes on politically charged amendments, which is a major consideration given the balance of power in the Senate for a Democratic majority hangs by a single vote (50-50 Senate, with the Vice President breaking the tie). Third, it means that Senate Democrats can only use one more reconciliation vehicle to pass Biden’s key legislative priorities this year, so they will not be able to divide up the Jobs and Families Plans as they had originally intended.
Another implication of the Senate Parliamentarian’s ruling poses an equally challenging barrier for the infrastructure Plans to move in Congress. Reportedly, the Senate Parliamentarian ruled that reasons beyond “political expediency” must be present to trigger the majority vote threshold of reconciliation, such as an economic downturn.[70] It is unclear how the Senate Parliamentarian would determine the meaning of “political expediency,” but this decision poses an obstacle for using reconciliation to pass an infrastructure bill.
b. Ideological Challenges
Another challenge for Senate Democrats is that even if they choose to use reconciliation, no guarantee exists that they will successfully keep their caucus together on a historically expensive and expansive proposal. Moderate Democrats like Senator Joe Manchin (D-WV) have raised their concerns with the proposed hike of the corporate tax rate. Indeed, Senator Manchin went so far as to say that increasing the corporate tax rate to 28 percent is a nonstarter and that “this whole thing here has to change.”[71] Senator Manchin has also expressed his preference for a bill that targets physical infrastructure, rather than the “soft infrastructure” spending currently in the President’s infrastructure proposals.[72]
Furthermore, it is unclear if Senate Democratic Moderates will want to break with a party-only bill that defies the Senate’s traditional process of “regular order,” the idea that a bill should move through a hearing, a committee vote, and a floor vote with the possibility of a filibuster proof 60-vote threshold.[73] Rather than use the fast-track, one-party rule vehicle of reconciliation, Senator Manchin, for example, has expressed his preference for a bipartisan bill that moves through regular order, saying “If the place works . . . let it work.”[74] Given the 50-50 Senate, the loss of even one Democratic Senator’s vote will bar reconciliation as an option. Thus, although Leader Schumer seeks to move the infrastructure package in July, that timeline may depend upon whether moderate Democratic Senators, like Senator Manchin, will agree that a bipartisan approach is no longer viable.
Progressive Democrats, on the other hand, are concerned the Jobs Plan doesn’t go far enough, citing President Biden’s campaign promise to spend $2 trillion over four years on infrastructure. Progressive Democrats worry that “bipartisanship” may be a cloak for cutting a deal on moving the Jobs Plan, legislation on physical infrastructure only, rather than the Families Plan, a human infrastructure proposal, that progressives view as a once in a generation opportunity to secure legislative victories for families by expanding family leave and child tax credits and for climate change by investing in green energy. Indeed, House Progressives like Rep. Ruben Gallego (D-AZ) have questioned whether Republicans are being “even players” and noted that now is the time to “just move on without them.”[75]
To achieve the votes needed to pass the Jobs Plan in both chambers of Congress, Democrats will rely on the votes of Progressives who are requiring human infrastructure as the price for their support, which makes a deal with Republicans who oppose human infrastructure politically tricky. As a result, Progressives will have leverage in shaping what infrastructure plan passes in Congress as Democratic Leadership will count on votes from Progressives in order to pass infrastructure legislation, via a majority vote in the House and Senate (via reconciliation), if a bipartisan deal is not reached. Indeed, in the strongest sign yet that Progressives are willing to use their leverage, House Progressives sent a letter to Speaker Pelosi and Majority Leader Schumer, noting that Democrats should pursue a multi-billion dollar omnibus bill combining the Jobs and Families Plans together because now is the time for “a single ambitious package combing physical and social investments [to go] hand in hand.”[76]
Republicans, however, believe President Biden’s infrastructure Plan goes too far. Republicans have already criticized the Jobs Plan’s cost and the Tax Plan’s proposal to raise corporate taxes to cover the cost as non-starters. Republicans have also emphasized that any bipartisan deal can only focus on physical infrastructure, like roads and bridges, similar to bills that usually make up a surface transportation reauthorization bill. Republicans have significant leverage in the negotiations due to the narrow Democratic majority in the House and the 50-50 Senate, which, when combined with rifts in the Democratic caucus, make it harder for Democrats to have the votes to move forward with their own unilateral approach like they did last March with enacting into law the trillion dollar coronavirus relief bill. Also, even if Democrats lose a couple of Senate Democrats they can still achieve a win on infrastructure if they pick up enough Republican votes, which is why the White House has engaged in negotiations with Senate Republicans in the hopes of achieving a compromise.
c. Road to Achieving a Compromise
The path to achieving a bipartisan deal in Congress has been long and, while there is now light at the end of the tunnel, challenges still remain and the deal “in principle” must still be agreed to by various political actors leaving the final status of infrastructure legislation possible, but still not fully guaranteed.
How did this we get here? Taking advantage of their leverage, Senate Republicans, through their main negotiator Senator Shelley Moore Capito (R-WV), released their first counteroffer to President Biden’s infrastructure Plans. On April 22, Senator Capito issued a $568 billion infrastructure proposal, which costs only about a quarter of President Biden’s $2 trillion package costs.[77] Consistent with Republican criticism of the Jobs Plan’s broad interpretation of what is considered infrastructure, this proposal did not address policies such as care for elderly and disabled people or funding for affordable housing. Instead, the Republican framework focuses on roads and bridges, public transit systems, rail, water infrastructure, airports, and broadband infrastructure. The Republican proposal also diverged from the Jobs Plan in its approach to funding, prioritizing joint spending from state and local governments and encouraging private-sector investments and financing. Republicans also called for funding offsets to cover the cost of the programs and did not propose any corporate or international tax increases. The proposal also leaves in place the 2017 tax cuts passed under President Trump.
On May 21, 2021, President Biden issued a counter-offer to the Republican proposal, cutting his original proposal by $550 billion down to $1.7 trillion. To add pressure on Republicans, President Biden insisted that if a bipartisan deal cannot be reached, Democrats were prepared to move forward on a one-party legislative solution. Indeed, White House senior advisor Cedric Richmond noted that President Biden “wants a deal . . . But again, he will not let inaction be the answer. And when he gets to the point where it looks like that is inevitable, you’ll see him change course.”[78]
On May 27, 2021 Senate Republicans, through Senator Capito, released a second counteroffer, totaling $928 billion. The second Republican counteroffer included $604 billion for physical infrastructure, including roads, bridges, transit systems, rail, water infrastructure, airports and broadband, an increase in funding of almost $40 billion more in funding than the $568 billion for physical infrastructure in Senate Republicans’ first counteroffer.[79] An agreement was still not reached.
On June 4, 2021, President Biden rejected the third counteroffer from Senate Republicans, proposed by Senator Capito, to add about $50 billion to the Senate Republicans’ $928 billion infrastructure plan. White House Press Secretary Jen Psaki said that Senate Republicans’ third counteroffer “did not meet [President Biden’s] objectives to grow the economy, tackle the climate crisis, and create new jobs,” but that the President would continue negotiations with bipartisan Senators on a “more substantial package.”[80] One challenge for President Biden, who cut the size of his infrastructure package to $1.7 trillion during the negotiations, was that he requested at least $1 trillion in new spending over current levels, but Senator Capito’s third proposal increased new investments by only $150 billion.
On June 8, 2021, President Biden ended his infrastructure negotiations with Senator Capito,[81] and started new negotiations with a separate bipartisan group of Senators who drafting their own infrastructure proposal (“Group of Ten”).[82] Members of the Group of Ten include Senators Rob Portman (R-Ohio) Kyrsten Sinema (D-AZ), the leaders of the group, which also includes Senators Bill Cassidy (R-LA), Lisa Murkowski (R-AK), Susan Collins (R-ME), Mitt Romney (R-UT) on the Republican side and Senators Jon Tester (D-MT), Joe Manchin (D-WV), Jeanne Shaheen (D-NH), and Mark Warner (D-VA) on the Democratic side.[83] The Group of Ten had been drafting an $880 billion infrastructure bill, which would be circulated to a broader group of about 20-centrist Senators for their support.[84] Senator Manchin, a moderate and key Senate swing vote, has said he is “very confident” a bipartisan compromise on infrastructure can still be worked out.[85]
While the first three Republican counteroffers signal that Senate Republicans remain interested in pursuing a bipartisan path forward with the White House and Senate Democrats, but significant challenges remained in achieving a deal, even with the new Group of Ten negotiations. First, the third Republican counteroffer of $978 billion and the bipartisan bill of $880 billion are both significantly less than the President Biden’s $1.7 trillion initial proposal, so Senate Republicans remain far apart from the White House on how much to spend on physical. Second, the third Republican counteroffer did not deliver on the key priorities that Progressives seek, most prominently, it failed to include human infrastructure and it is doubtful the bipartisan group’s proposal will include human infrastructure too. Third, the Republican counteroffers were silent on how to pay for an infrastructure bill, which will be key for reaching a deal.
In sum, both parties are about $700 billion apart on a deal, they lack a common definition of infrastructure, and an open question remains on how to pay for an infrastructure bill.[86] And finally, even with the Group of Ten discussions ongoing it may be difficult for 10 or more Senate Republicans—the threshold needed to overcome a filibuster—to support and vote for an infrastructure bill that goes too far beyond Senator Capito’s negotiations with the White House.
On June 10, 2021, the Group of Ten announced a bipartisan deal on a “compromise framework” to invest $1.2 trillion in physical infrastructure over the next eight years, including $974 billion over five years invested in physical infrastructure.[87] Importantly, the deal reportedly would not increase taxes even though it does include an option to index the gas tax to inflation.[88] Additionally, the deal includes a new energy section, which President Biden called for Congress to include in an infrastructure deal.[89] Furthermore, the deal would provide $579 billion in new funding, meaning funding over what would otherwise be spent without any new legislation. [90]Hence, the deal would be fully paid for without any tax increases, which is makes the deal likely to be able in theory to pass both chambers of Congress.
However, the deal must still be signed off on by the Biden White House and the Senate Republican Conference in order to guarantee its safe passage, none of which are guarantees. And the option to index the gas tax for inflation may be a tough sale for the broader Senate Democratic Caucus. And the $1.2 trillion spending figure may also raise cost concerns, at least insofar as finding broad agreement in the Senate on how to pay for that spending, but the $1.2 trillion figure is similar to the $1.25 trillion in infrastructure spending proposed by the bipartisan House Problem Solvers Caucus, which could help smooth the path. And of course the devil may be in the details, so the actual legislative text would need to be acceptable to the White House and both parties in Congress as well. So the bipartisan agreement among the Group of 10 is a significant step, but far from a guarantee that the deal will pass in a divided Senate, even though it creates more optimism that an infrastructure legislative victory is possible. The next step is to sale the deal to the White House and the broader Senate Republican and Democratic caucuses.
The final remaining question is whether the White House would pursue a bipartisan compromise strategy that would require at least 10 Republican votes to overcome a filibuster or if it will decide on a reconciliation strategy to pass a Democratic-only bill that may satisfy the Democratic base, but lose Republican support. Given the push from Progressives for the Families Plan in addition to the Jobs Plan to be included in any deal to retain their support, the Biden administration has a thin-line to walk. The consequences of which path it chooses could risk alienating either Republicans or Progressive Democrats.
The other key interest to watch that may shape how Washington’s negotiations on infrastructure turn out is the business community, which both moderate Democrats and Republicans court. The business community has generally supported the infrastructure spending promised by the Jobs Plan, but has criticized the Tax Plan intended to cover its costs. Some companies may be able to tolerate an increase of the corporate tax rate from 21 percent to up to 25 percent, which Democrats support. But most companies, including small businesses, may prefer the alternative financing plans proposed by Republicans, such as user fees and the creation of a federal infrastructure bank, as more palatable. Indeed, business trade associations have noted that raising the corporate tax rate may harm the business community because it will simply reduce the amount of private investment into infrastructure.
In response, the Biden administration has reportedly had conversations with business leaders to pitch the President’s infrastructure Plans as beneficial to companies, emphasizing the importance of the “soft infrastructure” such as job-training programs, as well as physical infrastructure like better roads.[91] But the question of whether the business community will support the Tax Plan needed to pay for the infrastructure package, and how that will impact what infrastructure legislation will come out of Washington, will be a key issue to watch closely.
d. Path Forward
The easiest path forward now would be for the Group of 10 to persuade the White House and Senate Democratic Caucus, and at least enough Republicans to achieve 60 votes in the Senate for a physical infrastructure bill. If that is achieved, then the Senate will likely move this bill through the committees of jurisdiction and vote on the Senate floor with enough votes to overcome a filibuster. The Group of 10 would also need the House Democrats to pass a mirror image of the Senate bill in order to for legislation to arrive on the President’s desk for him to sign, which of course the White House would have to support.
If the deal breaks down, Senate Democrats have a way forward by using reconciliation to push the President’s infrastructure Plans through Congress, significant political and procedural challenges remain if Democrats attempt a one-party solution. A partisan infrastructure bill is still possible, but these conditions are making it much harder to actually do it.
Democrats can navigate this political landscape and pass President Biden’s infrastructure Plans by choosing one of three alternate paths. First, Democrats can pass the entire package through budget reconciliation. This path requires that Democrats garner 50 votes in the evenly-divided Senate, with Vice President Kamala Harris casting the tie-breaking vote in favor of the plan. Second, Democrats can attempt to break up the infrastructure plan and pass three separate reconciliation bills. However, as stated above, it is now unlikely that Senate Democrats will be permitted to pass three reconciliation bills in a single fiscal year. If Democrats pursue this path, Senate Majority Leader Chuck Schumer will have to persuade the Senate Parliamentarian to allow the Democrats to amend the 2021 fiscal year resolution to include instructions for an additional reconciliation bill,[92] which given the latest ruling of the Senate Parliamentarian, seems unlikely. Third, Democrats can pass a bipartisan bill with Republican support on portions of the infrastructure plan that has bipartisan support, and then use the reconciliation process to pass other elements of the infrastructure plan. If the Group of Ten can achieve broader Republican support for the infrastructure deal, which as stated above may be difficult to achieve, then this may be the best path forward for Democrats to pass the President’s infrastructure Plans.
