Stacy Mitchell, Author at Gibson Dunn

A Survey of Disclosures from the S&P 100 During the Four Years Following Adoption of the Securities and Exchange Commission Rule.

Human capital resource disclosures by public companies have continued to be a focus since the U.S. Securities and Exchange Commission (the “Commission”) adopted the new rules in 2020, not only for companies making the disclosures, but employees, investors, and other stakeholders reading them. This alert updates the alert we issued in November 2023, “Form 10-K Human Capital Disclosures Continue to Evolve,” available here, and reviews disclosure trends among S&P 100 companies categorized into 28 topic areas. Each of these companies has now included human capital disclosure in their past four annual reports on Form 10-K. This alert also provides practical considerations for companies as we head into 2025.

Overall, our findings indicate that companies are generally making only minor changes to their disclosures year over year, and these minor changes generally included shortening of company disclosures, maintaining or decreasing the number of topics covered, and including slightly less quantitative information in some areas.[1] Specifically, we identified the following trends regarding the S&P 100 companies’ human capital disclosures compared to the previous year:

Length of disclosure. Fifty-seven percent of surveyed companies decreased the length of their disclosures, 34% increased the length of their disclosures, and the length of the remaining 9% remained the same.
Number of topics covered. Forty-one percent of surveyed companies decreased the number of topics covered, 13% increased the number of topics covered, and the remaining 46% covered the same number of topics.
Breadth of topics covered. Across all companies, the prevalence of 10 topics increased, nine topics decreased, and nine topics remained the same.
- The most significant year-over-year increases in frequency involved Culture Initiatives (30% to 35%) and Pay Equity (48% to 50%) disclosures.
- The most significant year-over-year decrease involved COVID-19 disclosures, which declined in frequency from 34% to 1%. Other year-over-year decreases related to disclosures addressing Diversity Targets and Goals (21% to 14%), Diversity in Promotion (29% to 26%), Quantitative Diversity Statistics regarding Gender (63% to 60%), and Community Investment (28% to 25%).
Most common topics covered. This year, the topics most commonly discussed generally remained consistent with the previous two years. For example, Talent Development, Diversity and Inclusion, Talent Attraction and Retention, Employee Compensation and Benefits, and Monitoring Culture remained the five most frequently discussed topics. The topics least discussed this most recent year, however, changed slightly from that of the previous year as COVID-19 disclosures, and Diversity Targets and Goals dropped into the five least frequently covered topics.
Industry trends. Within the technology and finance industries, the trends that we saw in the previous year regarding the frequency of topics disclosed generally remained the same.

I. Background on the Requirements

As we previously discussed in our client alert titled “Discussing Human Capital: A Survey of the S&P 500’s Compliance with the New SEC Disclosure Requirement One Year After Adoption,” available here, on August 26, 2020, the Commission voted three-to-two to approve amendments to Items 101, 103, and 105 of Regulation S-K, including the principles-based requirement to discuss a registrant’s human capital resources to the extent material to an understanding of the registrant’s business taken as a whole.[2] Specifically, public companies’ human capital disclosure must include “the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction, and retention of personnel).”

Notably, since 2021 the Commission’s agenda list has included new human capital disclosure rules that were expected to be more prescriptive than the current rules,[3] in part, because one of the main criticisms of the existing human capital rules is lack of comparability across companies. The future of these rules is even less clear now as Chair Gensler who pushed for these rules (along with other rules, such as climate change) announced that he will be leaving the SEC in January 2025 in light of the new incoming administration. In the meantime, as our survey demonstrates, while company human capital disclosures vary—which is expected under the principles-based regime—comparability across the disclosures exists. The next four sections show the relevant data from our survey.[4]

II. Disclosure Topics

Our survey classifies human capital disclosures into 28 topics, each of which is listed in the following chart, along with the number of companies that discussed the topic in each of 2021, 2022, 2023, and 2024. Each topic is described more fully in the sections following the chart.

A. Workforce Composition

Among S&P 100 companies, 58% included disclosures relating to workforce composition in one or more of the following categories:

Full-time/part-time employee split. While most companies provided the total number of full-time employees, only 14% of the companies surveyed included a quantitative breakdown of the number of full-time versus part-time employees or salaried versus hourly employees, consistent with the previous two years. Similarly, 66% of companies provided statistics on the number of seasonal employees and/or independent contractors or a breakdown of employees by business segment, job function, or geographical location, the same as the previous year, and up from and 60% in 2021.
Unionized employee relations. Of the companies surveyed, 38% stated that some portion of their workforce was part of a union, works council, or similar collective bargaining agreement.[5] These disclosures generally included a statement providing the company’s opinion on the quality of labor relations, and in many cases, disclosed the number of unionized employees.
Quantitative workforce turnover rates. Although a majority of companies discussed employee turnover and the related topics of talent attraction and retention in a qualitative way (as discussed in Section II.B. below), only 19% of companies surveyed provided specific employee turnover rates (whether voluntary or involuntary), consistent with the previous two years.

B. Diversity

Among S&P 100 companies, 97% included disclosures relating to diversity in one or more of the following categories:

Diversity and inclusion. This was the most common diversity-related disclosure topic, with 97% of companies including a qualitative discussion regarding the company’s commitment to diversity, equity, and inclusion (“DEI”), consistent with the previous two years and up slightly from 91% in 2021. The depth of these disclosures varied, ranging from generic statements expressing the company’s support of diversity in the workforce to detailed examples of actions taken to recruit and support underrepresented groups and increase the diversity of the company’s workforce.
Priorities within diversity. Companies disclosed different areas of focus for diversity efforts and programming within the organization. The most common disclosure was diversity in the company’s hiring practices (60% of companies in 2024, up dramatically from 47% in 2021), followed by diversity in the retention or development of the company’s current workforce (58% of companies in 2024, up slightly from 50% in 2021), diversity in the company’s promotion practices (26% of companies in 2024, down from a high of 31% in 2022), and finally diversity in the company’s suppliers (15% of companies in 2024, up slightly from 10% in 2021). A decreasing minority of companies also discussed, in qualitative or quantitative terms, the companies’ commitments to aspirational diversity goals or targets (14% of companies in 2024, down from a high of 24% of companies in 2022), with such decrease likely due to the heightened legal risk associated with DEI programs following the June 2023 United States Supreme Court decision in Students for Fair Admissions v. Harvard.
Quantitative diversity statistics. Many companies also included a quantitative breakdown of the gender or racial representation of the company’s workforce: 60% included statistics on gender and 56% included statistics on race or ethnicity (down slightly compared to 2023, but up significantly from 47% and 42%, respectively, in 2021). Companies generally provided gender statistics on both a global and U.S. basis, whereas nearly all companies provided race or ethnicity statistics for their U.S. workforce only. Most companies provided these statistics in relation to their workforce generally, regardless of position; however, an increased subset (40% in 2024, compared to 25% in 2021) included separate statistics for different classes of employees (e.g., managerial, vice president and above, etc.). Similarly, 12% of companies also provided separate statistics for their boards of directors (compared to 10% in each of 2023 and 2022 and 4% in 2021). Some companies also included numerical goals for gender or racial representation, either in terms of overall representation, promotions, or hiring—11% of companies included these diversity goals or targets (compared to 15% in 2023, 18% in 2022, and 14% in 2021).

C. Recruiting, Training, Succession

Among S&P 100 companies, 99% included disclosures relating to talent and succession planning in one or more of the following categories:

Talent attraction and retention. These disclosures were generally qualitative and focused on efforts to recruit and retain qualified individuals. While general statements regarding recruiting and retaining talent were very common, with 96% of companies including this type of disclosure (relatively flat in the prior two years, but up significantly from 66% in 2021), quantitative measures of retention, like workforce turnover rate, were uncommon, with only 19% of companies disclosing such statistics (as noted above).
Talent development. Disclosures related to talent development were the most common category, with 98% of companies including a qualitative discussion regarding employee training, learning, and development opportunities, up from 83% in 2021. This disclosure tended to focus on the workforce as a whole rather than specifically on senior management. Companies generally discussed training programs such as in-person and online courses, leadership development programs, mentoring opportunities, tuition assistance, and conferences. Some companies discussed quantitative figures related to talent development, such as the number of hours employees spent on learning and development or the company’s investment in development resources, with 19% of companies including this type of disclosure.
Succession planning. Only 33% of companies surveyed addressed their succession planning efforts, which may be a function of succession being a focus area primarily for executives rather than the human capital resources of a company more broadly. However, this is up from 27% of companies who discussed succession planning in 2021.

D. Employee Compensation[6]

Among S&P 100 companies, 92% included disclosures relating to employee compensation, up from 77% in 2021. All of those companies included a qualitative description of the compensation and/or benefits program offered to employees, with a small minority providing quantitative measures such as minimum or average wages or investment in benefits (17% of companies surveyed in 2024, up from 12% in 2021). Of the companies surveyed, 50% addressed pay equity practices or assessments (up from 37% in 2021), and substantially fewer companies included quantitative measures of the pay gap between racially or ethnically diverse and nondiverse employees or male and female employees (17% of companies surveyed in 2024, up from 12% in 2021).

E. Health and Safety

Among S&P 100 companies, 77% included disclosures relating to health and safety in one or both of the following categories:

Workplace safety. Of the companies surveyed, 55% included qualitative disclosures relating to workplace health and safety, down from 63% in 2022, typically consisting of statements about the company’s commitment to safety in the workplace generally and compliance with applicable regulatory and legal requirements. However, 9% of companies surveyed provided quantitative disclosures in this category, generally focusing on historical and/or target incident or safety rates or investments in safety programs. These quantitative disclosures tended to be more prevalent among industrial, energy, and manufacturing companies.
Employee mental health. In connection with disclosures about benefits provided to employees, including benefits intended to support employees’ general wellness or wellbeing, 54% of companies disclosed initiatives taken to support employees’ mental or emotional health and wellbeing, up from 37% in 2021.