Congress must still introduce legislative text to track the Jobs, Families, and Tax Plans’ broad contours. The extent to which that legislative text will mirror the Biden administration’s policy goals will undoubtedly be shaped by the political reality on Capitol Hill, especially if the bipartisan Group of Ten’s compromise breaks down. If Senate Democrats pursue reconciliation, they will need to receive at least 50 votes in the evenly-divided Senate—as opposed to 60 votes to defeat a filibuster—with Vice President Kamala Harris casting the tie-breaking vote in the Democrats’ favor. The infrastructure bill would then have to pass in House of Representatives, where the Democrats hold a slight majority (218 Democrats and 212 Republicans). The infrastructure bill would only become law after it passes both chambers of Congress and is signed by President Biden. Currently, Senate Majority Leader Schumer (D-NY) has proposed an infrastructure vote in July[93] and House Speaker Pelosi (D-CA) has set the Fourth of July as a deadline for a House floor vote on infrastructure.[94]
As detailed above, if Democrats and Republicans in Congress pass the compromise on infrastructure, then a bill will likely arrive on the President’s desk before the August recess. Otherwise, if a deal breaks down, Senate Democrats will need to go back to the drawing board and likely move a one-party bill through a Democratic Congress. Facing opposition from Republicans, the Biden White House has already attempted to redefine the meaning of “bipartisanship” as a concept that does not require support of Congressional Republicans.[95] Even if an infrastructure bill ultimately passes without a single Republican vote in Congress, the Biden White House is expected to herald it as “bipartisan” legislation with broad support from the American public.[96] But passing a one-party bill is not easy, and the political and procedural conditions have made it harder to do, but if the bipartisan compromise breaks down, it may be the best option for Democrats to move the infrastructure Plans this year through a 50-50 Senate.
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[1] Siegel, R., What’s in Biden’s $1.8 trillion American Families Plan?, The Washington Post, https://www.washingtonpost.com/us-policy/2021/04/28/what-is-in-biden-families-plan/ (last visited April 29, 2021).
[2] Snell, K., Countering Biden, Senate Republicans Unveil Smaller $568 Billion Infrastructure Plan, NPR, https://www.npr.org/2021/04/22/989841527/countering-biden-senate-republicans-unveil-smaller-568-billion-infrastructure-pl (last visited Feb. 28, 2021)
[3] Carey, L. et al., “The American Jobs Plan Gets Serious about Infrastructure and Climate Change,” Center for Strategic & International Studies (Apr. 2, 2021), available at https://www.csis.org/analysis/american-jobs-plan-gets-serious-about-infrastructure-and-climate-change.
[4] FACT SHEET: The American Jobs Plan Empowers and Protects Workers, THE WHITE HOUSE (Apr. 23, 2021) [hereinafter EMPLOYEE FACT SHEET].
[5] Alex Gangitano, Biden calls for passage of PRO Act, $15 minimum wage in joint address, THE HILL (Apr. 28, 2021), https://thehill.com/homenews/administration/550845-biden-calls-for-passage-of-pro-union-pro-act-and-15-minimum-wage.
[6] EMPLOYEE FACT SHEET, supra note 4.
[7] FACT SHEET: The American Jobs Plan, THE WHITE HOUSE (Mar. 31, 2021) [hereinafter JOBS PLAN FACT SHEET].
[8] S. 98, 117th Cong. (2021).
[9] H.R. 2143, 117th Cong. (2020).
[10] S. 98, 117th Cong. § 42A (2021).
[13] Id. Qualified census tracts also include projects located in a city with: (1) a population of more than 50,000; (2) a poverty rate not less than 150 percent of the applicable poverty rate; (3) a median gross income that does not exceed the applicable area median gross income; and (4) a median value for owner-occupied homes that does not exceed 80 percent of the applicable area median value for owner-occupied homes. Qualified projects may also be located in a nonmetropolitan county which has a median gross income that does not exceed the applicable area median gross income, and has been designated by a neighborhood comes credit agency as such.
[17] The Department of Energy’s Weatherization Assistance Program is designed “to increase the energy efficiency of dwellings owned or occupied by low-income persons, reduce their total residential energy expenditures, and improve their health and safety, especially low-income persons who are particularly vulnerable, such as the elderly, the disabled, and children.” Department of Energy, About the Weatherization Assistance Program, https://www.energy.gov/eere/wap/about-weatherization-assistance-program (last accessed Apr. 21, 2021).
[18] JOBS FACT SHEET, supra note 7.
[19] Energy Independence and Security Act of 2007, 121 Stat. 1511 (2007) (codified and amended at 42 U.S.C. § 16062).
[20] EMPLOYEE FACT SHEET, supra note 4.
[21] EMPLOYEE FACT SHEET, supra note 4.
[23] Don Gonyea, House Democrats Pass Bill that Would Protect Worker Organizing Efforts, NPR (Mar. 9, 2021), https://www.npr.org/2021/03/09/975259434/house-democrats-pass-bill-that-would-protect-worker-organizing-efforts.
[24] Philip B. Phillips, The Protecting the Right to Organize (PRO) Act Gains Momentum, The National Law Review (Mar. 9, 2021), https://www.natlawreview.com/article/protecting-right-to-organize-pro-act-gains-momentum.
[25] Eleanor Mueller & Holly Otterbein, Unions warn Senate Democrats: Pass the PRO Act, or else, POLITICO (Apr. 22, 2021), https://www.politico.com/news/2021/04/22/unions-senate-democrats-pro-act-484280.
[26] JOBS PLAN FACT SHEET, supra note 7; THE MADE IN AMERICA TAX PLAN, U.S. DEPT. OF TREAS. 1-2 (Apr. 2021) [hereinafter TAX PLAN].
[28] JOBS PLAN FACT SHEET, supra note 7.
[33] Thomas Franck, Biden says higher corporate tax won’t hurt economy; Manchin opposes 28% rate, CNBC (Apr. 5, 2021), https://www.cnbc.com/2021/04/05/biden-higher-corporate-tax-would-not-hurt-economy-manchin-opposes-28-percent-rate.html.
[34] Hans Nichols, Senate Democrats settling on 25% corporate tax rate, Axios (Apr. 18, 2021), https://www.axios.com/senate-democrats-tax-rate-biden-63190a59-0436-40d9-a8a3-fa21ef616412.html.
[36] Tax Policy Center, What is global intangible low-taxed income and how is it taxed under the TCJA, Briefing Book, https://www.taxpolicycenter.org/briefing-book/what-global-intangible-low-taxed-income-and-how-it-taxed-under-tcja.
[47] The BEAT limits the ability of multinational corporations to shift profits by making deductible payments to their affiliates in low-tax countries. Tax Policy Center, What is the TCJA base erosion and anti-abuse tax and how does it work?, Briefing Book, https://www.taxpolicycenter.org/briefing-book/what-tcja-base-erosion-and-anti-abuse-tax-and-how-does-it-work.
[50] Id.; JOBS PLAN FACT SHEET, supra note 7.
[51] JOBS PLAN FACT SHEET, supra note 7.
[52] Tax Policy Center, What is foreign-derived intangible income and how is it taxed under the TCJA, Briefing Book, https://www.taxpolicycenter.org/briefing-book/what-foreign-derived-intangible-income-and-how-it-taxed-under-tcja.
[61] JOBS PLAN FACT SHEET, supra note 7.
[62] Congressional Research Service, “The Budget Reconciliation Process: Stages of Consideration,” R44058 (Jan. 25, 2021), available at https://fas.org/sgp/crs/misc/R44058.pdf [hereinafter Budget Reconciliation Process].
[65] See Budget Reconciliation Process, supra note 62.
[66] Tonja Jacobi and Jeff VanDam, “The Filibuster and Reconciliation: The Future of Majoritarian Lawmaking in the U.S. Senate at 30 (2013), available at file:///C:/Users/22855/Downloads/SSRN-id2221712.pdf.
[67] Section 304 of the Congressional Budget Act (1974) (Pub. L. 97-344), codified at 2 U.S.C. 635.
[68] Kelsey Snell, “Ruling by Senate Parliamentarian Opens Up Potential Pathway for Democrats,” NPR, available at https://www.kpbs.org/news/2021/apr/05/ruling-by-senate-parliamentarian-opens-up/.
[69] Erik Wasson, “Schumer’s Infrastructure Path May Get Trickier After Ruling,” Bloomberg, available at https://www.bloomberg.com/news/articles/2021-06-02/senate-ruling-may-complicate-democrats-infrastructure-push.
[70] Igor Derysh, “Senate parliamentarian’s surprise decision threatens to derail Democrats’ infrastructure plans,” Salon (June 2, 2021), available at https://www.salon.com/2021/06/02/senate-parliamentarians-surprise-decision-threatens-to-derail-democrats-infrastructure-plans/.
[71] Everett, Burgess, “2 Dem senators balk at Biden’s new spending plan,” Politico (Apr. 5, 2021), available at https://www.politico.com/news/2021/04/05/manchin-biden-spending-plan-479058.
[72] “Pivotal U.S. Senate Democrat wants ‘more targeted’ infrastructure bill,” Reuters (Apr. 25, 2021), available at https://www.reuters.com/world/us/key-us-senate-democrat-favors-smaller-infrastructure-bill-2021-04-25/.
[74] Seung Min Kim & Tony Romm, “Bipartisan group of senators prepares new infrastructure plan as talks stall between White House and GOP,” Washington Post (May 25, 2021), available at https://www.washingtonpost.com/us-policy/2021/05/25/white-house-republicans-infrastructure-talks/.
[75] Burgess Everett & Sarah Ferris, “Liberals to Biden: Ditch the infrastructure talks with Republicans,” Politico, (May 19, 2021), available at https://www.politico.com/news/2021/05/19/biden-liberals-republicans-infrastructure-489418.
[76] Letter from Rep. Pramila Jayapal et al., to Rep. Nancy Pelosi & Sen. Chuck Schumer (May 17, 2021), available at https://jayapal.house.gov/wp-content/uploads/2021/05/Jayapal_Size-Scope-Speed-Letter.pdf.
[78] Devan Cole, “Biden adviser: President will ‘change course’ in infrastructure talks if inaction seems inevitable,” CNN (May 23, 2021), available at https://www.cnn.com/2021/05/23/politics/cedric-richmond-infrastructure-bill-biden-cnntv/index.html.
[79] Alexander Bolton, “Senate Republicans Pitch $928 billion infrastructure offer,” The Hill (May 27, 2021), available at https://thehill.com/homenews/senate/555700-senate-republicans-pitch-928-billion-infrastructure-offer.
[80] Jacob Pramuk and Christina Wilkie, “Biden rejects new GOP infrastructure offer but will meet with Sen. Capito again Monday,” CNBC (June 4, 2021), available at https://www.cnbc.com/2021/06/04/joe-biden-and-shelly-moore-capito-to-hold-more-infrastructure-talks.html.
[81] Brett Samuels, “Biden ends infrastructure talks with key Republican,” The Hill (June 8, 2021), available at https://thehill.com/homenews/administration/557417-white-house-to-end-infrastructure-talks-with-capito-shift-focus-to.
[84] Jordan Carney, “Bipartisan group prepping infrastructure plan as White House talks lag,” The Hill (June 7, 2021), available at https://thehill.com/homenews/senate/557263-bipartisan-group-prepping-infrastructure-plan-as-white-house-talks-lag.
[86] Jacob Pramuk and Christina Wilkie, supra n. 75.
[87] Alexander Bolton, “Bipartisan Senate group announces infrastructure deal,” The Hill (June 10, 2021), available at https://thehill.com/homenews/senate/557816-romney-tentative-deal-on-key-elements-of-bipartisan-infrastructure-package.
[91] Alex Leary & Emily Glazer, “Business Leaders Push for Infrastructure Deal, Minus the Corporate Tax Hikes,” Wall Street Journal (May 13, 2021), available at https://www.wsj.com/articles/business-leaders-push-for-infrastructure-deal-minus-the-corporate-tax-hikes-11620907204.
[92] Li Zhou & Ella Nilsen, “Democrats’ new plan for passing more bills with 51 votes, explained,” Vox (Mar. 29, 2021), available at https://www.vox.com/2021/3/29/22356453/chuck-schumer-budget-reconciliation-filibuster.
[93] Morgan Chalfant, “Biden talks reconciliation with Schumer as infrastructure negotiations falter,” The Hill (June 2021), available at https://thehill.com/homenews/administration/557435-biden-talks-reconciliation-with-schumer-as-infrastructure.
[94] Christopher Wilson, “Senate group tries one last-ditch attempt at bipartisan infrastructure deal,” Yahoo (June 9, 2021), available at https://www.yahoo.com/news/infrastructure-bipartisan-senate-negotiations-biden-cassidy-manchin-174623680.html.
[95] Ashley Parker, “Facing GOP opposition, Biden seeks to redefine bipartisanship,” Washington Post (Apr. 11, 2021), available at https://www.washingtonpost.com/politics/biden-bipartisan/2021/04/11/65b29ad8-96f0-11eb-b28d-bfa7bb5cb2a5_story.html.
The following Gibson Dunn lawyers assisted in preparing this client update: Michael D. Bopp, Roscoe Jones, Jr., Chantalle Carles Schropp, Christopher Wang, Amanda Sadra, and Brian Williamson.
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On June 11, 2021, the Second Circuit issued its decision in 1-800 Contacts, Inc. v. FTC,[1] an appeal of an administrative litigation brought by the Federal Trade Commission against 1-800 Contacts. The decision—which rejected the FTC’s claim that several trademark settlements by 1-800 Contacts violated the antitrust laws —found that the trademark settlement agreements at issue were “typical” and procompetitive, and provides crucial guidance for parties considering settling trademark disputes. The decision also has broader implications for antitrust claims involving the enforcement of intellectual property rights and will likely serve as an important precedent in such cases. From a substantive trademark perspective, the decision also confirms that the law over the use of another party’s trademarks as search engine keywords remains “unsettled.”
The FTC’s Case Against 1-800 Contacts
The FTC’s case challenged thirteen agreements that 1-800 Contacts had signed with competitors to settle trademark infringement claims where it alleged that those competitors’ online advertisements infringed 1-800 Contacts’ trademarks.[2] The settlements restricted competitors’ use of search advertising by requiring them (1) to refrain from bidding on 1-800 Contacts’ trademarks in search-engine auctions, and (2) to affirmatively bid on negative keywords that would prevent their ads from being displayed when a consumer searched for a 1-800 Contacts trademark. The FTC alleged that these agreements restricted competition in violation of Section 5 of the FTC Act because they “prevent[ed] [1-800 Contacts’] competitors from disseminating ads that would have informed consumers that the same contact lenses were available at a cheaper price from other online retailers,” and reduced “price competition in search advertising auctions.”[3] An Administrative Law Judge (ALJ) upheld the FTC’s case, and the Commission affirmed the ALJ’s decision, classifying the agreements in question as “inherently suspect” under the antitrust laws.[4]
The Second Circuit’s Decision
1-800 Contacts appealed the Commission’s decision to the Second Circuit, and the appeals court reversed. As an initial matter, the court agreed with the FTC that trademark settlements are not categorially immune from antitrust scrutiny.[5] Consistent with FTC v. Actavis,[6] the Second Circuit held that trademark settlements can, under certain circumstances, violate the antitrust laws. But the court rejected the Commission’s characterization of the trademark settlements as “inherently suspect” and its application of a truncated rule of reason analysis.[7] Because trademark settlements have “cognizable procompetitive justifications” and have not “been widely condemned” by courts, the court found that application of the full rule of reason approach was required.[8]
The court found that 1-800 Contacts had shown that its settlements had procompetitive justifications. The court reasoned that the “[t]he protection of [1-800 Contacts’] trademark interests constitutes a valid procompetitive justification,”[9] that “agreements to protect trademark interests are ‘common, and favored, under the law,’” and that courts “should ‘presume’ that trademark settlement agreements are procompetitive.”[10] In response to the FTC’s claim that these procompetitive justifications did not justify the restrictions in the settlements because those benefits could be achieved through a “less restrictive alternative,” the court adopted a very narrow view of that doctrine. In language deferential to the settling parties, the court held that “what is ‘reasonably necessary’” to achieve the procompetitive benefits of protecting a trademark interest “is likely to be determined by competitors during settlement negotiations.”[11] The court then found that the FTC’s proposed alternative—a “disclosure requirement”—was not shown to be a less restrictive alternative because, among other things, the FTC failed to address the practical difficulties with its proposal, e.g., how the disclosure requirement could be enforced.[12] As a result, the court found that the FTC’s proposed alternative might not as be as effective in promoting the “parties’ ability to protect and enforce their trademarks.”[13] The court, accordingly, found that the FTC failed to show that the settlement agreements violated the antitrust laws and ordered the FTC’s case dismissed.