F. Culture and Engagement

In addition to the many instances where companies included general descriptions of their commitment to company culture and values, 83% of S&P 100 companies discussed specific initiatives they were taking related to culture and engagement in one or more of the following categories:

Culture and engagement initiatives. Specific disclosures relating to practices and initiatives undertaken to build and maintain their culture and values have increased steadily each year, with 35% of the companies surveyed providing such disclosure, up from 18% in 2021. These companies most commonly discussed efforts to communicate with employees (e.g., through town halls, CEO outreach, trainings, or conferences and presentations) and to recognize employee contributions (e.g., awards programs and individualized feedback). Many companies also discussed culture in the context of diversity-related initiatives designed to help foster an inclusive culture.
Monitoring culture. Of the companies surveyed 69% provided disclosures about the ways that companies monitor culture and employee engagement, up from 54% in 2021. Companies generally disclosed the frequency of employee surveys used to track employee engagement and satisfaction, with some reporting on the results of these surveys, sometimes measured against prior year results or industry benchmarks, and ways in which company management or the board utilized survey results.
Flexible Work Opportunities. About one-third of S&P 100 companies describe flexible working arrangements, including remote or hybrid work or scheduling adjustments to accommodate different ways of working, with 34% of companies provided such disclosure in 2024, compared to 16% in 2021. Although many of these companies discussed this topic in previous years, past mentions of measures related to flexible work environments were generally in connection with COVID-related safety concerns, whereas recent discussions are increasingly related to talent acquisition and retention.
Community investment. Some companies disclosed information about community investment, partnerships, donations, or volunteer programs sponsored by the company, with 25% of companies surveyed providing such disclosure in 2024, compared to 28% in 2023 and 18% in 2021. Many companies discussed their community investment efforts as offshoots of or in conjunction with their diversity, equity, and inclusion efforts.

G. COVID-19

The number of S&P 100 companies that included information regarding COVID-19 and its impact on company policies and procedures or on employees dropped to only one companies making such disclosure, compared to 34% in 2023 and 70% in 2022. This sharp decline in COVID-19 disclosures is consistent with a more general trend of companies discussing COVID-19 less frequently as a result of its decreasing significance and illustrates the expected evolution of disclosure resulting from a principles-based framework.

H. Human Capital Management Governance and Organizational Practices

Just over half of S&P 100 companies (54% of those surveyed, compared to 40% in 2021) addressed their governance and organizational practices (such as oversight by the board of directors or a committee and the organization of the human resources function).

III. Industry Trends

One of the main rationales underlying the adoption of principles-based—rather than prescriptive—requirements for human capital disclosures is that the relative significance of various human capital measures and objectives varies by industry. This is reflected in the following industry trends that we observed:[7]

Technology Industries (E-Commerce, Internet Media & Services, Hardware, Software & IT Services, and Semiconductors). For the 22 companies in the Technology Industries, at least 63% discussed each of talent development and training opportunities, talent attraction, recruitment and retention, employee compensation, employee mental health, and diversity. Compared to the S&P 100 as a whole, relatively uncommon disclosures among this group included part-time and full-time employee statistics (5%), succession planning (9%), supplier diversity (5%), diversity in retention and development (41%), quantitative diversity statistics regarding race/ethnicity and gender (41% and 45%, respectively), and unionized employee relations (18%). However, these industries continued to see increased rates of disclosure compared to the S&P 100 for quantitative turnover rates (41%), flexible work opportunities (45%), culture initiatives (45%), and qualitative pay equity (59%).
Finance Industries (Asset Management & Custody Activities, Consumer Finance, Commercial Banks, and Investment Banking & Brokerage). For the 13 companies in the Finance Industries, a large majority continued to include quantitative diversity statistics regarding race (85%) and gender (92%) (matching that of the last two years) and qualitative disclosures regarding employee compensation (92%), and, compared to other industries, a relatively higher number discussed diversity in hiring (85%), employee mental health (77%), flexible work opportunities (69%), pay equity (69%), and quantified their pay gap (46%). Relatively uncommon disclosures among this group included part-time and full-time employee statistics, unionized employee relations, quantitative workforce turnover rates, diversity targets and goals, quantitative new hire diversity, supplier diversity, and workplace safety (in each case less than 16%).
Pharmaceutical Industries (Biotechnology & Pharmaceuticals). For the eight companies in the Pharmaceutical Industries, at least 87% discussed each of diversity, workplace safety, monitoring culture, talent attraction and retention, talent development, and employee compensation. Compared to the S&P 100 as a whole, relatively uncommon disclosures among this group included succession planning (13%), quantitative pay gap (0%), and diversity targets and goals (0%). However, these industries continued to see increased rates of disclosure compared to the S&P 100 for supplier diversity (38%), workplace safety (88%), culture initiatives (50%), and flexible work opportunities (75%).

IV. Disclosure Format

The format of human capital disclosures in S&P 100 companies’ annual reports on Form 10‑K continued to vary greatly.

Word Count. The length of the disclosures ranged from 106 to 1,809 words, with the following statistical trends in the past four years:

	2024	2023	2022	2021
Minimum word count	106	106	109	105
Maximum word count	1,809	2,094	1,995	1,931
Median	913	1,035	959	818
Mean	946	1,002	976	825

Metrics. The disclosure requirement specifically asks for a description of “any human capital measures or objectives that the registrant focuses on in managing the business” (emphasis added). Our survey revealed that companies are increasingly providing quantitative metrics, with 84% of companies providing disclosure in at least one of the quantitative categories we discuss above (compared to 87% in 2023, 80% in 2022, and 67% in 2021) and only 8% electing not to include any type of quantitative metrics beyond headcount numbers (compared to 7% in 2023, 10% in 2022 and 14% in 2021).

Graphics. Although the minority practice, 26% of companies surveyed also included tables, charts, graphics or similar formatting used to draw attention to particular elements, compared to 26% in 2023, 24% in 2022 21% in 2021, which were generally used to present statistical data, such as diversity statistics or breakdowns of the number of employees by geographic location.

Categories. Most companies organized their disclosures by categories similar to those discussed above and included headings to define the types of disclosures presented.

V. Upcoming Rulemaking and Investor Advisory Committee Recommendations

At its meeting on September 21, 2023, the Commission’s Investor Advisory Committee (“IAC”) approved subcommittee recommendations (the “IAC Recommendations”) to expand required human capital management disclosures.[8] The IAC Recommendations contain prescriptive disclosure requirements—many of which have been previously considered as part of the 2020 rulemaking—for various quantitative metrics in the business description of Form 10-K under Item 101(c) of Regulation S-K (including headcount, turnover, compensation, and demographic data) as well as narrative disclosure in Management Discussion and Analysis. For details regarding the IAC Recommendations, please refer to “Form 10-K Human Capital Disclosures Continue to Evolve,” available here.

According to the most recent Regulatory Flexibility agenda, a human capital management rule proposal that was originally slated for October 2021 was expected to be issued in October 2024.[9] However, no rule was ever proposed, and many expect regulatory priorities to change with the upcoming shift in the administration, including SEC Chair Gary Gensler’s upcoming departure on January 20, 2025. We therefore do not expect that the Commission will be adopting IAC’s recommendations in the near term as Republican commissions have in the past generally favored principles-based disclosure over prescriptive disclosure requirements.

VI. Comment Letter Correspondence

Comment letter correspondence from the staff of the Division of Corporation Finance (the “Staff”), which often helps put a finer point on principles-based disclosure requirements like this one, has shed relatively little light on how the Staff believes the new requirements should be interpreted. Consistent with what we found at this time in the prior three years, the comment letters, all of which involved reviews of registration statements, were generally issued to companies whose disclosures about employees were limited to the bare-bones items companies have discussed historically, such as the number of persons employed and the quality of employee relations. From these companies, the Staff simply sought a more detailed discussion of the company’s human capital resources, including any human capital measures or objectives upon which the company focuses in managing its business. There were also a few comment letters where the Staff asked companies to clarify statements in their human capital disclosures or expand their human capital disclosures based on related risks identified in their risk factors.[10] Based on our review of the responses to those comment letters, we have not seen a company take the position that a discussion of human capital resources was immaterial and therefore unnecessary.

VIII. Conclusion

Based on our survey, companies continue to be thoughtful about their human capital disclosures—expanding their disclosures in some areas (e.g., culture initiatives and pay equity) and reducing them in others (e.g., COVID-19, diversity targets and goals, diversity in promotion, and community investment)—in response to ever-changing circumstances. That is precisely what principles-based disclosure rules are designed to elicit.

To that end, as companies prepare for the upcoming Form 10-K reporting season, they should consider the following:

Confirm (or reconfirm) that the company’s disclosure controls and procedures support the statements made in human capital disclosures knowing that controls in the HR department may not be as rigorous as accounting controls. These disclosures create legal liability risks and should be treated accordingly.

Companies may want to compare their own disclosures against what their industry peers did these past four years, including specifically any notable changes to disclosures made in the past year.

Remind stakeholders internally that these disclosures likely will continue to evolve. This is especially true with the change in administration that could result in companies focusing on fewer or different issues. The types of measures and objectives that a company focuses on in managing its business and that are material to each company may also change in response to current events, as was shown by essentially the complete removal of COVID-19 related disclosures from 10-K filings the past two years and the decrease in disclosures relating to diversity targets and goals over the same period.

If you continue to disclose targets, expect the SEC staff to ask you to disclose the progress that management has made. You may wish to reconsider the utility in disclosing specific targets.
Addressing in the upcoming disclosure, if not already disclosed, the progress that management has made with respect to any significant objectives it has set regarding its human capital resources as investors are likely to focus on year-over-year changes and the company’s performance versus stated goals.
Addressing significant areas of focus highlighted in engagement meetings with investors and other stakeholders. In a 2024 survey, human capital management was one of the top five issues (aside from financial performance) most important to investors when evaluating companies.[11]
Revalidating the methodology for calculating quantitative metrics and assessing consistency with the prior year. Former Chairman Clayton commented that he would expect companies to “maintain metric definitions constant from period to period or to disclose prominently any changes to the metrics.”