Practical Implications for Trademark Settlements
The 1-800 Contacts decision has numerous practical implications for parties seeking to settle trademark disputes and otherwise protect their trademark interests. The decision provides some very useful guidance on how companies may settle trademark disputes with minimal antitrust risk, but companies should continue to take care to consider antitrust concerns in crafting such settlements. While the court dismissed the FTC’s case against 1-800 Contacts, it did find that trademark settlements can raise antitrust issues in certain circumstances. Overall, there are several key takeaways from the decision, including:
- The Second Circuit decision includes language that is deferential to the settling parties in trademark disputes. As a result, the FTC and private plaintiffs will face significant hurdles if they attempt to bringing new antitrust cases challenging trademark settlements. Notably, a respondent in an FTC administrative proceeding can appeal an adverse decision in any Circuit in which the respondent does business,[14] which means that the Second Circuit’s decision will effectively set the legal standard for any future FTC administrative enforcement actions.
- While the Second Circuit did not expressly define the situations in which a trademark settlement might raise greater antitrust risk, it did mention an agreement entered “under duress” “between parties with unequal bargaining power” as a potential example of where a trademark settlement might be entitled to lesser deference in an antitrust challenge.[15]
- The court also left open the possibility that the requirement that competitors use negative keywords could be higher risk than agreements not to bid on each other’s trademarks. The court stated that it had “no reason to consider” the issue of whether the requirement to use negative keywords went “beyond any legitimate claim of trademark infringement” because the FTC had not made a finding of anticompetitive effects specific to “this narrow aspect of the settlement agreements.”[16]
- The court stated that the merits of the trademark claims that led to the settlement agreements in the 1-800 Contacts case were “unsettled.”[17] Although the court’s overall holding implies that courts will be reluctant to second guess the merits of a claim that the parties have elected to settle, aggressive antitrust plaintiffs will likely continue to argue that a lower level of deference should apply if the trademark claims are extremely weak.
- The decision’s reasoning also appears to extend to agreements between competitors that do not arise out of pending trademark infringement litigation. While the FTC had argued that one of the agreements was particularly suspect because the parties’ agreement to limit their bidding on trademark terms was not based on an asserted infringement claim, the court found that the FTC had not offered “direct evidence differentiating” that agreement from the others and that the court did not need to do so in its decision because “protecting trademarks is a valid procompetitive justification for the restrictions.”[18]
Given the risk that regulators or private plaintiffs will continue to pursue similar claims, it remains crucial for companies considering settling trademark disputes with restrictions on search advertising to analyze the antitrust risk of such arrangements.
Broader Implications for Other Types of IP Enforcement and Settlements
The decision also has important implications for non-trademark cases. The court found, as noted, that protecting one’s intellectual property rights constitutes a legitimate business interest that can justify restrictions on an allegedly infringing party’s conduct in a settlement agreement. Although the decision emphasizes the unique features of trademarks, its reasoning is likely to apply, at least to some extent, to antitrust claims challenging settlements of other types of IP disputes. For example, we expect that this decision will be cited by parties in antitrust cases based on alleged reverse-payment settlement agreements in the pharmaceutical industry. Similarly, the court’s narrow interpretation of the “less restrictive alternative” doctrine is also likely applicable outside of the trademark context. For that doctrine to apply, the court required the plaintiff to do more than just speculate about potentially less restrictive alternatives: the plaintiff “needs to show more than the mere possibility” of a less restrictive alternative.[19] And the court also stated that not any proposed alternative will do—the proposed alternative must be practical to apply, as well as “substantially less restrictive” than the arrangement challenged.[20]
Finally, the decision in 1-800 Contacts also serves as a reminder that, in an era in which commentators are encouraging more aggressive and novel antitrust enforcement, the federal judiciary remains the ultimate arbiter of federal antitrust policy. Enforcers seeking to expand the scope of U.S. antitrust law must do more than bring novel cases—they must also prove their cases with hard facts in a court of law.
* Gibson Dunn partner Howard S. Hogan served as an expert witness for 1-800 Contacts in this case, and offered the opinion that the settlement agreements at issue were standard trademark settlements, as courts continue to determine the bounds of trademark claims arising from the use of trademarks as search engine keywords.
____________________________
[1] — F.3d —, 2021 WL 2385274 (2d Cir. June 11, 2021).
[7] 1-800 Contacts, 2021 WL 2385274, at *7. The “inherently suspect” framework is also known as the “abbreviated rule of reason analysis” or a “quick-look” approach. Id. at *6 (quoting Cal. Dental Ass’n v. FTC, 526 U.S. 756, 770 (1999)).
[10] Id. at *9 (first quoting Clorox, 117 F.3d at 55; and then quoting id. at 60).
[11] Id. at *10 (quoting United States v. Brown Univ., 5 F.3d 658, 679 (3d Cir. 1993)).
[13] Id. The panel also held that the FTC failed to offer “direct” evidence of anticompetitive effects. Id. at *8.
[15] 1-800 Contacts, 2021 WL 2385274, at *10 n.14.
[19] Id. at *11 (emphasis added).
[20] Id. (quoting Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 1502 (3rd & 4th eds., 2019 Cum. Supp. 2010-2018)).
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 Antitrust and Competition, Intellectual Property, Fashion, Retail and Consumer Products, or Media, Entertainment and Technology practice groups, or the authors:
Eric J. Stock – New York (+1 212-351-2301, estock@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
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Jane M. Love, Ph.D. – New York (+1 212-351-3922, jlove@gibsondunn.com)
Fashion, Retail and Consumer Products Group:
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
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On June 3, 2021, the United States Court of Appeals for the Second Circuit issued an important decision dismissing a lawsuit by the New York State Department of Financial Services (“DFS”), which was challenging the authority of the federal Office of the Comptroller of the Currency (“OCC”) to grant special purpose national bank (“SPNB”) charters.[1] Such non-depository charters have attracted the attention of financial technology (“fintech”) companies. The decision reversed a holding of the United States District Court for the Southern District of New York that had placed greater power in state regulators’ hands in holding that the OCC lacked such authority because such non-depository institutions are not engaged in the “business of banking.” The Second Circuit’s decision, which was based on threshold standing and ripeness grounds, maintains ambiguity in the federal-state balance with respect to regulation of SPNBs and threatens to narrow DFS’s regulatory and supervisory reach over cutting-edge financial products and services, which the agency has sought to expand in recent years.
DFS Challenges Special Purpose National Bank Charters
The lawsuit centered around the National Bank Act of 1864, which provides for OCC regulation and supervision of federally chartered national banks in their “business of banking.” The statute provides that if “it appears that [an entity applying for a federal banking charter] is lawfully entitled to commence the business of banking,” the Comptroller shall “give to such association a certificate . . . that such association has complied with all the provisions required to be complied with before commencing the business of banking, and that such association is authorized to commence such business.[2] Once a bank receives a federal charter,
It shall have power . . . [t]o exercise . . . all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes . . . .[3]
In 2003, the OCC amended federal regulations to provide for authority to issue SPNB charters, or charters for a national bank that engages in a limited range of banking activities, “including one of the core banking functions [i.e., paying checks or lending money], but does not take deposits.”[4] In amending these regulations, the OCC thus asserted that it had authority to charter entities that pay checks or lend money, among other activities, but that do not receive deposits. These regulations, however, were largely ignored until then-Comptroller of the Currency Thomas Curry announced in late 2016 that the OCC would consider such charters for fintech firms.[5]
This announcement met vigorous resistance by DFS, New York’s chief financial regulator. According to DFS, the decision to issue federal SPNB charters would lead to a preemption of state law for newly chartered entities and would reduce “critical financial protections” provided in New York, weakening the state’s “regulatory controls on usury, payday loans, and other predatory lending practices.”[6] DFS also claimed it would lose revenue from assessments levied against fintech companies that do not take deposits, because such companies, which are currently governed primarily by state law, could convert to a federal charter.[7]
In 2017, DFS challenged the OCC’s regulatory regime, but that lawsuit was dismissed for lack of standing and ripeness.[8] In 2018, the OCC announced that it would accept applications for SPNB charters under the new regulation.[9] Soon thereafter, the OCC allegedly invited “Fintech startup companies to come to [its] office in New York to discuss . . . the new [SPNB] charter.”[10] Fintech companies are “non-bank companies that leverage recent technological innovations to provide financial services and/or products to customers in new ways,” such as mobile payment services, distributed ledger technology, marketplace lending, and crowdfunding sites.[11] DFS responded to the OCC’s efforts by bringing an action against the OCC in the United States District Court for the Southern District of New York, claiming among other things that the OCC exceeded its authority under the National Bank Act by authorizing itself to grant SPNB charters to institutions that do not accept deposits and that the OCC’s regulation is null and void.[12]
The District Court’s Decision
The District Court set aside the OCC’s decision to accept SPNB charter applications and held that the OCC had exceeded its authority under the National Bank Act. In particular, the District Court found that the term the “business of banking” in the statute unambiguously requires receiving deposits as an aspect of the banking business.[13] In reaching that conclusion, the District Court looked to the statute’s text, framework, and history, as well as the history of federal banking law, the long history of the OCC not asserting charting power over special purpose institutions, and the “dramatic disruption of federal-state relationships in the banking industry” sought by the OCC on “a question of deep economic and political significance.”[14]
Following that ruling, the parties submitted proposed judgments setting aside the OCC’s regulation “with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” but the OCC sought a narrower judgment setting aside the regulation only as to fintech companies that “have a nexus to New York State, i.e., applicants that are chartered in New York or that intend to do business in New York (including through the internet) in a manner that would subject them to regulation by DFS.”[15] The District Court rejected the OCC’s proposal and set aside the regulation regardless of fintech companies’ location nationwide.[16]
The Second Circuit’s Ruling
Last week, the Second Circuit reversed the district court’s judgment and instructed the court to dismiss the case without prejudice. The Court concluded that DFS’s claims were unripe and without standing because DFS failed to allege that the OCC’s decision caused it to suffer an actual or imminent injury.[17] Having determined that the case was not justiciable, the Court did not address the District Court’s holding on the merits that the “business of banking” under the federal banking statute unambiguously requires receipt of deposits.[18]
The Court concluded that DFS lacked standing because its concerns about the effects of preemption were “too speculative,” given that the OCC’s actions would not implicate such concerns until the OCC received an SPNB charter application from or granted such a charter to a non-depository fintech that would otherwise be subject to DFS’s jurisdiction.[19] As the Court explained, there is “currently no non-depository fintech that can claim federal preemption engaging in any practice that may give rise to the regulatory harms that DFS alleges, such as charging interest rates that exceed New York’s statutory cap.”[20] The Court was likewise unpersuaded that DFS faced a “substantial risk” of losing revenue acquired through annual assessments under New York law.[21] The Court explained that DFS has “yet to lose out on any revenue acquired through its assessments . . . because the OCC has not received, let alone approved, an application for an SPNB charter from a non-depository fintech within DFS’s jurisdiction.”[22] The Court declined to “decide the precise point at which DFS’s claims may become justiciable in the future,” whether it be when a non-depository fintech formally applies for an SPNB charter, when the OCC grants such an application, or some other time.[23]
Conclusion
This decision represents a setback for DFS and other state regulators who may perceive the OCC’s assertion of authority over non-depository institutions as an incursion into an area that has traditionally fallen within the states’ ambit. Indeed, as New York’s primary financial regulator, DFS has jurisdiction over approximately 1,500 financial institutions and 1,800 insurance companies, and it supervises approximately $7 trillion in assets across the insurance, banking, and financial services industries.[24]
The OCC’s ability to press forward with fintech companies is of special concern to DFS, which has been actively flexing authority in recent years with respect to contemporary trends in financial services, implementing new initiatives designed to foster innovation in a wide range of services and products, such as cryptocurrencies, while also focusing on consumer protection and bringing fintechs within an expanded regulatory scheme.[25] The future of regulation over these cutting-edge industries, many of which have close connections to New York, could be impacted by the Second Circuit’s ruling.
The effects of the decision, however, should not be overstated. The Court of Appeals made clear that it expressed no opinion on the ultimate issue of whether the OCC has authority to grant national bank charters to non-depository institutions, and it likewise expressed no view on whether the OCC’s amended regulation (if unlawful) must be set aside only as to companies applying within a particular jurisdiction such as New York or more broadly nationwide. These important issues are likely to be resolved through future litigation, and indeed, a similar case is pending in the United States District Court for the District of Columbia.[26] In addition, the new Acting Comptroller of the Currency, Michael Hsu, a longtime member of the supervisory staff of the Federal Reserve Board, has indicated that he intends to take a close look at whether to continue some of the OCC’s initiatives launched under the Trump Administration.[27]
__________________________
[1] See Lacewell v. Office of Comptroller of Currency, — F.3d —, 2021 WL 2232109 (2d Cir. June 3, 2021).
[2] 12 U.S.C. § 27(a) (emphasis added).
[3] Id. § 24 (Seventh) (emphasis added).
[4] Lacewell, 2021 WL 2232109, at *2 (quoting 12 C.F.R. § 5.20(e)(1)(i)); see Vullo v. Office of Comptroller of Currency, 378 F. Supp. 3d 271, 279 (S.D.N.Y. 2019), rev’d, Lacewell, 2021 WL 2232109.
[5] See “Remarks By Thomas J. Curry Comptroller of the Currency Regarding Special Purpose National Bank Charters for Fintech Companies,” Georgetown University Law Center (December 2, 2016), available at https://www.occ.gov/news-issuances/speeches/2016/pub-speech-2016-152.pdf.
[6] Lacewell, 2021 WL 2232109, at *8; see Vullo, 378 F. Supp. 3d at 286.
[7] Lacewell, 2021 WL 2232109, at *8, *11; see Vullo, 378 F. Supp. 3d at 286.
[8] Vullo, 378 F. Supp. 3d at 280.
[10] Lacewell, 2021 WL 2232109, at *4.
[11] Vullo, 378 F. Supp. 3d at 378 n.2; see Lacewell, 2021 WL 2232109, at *3.
[12] Vullo, 378 F. Supp. 3d at 278, 280.