[1] Data provided is as of November 10, 2024 and is based on the companies currently included within the S&P 500, so some statistics are slightly different than they were in the prior surveys. The categorization data necessarily involves subjective assessment and should be considered approximate.

[2] See 17 C.F.R. § 229.101(c)(2)(ii).

[3] Agency Rule List – Spring 2024 Securities and Exchange Commission, Office of Information and Regulatory Affairs (2024), available here.

[4] Note that companies often include additional human capital management-related disclosures in their ESG/sustainability/social responsibility reports, on their websites, and in their proxy statements, but these disclosures are outside the scope of the survey, which is focused on disclosures included in Part I, Item 1 of annual reports on Form 10-K.

[5] While never expressly required by Regulation S-K, as a result of disclosure review comments issued by the Division of Corporation Finance over the years and a decades-old and since-deleted requirement in Form 1-A, it has been a relatively common practice to discuss collective bargaining and employee relations in the Form 10-K or in an IPO Form S-1, particularly since the threat of a workforce strike could be material.

[6] Our survey reviewed the employee compensation disclosures contained in Part I, Item 1 of each company’s Form 10-K and did not separately review any employee compensation information included in companies’ financial statements or the notes thereto.

[7] For purposes of our survey, we grouped companies in similar industries based on both their four-digit Standard Industrial Classification code and their designated industry within the Sustainable Industry Classification System. The industry groups discussed in this section cover 43% of the companies included in our survey.

[8] Available at https://www.sec.gov/files/spotlight/iac/20230921-recommendation-regarding-hcm.pdf.

[9] Agency Rule List – Spring 2024 Securities and Exchange Commission, Office of Information and Regulatory Affairs (2024), available here.

[10] See, e.g., comments issued to Concentra Group Holdings Parent, Inc. (available at https://www.sec.gov/Archives/edgar/data/2014596/000000000024003738/filename1.pdf) and PACS Group, Inc. (available at https://www.sec.gov/Archives/edgar/data/2001184/000000000024000134/filename1.pdf).

[11] See PwC’s Global Investor Survey 2024, available at https://www.pwc.com/gx/en/issues/c-suite-insights/global-investor-survey.html.

The following Gibson Dunn attorneys assisted in preparing this update: Brian Lane, Julia Lapitskaya, Ronald Mueller, Michael Titera, and Meghan Sherley.

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

Securities Regulation and Corporate Governance:
Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202.955.8287, [email protected])
James J. Moloney – Co-Chair, Orange County (+1 949.451.4343, [email protected])
Lori Zyskowski – Co-Chair, New York (+1 212.351.2309, [email protected])
Aaron Briggs – San Francisco (+1 415.393.8297, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202.887.3550, [email protected])
Brian J. Lane – Washington, D.C. (+1 202.887.3646, [email protected])
Julia Lapitskaya – New York (+1 212.351.2354, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, [email protected])
Michael Scanlon – Washington, D.C.(+1 202.887.3668, [email protected])
Michael A. Titera – Orange County (+1 949.451.4365, [email protected])

Labor and Employment:
Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202.955.8242, [email protected])
Katherine V.A. Smith – Co-Chair, Los Angeles (+1 213.229.7107, [email protected])

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

On December 3, 2024, a federal district court in Texas ruled that the Corporate Transparency Act (CTA) is likely unconstitutional and preliminarily enjoined its enforcement nationwide. Accordingly, the rule’s requirements cannot currently be enforced against entities that would otherwise be subject to the rule. Thus, as it currently stands, reporting companies that were required to make a CTA filing by the end of the year are not required to do so, although that posture could change very quickly depending on the government’s next steps. This update briefly describes the ruling and what it means for CTA compliance moving forward.[1]

The Corporate Transparency Act, enacted in 2021, requires all corporations, limited liability companies, and certain other entities created (or, as to non-U.S. entities, registered to do business) in any U.S. state or tribal jurisdiction to file a beneficial ownership interest (BOI) report with the U.S. Financial Crimes Enforcement Network (FinCEN) identifying, among other information, the natural persons who are beneficial owners of the entity.[2] A regulation, the Reporting Rule, helps implement the CTA by specifying compliance deadlines—including a January 1, 2025 deadline for companies created or registered to do business in the United States before January 1, 2024—and detailing what information must be reported to FinCEN.[3]

On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional.[4] The court permanently enjoined the government from enforcing the CTA, but only as to the plaintiffs in that case.[5] The government appealed, and the Eleventh Circuit heard oral argument on September 27. The Eleventh Circuit’s decision in that case remains pending.

The December 3, 2024 Ruling

Six plaintiffs, among which include a small business named Texas Top Cop Shop, Inc. and the National Federation of Independent Business (NFIB), brought a lawsuit challenging the constitutionality of the CTA and the Reporting Rule on various grounds. On December 3, 2024, Judge Amos L. Mazzant of the U.S. District Court for the Eastern District of Texas granted the plaintiffs’ motion for a preliminary injunction.[6] Like the Northern District of Alabama, the court held that the CTA exceeds Congress’s enumerated powers. Specifically, in a 79-page opinion, Judge Mazzant ruled that it was likely that the plaintiffs would be able to prove that:

The CTA is not a proper exercise of Commerce Clause power because it does not regulate a channel or instrumentality of interstate commerce or any activity that substantially affects commerce[7]; and
The CTA cannot be justified under the Necessary and Proper Clause because, contrary to the government’s assertions, it is not rationally related to any enumerated power to regulate commerce, conduct foreign affairs, or collect taxes.[8]

The court’s reasoning about the scope of the Commerce Clause, Necessary and Proper Clause, foreign affairs power, and taxing power echoed that of the Northern District of Alabama. While the Northern District of Alabama enjoined enforcement of the CTA against only the plaintiffs in that case, the Eastern District of Texas went further. Observing that an injunction pertaining to plaintiff NFIB’s approximately 300,000 members would be tantamount to a nationwide injunction, the court concluded that it was appropriate to preliminarily enjoin enforcement of the CTA and the Reporting Rule nationwide.[9] Moreover, the court invoked its power under the Administrative Procedure Act’s stay provision, 5 U.S.C. § 705, to “postpone the effective date of” the Reporting Rule.[10]

Potential U.S. Government Response

The government has 60 days to appeal the district court’s preliminary injunction to the U.S. Court of Appeals for the Fifth Circuit, though it may do so earlier.[11] The government may also ask the district court or the Fifth Circuit for an emergency stay of the district court’s preliminary injunction in full or in part during the pendency of any appeal. Any such emergency application would be considered by the Fifth Circuit on an expedited basis. If the Fifth Circuit leaves the district court’s order in place, the government could then seek emergency relief in the Supreme Court, which could also stay the injunction pending appeal.

In the meantime, FinCEN will likely issue a notice clarifying its position on the impact of the district court’s order, including potentially extending the January 1, 2025 filing deadline.

Ultimately, the validity of the CTA is unlikely to be resolved nationwide without Supreme Court review or unanimous decisions from the federal courts of appeals who consider the question. Notably, district courts in Michigan,[12] Oregon,[13] and Virginia[14] have denied similar requests for preliminary injunctions against enforcement of the CTA. The Eastern District of Virginia, for example, concluded that the CTA is an exercise of Congress’s Commerce Clause power because it regulates an activity—operating a corporate entity as a going concern—that in the aggregate substantially affects interstate commerce.[15]

What the Ruling Means for Entities Subject to the CTA

Given the district court’s nationwide preliminary injunction and stay of the Reporting Rule’s effective date, the rule’s requirements cannot currently be enforced against entities that would otherwise be subject to the rule. Thus, as it currently stands, reporting companies that were required to make a CTA filing are not required to do so.

Given the possibility of either the Fifth Circuit or the Supreme Court staying the district court’s order pending appeal, however, reporting entities’ legal obligations are subject to change on short notice, and as a general matter companies should not assume that the January 1, 2025 deadline will ultimately be extended without further guidance from FinCEN. If either the Fifth Circuit or Supreme Court stay the district court’s order pending appeal, the Reporting Rule will become enforceable again, and the rule’s deadlines will become effective as to all entities that are not parties to the litigation in the Northern District of Alabama—though FinCEN may adjust those deadlines depending on how long the district court’s order remains in effect. It also remains to be seen whether the incoming administration will continue to defend the constitutionality of the CTA or not, although as a general rule the Department of Justice typically defends the constitutionality of federal statutes regardless of administration.[16]

Entities that believe they may be subject to the Reporting Rule should closely monitor this matter, and consult with their CTA advisors as necessary, to understand whether and when they need to comply with the Reporting Rule’s requirements and to allow for sufficient lead time in advance of any filing deadline.

We note that this ruling deals only with the federal CTA passed by Congress, not similar legislation passed by states such as New York, which have enacted similar requirements.[17] Gibson Dunn will continue to monitor CTA developments closely.

[1] Prior alerts by Gibson Dunn explaining the Corporate Transparency Act are available at: https://www.gibsondunn.com/top-12-developments-in-anti-money-laundering-enforcement-in-2023; https://www.gibsondunn.com/the-impact-of-fincens-beneficial-ownership-regulation-on-investment-funds; https://www.gibsondunn.com/the-corporate-transparency-act-reminders-and-key-updates-including-fincen-october-3-faqs.

[2] See William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. 116-283, Div. F., § 6403 (adding 31 U.S.C. § 5336).

[3] 31 C.F.R. § 1010.380.

[4] Nat’l Small Business United v. Yellen, 721 F. Supp. 3d 1260 (N.D. Ala. 2024); see https://www.gibsondunn.com/corporate-transparency-act-declared-unconstitutional-what-it-means-for-you.

[5] Nat’l Small Business Union et al. v. Yellen et al., No. 5:22-cv-01448, Dkt. 52 (N.D. Ala. 2024).

[6] Texas Top Cop Shop, Inc. et al. v. Garland et al., No. 4:24-CV-478, Dkt. 30 (E.D. Tex. Dec. 3, 2024).

[7] Id. at 35–53.

[8] Id. at 53–73.

[9] Id. at 74–75, 77.

[10] Id. at 78.

[11] Fed. R. App. P. 4(a)(1)(B).

[12] Small Business Ass’n of Mich. et al. v. Yellen et al., No. 1:24-cv-00314-RJJ-SJB, Dkt. 24 (W.D. Mich. Apr. 26, 2024).

[13] Firestone et al. v. Yellen et al., No. 3:24-cv-1034-SI, Dkt. 18 (D. Ore. Sept. 20, 2024).

[14] Cmty. Ass’ns Inst. et al. v. Yellen et al., No. 1:24-cv-1597 (MSN/LRV), Dkt. 40 (E.D. Va. Oct. 24, 2024).

[15] Id. at 14; see also Firestone, supra note 13, at 12–14.

[16] See https://www.gibsondunn.com/tools-of-transition-procedural-devices-could-help-president-elect-implement-agenda.

[17] See S.995-B/A.3484-A

The following Gibson Dunn lawyers assisted in preparing this update: Kevin Bettsteller, Stephanie Brooker, Matt Gregory, Justin Newman, Dave Ware, Sam Raymond, Chris Jones, and Connor Mui.

Gibson Dunn has deep experience with issues relating to the Bank Secrecy Act, the Corporate Transparency Act, other AML and sanctions laws and regulations, and challenges to Congressional statutes and administrative regulations.

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In this update, we explore the possible impacts of the 2024 presidential election on emissions regulations for light- and heavy-duty motor vehicles and on- and off-road engines, known collectively as “mobile sources.”

Based on actions during President-elect Trump’s previous term, we anticipate that the second Trump Administration will move swiftly to rescind and replace federal rules regarding mobile source emissions and seek to limit California’s authority to regulate such emissions. Below we outline the anticipated implications for industry of forthcoming changes to the existing federal and California regulations, related anticipated litigation, and potential compliance and enforcement considerations for industry.

The key takeaways for industry are:

The second Trump Administration is likely to deny pending requests by California for authorization to adopt and enforce its own mobile source emissions regulations and to revoke existing preemption waivers allowing California to issue mobile source greenhouse gas (GHG) standards in particular.
If these waivers are later restored, manufacturers may face retroactive enforcement by the California Air Resources Board (CARB), which has recently stated in other contexts that it will seek to enforce its regulations back to the state law effective date upon the receipt of a preemption waiver or authorization.
New litigation surrounding the denial or revocation of California’s waivers is likely to arise, but any cases seeking to restore California’s waivers will be heard by a judiciary—including a Supreme Court—shaped by the appointees of the first Trump Administration.
From an enforcement perspective, the U.S. Environmental Protection Agency (EPA) will retain primacy for mobile source enforcement even if the next Trump Administration moves back to a policy focused on state-first enforcement. If the EPA de-prioritizes GHG enforcement, the balance of the enforcement docket may shift to criteria pollutant cases, such as enforcement related to NOx or PM emissions.

Federal Rules

During the first Trump Administration, the U.S. Environmental Protection Agency (EPA) undertook efforts to change mobile source emission rules, in particular by replacing an increasingly strict GHG emissions regime from the Obama Administration with rules that did not become more stringent year-over-year. We anticipate that during President-elect Trump’s second term, his administration may move again to reduce the stringency of the previous administration’s emissions regulations pertaining to GHGs.

First Trump Administration Recission of Federal Rules

In August 2018, the EPA, along with the National Highway Traffic Safety Administration (NHTSA), initiated a rulemaking to amend the existing tailpipe emissions standards and fuel economy requirements for passenger cars and light trucks and establish new standards for model years 2021 through 2026.[1] This action, which was finalized in April 2020, froze the federal GHG emissions and fuel economy standards at model year 2020 levels through 2026.[2]

Lessons for the Second Trump Administration

During the second Trump Administration, we anticipate that the EPA will again take action to rescind the previous administration’s vehicle and engine emissions standards, particularly GHG standards. Based on campaign statements and Project 2025, an extensive suite of policy proposals from major conservative groups including many appointees from President-elect Trump’s first administration,[3] the EPA will likely rescind the Biden EPA’s model year 2027 through 2032 light- and medium-duty vehicle emissions standards.[4] The Trump Administration’s replacement rule will likely slow the rate at which the GHG standards ramp up.[5] We also anticipate that the Trump Administration’s replacement rule will significantly reduce the pressure on manufacturers to meet emissions standards through the sale of electric vehicles (although this seems less certain given the anticipated role that Tesla CEO Elon Musk will have in the second Trump Administration).[6]

Project 2025 also contemplates that NHTSA will amend its fuel economy standards and return to the minimum average fuel economy standards specified by Congress for model year 2020 vehicles, including levels aimed at achieving a fleet-wide average of 35 miles per gallon.[7] NHTSA may also reconsider existing fuel economy credits for electric vehicles.[8]

California Rules

Outlook for Section 209 Waivers

Under the Clean Air Act, states are expressly preempted from adopting or enforcing emissions standards for new motor vehicles and engines.[9] However, a statutory exemption exists for California: EPA has authority under Section 209 to issue a preemption waiver to California to establish, and enforce, its own standards for new motor vehicle and engine emissions that are at least as strict as the federal standards, if certain statutory criteria are met.[10] Currently, eight California rules are under waiver or authorization review by EPA, including the following CARB rules with significant compliance implications and costs for the regulated industry:

California Rule	Federal Register Notice
Heavy-Duty Omnibus Low NOx Waiver Request	87 Fed. Reg. 35765 (Jun. 13, 2022)
Commercial Harbor Craft Authorization Request	88 Fed. Reg. 25636 (Apr. 27, 2023)
Advanced Clean Car II Waiver Request	88 Fed. Reg. 88908 (Dec. 26, 2023)
In-Use Locomotive Authorization Request	89 Fed. Reg. 14484 (Feb. 27, 2024)
Advanced Clean Fleets Waiver Request	89 Fed. Reg. 57151 (Jul. 12, 2024)

In addition, for some other recent rules, such as the Zero-Emissions Forklift Rule, which mandates a complete transition to powertrains with no tailpipe emissions, CARB has not yet submitted a waiver application to the EPA.

If these waiver and authorization requests are not finalized during President Biden’s lame-duck period, they likely will be denied by a Trump EPA. Based on the Trump EPA’s approach during the first administration, it is likely that President-elect Trump’s EPA will revoke existing waivers granted to California. The ability of California to secure waivers or authorizations from the EPA during the second Trump Administration based on new requests is also questionable.

In particular, campaign statements and Project 2025 indicate that the next Administration will revoke any Section 209(b) waiver that does not apply only to California-specific issues such as ground-level ozone, including any waiver to issue vehicle GHG standards.[11] President-elect Trump campaigned on a platform that no state should have the authority to ban gasoline-powered cars, which implicates California’s waiver that has been used to order the phase-out of gas-powered vehicles and transition to electric vehicles beginning in model year 2026 through model year 2035.[12]

CARB Response to Waiver Recission and Restoration During the First Trump Administration

Looking back to the first Trump Administration may provide a preview of future conflict between CARB and the Trump EPA regarding Section 209 waivers. During the first Trump Administration, in August 2018, the EPA proposed to withdraw CARB’s previously granted Section 209(b) waiver for its Advanced Clean Cars regulation.[13] In September 2019, the EPA finalized this rule, revoking California’s Section 209(b) waiver to enforce unique state motor vehicle GHG standards for model years 2021 through 2025.[14]

During the interim period between the Trump EPA’s initial proposal to revoke California’s waiver and the actual revocation, CARB modified its existing GHG rules for model years 2021 through 2026 to state that, should the EPA change federal emission standards, vehicle and engine manufacturers who complied with the federal standards would no longer be considered in compliance with the significantly differing California standards.[15] In other words, CARB declared that it would no longer accept compliance with federal emissions standards as a safe harbor if the EPA were to revise the federal rules. In doing so, California departed from a prior deal struck with industry and EPA in promulgating the first harmonized GHG program at the outset of the Obama Administration (which, in turn, resolved years of litigation relating to state regulation of GHGs from motor vehicles).[16]

Next, in the summer of 2019, CARB and four automakers announced their entry into “Framework Agreements.”^[17] The Framework Agreements imposed alternative GHG standards for model year 2021 through 2026 light-duty vehicles, and were described by the Trump EPA as “a voluntary agreement with four automobile manufacturers that amongst other things, requires the manufacturers to refrain from challenging California’s GHG and [Zero-Emission Vehicle] programs, and provides that California will accept automobile manufacturer compliance with a less stringent standard” than either the existing California program or the federal regulations promulgated in 2012.[18]

As a result, during the period when CARB’s waiver was revoked, manufacturers were subject to significant regulatory uncertainty. Some manufacturers complied with the federal regulations, which EPA and NHTSA maintained were the only lawful regulations. Other manufacturers entered into agreements with CARB to comply with the requirements of the Framework Agreement. Overlaying all of this, CARB’s own original GHG emissions standards remained the law in California, and CARB maintained that their waiver was improperly revoked, raising the specter of retroactive enforcement should it be restored.[19]

In March 2022, under President Biden, the EPA reinstated California’s Section 209(b) waiver to issue and enforce motor vehicle GHG standards.[20] OEMs expressed concern that CARB could seek to retroactively enforce its separate standards for the period during which California’s waiver had been revoked.[21] This was particularly challenging because, during the period where CARB’s waiver was withdrawn, many manufacturers followed the federal regulations and made decisions that fixed their vehicle production strategies for model years 2021 and 2022, leaving them with a lack of lead time to comply with CARB’s regulations after its waiver was reinstated.