[14] Id. at 292-98 (emphasis added).
[15] Lacewell, 2019 WL 6334895, at *1 (S.D.N.Y. Oct. 21, 2019), rev’d, Lacewell, 2021 WL 2232109.
[24] See N.Y. Dep’t of Fin. Servs., About Us, https://www.dfs.ny.gov/our_mission; Vullo, 378 F. Supp. 3d at 278.
[25] See, e.g., Mylan L. Denerstein, Akiva Shapiro & Seth M. Rokosky, New York State Dep’t of Fin. Servs. Roundup (2021), https://www.gibsondunn.com/wp-content/uploads/2021/02/NY-Department-of-Financial-Services-Round-Up-February-2021.pdf; Denerstein, Shapiro & Rokosky, Webcast: Recent Developments at the New York State Dep’t of Fin. Servs. (2020), https://www.gibsondunn.com/webcast-recent-developments-at-the-new-york-state-department-of-financial-services/; Denerstein, Shapiro & Rokosky, New York State Dep’t of Fin. Servs. Roundup (2020), https://www.gibsondunn.com/wp-content/uploads/2020/02/NY-Department-of-Financial-Services-Round-Up-February-2020.pdf.
[26] See, e.g., Press Release, “Conference of State Banking Supervisors Files New Complaint Against OCC,” December 22, 2020, available at https://www.csbs.org/newsroom/csbs-files-new-complaint-against-occ.
[27] See, e.g., Statement of Michael J. Hsu, Acting Comptroller of the Currency, Committee on Financial Services, United States House of Representatives, May 19, 2021 (Hsu Statement).
Gibson, Dunn & Crutcher’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, or the authors:
Mylan L. Denerstein – Co-Chair, Public Policy Practice, New York (+1 212-351-3850, mdenerstein@gibsondunn.com)
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Seth M. Rokosky – New York (+1 212-351-6389, srokosky@gibsondunn.com)
Please also feel free to contact the following leaders and members of the firm’s Financial Institutions practice group:
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Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
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Pearl of Wisdom
The DIFC Court of Appeal in Lahelalahela V Lameezlameez [2020] DIFC CA 007 found that the Riyadh Convention[1] is not a part of DIFC Law, and in any event provides a non-exclusive service regime. To the extent Pearl Petroleum[2] found to the contrary, it was wrongly decided. The DIFC Court can therefore order alternative service or dispense with service in respect of a receiving party domiciled in a Riyadh Convention state. This will come as a great relief to DIFC Court practitioners who have been grappling with Pearl Petroleum and the significant hurdles it created for service of DIFC Court documents in the GCC Region. The Court of Appeal also provided welcome clarity on the implementation of international agreements to which the UAE is a party into DIFC Law, finding that obligations in such agreements are not automatically a part of DIFC Law where they relate to civil and commercial matters. This is an important development with wide-ranging implications for the source and content of DIFC Law, as well as for the enforcement of DIFC-seated arbitrations. Gibson, Dunn & Crutcher, with lead Counsel Tom Montagu-Smith-QC, acted for the successful Claimant at first instance and Respondent on appeal.
Background
The Claimant obtained a monetary award in DIFC-seated arbitration proceedings against the Defendant, and later successfully obtained (ex parte) a DIFC Court order recognising and enforcing the award (the “Enforcement Order”). Pursuant to RDC 43.70 and the terms of the Enforcement Order, the Enforcement Order could not be enforced until after it had been served on the Defendant.
The Defendant company is registered in Erbil, in the Republic of Iraq, which, along with the UAE, is a signatory to the Riyadh Convention. Article 6 of the Riyadh Convention sets out a method of service (“Convention Service”), which applies where the sender and recipient are both resident in a signatory state to the Riyadh Convention (a “Convention State”).[3] Unlike diplomatic service, Convention Service operates directly between a sending court (in this case the DIFC Court) and a receiving court (in this case the local Erbil Court).
The Claimant attempted Convention Service. The local court in Erbil refused to serve the Enforcement Order and stated (wrongly) that the Riyadh Convention did not apply. The Claimant then obtained (ex parte) an order for alternative service from the DIFC Court (the “Service Order”). Upon being served with the Service Order, the Defendant applied for it to be set aside. The principal argument by the Defendant was that Pearl Petroleum correctly found that the Riyadh Convention, where applicable, is part of DIFC law and provides an exclusive and mandatory service regime, and the DIFC Court does not have the power to order alternative service or dispense with service.
The Claimant argued that Pearl Petroleum was distinguishable, and in any event wrongly decided because the Riyadh Convention is not binding on the DIFC Court. At first instance, H.E. Justice Shamlan Al Sawalehi (“Justice Al Sawalehi”) found for the Claimant on both these grounds. As the first instance decision conflicted with Pearl Petroleum, permission to appeal was granted, and a hearing occurred before the Court of Appeal in February 2021, with the Court of Appeal issuing its decision on 9 May 2021.
Pearl Petroleum
In Pearl Petroleum, the DIFC Court set aside an order for alternative service of a recognition and enforcement order. The alternative service order had been initially granted ex parte on the basis that service under the Riyadh Convention would very likely be stymied by the award-debtor, the Kurdistan Regional Government. The DIFC Court held that, by virtue of Article 5 of UAE Federal Law No. 8 of 2004 (“Article 5”)[4], treaties which form part of the law of the UAE are binding in the DIFC. Importantly, the Court found that, not only was the Riyadh Convention applicable in the DIFC, but the service regime in Article 6 of the Riyadh Convention was mandatory and exclusive. That is, there was no scope to circumvent the terms of the Riyadh Convention by an order for alternative service or to dispense with service altogether so that the Riyadh Convention was not engaged.
The effect of Pearl Petroleum was that, if the Court of a Convention State refuses or fails to serve a DIFC Court recognition and enforcement order pursuant to the Convention Service regime, the recognition and enforcement order will never become enforceable; similarly draconian implications applied to the service of other court documents. The obvious problem that this gave DIFC Court users was exacerbated by the fact that the Riyadh Convention is of broad application throughout the GCC region.
Justice Al Sawalehi’s Decision
At first instance, Justice Al Sawalehi held that Pearl Petroleum was distinguishable, as, unlike in Pearl Petroleum, service had been attempted but failed in the present case. In the alternative, His Honour found that Pearl Petroleum was wrongly decided and the DIFC Court was not bound to follow the Riyadh Convention at all.
The present case distinguished from Pearl Petroleum
In Pearl Petroleum, the claimant had not actually attempted service in accordance with the Riyadh Convention – instead, alternative service had been sought on the basis that interference with service by the Defendant was highly likely. Justice Al Sawalehi considered this to be a critical distinction and confined the ration in Pearl Petroleum accordingly. That is, Pearl Petroleum, properly interpreted, held that where a document in DIFC Court proceedings is required to be served on a defendant in a Convention State, it must first be attempted to be served by Convention Service, but after this attempt, the Court is empowered to order alternative service or dispense with it altogether.
Pearl Petroleum wrongly decided
Justice Al Sawalehi also found that, even if Pearl Petroleum was not distinguishable, it was in any event wrong on a more fundamental basis – i.e. the Riyadh Convention was not binding in the DIFC at all. There are two ‘avenues’ by which the Riyadh Convention could ‘automatically’[5] apply in the DIFC: (1) Article 5; and (2) Article 3(2) of the UAE Federal Law No. 8 of 2004, which provides that financial Free Zones “shall…be subject to all Federal laws, with the exception of Federal civil and commercial laws” (“Article 3(2)”).
Regarding Article 5, His Honour found that it placed an obligation on “financial free zones”, which meant the DIFC executive (i.e. the Ruler, the President of the DIFC and the DIFC Authority), but not the DIFC Courts. To the contrary, Article 30 of the DIFC Court Law[6] provides a mandatory, exhaustive list of the law that can be applied by the DIFC Court. UAE Federal law is not mentioned. Therefore, the DIFC Court shall not apply UAE Federal law unless either: (1) it is agreed by the parties, or (2) it is incorporated into DIFC domestic law by express enactment. There was no such party agreement, and His Honour found that the Riyadh Convention had not been incorporated into DIFC Law, notwithstanding Article 42(1) of the DIFC Arbitration Law[7] and Article 24(2) of the DIFC Court Law[8]. As such, Article 5 was not binding on the DIFC Court.
His Honour also grappled with the slightly different question of whether the Riyadh Convention applied to the DIFC Court, not by virtue of Article 5, but by virtue of Article 3(2). The Riyadh Convention is not only an international treaty to which the UAE is party (thus potentially triggering Article 5, were it to apply), but it is also incorporated directly into UAE Federal law by way of Federal Decree No. 53 of 1999 (the “Decree”). If the Riyadh Convention (as converted to Federal Law by the Decree) was not a civil or commercial law, it would therefore apply to the DIFC by virtue of Article 3(2). The Defendant argued that the Riyadh Convention was procedural law, not civil or commercial law, and thus applied in the DIFC. Justice Al Sawalehi rejected this, finding that Article 6 fell under the rubric of civil and commercial law in Article 3(2), and was thus precluded from application in the DIFC.
The Appeal
The Defendant appealed, and the hearing occurred in February 2021 before Chief Justice Zaki Azmi, Justice Wayne Martin, and Justice Sir Richard Field. The two[9] key issues on appeal were:
- Do the terms of the Riyadh Convention form part of DIFC Law such that they must be applied by the DIFC Court?
- If the answer to (1) is yes, is the service regime in the Riyadh Convention exclusive, such that the DIFC Court cannot either order alternative service or dispense with service?
(1) Is the Riyadh Convention part of DIFC Law?
The Court of Appeal answered this question in the negative, which was sufficient to dismiss the Appeal. Like the Court of First Instance, the focus of the Court of Appeal was on whether the Riyadh Convention was ‘automatically’ a part of DIFC Law (and therefore binding on the DIFC Court), by virtue of Article 5 and/or Article 3(2).
Article 5
Regarding Article 5, the Court of Appeal found:
(a) Article 5 imposes obligations upon the “Financial Free Zones”. On the proper construction of Article 5, “Financial Free Zones” does not include the DIFC Courts. This was for the following reasons:
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i. | A “Financial Free Zone” is defined by Article 1 to be the corporate body created when a Federal Decree is issued in accordance with Article 2[10] of UAE Federal Law No. 8 of 2004. The DIFC Court is not such a corporate entity[11]. Rather, the combined effect of Federal Law No. 8 of 2004 and Federal Decree No. 35 of 2004 was to create a corporate entity known as the Dubai International Financial Centre. It is this entity that is the subject of Article 5. |
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ii. | There is an important distinction between the obligation of courts to apply the domestic law of the jurisdiction, and the obligation of States to comply with their international agreements. The Defendant/Appellant’s reliance on Article 5 elided this distinction. |
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iii. | Article 5 is intended to ensure that the relevant corporate body which is delegated executive power by the State exercises such power in a manner which does not put the State in breach of its international agreements. In other words, Article 5 functions as a constraint on the exercise of executive power; it cannot be taken to import all obligations imposed under all treaties to which the UAE is a party into the domestic law of each Financial Free Zone. |
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iv. | Indeed, Articles 3 and 7(3)[12] of UAE Federal Law No. 8 of 2004 are the provisions concerned with the laws applicable in Financial Free Zones, not Article 5. |
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v. | The exercise of judicial authority within a Financial Free Zone is left to be dealt with by laws issued by the relevant Emirate pursuant to Article 7(3). It is impossible to construe the reference in Article 5 to the “Financial Free Zones” to include whatever myriad arrangements might be made with respect to the exercise of judicial authority within the various Emirates within which such Zones might be created. |
The crux of the above is that Article 5 does not provide that international agreements to which the UAE is party apply automatically within the DIFC. Subject to Article 3(2) (see below), unless and until a relevant Emirate exercises the powers reserved to it by Article 7(3) to issue legislation implementing international agreements into the domestic law of the relevant Financial Free Zone, such obligations will not form part of that domestic law – in the same way as treaty obligations do not form part of the domestic law of any State unless and until implemented by the State.
However, the Court of Appeal was careful to say that, although the Riyadh Convention was not binding law in the DIFC, the DIFC Court was a UAE Court and thus could invoke the provisions of the Riyadh Convention to facilitate service where it was applicable. In such cases, whether service is validly effected as a matter of DIFC Law will turn upon the question of whether service has taken place in accordance with the rules of the Court.
Article 3(2)
As set out above, Article 3 provides that all Financial Free Zones are subject to all Federal Laws “with the exception of Federal civil and commercial laws”. On the assumption that the Riyadh Convention formed part of the UAE Federal Law, the critical question for the Court of Appeal was whether the Riyadh Convention generally, or Article 6 of the Riyadh Convention specifically, were “civil and commercial laws” and therefore excepted from the operation of Article 3(2). The Court of Appeal found as follows:
- Article 3(2) is properly construed as applying to the specific rule or obligation which it is contended should be applied within the relevant Zone, rather than as a reference to the instrument in which that rule, law or obligation is located. So the question was not whether the Riyadh Convention is a civil and commercial law, but whether the relevant provisions are (e.g. Article 6).
- The relevant provisions in the Riyadh Convention relate to service of DIFC Court documents. This is a matter of civil procedure. Pursuant to the case of IGPL v Standard Chartered Bank[13], matters of civil procedure are matters of civil and commercial law, and thus excepted from the operation of Article 3. This is further supported by the application of Article 6, which is expressly said to relate to “civil, commercial and administrative cases and cases of personal status”.
For these reasons Article 3(2) expressly excludes Article 6 of the Riyadh Convention from application within the DIFC. The Judge in Pearl Petroleum was wrong to conclude otherwise.
(2) Is the service regime in the Riyadh Convention exclusive?
While strictly unnecessary given the finding that the Riyadh Convention did not apply in the DIFC under either Article 5 or Article 3(2), the Court of Appeal also considered whether the Riyadh Convention specified an exclusive service regime. The Court of Appeal answered this in the negative, finding that:
- The Riyadh Convention does not state that Convention Service is the exclusive means by which service can be validly effected.
- Any construction of the Riyadh Convention to that effect would be antithetical to its objects and purpose.
- The proposition that service by alternative methods may only be permitted after service under the Riyadh Convention had been attempted but failed therefore falls away.
(3) Can the DIFC Court in any event dispense with service so that the Riyadh Convention is not engaged?
The Riyadh Convention also did not prevent the DIFC Court from dispensing with service. Article 6 applies to documents which are “required to be served or notified”. Determining which documents fall within that category is a matter for the Court in which the proceedings are being conducted. If that Court concludes, in accordance with its own rules, that a document is not required to be served, Article 6 has no application.
Take-away points
To recap, the key points from the Judgment are as follows:
- Article 5 of Federal Law No. 8 of 2004 does not provide that international agreements to which the UAE is party apply automatically within the DIFC. Subject to Article 3(2), unless and until a relevant Emirate expressly implements the international agreement into the domestic law of the relevant Financial Free Zone, such obligations will not form part of that domestic law. The Riyadh Convention is not therefore part of DIFC Law.