Potential CARB Retroactive Enforcement in the Second Trump Administration

The potential for retroactive enforcement will remain a challenge in the new Trump Administration. CARB has indicated in several contexts that it will seek to enforce state law retroactively upon the receipt of EPA waiver or authorization. For example, CARB’s Advanced Clean Fleets (ACF) waiver request is still pending with EPA,[22] but in December 2023, CARB issued an “Enforcement Notice” stating that it “reserves all of its rights to enforce the ACF regulation in full for any period for which a waiver is granted” including back to the effective date of the rule under California law.[23] In comments on the EPA waiver proceeding on this rule, one comment rightfully pointed out that “to apply the waiver retroactively violates both the [Clean Air Act] and basic principles of due process” and observed that CARB has increasingly sought to assert this position for its rules pending waiver determinations.[24] In October 2024, CARB clarified that it would not retroactively enforce certain aspects of the ACF regulation, but this clarification did not comprehensively address all ACF requirements.[25] Notably, CARB has not provided similar clarifications for other rules.

During a second Trump Administration, CARB may renew its threats of retroactive enforcement for regulations between the period of a regulation becoming California law and receipt of a waiver or authorization from EPA. This would lead to significant regulatory uncertainty (and due process concerns) for automakers and engine manufacturers, as a Trump EPA is likely to delay or deny California’s waiver and authorization requests. Furthermore, if existing waivers are rescinded and then restored by a later administration, manufacturers may again face the situation where federal regulations were technically the sole law of the land, but California alleges the waiver revocation was improper, its regulations were still valid, and that it can retroactively enforce following the restoration. This Damocles’ sword could hang over industry’s head until the issue of California’s authority is decided by the U.S. Supreme Court or the next Democratic Administration.

Waiver Litigation

EPA’s decision to reinstate CARB’s waiver is also currently being challenged in federal court by a group of states and fuel producers. Petitioners argue that the EPA exceeded its authority under the CAA and violated a constitutional requirement to treat states equally in terms of their sovereign authority.[26] The DC Circuit held that the Petitioners did not have standing to raise the statutory claims, and it rejected Petitioners’ constitutional claim on the merits.[27] Although the petition for certiorari remains pending before the Supreme Court, a Trump Administration revocation could render this case moot by again revoking the California waiver.

However, even if the existing litigation is mooted, new waiver litigation is likely to arise. Specifically, in the event that the Trump EPA denies or revokes any of California’s waivers, new litigation will almost certainly commence to challenge such decisions, including litigation brought by the State of California.[28]

In those cases—or if the existing waiver litigation proceeds to the Supreme Court—the second Trump Administration will have an advantage that the first Trump Administration did not: the benefit of a federal judiciary, and a Supreme Court, shaped by President-elect Trump’s first term.[29] In addition, the Supreme Court’s 2024 decision in Loper Bright provides the courts with greater latitude to question agency decisions that previously may have received the benefit of Chevron deference.[30] As a result, cases trying to restore California’s waivers may face more of an uphill battle during the second Trump Administration than during the first.

Implications for Enforcement

Federal Enforcement

During the first Trump Administration, EPA policy emphasized coordination with states and allowing state agencies to take the lead in enforcement. Even under a state-focused enforcement policy, EPA remains the lead for any enforcement pursuant to Title II of the Clean Air Act relating to mobile sources and fuels, especially if California’s waivers to enforce its own mobile source emission standards are delayed, denied, or revoked. Thus, EPA’s Office of Enforcement and Compliance Assurance (OECA) will retain primacy for Title II enforcement even if the next Trump Administration moves back to a policy focused on state-first enforcement.

Furthermore, where GHG enforcement becomes less of a priority, OECA may then seek to fill its enforcement docket with criteria pollutant cases. For vehicle and engine manufacturers, this could include enforcement related to NOx or PM emissions, for example. Enforcement actions under the first Trump Administration included three major mobile source cases focused on criteria emissions all of which were focused on non-U.S. manufacturers.

CARB Enforcement

As discussed above, the recission and reinstatement of CARB’s Advanced Clean Cars waiver created significant uncertainty for manufacturers regarding enforcement risks, as the fundamental issues of which regulations were in effect, and when, were in question. To date, this dilemma and the related due process concerns created by this positioning have not been squarely addressed in the context of enforcement or an as-applied constitutional challenge.

Should a similar situation develop during the second Trump Administration, another potential method for manufacturers to seek certainty on enforcement is to enter into an agreement with CARB where CARB agrees to exercise its enforcement discretion with respect to certain regulatory terms in exchange for support for CARB’s legal positions and regulations. CARB has taken this approach not only on a manufacturer-by-manufacturer basis as mentioned above, but also entered into an agreement with a trade association and a coalition of manufacturers in the association’s membership.[31] But such an approach could face retaliation by the Trump Administration: during President-elect Trump’s first term, the U.S. Department of Justice briefly sought to investigate the manufacturers involved in these agreements for violations of antitrust law.[32]

Conclusion

In his second term, President-elect Trump is likely to target California’s authority to regulate mobile source emissions, and especially GHG emissions. Lessons from the first Trump Administration indicate that CARB may respond by taking an aggressive position on retroactive enforcement to induce manufacturers to comply with California regulations during any waiver revocation period. The question of CARB’s authority to retroactively enforce mobile source emissions regulations, and the related due process concerns, has not been decided by a court or squarely addressed in litigation.

Meanwhile, even if EPA’s enforcement program shifts Title I enforcement to the states, Title II mobile source emissions enforcement will remain a federal concern. In particular, mobile source criteria pollutant cases, and especially those targeting foreign manufacturers, are likely to continue to remain part of OECA’s docket throughout President-elect Trump’s second administration.

[1] See The Safer Affordable Fuel-Efficient (“SAFE”) Vehicles Rule for Model Years 2021-2026 Passenger Cars and Light Trucks, 83 Fed. Reg. 42986 (proposed Aug. 24, 2018).

[2] See The Safer Affordable Fuel-Efficient (“SAFE”) Vehicles Rule for Model Years 2021-2026 Passenger Cars and Light Trucks, 85 Fed. Reg. 24174 (Apr. 30, 2020). Under the direction of the Biden Administration, in March 2022, EPA instituted stricter GHG standards for model years 2023 through 2026. Revised 2023 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions Standards, 86 Fed. Reg. 74434 (Dec. 30. 2021). In April 2024, the Biden EPA promulgated model year 2027 through 2032 light- and medium-duty vehicle emissions standards, including GHG standards. Multi-Pollutant Emissions Standards for Model Years 2027 and Later Light-Duty and Medium-Duty Vehicles, 89 Fed. Reg. 27842 (Apr. 18, 2024). Currently, no major federal rules are pending for non-road engines or vehicles, or other Title II sources.

[3] BrieAnna J. Frank, Project 2025 is an effort by the Heritage Foundation, not Donald Trump | Fact check, USA TODAY (July 10, 2024, 12:05 PM ET), https://www.usatoday.com/story/news/factcheck/2024/07/10/trump-project-2025-heritage-foundation-fact-check/74340278007/.

[4] See Mandy M Gunasekara, Environmental Protection Agency, in Project 2025: Presidential Transition Project, 417, 426 (Paul Dans and Steven Groves, eds., 2023), static.project2025.org/2025_MandateForLeadership_CHAPTER-13.pdf.

[5] Id.

[6] See Ryan Hanrahan, Trump Vows to ‘End the Electric Vehicle Mandate’ in GOP Acceptance Speech, Farm Policy News (July 22, 2024), https://farmpolicynews.illinois.edu/2024/07/trump-vows-to-end-the-electric-vehicle-mandate-in-gop-acceptance-speech/.

[7] See Diana Furchtgott-Roth, Project 2025 Chapter 19 Department of Transportation 627 (2024), static.project2025.org/2025_MandateForLeadership_CHAPTER-19.pdf.

[8] See id.

[9] See 42 U.S.C. § 7543.

[10] 42 U.S.C. §§ 7543(b), (e). Clean Air Act Section 209(b), 42 U.S.C. § 7543(b), pertains to preemption waivers for on-road vehicles and engines. Under Section 209(e), 42 U.S.C. § 7543(e), EPA may issue authorization for California to adopt and enforce its own non-road vehicle or engine emission standards.

[11] See Gunasekara, supra note 3.

[12] Alexandra Ulmer and David Shepardson, Trump says no state would be allowed to ban gasoline-powered cars if he is elected, Reuters (Oct. 4, 2024), https://www.reuters.com/business/autos-transportation/trump-says-no-state-would-be-allowed-ban-gas-powered-cars-if-he-is-elected-2024-10-03/.

[13] See The Safer Affordable Fuel-Efficient (“SAFE”) Vehicles Rule for Model Years 2021-2026 Passenger Cars and Light Trucks, 83 Fed. Reg. at 42999.

[14] See The Safer Affordable Fuel-Efficient Vehicles Rule Part One: One National Program, 84 Fed. Reg. 51310, 51337 (Sept. 27, 2019).

[15] See In re Air Resources Board, OAL Matter No. 2018-1114-03, Cal. Office of Admin. Law, (Dec. 12, 2018), https://www.arb.ca.gov/regact/2018/leviii2018/form400dtc.pdf.

[16] See Letter from Mary D. Nichols, Chairman, CARB, to U.S. EPA and U.S. Dep’t of Transp. (July 28, 2011), https://www.epa.gov/sites/default/files/2016-10/documents/carb-commitment-ltr.pdf (“California commits to propose to revise its standards on GHG emissions from new motor vehicles for model-years MYs 2017 through 2025, such that compliance with the GHG emissions standards adopted by EPA for those model years that are substantially as described in the July 2011 Notice of Intent, even if amended after 2012, shall be deemed compliance with the California GHG emissions standards . . . .”).

[17] Press Release, CARB, California and major automakers reach groundbreaking framework agreement on clean emission standards (July 25, 2019), https://ww2.arb.ca.gov/news/california-and-major-automakers-reach-groundbreaking-framework-agreement-clean-emission. Later, CARB also agreed to allow an additional OEM to enter into a Framework Agreement. See CARB, Framework Agreements on Clean Cars, https://ww2.arb.ca.gov/resources/documents/ framework-agreements-clean-cars (last visited Nov. 11, 2024).

[18] The Safer Affordable Fuel-Efficient Vehicles Rule Part One: One National Program, 84 Fed. Reg at 51329 n.211. In contemporaneous public statements, CARB explained that they offered the Framework Agreements to manufacturers that “support[ed] . . . California’s authority to set vehicle emissions standards” after EPA had indicated its intent to revoke CARB’s Section 209(b) waiver. Media Advisory, CARB, Mary Nichols to Explain Why CARB Is Not Attending the 2019 Los Angeles Auto Show (Nov. 20, 2019), https://ww2.arb.ca.gov/news/media-advisory-mary-nichols-explain-why-california-air-resources-board-not-attending-2019-los. The Framework Agreements were finalized in August 2020 after the revocation of California’s waiver under Section 209(b) of the Clean Air Act to regulate GHG emissions.

[19] See Letter from CARB Regarding Revised 2023 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions Standards, Docket ID No. EPA-HQ-OAR-2021-020, to Michael Regan, EPA Administrator, at 9 (Sept. 27, 2021), https://ww2.arb.ca.gov/sites/default/files/2021-10/2021-9-27-final-carb-my-2023-26-usepa-ghg-stds-ccessible.pdf; see also Union of Concerned Scientists v. Nat’l Highway Traffic Safety Admin., No. 19-1230, consolidated with Nos. 19-1239, 1241, 1242, 1243, 1243, 1246, 1249, 1174, and 1178, (D.C. Cir., filed Dec. 26, 2019).

[20] California State Motor Vehicle Pollution Control Standards, 87 Fed. Reg. 14332 (Notice of Decision, Mar. 14, 2022).

[21] See, e.g., Toyota Motors North America, Comment Letter on California State Motor Vehicle Pollution Control Standards; Advanced Clean Car Program; Reconsideration of a Previous Withdrawal of a Waiver of Preemption, Docket No. EPA-HQ-OAR-2021-0257(July 6, 2021 at 4–5) (raising concerns of retroactive enforcement in public comments to EPA’s proposed reconsideration of California’s waiver).

[22] See Opportunity for Public Hearing and Public Comment; California State Motor Vehicle Pollution Control Standards, 89 Fed. Reg. 57151 (Jul. 12, 2024).

[23] CARB, Advanced Clean Fleets Regulation, Enforcement Notice (Dec. 28, 2023) https://ww2.arb.ca.gov/sites/default/files/2023-12/231228acfnotice_ADA.pdf.

[24] Truck and Engine Manufacturers Association, Comment Letter on California State Motor Vehicle Pollution Control Standards; Advanced Clean Fleets Regulation; Request for Waiver of Preemption and Authorization; Opportunity for Public Hearing and Comment, EPA-HQ-OAR-2023-0589 (Sept. 12, 2024) (“. . . to apply the waiver retroactively violates both the CAA and basic principles of due process. The Due Process Clause of the U.S. Constitution requires a government to provide individuals with “an opportunity (1) to know what the law is and (2) to conform their conduct accordingly. Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994). Retroactive laws contravene “the bedrock due process principle that the people should have fair notice of what conduct is prohibited.” PHH Corp. v. CFPB, 839 F.3d 1, 46 (D.C. Cir. 2016), reinstated in relevant part, 881 F.3d 75, 83 (D.C. Cir. 2018) (en banc). . . . Accordingly, applying CARB’s regulations retroactively would undermine due process generally and as specifically incorporated into the CAA’s preemption waiver provisions. As a result, it is clear that California has no authority to apply its mobile source standards until after a waiver is granted.”).

[25] CARB, Advanced Clean Fleets Regulation, Enforcement Notice (Dec. 28, 2023, updated Oct. 25, 2024) https://ww2.arb.ca.gov/sites/default/files/2024-10/241025acfnotice_ADA.pdf (stating CARB has “decided to exercise its enforcement discretion” to refrain from enforcement action as to certain aspects of the rule “until U.S. EPA grants a preemption waiver . . . or[]determines a waiver is not necessary.”).

[26] See Ohio v. EPA, 98 F.4th 288, 293 (DC Cir. 2024), petition for cert. filed, No. 24-450 (U.S. Oct. 22, 2024).

[27] Id. at 294.

[28] See Press Release, Office of Governor Gavin Newsom, Governor Newsom convenes a special session of the Legislature to protect California values (Nov. 7, 2024), https://www.gov.ca.gov/2024/11/07/special-session-ca-values/ (calling for the California Legislature to allocate additional funding for state agencies “to pursue robust affirmative litigation against any unlawful actions by the incoming Trump Administration, as well as defend against federal lawsuits aimed at undermining California’s laws and policies.”).

[29] See Blanca Begert and Alex Nieves, It’s Already Trump’s World. California Is Just Living In It., Politico (Oct. 15, 2024 5:00 AM EDT), https://www.politico.com/news/2024/10/15/trump-california-environment-supreme-court-00183585.

[30] Loper Bright Enterprises v. Raimondo, 603 U.S. ___, 144 S. Ct. 2244 (2024).

[31] Press Release, CARB, CARB and truck and engine manufacturers announce unprecedented partnership to meet clean air goals (July 6, 2023), https://ww2.arb.ca.gov/news/carb-and-truck-and-engine-manufacturers-announce-unprecedented-partnership-meet-clean-air.

[32] See, e.g., Timothy Puko and Ben Foldy, Justice Department Launches Antitrust Probe Into Four Auto Makers” Wall St. J. (Sept. 6, 2019, 5:55 PM ET), https://www.wsj.com/articles/justice-department-launches-antitrust-probe-into-four-auto-makers-11567778958.

The following Gibson Dunn lawyers prepared this update: Stacie Fletcher, Rachel Levick, and Veronica J.T. Goodson.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Environmental Litigation and Mass Tort practice group:

Environmental Litigation and Mass Tort:

Stacie B. Fletcher – Washington, D.C.
(+1 202.887.3627, [email protected])

Rachel Levick – Washington, D.C.
(+1 202.887.3574, [email protected])

Raymond B. Ludwiszewski – Washington, D.C.
(+1 202-955-8665, [email protected])

Veronica J.T. Goodson – Washington, D.C.
(+1 202.887.3719, [email protected])

The Final Rule brings the standard for determining when a person has “identified” an overpayment in line with the FCA’s knowledge standard and formalizes a six-month good-faith investigation period—but risks for providers remain.

Introduction

On November 1, 2024, the federal Centers for Medicare and Medicaid Services (CMS) issued a Final Rule (the “Final Rule“) regarding the identification, reporting, and return of overpayments by Medicare participants. The Final Rule applies to participants in Medicare Parts A through D––providers, suppliers, managed care organizations, Medicare Advantage organizations, and prescription drug plan sponsors. The Final Rule will be published in the Federal Register on December 9, 2024, and will go into effect on January 1, 2025.

Under the Affordable Care Act (ACA), recipients of federal health care program funds must report and return any overpayments within 60 days of “identifying” them. The Final Rule starts the 60-day clock for return of overpayments when an entity “knowingly receives or retains an overpayment,” replacing a prior standard—rejected in a 2018 court decision—that had started the clock at the point when an entity “should have determined through . . . reasonable diligence” that it received an overpayment. The Final Rule also introduces a 180-day suspension of the 60-day clock to allow for “good-faith” internal investigations into potential overpayments. Prior to the Final Rule, CMS had suggested that “most” such investigations should be completed within 180 days, but did not make that a formal deadline. However, investigations undertaken in good faith can last well over six months, and in finalizing the rule, CMS declined to reconsider the 180-day timeline or allow for extensions. Because the Final Rule also provides that the period for investigating overpayments ends at the latest when the 180-day suspension period ends, entities may face FCA challenges based on claims that investigations lasting longer than 180 days were not conducted in “good faith.”

Background

An “overpayment” occurs when CMS reimburses an entity for health care goods or services in excess of the amount to which the entity is entitled. Under the ACA, an entity must report and return an overpayment 60 days after the date on which the overpayment is “identified.”[1] The ACA does not specify what it means to “identify” an overpayment. An overpayment not returned by the appropriate deadline is considered an “obligation” under the “reverse” provision of the federal False Claims Act (FCA), which prohibits knowing and improper avoidance of an obligation to pay money to the government.[2]

In a series of regulations promulgated in 2014 and 2016, CMS stated that a Medicare participant “identifies” an overpayment when it “has determined, or should have determined through the exercise of reasonable diligence, that [it] has received an overpayment.”[3] This was essentially a negligence standard, and meant that reverse FCA liability could be premised on something less than recklessness, which is the minimum level of scienter the FCA requires. For several years, the CMS regulations remained intact, and in fact met with deference by some courts—most notably in the case of Kane ex rel. United States v. Healthfirst, Inc., 120 F. Supp. 3d 370 (S.D.N.Y. 2015). There, in analyzing reverse FCA allegations regarding Medicaid overpayments, the court credited CMS’s definition of “identified” in the Medicare context.[4]

Change came in UnitedHealthcare Ins. Co. v. Azar, which struck down the “reasonable diligence” standard.[5] The district court there held that the standard impermissibly created potential FCA liability based on mere negligence as to an obligation to return an overpayment, when the FCA itself requires at least reckless disregard.[6] In response to the UnitedHealthcare decision, CMS proposed a rule in late 2022 that—for the entire Medicare program—defined “identified” by reference to the relatively more stringent definition of “knowing” and “knowingly” contained in the FCA itself.[7]

Both the UnitedHealthcare decision and the 2022 Proposed Rule, however, left a key question unanswered, namely: how can providers avoid being charged with “knowledge” of an overpayment—within the meaning of the FCA—if they take longer than 60 days to conduct a good-faith investigation to determine whether overpayments have occurred? Particularly in large organizations with high volumes of claims, the running of that clock without any action to return monies to the government is very often a sign that a good-faith investigation into potential overpayments remains underway, not that overpayments were quickly identified and are being concealed or disregarded.

While the Final Rule provides a measure of clarity, it ultimately does not answer this question—and in fact, it creates new risks for providers facing potential FCA challenges.