- In any event, the Riyadh Convention does not provide an exclusive service regime.
- The DIFC Court can, in an appropriate case, order alternative service or dispense with service in respect of a receiving party domiciled in a Convention State.
- That said, where a receiving party is domiciled in a Convention State, the Riyadh Convention should be considered a ‘tool in the arsenal’ – it can still be used to effect valid service, provided the DIFC Court Rules are satisfied.
Conclusion
The Court of Appeal’s decision will be welcomed by DIFC Court practitioners and users. It provides welcome clarity to an issue that has dogged practitioners since Pearl Petroleum, and confirms flexibility regarding service-out of DIFC Court documents on parties resident in Convention states. No longer are parties bound to attempt Convention Service, and blocked when Convention Service fails. This reaffirms the DIFC Court’s status as a regional dispute resolution hub that is pro-arbitration and committed to enforcement. Further, and perhaps most importantly, the decision has answered the fundamental question of when and how international agreements to which the UAE is a party become part of DIFC law. This will no doubt be relied on in many cases to come.
For further information or advice regarding the Court of Appeal decision, or service and enforcement more generally, please contact the highly experienced team at Gibson Dunn.
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[1] The 1983 Riyadh Arab Agreement for Judicial Cooperation (the “Riyadh Convention”). The Riyadh Convention has state signatories from across the Arab world (including the UAE, Jordan, Bahrain, Tunisia, Egypt, Algeria, Djibouti, Saudi Arabia, Sudan, Syria, Somalia, Iraq, Oman, Palestine, Qatar, Kuwait, Lebanon, Libya, Morocco, Mauritania and Yemen).
[2] Pearl Petroleum Company Limited & Others v The Kurdistan Regional Government of Iraq [2017] DIFC ARB 003 (“Pearl Petroleum”).
[3] A translation of Article 6 of the Riyadh Convention provides (with alternative wording in square brackets): “Legal and non- legal [Judicial and non-judicial] documents and papers relating [pertaining] to civil, commercial and administrative cases and cases of personal status required to be served or notified to [which are to be published or which are to be transmitted to] persons residing in one of the contracting states shall be sent [dispatched] directly by the authority or the competent legal office [from the judicial body or officer concerned] to the court which the person who is required to be served or notified resides in its jurisdiction area [to the court of the district in which the person to be notified resides].”
[4] Article 5 provides: “The Financial Free Zones shall not do anything which may lead to contravention of any international agreements to which the state is or shall be a party”.
[5] That is to say, apply without express implementation by Dubai or DIFC Law, or the agreement of the parties.
[6] Law No. 10 of 2004. Article 30 provides: “Governing Law (1) In exercising its power and functions, the DIFC Court shall apply: (a) the Judicial Authority Law; (b) DIFC Law or any legislation made under it; (c) the Rules of Court; or (d) such law as is agreed by the parties. (2) The DIFC Court may, in determining a matter or proceeding, consider decisions made in other jurisdictions for the purpose of making its decision”.
[7] Article 42(1) provides: “For the avoidance of doubt, where the UAE has entered into an applicable treaty for the mutual enforcement of judgments, orders or awards the DIFC Court shall comply with the terms of such treaty”.
[8] Article 24(2) provides: “Where the UAE has entered into an applicable treaty for the mutual enforcement of judgments, orders or awards, the Court of First Instance shall comply with the terms of such treaty”. In his additional reasons for granting permission to appeal, Justice Al Sawalehi found that, Article 24(2) was an express exception to the general rule that UAE treaties do not apply directly within the DIFC. The need for this express exception carried with it a negative implication – i.e. that UAE treaties do not have direct effect within the DIFC absent DIFC legislation enacting the treaty as law. This was consistent with the relationship between UAE treaties and the rest of the UAE. This does not mean that DIFC Courts cannot comply with UAE treaties which have not been expressly incorporated into DIFC Law; it simply means that the effectiveness of proceedings will not come down to compliance or non-compliance with them. This is similar to the approach of the English Courts with respect to UK treaties.
[9] The Court also briefly discussed other issues that had been raised by the Parties, including: (1) whether the DIFC Court was precluded from applying Federal Laws generally, absent agreement of the Parties and (2) whether the New York Convention overrode any inconsistent provisions of the Riyadh Convention. Ultimately the Court found it was unnecessary to decide these issues given its primary finding that the Riyadh Convention was not a part of DIFC law.
[10] Article 2 provides: “A Financial Free zone shall be established by a Federal Decree. It shall have a body corporate and shall be represented by the President of its Board. It and no one else shall be responsible for the obligations arising out of the conduct of its activities. The Cabinet will describe its area and location”.
[11] The DIFC Courts are a separate (in effect, subsidiary) corporate body established under the Dubai Law No. 9 of 2004, which was made pursuant to the legislative powers specifically reserved to the Emirate of Dubai by Article 7(3) of Federal Law No. 8 of 2004.
[12] Article 7(3) provides: “Subject to the provisions of Article 3, the concerned Emirate may, within the limits of the goals of establishing the Financial Free Zone, issue legislation necessary for the conduct of its activities”.
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, or the following authors in the firm’s Dubai office:
Graham Lovett (+971 (0) 4 318 4620, glovett@gibsondunn.com)
Michael Stewart (+971 (0) 4 318 4638, mjstewart@gibsondunn.com)
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Colorado’s Equal Pay for Equal Work Act (EPEW), as well as the accompanying Rules and guidance, took effect on January 1, 2021. Prior to the new year, however, the Rocky Mountain Association of Recruiters (RMAR) sued the Colorado Department of Labor and Employment (CDLE) in the U.S. District Court for the District of Colorado, challenging the constitutionality of the law’s compensation and promotion posting requirements. On May 27, 2021, after previously ordering supplemental briefs on the posting requirements’ burdens on interstate commerce, Judge William J. Martinez denied the RMAR’s request for a preliminary injunction to suspend enforcement of the posting provisions at issue.
Colorado’s Equal Pay for Equal Work Act Posting Requirements
With a stated goal of aiding in achieving pay equity in Colorado, the EPEW has an expansive reach, covering all public and private employers that employ at least one person in Colorado. The law includes extensive compensation and promotion posting requirements, which employers—particularly multi-jurisdictional employers—have struggled with implementing. In fact, the posting provisions have proved so burdensome in practice that some employers have elected to wholly remove some employment opportunities from Colorado rather than navigate compliance difficulties. See https://www.9news.com/article/news/investigations/job-posting-labor-laws/73-7f2ac237-06fe-4353-8318-00a4b52d80bc.
Under the EPEW’s compensation 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) (2021). In addition to postings for jobs in Colorado, the requirement also reaches postings for all remote positions that could be performed in Colorado. 7 CCR 1103-13 (4.3)(B).
Additionally, the EPEW 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) (2021). Under the Rules, a “promotional opportunity” is broadly defined as “when an employer has or anticipates a vacancy in an existing or new position that could be considered a promotion for one or more employee(s) in terms of compensation, benefits, status, duties, or access to further advancement.” 7 CCR 1103-13 (4.2.1). Postings are required even if no one in Colorado is qualified for the promotional opportunities. The promotion requirement applies widely and only allows for a few narrow exceptions, such as when employees are unaware they will be separated from their employers.
Background on Rocky Mountain Association of Recruiters v. Moss
In its initial complaint, the RMAR argued that: (1) the EPEW’s posting requirements constitute unlawfully “compelled speech” in violation of the First Amendment; and (2) the requirements violate the Dormant Commerce Clause due to their excessive burden on interstate commerce and their conflict with other states’ statutory schemes. The RMAR requested from the court a declaration that the posting requirements are unconstitutional, as well as a permanent injunction barring the CDLE’s enforcement of the posting provisions. Additionally, the RMAR filed a motion for a preliminary injunction on December 31, 2020, which would prevent the posting provisions’ enforcement until a decision on their legality is reached.
On April 21, 2021, Judge William J. Martinez held a hearing on the RMAR’s motion for preliminary injunction. The court ordered supplemental briefings from the CDLE and RMAR on the burdens that the EPEW posting requirements place on interstate commerce—hinting that the court was potentially amenable to the RMAR’s Dormant Commerce Clause argument. The supplemental briefs were filed on May 6, 2021, and response briefs were filed on May 17, 2021.
For the RMAR’s supplemental brief, the court directed it to identify the two most burdensome aspects of both the compensation and promotion posting requirements. For the compensation posting requirements, the RMAR identified as most burdensome: (1) the requirement to post compensation for remote jobs or other jobs that “could” be performed in Colorado; and (2) the forced disclosure of confidential information and trade secrets. For the most burdensome aspects of the promotion posting requirements, the RMAR identified: (1) the requirement to notify Colorado employees of “promotional opportunities” anywhere in the world and to pause any hiring or promotions until such notice is provided; and (2) the lack of exceptions for trade secret disclosures, confidential searches, and corporate mergers and reorganizations. In its response brief, the CDLE argued that the RMAR’s identified burdens were “simply operational or logistical burdens” on individual firms, which do not rise to cognizable burdens on interstate commerce under the Dormant Commerce Clause.
From the CDLE, the court requested a supplemental brief on why the operational compliance costs incurred by employers do not matter to Dormant Commerce Clause analysis. In its brief, the CDLE argued that the RMAR failed to show that interstate commerce would be unduly burdened, as individual companies’ increased operational or compliance costs do not equate to a harm to the national market. It also argued that, because the EPEW’s effects are felt primarily in Colorado (or equally inside and outside of Colorado), precedent dictates that the court should not engage in Dormant Commerce Clause balancing analysis at all. Finally, the CDLE contended that, even if the court proceeds with a balancing test, the RMAR’s allegations are too broad and general to use as evidence in such a test. In response, the RMAR reiterated that the posting requirements burden interstate commerce by interfering with “a fundamental part of the process of talent acquisition and mobility nationwide (and worldwide)” and that the burdens on its members are representative of the burdens on interstate commerce.
Injunction Holding & Key Takeaways
On Thursday, May 27, 2021, Judge William J. Martinez denied the RMAR’s motion for preliminary injunction, finding that the RMAR failed to demonstrate a substantial likelihood of success on the merits of its Dormant Commerce Clause or First Amendment claims. Notably, the court categorized the RMAR’s request as a disfavored preliminary injunction and applied a heightened standard, with the RMAR bearing a heavier burden to show likelihood of success on the merits of its claims.
For the RMAR’s Dormant Commerce Clause claim, the court found that the RMAR “failed to put forward the necessary evidence regarding the relative magnitude of the local benefits, as compared to the burdens on interstate commerce.” That is, given the record’s lack of specific evidence regarding the EPEW’s harm to interstate commerce, the court could not effectively engage in the necessary balancing test. As such, the RMAR failed to establish a substantial likelihood of success on its Dormant Commerce Clause claim.
For the RMAR’s First Amendment claim, the court found that the EPEW bears a reasonable relationship to a substantial government interest and that, at this stage, the RMAR failed to show that the posting provisions created an undue burden on employers. Specifically, the court noted that, based on testimony and common sense, the posting requirements rationally related to the law’s goal of reducing the wage pay gap. Further, the court found that the requirements do not drown out employers’ individual messages in job postings, because they can be satisfied “in short statements and by disclosing promotion opportunities available to some employees to current Colorado employees.” The court was similarly unpersuaded by the RMAR’s argument that the provisions chill commercial speech, because “employers are still able to recruit candidates with compensation rates for positions of the employers’ choosing.” Thus, the RMAR failed to show a substantial likelihood of success on its First Amendment claim.
It is worth noting that the RMAR’s Dormant Commerce Clause claim failed due to the record’s lack of evidence at this initial, pre-discovery stage of litigation. This leaves the door open for the record to be developed adequately, as the suit proceeds, with the types of specific evidence the court identified as necessary for determining whether the Dormant Commerce Clause claim has merit. (The court seemed less receptive to the First Amendment claim, as its Order tended to focus on the substantive flaws of the RMAR’s arguments.) Thus, while the court denied the RMAR’s motion for preliminary injunction, the RMAR could still ultimately succeed in the suit and, if so, potentially obtain a permanent injunction that would prevent enforcement of the EPEW’s posting provisions. It will be important for employers to continue to comply with the EPEW’s posting requirements in the meantime.
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, any member of the firm’s Labor and Employment practice group, or the following authors:
Jessica Brown – Denver (+1 303-298-5944, jbrown@gibsondunn.com)
Marie Zoglo – Denver (+1 303-298-5735, mzoglo@gibsondunn.com)
Labor and Employment Group:
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Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Jessica Brown – Denver (+1 303-298-5944, jbrown@gibsondunn.com)
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Background
On May 28, 2021, the Administration released its fiscal year (FY) 2022 Budget, outlining a plan for $6 trillion of federal spending and $4.1 trillion in revenue for FY 2022 alone. Each year, the White House publishes the President’s Budget request for the upcoming fiscal year, which begins on October 1st. The President’s Budget lays out the Administration’s proposals for discretionary spending, revenue and borrowing and typically marks the opening of a dialog with Congress that culminates in appropriations bills and, on a parallel path, tax expenditure and revenue-raising legislation.
Detailed descriptions of the Administration’s legislative tax proposals have historically been provided in a “Greenbook” that includes revenue estimates generated by economists in Treasury’s Office of Tax Policy.[1] With the December 2017 enactment of sweeping changes to the federal tax law in legislation commonly known as the “Tax Cuts and Jobs Act” (the “TCJA”),[2] the prior administration did not publish a separate document laying out new tax legislative proposals. Thus, for the first time since the Obama Administration’s FY 2017 Budget (released in February 2016), the President’s FY 2022 Budget includes a Greenbook with detailed proposals for changes to the federal tax law, including provisions that would modify, expand or add to existing tax expenditures and revenue-raising measures.
Although the Greenbook is only the opening chapter in the FY 2022 budget and appropriations process, the current unified Democratic control of both the White House and of Congress, albeit each House of Congress by small margins, suggests that at least some of its proposals have a significant, although by no means certain, likelihood of moving forward as part of the Appropriations process or in separate pieces of legislation like an infrastructure bill. Most notably, the narrow Democratic majority in the House and the potential use of “reconciliation” procedures in an evenly divided Senate allow Democratic Senators, if they all agree, to pass legislation in Congress without help from Senate Republicans. The prospect of Democrats enacting legislation into law without Republican buy-in provides a new dynamic this year and makes this the most anticipated set of administration legislative tax proposals in recent memory.
The following summaries focus on tax expenditure and revenue-raising proposals in the Greenbook that affect business taxpayers and their owners, as follows:
Part I: Increased Rates for Corporations and Individuals
Part II: Elimination of Certain Significant Benefits
Part III: Sea Changes for International Tax
Part IV: Changes to Prioritize Clean Energy
Part V: Improve Compliance and Tax Administration
PART I: INCREASED RATES FOR CORPORATIONS AND INDIVIDUALS
Corporate Income Tax Rate Raised to 28%
The Greenbook proposes to increase the federal income tax rate on C corporations from 21 percent to 28 percent, effective for taxable years beginning after the end of 2021 (with a phase-in rule for taxpayers that have a non-calendar taxable year).