Changes Effectuated by the Final Rule

At the most basic level, the Final Rule codifies the UnitedHealthcare court’s holding by providing that the 60-day clock for repayments begins when an entity “knowingly receives or retains an overpayment,” and explicitly incorporates the FCA’s definition of the word “knowingly.”[8]

The Final Rule also introduces a new provision ostensibly aimed at affording Medicare participants time to conduct internal investigations into potential overpayments. In 2015, CMS acknowledged that such investigations could take around 180 days, but prior to now the agency had not implemented either a requirement that such investigations be completed in that timeframe or an explicit provision tolling the deadline for return of overpayments pending such investigations.[9] The Final Rule, dovetailing off of CMS’s observation in 2015, provides for a maximum 180-day suspension of the 60-day clock to allow providers to conduct internal investigations.[10] In particular, the 180-day suspension applies if a provider has identified at least one overpayment and conducts a “good-faith investigation to determine the existence of related overpayments.”[11]

While the 180-day period seems aimed at providing greater clarity around CMS’s expectations for the timeline for investigating potential overpayments, a six-month investigation period is likely to prove a poor fit for many Medicare participants. Smaller providers facing relatively straightforward overpayment issues may have little trouble completing investigations in 180 days. But larger institutions such as hospitals—for which potential overpayments could span multiple providers and disease states and involve a variety of personnel over long periods of time—are likely to face significant challenges investigating and calculating potential overpayments on a six-month timeframe. Such investigations require time not only by compliance personnel but also by caregivers themselves, who are expected to provide information to aid in the investigation while juggling the non-stop realities of patient care and the operation of the enterprise itself. Even a fast-moving investigation in this sort of setting could easily take more than six months to yield conclusions.

That much could perhaps be addressed by a longer investigation period, at least for large institutional providers. But the Final Rule exacerbates the challenges for such providers by providing that the investigation period closes either when the aggregate overpayments have been identified and calculated or when 180 days have passed.[12] Because the Final Rule states that only a “good-faith” investigation will trigger the 180-day suspension period, the rule creates a risk that the government—or FCA relators—will argue that any investigation longer than 180 days was not conducted in “good faith,” and thus that any provider that does not return putative overpayments within 60 days after the expiration of the 180-day window has acted “knowingly” and faces reverse FCA liability for that reason. As the previous CMS guidance did, the Final Rule leaves open what types of information or scenarios would trigger an obligation to investigate short of having “actual knowledge” of the potential overpayment.

The comments CMS received on the Proposed Rule pointed to the challenges of completing an investigation of potential overpayments within six months. CMS acknowledged that they “heard from many commentators on the issue of time needed for investigations and calculations of overpayments,” and that some comments proposed that the rule include a process to extend the 180-day period for complex investigations, or include an 8-month investigation suspension.[13] Nonetheless, CMS stated that general support for codification of an investigatory period led them to believe that they had “appropriately balanced the needs of providers and suppliers with the required statutory mandates.”[14] It remains to be seen whether or not courts agree with that assertion—particularly in the wake of the Supreme Court’s Loper Bright decision, which empowers federal courts to independently evaluate, rather than defer to, federal agencies’ interpretations of the statutes they implement.[15] For now, Medicare participants undertaking complex overpayment investigations may be faced with a difficult choice in some cases: investigate for longer than 180 days and risk an accusation of “bad faith,” or somehow make a repayment to the payor before the potential overpayment is confirmed and/or quantified. The dilemma appears designed to force on providers a commitment of resources to quickly investigate potential overpayments that may not be available in all cases. Among other questions about how the Final Rule will be implemented, it remains to be seen whether CMS, Medicare Administrative Contractors, and/or potential FCA enforcers will be willing to consider a provider’s facts and circumstances in cases where investigative deadlines cannot be met. Additionally, while this Final Rule is specific to Medicare, FCA cases in other regulatory contexts regularly present the question of the appropriate timeline for internal investigations to identify potential overpayments. It remains to be seen whether the 180-day suspension period and the “good faith” requirement—and the risks they pose—have broader implications for defendants facing FCA investigations and litigation outside the health care arena.

Gibson Dunn will continue to monitor developments related to the Final Rule. And, of course, we would be happy to discuss these developments—and their implications for your business—with you.

[1] 42 U.S.C. § 1320-7k(d).

[2] Id.; 31 U.S.C. § 3729(a)(1)(g).

[3] See, e.g., 42 C.F.R. § 422.326(c) (Medicare Advantage rule); 42 C.F.R. § 401.305(a)(2) (Part A and B rule), 42 C.F.R. § 423.360(c) (Part D rule).

[4] 120 F. Supp. 3d at 383-93.

[5] 330 F. Supp. 3d 173 (D.D.C. 2018), rev’d on other grounds sub nom. UnitedHealthcare Ins. Co. v. Becerra, 16 F.4th 867 (D.C. Cir. 2021).

[6] UnitedHealthcare Ins. Co. v. Azar, 330 F. Supp. 3d at 191.

[7] Contract Year 2024 Medicare Parts A, B, C, and D Overpayment Provisions, 87 Fed. Reg. 79452, 79559 (Dec. 27, 2022).

[8] Dep’t of Health & Hum. Servs., Centers for Medicare & Medicaid Servs., RIN 0938-AV33 and 0938-AU96, at 2446 (emphasis added).

[9] Medicare Program; Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs, 79 Fed. Reg. 29,844, 29,923 (May 23, 2014).

[10] Dep’t of Health & Hum. Servs., Centers for Medicare & Medicaid Servs., RIN 0938-AV33 and 0938-AU96, at 2447.

[11] Id.

[12] Id.

[13] Id. at 1871-72.

[14] Id. at 1871.

[15] Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2273 (2024).

The following Gibson Dunn lawyers prepared this update: Jonathan Phillips, Winston Chan, Michael Dziuban, and Heather Skrabak.

Gibson Dunn lawyers regularly counsel clients on the False Claims Act issues and are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s False Claims Act/Qui Tam Defense practice group:

Washington, D.C.
Jonathan M. Phillips – Co-Chair (+1 202.887.3546, [email protected])
Stuart F. Delery (+1 202.955.8515,[email protected])
F. Joseph Warin (+1 202.887.3609, [email protected])
Gustav W. Eyler (+1 202.955.8610, [email protected])
Lindsay M. Paulin (+1 202.887.3701, [email protected])
Geoffrey M. Sigler (+1 202.887.3752, [email protected])
Joseph D. West (+1 202.955.8658, [email protected])

San Francisco
Winston Y. Chan – Co-Chair (+1 415.393.8362, [email protected])
Charles J. Stevens (+1 415.393.8391, [email protected])

New York
Reed Brodsky (+1 212.351.5334, [email protected])
Mylan Denerstein (+1 212.351.3850, [email protected])

Denver
John D.W. Partridge (+1 303.298.5931, [email protected])
Ryan T. Bergsieker (+1 303.298.5774, [email protected])
Robert C. Blume (+1 303.298.5758, [email protected])
Monica K. Loseman (+1 303.298.5784, [email protected])

Dallas
Andrew LeGrand (+1 214.698.3405, [email protected])

Los Angeles
James L. Zelenay Jr. (+1 213.229.7449, [email protected])
Nicola T. Hanna (+1 213.229.7269, [email protected])
Jeremy S. Smith (+1 213.229.7973, [email protected])
Deborah L. Stein (+1 213.229.7164, [email protected])
Dhananjay S. Manthripragada (+1 213.229.7366, [email protected])

Palo Alto
Benjamin Wagner (+1 650.849.5395, [email protected])

From the Derivatives Practice Group: The CFTC Global Markets Advisory Committee will hold a virtual meeting on November 21 to discuss expanding the use of non-cash collateral through the use of distributed ledger technology.

New Developments

CFTC Warns of Potential Dangers for Messaging App Users. On October 31, the CFTC Office of Customer Education and Outreach released a customer advisory alerting messaging app users to beware of schemes to defraud them of assets, specifically crypto assets. Fraudsters are exploiting the default settings of commonly used messaging apps, telephone networks, and mobile devices to lure users into crypto pump-and-dump schemes and other scams. [NEW]
Commissioner Pham Announces CFTC Global Markets Advisory Committee Meeting on November 21. CFTC Commissioner Caroline D. Pham, sponsor of the Global Markets Advisory Committee (“GMAC”), announced the GMAC will hold a virtual public meeting Thursday, Nov. 21, from 9:30 a.m. to 10:30 a.m. EST. At this meeting, the GMAC will hear a presentation by the Tokenized Collateral workstream of the GMAC’s Digital Asset Markets Subcommittee on expanding use of non-cash collateral through use of distributed ledger technology and consider a recommendation from the Subcommittee. The meeting will also include a presentation by the Utility Tokens workstream of the Digital Asset Markets Subcommittee summarizing their work to-date on defining utility tokens and developing guidance for market participants. [NEW]
SEC Adopts Rule Amendments and New Rule to Improve Risk Management and Resilience of Covered Clearing Agencies. On October 25, the SEC adopted rule amendments and a new rule to improve the resilience and recovery and wind-down planning of covered clearing agencies. The rule amendments establish new requirements regarding a covered clearing agency’s collection of intraday margin as well as a covered clearing agency’s reliance on substantive inputs to its risk-based margin model. The new rule prescribes requirements for the contents of a covered clearing agency’s recovery and wind-down plan. The rule amendments require that a covered clearing agency that provides central counterparty services has policies and procedures to establish a risk-based margin system that monitors intraday exposures on an ongoing basis, includes the authority and operational capacity to make intraday margin calls as frequently as circumstances warrant (including when risk thresholds specified by the covered clearing agency are breached or when the products cleared or markets served display elevated volatility), and documents when the covered clearing agency determines not to make an intraday call pursuant to its written policies and procedures. [NEW]
SEC Division of Examinations Announces 2025 Priorities. On October 21, the SEC’s Division of Examinations released its 2025 examination priorities. The Division of Examinations indicated that it will continue to focus on whether security-based swap dealers (“SBSDs”) have implemented policies and procedures related to compliance with security-based swap rules generally, including whether they are meeting their obligations under Regulation SBSR to accurately report security-based swap transactions to security-based swap data repositories and, where applicable, whether they are complying with relevant conditions in SEC orders governing substituted compliance. For other SBSDs, the Division of Examinations said that it may focus on SBSDs’ practices with respect to applicable capital, margin, and segregation requirements and risk management. The Division of Examinations also indicated that it expects to assess whether SBSDs have taken corrective action to address issues identified in prior examinations. Additionally, the Division of Examinations advised that it may begin conducting examinations of registered security-based swap execution facilities in late fiscal year 2025.