Recent comments by President Biden caused many to expect a proposed increase to 25 percent, rather than 28 percent, and it remains possible that the Administration will end up agreeing to a smaller corporate rate increase. An increased corporate income tax rate may incentivize corporations to accelerate income into the 2021 calendar year and to defer deductions until a later calendar year. This proposal may also encourage the use of passthrough entities (although taxpayers must also take into account the proposed increase in individual rates). Moreover, the proposed increase would push the corporate rate well above the 23.51 percent average rate for trading partners in the Organisation for Economic Co-Operation and Development (the “OECD”), raising again the long-standing tension between avoiding a “race to the bottom” on rates and strengthening the global tax competitiveness of U.S.-based companies.
It is noteworthy that in proposing an increase in the corporate rate, the Greenbook makes no reference to repealing or modifying the deduction for qualifying business income of certain passthrough entities (e.g., partnerships and S corporations) under Internal Revenue Code (the “Code”) section 199A. That provision was included in the TCJA late in the legislative drafting process in order to create parity between corporations and business operated in passthrough form, such as partnerships, S corporations, and sole proprietorships. Setting the corporate rate at 28 percent (along with the proposed elimination of lower rates on qualified dividends above stated thresholds) may tend to shift the incentive in the opposite direction, although Code section 199A is scheduled to expire in 2025.
Corporate taxpayers with GAAP-based financial statements will have to consider the impact of any rate increase on the values of their deferred tax assets and liabilities.
New 15 Percent Minimum Tax on Book Earnings of Large Corporations
The Greenbook proposes a 15 percent minimum tax on worldwide pre-tax book income for corporations whose book income exceeds $2 billion annually.
This proposal, taken together with the proposal for disallowing interest deductions, would further integrate income tax treatment with financial statement accounting treatment. Historically, these treatments have operated independently, but began to be integrated for limited purposes with the enactment of Code section 451(b) in 2017. The link to financial statement treatment is one of two proposals in the Greenbook (along with the proposed SHIELD provision discussed below) that would significantly expand reliance on third-party accounting standards to determine federal tax liability, a notable shift from the long-standing assumption, recognized by the Supreme Court in Thor Power Tool Co. v. United States, that there are “differing objectives of tax and financial accounting” and the risks and challenges associated with conforming them. It would also re-introduce the complexity of parallel sets of tax rules that Congress sought to eliminate when it repealed the corporate alternative minimum tax as part of the TCJA.
The proposal would be effective for taxable years beginning after December 31, 2021.
Top Marginal Tax Rate for Individuals Raised to 39.6%
Under current law, the top marginal income tax rate for individuals is 37 percent (before accounting for the additional 3.8 percent tax rate on net investment income), but would revert to 39.6 percent (again, before accounting for the additional 3.8 percent tax rate on net investment income) for taxable years beginning on and after January 1, 2026. In 2021, the top marginal rate applies to taxable income that exceeds $628,300 (for married couples filing jointly) or $523,600 (for single filers).
The Greenbook proposes that, beginning in 2022, the new 39.6 percent (before accounting for the additional 3.8 percent tax rate on net investment income) top marginal income tax rate would apply to taxable income that exceeds $509,300 (for married couples filing jointly) or $452,700 (for single filers); the thresholds would be adjusted for inflation in taxable years after 2022. The proposed increase in individual tax rates was not accompanied by a repeal of the limitation on deductibility of state and local taxes.
Tax Certain Capital Gains at Ordinary Income Rates for High Earners
Currently, individual taxpayers are taxed at preferential rates on their long-term capital gains and qualified dividends as compared to ordinary income—the current highest rate for long-term capital gains and qualified dividends is 20 percent (23.8 percent, including the net investment income tax, if applicable).
The Greenbook proposes to tax individuals’ long-term capital gains and qualified dividends at ordinary income tax rates to the extent that the individual’s adjusted gross income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022. For example, an individual with $200,000 of long-term capital gains and $900,000 of wages would have $100,000 of long-term capital gains taxed at ordinary income rates (the $100,000 excess over $1 million).
Other than a brief period of time after passage of the Tax Reform Act of 1986, capital gains have received preferential federal income tax treatment since the 1920s. The Greenbook proposal will add to the long-standing debate on the merits of this preference and undoubtedly cause taxpayers to consider ways in which they can defer or avoid recognition events.The proposal would also remove a historic tax incentive to hold capital assets for one year, possibly resulting in earlier and more common dispositions of assets held for 10 or 11 months.
The proposal would be effective for gain recognized after the date of the announcement (understood to be April 28, 2021, the date when President Biden announced the proposal as part of the American Families Plan). As with other aspects of the Greenbook proposals, the effective date could change during the Budget reconciliation process.
“Deemed” or “Forced” Realization – New Realization Events for Gifts, at Death and for Certain Partnerships and Trusts
Under general tax principles, taxpayers take into account increases and decreases in the value of their assets only at the time of a realization event, such as a sale. Currently, gifts and transfers upon death are not treated as taxable events. This is the case on transfers on death, even though the heir generally takes a “stepped up” fair market value basis in the decedent’s assets upon death, with no income tax due at that time.
Under the Greenbook proposal, donors and decedents would recognize capital gain upon a transfer to a donee or heir, as applicable, based on the asset’s fair market value at the time of transfer. A decedent would be permitted to use capital losses and carry-forwards to offset such capital gains.
The proposal would require the recognition of unrealized appreciation by partnerships, trusts, and other non-corporate entities that are the owners of the property if that property has not been subject to a recognition event in the prior 90 years. Because the look-back period begins January 1, 1940, this aspect of the proposal would not become operational until December 31, 2030. The operational aspects of this proposal – such as which property would be taxed, who would bear the incidence of tax, and the extent of adjustment to basis – are not addressed by the Greenbook.
The proposal also would treat otherwise tax-deferred contributions to, or distributions from, partnerships, trusts, and other non-corporate entities as taxable events. The description of this aspect of the proposal in the Greenbook is startling in its breadth. That is, if taken literally the proposal would upend the bedrock principles in partnership taxation that contributions to and distributions by partnerships generally are tax free. Presumably, the proposal was intended to address indirect donative transfers, and it is hoped that clarification will be forthcoming in short order.
Exclusions would apply to assets transferred to U.S. spouses and charities. Additionally, there would be a $1 million per-person exclusion (generally $2 million per married couple) that would be indexed for inflation. Payment of tax would be deferred in the case of certain family-owned and -operated businesses (which are not defined but would presumably be modeled on the payment extension provisions for estate taxes in Code section 6166) until the interest in the business is sold or the business ceases to be family-owned and -operated. Additionally, the proposal would allow a 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death (excluding certain liquid assets and transfers of businesses for which the deferral election is made). This proposal has the potential to create substantial liquidity issues for closely held businesses. As proposed, no change would be made to the exclusion of certain capital gains under Code section 1202.
The proposal generally would be effective beginning January 1, 2022.
Eliminate Gap in Medicare Taxes for High Earners
The current 3.8 percent “net investment income tax” generally applies to passive income and gains recognized by high-income individuals, including trade or business income earned by taxpayers who do not materially participate in the business. The separate 3.8 percent “SECA” tax currently applies to self-employment earnings of high-income taxpayers—both taxes are intended to fund Medicare and are often colloquially referred to as “Medicare” taxes.
Neither form of Medicare tax currently applies to limited partners (many taxpayers believe that certain members of limited liability companies classified as partnerships for federal income tax purposes are “limited partners” for this purpose) and S corporation shareholders (who are subject to Medicare tax solely on “reasonable compensation” paid in an employee capacity) who are treated as materially participating in a trade or business. The Biden Administration likens this gap to a loophole because certain high-income taxpayers’ distributive share of business income may escape Medicare taxation.
The Greenbook proposal would subject all trade or business income of high-income taxpayers (earned income exceeding $400,000) to the 3.8 percent Medicare tax (either through the net investment income tax or the SECA tax) and would apply to taxable years beginning on or after January 1, 2022. The Greenbook bases this change on fair and efficient tax administration. “Different treatment [for owners of different types of passthrough entities] is unfair, inefficient, distorts choice of organizational form, and provides tax planning opportunities for business owners, particularly those with high income, to avoid paying tax.” Notwithstanding that explanation, the proposal goes to some lengths to ensure that it does not impact taxpayers with less than $400,000 in earned income, although it is noteworthy that the proposal is explicit in saying that this threshold would not be indexed for inflation. It is also noteworthy that the exclusion for these lower income taxpayers is linked to earned income rather than “taxable income (from all sources),” which is used elsewhere in the Greenbook as the trigger for proposed denial of capital gain treatment for carried interest.
PART II: ELIMINATION OF CERTAIN SIGNIFICANT BENEFITS
Tax Carried Interests as Ordinary Income
The Greenbook, following in the footsteps of many previously proposed bills, proposes to tax a partner’s share of profits from, and gain from the disposition of, an “investment services partnership interest” as ordinary income, regardless of the character of the income at the partnership level.
Under current law, partnerships are generally able to issue a partnership interest to a service provider who then holds the interest as a capital asset, with the character of the partner’s share of profits from the partnership being determined by reference to the character of the profits in the hands of the partnership. Thus, if the partnership recognizes capital gain, the service provider’s share of such income would generally likewise be capital gain. These equity grants may take the form of a “profits interest,” which is referred to as a “carried interest” in the private equity context, an “incentive allocation” in the hedge fund context, or a “promote” in the real estate context. The TCJA limited the ability to recognize long-term capital gain with respect to these profits interests by enacting Code section 1061, which generally treats gain recognized with respect to certain partnership interests held for less than three years as short-term capital gain.
The Greenbook proposal would eliminate this benefit, but only for partners whose taxable income (from all sources) exceeds $400,000. Partners whose taxable income does not exceed $400,000 would continue to be subject to Code section 1061, which generally treats gain recognized with respect to certain partnership interests or partnership assets held for less than three years as short-term . The “cliff” effect of this proposal would add considerable complexity to the tax law, requiring a parallel set of rules that may apply differently to different members of the same partnership.
The proposal would apply to profits interests held by persons who provide services to a partnership that is an “investment partnership.” A partnership would be an investment partnership if (i) substantially all of its assets are investment-type assets and (ii) more than half of the partnership’s contributed capital is from partners whose partnership interest is an investment (i.e., partners in whose hands the partnership interest is not held in connection with a trade or business). The proposal would not apply to a partnership interest attributable to any capital contributed by the service provider. The proposal includes certain anti-abuse rules intended to prevent the avoidance of the recharacterization rule through the use of compensatory arrangements other than partnership interests.
It appears that the most significant differences between the proposal in the Greenbook and existing law under Code section 1061 would be (i) unlimited time duration (Code section 1061 applies only to recharacterize long-term capital gain recognized with respect to an asset held for three years or less), (ii) treatment of the recharacterized amount as ordinary income rather than short-term capital gain (there is no rate differential, but there could be sourcing and other differences), and (iii) subjecting the income to SECA.
Given that final Treasury regulations under Code section 1061 were released only this year, the proposal to repeal and replace Code section 1061 in certain cases is somewhat surprising, although similar proposals have recently been introduced in Congress. If enacted, this proposal could meaningfully impact the taxation of individuals in the private equity, hedge fund, and real estate industries, and other service providers receiving a profits interest as a form of compensation. It should be noted that if the proposal ending the preferential treatment of long-term capital gain is also enacted, this carried interest proposal would materially affect only profits interests holders with taxable income below $1 million (the threshold in the long-term capital gain proposal).
The provision would be effective for taxable years beginning after December 31, 2021.
Make Permanent Excess Business Loss Limitation of Noncorporate Taxpayers
The TCJA requires that “excess business losses” be carried forward as net operating losses rather than deducted currently. Very generally, an excess business loss is the amount of losses from a business that exceeds the sum of the gains from business activities and a stated threshold ($524,000 for married couples filing jointly and $262,000 for other taxpayers).
Under current law, the excess business loss provision expires in 2027; the Greenbook would make the provision permanent.
Severely Limit Deferral of Gain from Like-Kind Exchanges
Code section 1031 currently provides for non-recognition of gain on exchanges of real property for other like-kind real property (like-kind exchanges). The Greenbook proposes to limit the applicability of Code section 1031 to exchanges that defer gain of less than $500,000 (or $1 million in the case of married individuals filing a joint return) in a taxable year. The proposal does not index the exclusion amounts to inflation, although it does apply those amounts on an annual basis.
This proposal represents a significant change for the real estate, oil and gas, and mineral industries, which together engage in billions of dollars of like-kind exchanges per year. In particular, the proposal could significantly impact the business of REITs, which must distribute at least 90 percent of their taxable income per year and often use Code section 1031 to reduce the amount of income subject to this distribution requirement in order to keep additional cash on hand to complete other real estate purchases. Further, oil and gas “acreage swaps” and mineral interest exchanges could be severely limited. If enacted, the $500,000 / $1 million exclusion included in the proposal could create an incentive to divide property and make partial, tax-deferred dispositions. It could also create an incentive for taxpayers to use tenant-in-common or other pooled structures, like tax partnerships, to facilitate transactions without triggering taxation.
The proposal would be effective for exchanges completed in taxable years beginning after December 31, 2021.
PART III: SEA CHANGES FOR INTERNATIONAL TAX
The TCJA introduced sweeping reform on international tax matters with the goal of incentivizing multinational companies to remain in the United States. Along these lines, not only did the TCJA lower the U.S. corporate income tax rate and provide a 100 percent dividends-received deduction for certain offshore dividends, but it also introduced new obstacles and penalties to discourage so-called inversions and established the global intangible low-tax income (GILTI) and base erosion anti-avoidance regimes to generally provide a minimum level of tax on certain foreign earnings.
The Greenbook, as described in further detail below, proposes to—again—usher in comprehensive changes and unscramble some of the TCJA complexity. Interestingly, several of these proposals are reminiscent of similar proposals made by the OECD. In fact, the Greenbook mentions the OECD four times (compared to zero mentions in the JCT’s Blue Book for the TCJA), suggesting a willingness to find common ground with the OECD on some principles of international taxation.
The proposed changes to the international tax regime come less than four years after passage of the TCJA and inject a new level of uncertainty and instability into U.S.-based companies’ decisions around the global deployment of capital. Moreover, the IRS is just now beginning to audit many of the returns filed for the 2018 tax year, the first year in which TCJA was in full effect. Beyond the front-end planning challenges for taxpayers, enactment of the Greenbook proposals will raise significant administrability issues for the IRS as it works with taxpayers to sort through several interlocking but materially different regimes for taxing cross-border activities.
Revised Global Minimum Tax Regime
The Greenbook proposal would increase the effective tax rate of U.S. multinational companies by overhauling the GILTI regime. Specifically, the so-called “QBAI” (or qualified business asset income) exemption would be eliminated, with the result that a U.S. shareholder’s entire net tested income would be subject to tax (i.e., net tested income would no longer be offset by a deemed 10 percent return on certain depreciable tangible property).
The elimination of the QBAI exemption would remove the last fig leaf of the quasi-territorial tax system that was announced with much fanfare in 2017. If enacted, the United States will stake new ground in the international tax arena by requiring U.S. shareholders to pay tax on all earnings in foreign companies, as compared to most countries that tax analogous shareholders only on certain foreign earnings (e.g., corporate earnings from low-tax countries or passive income). Moreover, since all foreign earnings would now be taxed, the Code section 245A dividend-received exemption would become increasingly irrelevant, since the earnings underlying the dividends would generally have been taxed under subpart F or GILTI at the time the foreign corporation earned the income.
It is also worth noting that QBAI is generally tangible property eligible for depreciation, such as buildings or machinery, but QBAI does not include assets that are not depreciable (such as land) nor intangible assets. As a result, the elimination of QBAI may disproportionately affect companies with more tangible assets, rather than companies whose value is primarily intangible assets (like intellectual property). In addition, the cost-benefit analysis of a potential Code section 338(g) election, which regularly arises in cross-border acquisitions, will change given that the step-up in asset basis will no longer produce a tax benefit in the form of QBAI to reduce future GILTI inclusions, though Code section 338(g) elections still have other benefits.
The proposal would also effectively increase the GILTI rate by reducing the Code section 250 deduction from 50 percent to 25 percent. Under current law, U.S. shareholders are entitled to a 50 percent deduction against a 21 percent tax rate, resulting in an effective 10.5 percent GILTI rate. The Greenbook proposal, however, would reduce the deduction to 25 percent. Taken together with the proposed corporate rate increase to 28 percent, this change would result in an effective GILTI rate of 21 percent. Interestingly, the Greenbook’s proposal does not do away with the Code section 250 deduction. Rather, it achieves the 21 percent rate by changing the percentage of the deduction. This approach suggests a willingness to use the relative percentage deduction as a way to reach a compromise on the overall package.
Consistent with the general increase in corporate tax rates, this change to the effective GILTI rate may encourage taxpayers to accelerate gain recognition transactions and/or defer deductions.
In addition, the Greenbook proposes that U.S. shareholders of a controlled foreign corporation (“CFC”) calculate their global minimum tax on a country-by-country basis. In other words, a U.S. shareholder’s global minimum tax inclusion, and tax on such inclusion, would be determined separately for each country in which it or its CFCs operate, rather than permitting taxes paid to higher-taxed jurisdictions to reduce the residual U.S. tax paid on income earned in lower-taxed foreign jurisdictions. This proposed change results in a separate foreign tax credit limitation for each country.
The Greenbook does not suggest any changes to the 80 percent limitation that currently applies to GILTI foreign tax credits. If the 80 percent limitation still exists, GILTI will be exempt from further U.S. tax only if it is subject to foreign taxation at a rate of at least 26.25 percent, since 20 percent (or 5.25) of the foreign tax credit is disallowed under current law.
Finally, this proposal would also repeal the high tax exemption to subpart F income and repeal the cross-reference to that provision in the global minimum tax rules in Code section 951A. This proposal would end the controversy over the Treasury Regulations that provided a high tax exemption for GILTI.
In a proposal that is remarkable for its potential deference to the OECD, these general rules would be adjusted for foreign-parented multinational groups (consistent with the OECD/G20 Inclusive Framework on BEPS project’s Pillar Two proposal (the “Pillar Two”)).
These rules would be effective for taxable years beginning after December 31, 2021.
Expanded Application of Anti-Inversion Rules
To backstop the changes to the global minimum tax regime and prevent U.S. companies from moving offshore to avoid the global minimum tax, the Greenbook proposes a dramatic expansion of the anti-inversion regime under Code section 7874. Code section 7874 currently applies to the acquisition of a U.S. corporation by a foreign corporation if, after the transaction, the former shareholders of the U.S. corporation own more than 80 percent, by vote or value, of the foreign corporation and certain other conditions are satisfied. In this case, Code section 7874 applies to treat the foreign acquiring corporation as a domestic corporation for U.S. federal income tax purposes, assuming certain other conditions are satisfied. If the portion of the foreign corporation held by former shareholders of the U.S. corporation (the so-called ownership fraction) is between 60 and 80 percent, current law subjects the foreign corporation to the possibility of increased taxation, but does not treat it as a domestic taxpayer.
The Greenbook proposal would replace the current 80-percent threshold with a 50-percent threshold and would eliminate the current 60-percent test entirely. In addition, the proposal would expand the universe of acquisitions treated as inversions (regardless of ownership fraction) to include acquisitions where (1) immediately prior to the acquisition, the fair market value of the domestic entity is greater than the fair market value of the foreign acquiring corporation, (2) after the acquisition, the expanded affiliated group is primarily managed and controlled in the United States, and (3) the expanded affiliated group does not conduct substantial business activities in the country in which the foreign acquiring corporation is created or organized. The proposal would also broaden Code section 7874 in several important ways, by including certain asset acquisitions and stock distributions, picking up U.S. businesses operated by foreign partnerships, and by considering the spinoff of a foreign subsidiary the equivalent of an inversion under certain circumstances.
Code section 7874 is already exceedingly complex and broad in many respects and is thus a frequent trap for the unwary. These proposals, if enacted, will require careful scrutiny by taxpayers and practitioners to avoid dangerous foot faults. Introduction of the management and control and substantial business activities tests, in particular, would add a new level of subjectivity and uncertainty to the threshold question of whether the rules apply.
These rules would be effective for transactions that are completed after the date of enactment of such rules. The lack of an exception for transactions for which there is a binding contract as of the effective date could chill market activity even before passage.
Repeal of Deduction for Foreign-Derived Intangible Income
The Greenbook proposes the repeal of the deduction currently available to domestic corporations with respect to 37.5 percent of any foreign-derived intangible income for taxable years beginning after December 31, 2021. This proposal was expected, and is framed by the Greenbook as the elimination of an inefficient subsidy to multinational corporations. Additionally, many commentators viewed the existing provision as violating World Trade Organization principles. The increased tax revenue that is estimated to come from repeal would be “used to encourage R&D” (presumably in the United States), although no details are provided on how the $123 billion would be deployed.
Replace BEAT with Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) Rule
The Greenbook would replace the “base erosion and anti-abuse tax” (“BEAT”) in Code section 59A with a new rule—the Stopping Harmful Inversions and Ending Low-Tax Developments (“SHIELD”) rule—disallowing deductions by domestic corporations with respect to members in their financial reporting group whose income is subject to (or deemed to be subject to) an effective tax rate that is below either the rate agreed to under OECD Pillar Two or the U.S. global minimum tax rate of 21 percent. Disallowance may be complete or partial, depending on whether the payment is made directly to such low-taxed entities.
The rule would apply to financial reporting groups with greater than $500 million in global annual revenues, although the proposal permits the Treasury Department to exempt from SHIELD (i) certain financial reporting groups, if they meet a minimum effective level of tax (on a jurisdiction-by-jurisdiction basis) and (ii) payments to investment funds, pension funds, international organizations, or non-profit entities. It is unclear whether the exemption would extend to investors that rely on the Code section 892 exemption. As discussed above in connection with the proposed minimum tax on book earnings, the link to financial statement reporting would mark another notable shift to reliance on third-party standards for determining U.S. income tax liability.
This proposal could adversely impact entities that have already “inverted,” or foreign-parented entities with domestic subsidiaries (and which conduct significant business in the United States). Foreign-parented entities that have substantial offshore intellectual property held in lower-tax jurisdictions may be particularly affected by this proposal.
The rule would be effective for taxable years beginning after December 31, 2022.
Limit Foreign Tax Credits from Sales of Hybrid Entities
The Greenbook would require that, for purposes of applying the foreign tax credit rules, the source and character of items of certain hybrid entities resulting from either a disposition of an interest in such a hybrid entity or a change in the U.S. tax classification of such entity that is not recognized for foreign tax purposes be determined as if the recognition event were a sale or exchange of stock.
The rule would be effective for transactions occurring after the date of enactment.
Restrict Interest Deductions for Disproportionate Borrowing in the United States
This proposal potentially disallows deductions for interest paid by an entity that is a member of a multinational group that prepares consolidated financial statements. Such an entity’s interest deductions would be disallowed to the extent they exceed an amount determined by reference to the entity’s proportionate share (based on its proportion of group earnings) of the group’s net interest expense as reported on the group’s consolidated financial statement.
Alternatively, if an entity subject to the proposal fails to substantiate its proportionate share of the group’s net interest expense for financial reporting purposes, or an entity so elects, the entity’s interest deduction would be limited to the entity’s interest income plus ten percent of the entity’s adjusted taxable income (as defined under Code section 163(j)).
The proposal would not apply to financial services entities. The proposal also would not apply to groups that would otherwise report less than $5 million of net interest expense, in the aggregate, on one or more U.S. income tax returns for a taxable year.
The proposal would be effective for taxable years beginning after December 31, 2021.
Tax Incentive for Onshoring Jobs
This proposal would create a new general business credit equal to 10 percent of certain expenses paid or incurred in connection with moving a trade or business located outside the United States to the United States to the extent the action results in an increase in U.S. jobs.
The proposal would also reduce tax benefits associated with U.S. companies moving jobs outside of the United States by disallowing deductions for certain expenses paid or incurred in connection with offshoring a U.S. trade or business to the extent the action results in a loss of U.S. jobs.
The proposal would be effective for expenses paid or incurred after the date of enactment.
Expand Taxation of Foreign Fossil Fuel Income
Under current law, certain non-U.S. oil-and-gas-related income effectively is taxed at a lower rate than similar oil-and-gas-related income from activities within the United States. For example, “foreign oil and gas extraction income” is excluded from a controlled foreign corporation’s “gross tested income” and may be repatriated tax free. In addition, taxpayers may claim a credit against U.S. income tax liability for certain levies paid to non-U.S. governments.
The Greenbook proposes scaling back the beneficial tax treatment afforded to non-U.S. oil-and-gas-related income. Specifically, the proposal would require foreign oil-and-gas-extraction income to be included in a CFC’s gross tested income for purposes of GILTI and would limit the situations in which taxpayers can claim a credit for levies paid to non-U.S. governments.
The proposal would be effective for taxable years beginning after December 31, 2021.
PART IV: CHANGES TO PRIORITIZE CLEAN ENERGY
Extension of Tax Credits for Wind, Solar and Other Renewable Generation Facilities
The production tax credit (“PTC”) and investment tax credit (“ITC”) are long-standing renewable energy incentives. The PTC is a production-based incentive, available as power produced from qualifying renewable resources (e.g., wind, solar) is sold to unrelated parties. The ITC is a cost-based incentive, determined as a percentage of eligible basis, that arises when a qualifying renewable energy facility is placed in service. The credits have historically been subject to a complicated patchwork of rules for different resources (e.g., when construction of a facility needs to begin, when the facility must be placed in service, etc.), the qualification rules have changed frequently and often unpredictably, and the credits have been non-refundable. Taken together, these features have presented challenges in the development and financing of renewable energy projects.
The Greenbook proposes a long-term extension of the rules, with the full PTC and ITC both being available for facilities whose construction begins after December 31, 2021 and before January 1, 2027, followed by a predictable, stepped phase-down period. Moreover, unlike the current PTC and ITC, taxpayers would have the option to elect a cash payment in lieu of the tax credits (the so-called “direct pay” option).
If enacted, these proposals would bring greater predictability to project developers and, through the direct pay option, make it meaningfully easier for taxpayers lacking sufficient tax “appetite” to efficiently participate in renewables transactions, spurring additional investment in renewable energy generation facilities. While not described in detail, this “direct pay” option would appear to effectively make the credits refundable, meaning that funding is available irrespective of whether the taxpayer has positive income tax liability. Although this could reduce the incentive to use partnership structures to utilize the credits, it would also add a new level of complexity to their administration and raise concerns from the IRS about the potential for abuse.
The proposal would be effective for taxable years beginning after December 31, 2021.
Expansion of Tax Credits to Stand-Alone Energy Storage and Energy Transmission Assets
Historically, energy storage assets (such as battery storage projects) have been eligible for the ITC only when paired with certain renewable energy resources, and the ITC has been unavailable with respect to energy transmission property. The Greenbook proposes to make certain stand-alone energy storage assets and energy transmission infrastructure assets eligible for the ITC. Moreover, as with the generation facility credit, taxpayers would be eligible to elect a cash payment in lieu of tax credits.
We expect that these proposals to increase the scope of ITC-eligible assets will provide strong incentives for investment in infrastructure designed to make the nation’s electric grid more reliable and resilient.
The proposal would be effective for taxable years beginning after December 31, 2021.
New Tax Credits for Qualifying Advanced Energy Manufacturing
Existing law authorizes a tax credit for the establishment of certain clean energy manufacturing facilities (e.g., facility to manufacture wind or solar equipment), but the amount of the credit is subject to a relatively low cap, which makes the incentive unavailable to certain otherwise-qualifying credit applicants. The Greenbook would expand the availability of the credit to include various new manufacturing facilities (including those focused on energy storage equipment, electric grid modernization equipment, energy conservation technology, and carbon oxide sequestration equipment) and significantly expand the cap, with a material portion of the credit being specifically allocable to projects in coal communities. Again, taxpayers would be eligible to elect a cash payment in lieu of tax credits. Taken together, the proposal intends to spur the production of domestic manufacturing of clean energy property.
The proposal would be effective for taxable years beginning after December 31, 2021.
Eliminate Fossil Fuel Tax Preferences
Current law provides a number of tax incentives meant to encourage oil and gas production. These incentives were targeted for repeal under the Obama Administration’s Greenbook in each year beginning with the 2011 fiscal year. The Biden Administration’s fiscal year 2022 Greenbook picks up where the Obama Administration left off, proposing to repeal a nearly identical set of fossil fuel-related tax incentives. Specifically, the Greenbook proposes repealing: (1) the enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project; (2) the credit for oil and gas produced from marginal wells; (3) the expensing of intangible drilling costs; (4) the deduction for costs paid or incurred for any tertiary injectant used as part of a tertiary recovery method; (5) the exception to passive loss limitations provided to working interests in oil and natural gas properties; (6) the use of percentage depletion with respect to oil and gas wells; (7) two-year amortization of independent producers’ geological and geophysical expenditures, instead allowing amortization over the seven-year period used by integrated oil and gas producers; (8) expensing of exploration and development costs; (9) percentage depletion for hard mineral fossil fuels; (10) capital gains treatment for royalties; (11) the exemption from the corporate income tax for publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels; (12) the Oil Spill Liability Trust Fund excise tax exemption for crude oil derived from bitumen and kerogen-rich rock; and (13) accelerated amortization for air pollution control facilities.
If enacted, the repeal of these incentives would make the production of oil and gas costlier by increasing producers’ effective tax rate. That said, some of these incentives, like the intangible drilling cost deduction, predate the Internal Revenue Code itself and have survived numerous political cycles. Efforts to repeal a nearly identical set of incentives proved difficult for the Obama Administration, even where the revenue generated from repeal was projected to be higher during the Obama Administration.
The proposal generally would be effective for taxable years beginning after December 31, 2021, although the repeal of item 11 above (exception for certain publicly traded partnerships) will only become effective for taxable years beginning after December 31, 2026.
Expand and Enhance the Carbon Oxide Sequestration Credit
Current law provides a tax credit for the capture and sequestration of certain types of carbon oxide captured with carbon-capture equipment placed in service at certain qualifying facilities, with the amount of the credit dependent on when and how the carbon oxide is sequestered.
The Greenbook proposes increasing the value of the sequestration credit by (i) $35 dollars per metric ton for carbon oxide that is more difficult to capture, such as carbon oxide from cement production, steelmaking, or hydrogen production, and (ii) $70 per metric ton for direct air carbon capture projects. Further, the “begin construction” date for qualifying facilities eligible for the credit would be extended five years to January 1, 2031. As is the case for the Greenbook’s other clean energy proposals, taxpayers could elect to receive a direct cash payment in lieu of the credits. The enhanced credits, together with the begin construction date extension and the direct pay option, should spur investment in carbon capture facilities and technologies.
The proposal would be effective for taxable years beginning after December 31, 2021.
Other Clean Energy Proposals
- Establish Tax Credits for Heavy- and Medium-Duty Zero Emissions Vehicles
- Provide Tax Incentives for Sustainable Aviation Fuel
- Provide a Production Tax Credit for Low-Carbon Hydrogen
- Extend and Enhance Energy Efficiency and Electrification Incentives
- Provide Disaster Mitigation Tax Credit
- Extend and Enhance the Electric Vehicle Charging Station Credit
- Reinstate Superfund Excise Taxes and Modify Oil Spill Liability Trust Fund Financing
PART V: IMPROVE COMPLIANCE AND TAX ADMINISTRATION
The Administration has been vocal in recent months in calling for an increase in IRS funding to reverse more than a decade of declining budgets and staff attrition, and to address information technology infrastructure challenges, all of which have driven historically low audit rates. On April 9, 2021, the Office of Management and Budget released an outline of the President’s request for fiscal year 2022 discretionary spending that would provide the IRS with $13.2 billion in funding for next year alone, a $1.2 billion or 10.4 percent increase over enacted IRS funding for 2021.[3] This increase would be used in part to improve taxpayer service but a major focus of the increased funding would be on increasing taxpayer compliance with existing law, reducing the “gap” between what is paid over to Treasury in taxes each year and what is actually owed. The most recent official estimates, covering the 2011 – 2013 tax years, are that this “tax gap” is roughly $441 billion annually (reduced by existing enforcement efforts to roughly $ $281 billion), although IRS Commissioner Charles Rettig recently suggested that a more accurate number may be closer to $1 trillion.
While there are some estimates that the IRS can collect $4 in additional tax for every $1 in increased IRS funding, those estimates cover a broad range of enforcement activity and are likely skewed toward low-cost/high-return functions like automated matching of information returns, rather than audits of complex tax returns. And, in the context of those more complex returns, there is considerably more uncertainty around what tax is actually owed, given ambiguities in the underlying law. Moreover, according to the IRS’s own estimates, over time the voluntary compliance rate has remained remarkably constant at just under 85 percent, even during periods of significantly declining budgets and enforcement activity, raising the question as to whether a material increase in IRS funding will translate into the expected increase in compliance.
Introduce Comprehensive Financial Account Reporting to Improve Tax Compliance
Recognizing that increased funding for the IRS alone will not be sufficient to make the necessary dent in the tax gap, the Greenbook includes several proposals that would equip the IRS with better information to address noncompliance with existing tax laws. The premise for these proposals is that third-party reporting can increase voluntary compliance rates from below 50 percent to as high as 95 percent. From that premise, the Administration proposes to create a “comprehensive financial account reporting regime,” that would require financial institutions to report gross transfers into and out of accounts, including accounts owned by the same taxpayer. This proposal is estimated to raise $8.3 billion in FY 2022 alone and, once fully implemented, to raise over $462 billion over the next 10 years. While increased information reporting will undoubtedly improve voluntary compliance, by how much is an open question. The proposed reporting regime falls several steps short of the Form W-2 reporting that ties directly into taxable income and also falls short of most existing Form 1099 reporting, which ties directly into gross income. Rather, like merchant card reporting under Code section 6050W, the comprehensive reporting regime would provide the IRS with information about fund flows that could lead to uncovering unreported taxable income (or encourage taxpayers to more accurately report taxable income to begin with) but will not do so directly. Whether this helps move compliance from under 50 percent to closer to 95 percent will depend on a number of variables, including the extent to which and how quickly financial institutions can implement a new reporting requirement and whether the IRS has the resources in place to effectively utilize the new information through deployment of artificial intelligence and comprehensive audit follow up. Successful implementation of the program will present additional challenges to the extent that, as proposed, it covers crypto assets, where a longer period of time for implementation could be needed, and unique substantive issues around transfers of “property,” as the IRS has characterized cryptocurrency, are likely to be raised. Even with established financial institutions that have deep experience with reporting information to the IRS, implementation of prior information reporting regimes including broker accounts and FATCA have proven far more complicated and burdensome than first expected.
Oversight of Paid Tax Return Preparers
The Greenbook proposes to provide the Secretary with explicit authority to regulate paid tax return preparers. This proposal has been included in several pieces of introduced legislation and was proposed in a number of prior-year Budget requests. In the past it was met with resistance from some in the tax professional community as well as members of Congress who oppose imposing new regulatory requirements on small businesses.
The proposal would be effective for taxable years beginning after December 31, 2021.
Modifications to Partnership Audit Rules
Under the BBA Centralized Partnership Audit Regime signed into law in 2015 and generally effective for tax years beginning in 2018, partners in the “adjustment” year of a partnership’s return are responsible for any tax payment obligation arising from adjustments going back to the “reporting year” return at issue. The BBA generally permits partnerships undergoing audit for certain tax years to make a “push out” election whereby the reporting year partners, and not the adjustment year partnership, become responsible for payments arising from an audit adjustment. If an adjustment reduces, instead of increases, a partner’s tax liability, the partner can use the decrease to offset its tax liability in the current year, but not below zero, with any reduction in excess of its tax liability in the current year being lost. The proposed change would treat the excess as a tax overpayment, potentially allowing a refund. This proposal reflects the Administration’s priority on increased enforcement for flow-through entities.
The proposal would be effective upon enactment.
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[1] The term “Bluebook” has also been used in prior administrations. Greenbook and Bluebook legislative proposals dating back to 1990 are available on the Treasury Department’s website, https://home.treasury.gov/policy-issues/tax-policy/revenue-proposals. The Joint Committee on Taxation (“JCT”) periodically publishes a general explanation of recently enacted tax legislation in a publication that is also known as a “Blue Book.” In December 2018, JCT released a Blue Book that explains the TCJA, which can be found at https://www.jct.gov/publications/2019/jcs-2-19/.
[2] TCJA 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.
[3] https://www.whitehouse.gov/wp-content/uploads/2021/04/FY2022-Discretionary-Request.pdf.
This alert was prepared by Jennifer Sabin, John-Paul Vojtisek, Dora Arash, Michael D. Bopp, James Chenoweth, Michael J. Desmond, Pamela Lawrence Endreny, Roscoe Jones, Jr., Kathryn Kelly, Brian W. Kniesly, David Sinak, Eric Sloan, Jeffrey M. Trinklein, Edward Wei, Lorna Wilson, Daniel A. Zygielbaum, Michael Cannon, Jennifer Fitzgerald, Evan M. Gusler, Brian Hamano, James Jennings, James Manzione and Collin Metcalf.
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 or Public Policy practice groups, or the following authors:
Jennifer Sabin – New York (+1 212-351-5208, jsabin@gibsondunn.com)
John-Paul Vojtisek – New York (+1 212-351-2320, jvojtisek@gibsondunn.com)
Dora Arash – Los Angeles (+1 213-229-7134, darash@gibsondunn.com)
James Chenoweth – Houston (+1 346-718-6718, jchenoweth@gibsondunn.com)
Michael J. Desmond – Los Angeles/Washington, D.C. (+1 213-229-7531, mdesmond@gibsondunn.com)
Pamela Lawrence Endreny – New York (+1 212-351-2474, pendreny@gibsondunn.com)
Kathryn A. Kelly – New York (+1 212-351-3876, kkelly@gibsondunn.com)
Brian W. Kniesly – New York (+1 212-351-2379, bkniesly@gibsondunn.com)
David Sinak – Dallas (+1 214-698-3107, dsinak@gibsondunn.com)
Eric B. Sloan – Co-Chair, New York (+1 212-351-2340, esloan@gibsondunn.com)
Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224 /+1 212-351-2344), jtrinklein@gibsondunn.com)
Edward S. Wei – New York (+1 212-351-3925, ewei@gibsondunn.com)
Lorna Wilson – Los Angeles (+1 213-229-7547, lwilson@gibsondunn.com)
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, dzygielbaum@gibsondunn.com)
Public Policy Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Roscoe Jones, Jr. – Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)
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Mass arbitration is a recent phenomenon in which thousands of plaintiffs—often consumers, employees, or independent contractors—bring arbitration demands against a company at the same time. Many mass arbitrations are the product of sophisticated advertising campaigns in which a plaintiffs’ firm uses social media to generate a list of thousands of individual “clients.” Other mass arbitrations arise after a court has enforced a class-action waiver in an arbitration agreement—instead of filing a single arbitration on behalf of the named plaintiff only, the plaintiffs’ firm tries to replicate the failed class action by bringing thousands of arbitrations on behalf of would-be class members.
Mass arbitrations can impose significant, even crippling, costs on companies, particularly in light of the hefty filing fees that many arbitration providers charge. For example, if a company’s filing-fee obligation is $2,000 per arbitration, a mass arbitration of 5,000 individuals could result in the arbitration provider invoicing the company for $10 million in nonrefundable filing fees. Equally large invoices—for case management fees and arbitrators’ fees—can quickly follow.
Because mass-arbitration plaintiffs are often recruited on social media, with little-to-no vetting, a mass arbitration might include hundreds of plaintiffs who never had any relationship or dealings with the company. Nonetheless, it is often difficult to identify and eliminate those frivolous claims before the arbitrations commence, and many arbitration providers insist on the company paying nonrefundable filing fees regardless of whether the claims have merits. A recent California law (SB 707) raises the stakes even further by requiring companies to pay arbitration fees within 30 days, and failure to do so can lead to default judgments and liability for the plaintiffs’ attorneys’ fees.
Many companies, however, have deployed successful strategies for deterring and defending against mass arbitrations, primarily through the careful drafting of their arbitration agreements. Below, we identify a few of the strategies that have been deployed. This list is not exhaustive, not all strategies are right for each company, and mass arbitration tactics are evolving and changing rapidly.
- Informal dispute resolution clauses. Companies can often reduce mass-arbitration costs by requiring the parties to engage in a mediation or informal dispute resolution conference before either side serves an arbitration demand. Those conferences can often result in the settlement or dismissal of many claims, and also deter the filing of frivolous claims, saving the company costly arbitration filing fees.
- Require individualized arbitration demands. Plaintiffs’ firms often try to initiate mass arbitrations by sending the company a single arbitration demand and appending a list of their purported clients. This tactic often fails to give companies sufficient information about the claimants bringing the arbitration demands, and also increases companies’ nonrefundable filing fees. To deter this tactic, some companies have required claimants to serve individualized arbitration demands, each of which must clearly identify the claimant, their legal claims, the requested relief, and an express authorization by the claimant to bring the arbitration demand.
- Cost-splitting provisions. Courts generally permit companies to require consumers, employees or independent contractors to bear some of the costs of arbitration, including the amount it would cost a claimant to file a lawsuit in a local court. Requiring claimants to pay for some arbitration fees can reduce the cost of a mass arbitration and deter the filing of frivolous claims.
- Fee-shifting for frivolous claims. Companies may also consider inserting clauses in their arbitration agreements that allow the arbitrator to award fees and costs to the prevailing party if the arbitrator finds that the losing party filed a frivolous claim. This can be another useful tool for deterring frivolous mass arbitrations and, at a minimum, it incentivizes plaintiffs’ counsel to vet claimants before bringing claims on their behalf.
- Offers of judgment. In many jurisdictions, an offer of judgment shifts costs to the plaintiff if they recover less money at trial than the settlement offer. A company may be able to reduce its costs and exposure by making offers of judgment at the outset of a mass arbitration. While most jurisdictions automatically enforce offers of judgment in arbitration, companies may consider including provisions in their arbitration agreements that expressly permit offers of judgment, with cost-shifting.
- Selecting the arbitration provider. Arbitration providers charge filing fees and other fees that vary widely. Some arbitration providers have dedicated fee schedules and other protocols for mass arbitrations. Companies should research and compare providers’ fee schedules and mass-arbitration protocols before selecting a provider for their arbitration agreement. It is also advisable to include a provision in the arbitration agreement that allows either side to negotiate lower fees with the provider—without such a provision, the provider may be unwilling to enter into such negotiations.
- Reserve the right to settle claims on a class-wide basis. A company facing a mass arbitration may wish to obtain global peace by entering into a class settlement that extinguishes all claims. No clause in an arbitration agreement should be necessary to allow a company to settle a class action. Indeed, for years, companies have settled class actions despite having arbitration agreements with class-action waivers. However, some plaintiffs’ lawyers have argued that class-action waivers preclude companies from settling a class action. Therefore, in an abundance of caution, companies might consider adding a clause to their arbitration agreements that allows any party to settle claims on a class-wide basis.
- Establish a protocol for adjudicating a mass arbitration. Some companies have inserted specific protocols in their arbitration agreements to help reduce the cost of a potential mass arbitration. For example, some arbitration agreements state that, in the event more than 100 similar arbitrations are filed at the same time, they will be “batched” into groups of 100, with each batch assigned to a single arbitrator and triggering a single filing fee. In this particular example, the batching protocol could potentially cut the company’s arbitration costs by up to 99%. However, having arbitrators assigned to multiple arbitrations could create additional risk for the company. In addition to batching, there are other mass-arbitration protocols that offer different risk/cost profiles.
Conclusion
Mass arbitrations can create significant cost and risk for a company. Being proactive and drafting an arbitration agreement with an eye toward mass arbitration can help reduce that cost and risk.
We will continue to monitor closely and develop new strategies and approaches to mass arbitration. If you have any questions or would like additional information about these or other developments, please reach out to any of your contacts at Gibson Dunn, any member of the firm’s Class Actions practice group, or the author of this alert:
Michael Holecek – Los Angeles (+1 213-220-6285, mholecek@gibsondunn.com)
The following Gibson Dunn attorneys also are available to assist in addressing any questions you may have regarding this alert:
Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com)
Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com)
Joshua S. Lipshutz – Washington, D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com)
Dhananjay S. Manthripragada – Los Angeles (+1 213-229-7366, dmanthripragada@gibsondunn.com)
© 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.