New Developments Outside the U.S.

ESAs Publish 2024 Joint Report on Principal Adverse Impacts Disclosures Under the Sustainable Finance Disclosure Regulation. On October 30, the European Supervisory Authorities (“ESAs”) published their third annual Report on disclosures of principal adverse impacts under the Sustainable Finance Disclosure Regulation (“SFDR”). The Report assesses both entity and product-level Principal Adverse Impact disclosures under the SFDR. These disclosures aim at showing the negative impact of financial institutions’ investments on the environment and people and the actions taken by asset managers, insurers, investment firms, banks and pension funds to mitigate them. [NEW]
The ESAs Finalize Rules to Facilitate Access to Financial and Sustainability Information on the ESAP. On October 29, the ESAs published the Final Report on the draft implementing technical standards (“ITS”) regarding certain tasks of the collection bodies and functionalities of the European Single Access Point (“ESAP”). The requirements are designed to enable future users to be able to access and use financial and sustainability information effectively and effortlessly in a centralized ESAP platform. [NEW]
ESMA Consults on Amendments to MiFID Research Regime. On October 28, ESMA launched a consultation on amendments to the research provisions in the Markets in Financial Instruments II (“MiFID II”) Delegated Directive following changes introduced by the Listing Act. The Listing Act introduces changes that enable joint payments for execution services and research for all issuers, irrespective of the market capitalization of the issuers covered by the research. The Consultation Paper includes proposals to amend Article 13 of the MiFID II Delegated Directive in order to align it with the new payment option offered. [NEW]
ESMA Responds to the Commission Rejection of Certain MiCA Technical Standards. On October 16, ESMA responded to the European Commission proposal to amend the Markets in crypto-assets Regulation (“MiCA”) Regulatory Technical Standards (“RTS”). In their response, ESMA emphasized the importance of the policy objectives behind the initial proposal.
ESAs Respond to the European Commission’s Rejection of the Technical Standards on Registers of Information under the Digital Operational Resilience Act and Call for Swift Adoption. On October 15, the ESAs issued an Opinion on the European Commission’s rejection of the draft ITS on the registers of information under the Digital Operational Resilience Act. The ESAs raise concerns over the impacts and practicalities of the proposed EC changes to the draft ITS on the registers of information in relation to financial entities’ contractual arrangements with ICT third-party service providers.
ESMA, ECB and EC Announce Next Steps for the Transition to T+1 Governance. On October 15, ESMA, the European Commission and the European Central Bank announced the next steps to support the preparations towards a transition to T+1 in a Joint Statement. ESMA stressed in the Joint Statement that they believe a coordinated approach across Europe is desirable, with efforts to reach consensus on the timing of any move to T+1.

New Industry-Led Developments

ISDA Letter to FASB on Share-based Payment from a Customer in a Revenue Contract. On October 21, ISDA submitted a response to the Financial Accounting Standards Board (“FASB”) on File Reference No. 2024-ED100, Derivatives Scope Refinements and Scope Clarification for a Share-based Payment from a Customer in a Revenue Contract. ISDA believes the FASB’s proposal will improve the application and relevance of the Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606) guidance and has provided potential refinements to the guidance in the letter. [NEW]
Central Database of Reporting Entity Contact Details for EU and UK EMIR. On October 17, ISDA produced a central database of contact details to assist members resolve reconciliation breaks with counterparties for EU and UK European Market Infrastructure Regulation (“EMIR”) reporting. The central database was created by contributing firms’ submissions and includes details such as entity names, legal entity identifiers and reporting contact emails.
ISDA, GFXD respond to ESMA on Order Execution Policies. On October 16, ISDA and the Global FX Division of the Global Financial Markets Association responded to a consultation paper from ESMA on “Technical Standards specifying the criteria for establishing and assessing the effectiveness of investment firms’ order execution policies.” In the response, the associations discuss the requirement for pre-selected execution venues, mandatory consumption of consolidated tapes and categorization of financial instruments under the Markets in Financial Instruments Regulation, among other issues.

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

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

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])

Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])

Darius Mehraban, New York (212.351.2428, [email protected])

Jason J. Cabral, New York (212.351.6267, [email protected])

Adam Lapidus – New York (212.351.3869, [email protected] )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

William R. Hallatt , Hong Kong (+852 2214 3836, [email protected] )

David P. Burns, Washington, D.C. (202.887.3786, [email protected])

Marc Aaron Takagaki , New York (212.351.4028, [email protected] )

Hayden K. McGovern, Dallas (214.698.3142, [email protected])

Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])

An overview of International Trade considerations that most frequently impact deal timing, valuation, and ability to operate after closing.

In today’s global economy, geopolitical risks are on the rise and international trade controls are a tool of first resort deployed by the United States and other jurisdictions to achieve foreign policy and national security goals. International trade controls include financial and trade sanctions, export and import controls, national security reviews of foreign direct investment, and (anticipated) controls on outbound investment. These controls can have an impact on a target’s valuation, ability to continue operating in the same manner or in the same jurisdictions as prior to an acquisition or affect deal timing and certainty. Liability for a target’s past conduct can be imputed to the buyer in many circumstances, including for strict liability offenses.

In addition to potential civil and criminal liability, violations of international trade laws can result in other adverse consequences for buyers, including substantial reputational harm, costly government investigations or monitorships, or even halting the deal. Many acquisition targets—especially smaller, fast-growing targets—may lack adequate policies and procedures to mitigate the risk of violating applicable international trade laws. Therefore, it is critical to understand a target’s risk profile, internal controls, and potential exposure to regulatory, commercial, and reputational risks during pre-acquisition due diligence.

1. Dealings with Sanctioned Parties and Sanctioned Jurisdictions

Whether a target is transacting business in violation of applicable U.S. sanctions is often a top concern for buyers and insurers alike. Unlike some other areas of the law, corporate formality in the structure of an acquisition will not always insulate a buyer from civil liability for past violations of the target. Rather, in enforcing U.S. sanctions, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) is usually willing to “pierce the corporate veil.” Nor will a buyer’s lack of knowledge regarding the target’s past sanctions violations necessarily shield it from liability. Even inadvertent violations of U.S. sanctions can result in substantial monetary penalties, at times in the tens of millions, and occasionally beyond. In April of this year, the statute of limitations for sanctions violations was expanded from 5 to 10 years.

Consequently, it is critical to focus on potential exposure to sanctioned persons or sanctioned jurisdictions during pre-acquisition due diligence. U.S. sanctions requirements can be understood to fall into two broad categories:

Dealings with sanctioned parties: U.S. sanctions generally prohibit U.S.-linked business involving “blocked” persons or entities listed on OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SDN List“). Pursuant to OFAC’s 50 Percent Rule, these broad prohibitions extend to entities owned 50% or more by blocked persons, whether directly or indirectly and whether by a single blocked person or in the aggregate.
Dealings with sanctioned jurisdictions: U.S. sanctions generally prohibit U.S.-linked business involving “comprehensively-sanctioned” jurisdictions, which, as of this writing, include Cuba, Iran, Syria, North Korea, Crimea, and the so-called Luhansk People’s Republic and Donetsk People’s Republic regions of Ukraine.

In addition to direct prohibitions on U.S.-nexus dealings, U.S. persons are generally prohibited from “facilitating” foreign transactions that involve a sanctioned party or sanctioned jurisdiction. Consequently, it is essential to ensure that target companies with an international footprint have adequate policies and procedures in place to avoid and detect transactions that may be prohibited by applicable sanctions.

OFAC encourages companies to employ a “risk-based approach” in designing and deploying sanctions compliance programs (see OFAC’s “Framework for Compliance Commitments“). Risk factors include a company’s size and sophistication, products and services, customers and counterparties, and geographic locations. An adequate sanctions compliance program will often include the use of counterparty “screening” tools (which compare counterparty information, including ultimate beneficial owners, against the SDN List and other relevant restricted party lists) as well as procedures for escalating transactions that pose an unacceptable risk of violating applicable sanctions. Screening protocols should be calibrated according to risk profile as well, including use of “fuzzy logic” algorithms. For some targets, reasonable sanctions compliance measures should include Internet Protocol address-based geo-blocking to prevent persons in sanctioned jurisdictions from accessing a company’s online platform or products.

2. Dealings with Russia, Belarus, and Assessing Diversion Risk

Since Russia’s 2022 full-scale invasion of Ukraine, the United States, in coordination with its allies and partners, has imposed a wide range of restrictions on trade with Russia and Belarus. For example, the United States has prohibited new investment in Russia, the importation into the United States of energy products from Russia, and the exportation of any military or dual-use products to Russia. In addition, OFAC has designated thousands of Russian persons and entities, including Russian oligarchs and family members, and imposed severe restrictions on dealings with Russia’s banking, financial, energy, and military-industrial sector. OFAC has prohibited the provision of certain professional services, to persons located in Russia, including accounting, trust and corporate formation, management consulting, quantum computing, architecture, engineering, certain maritime transportation-related services, and IT services, among others. The Department of Commerce’s Bureau of Industry and Security (“BIS”) has imposed stringent export controls targeting Russia and Belarus, which cover a wide range of industrial and commercial items. In some cases, these restrictions extend to products made outside of the United States that depend upon U.S.-origin software, technology, or tools. As such, any business involving Russia and Belarus, directly or indirectly, can pose substantial international trade-related risks—especially if the target maintains a Russian subsidiary or branch office.

U.S. authorities have been particularly focused on diversion risk and efforts by companies to detect and prevent the illicit transfer of goods to restricted destinations via intermediaries and shell companies. More broadly, acquiring a target that is based in a jurisdiction that has not adopted export controls similar to those maintained in G7 states can carry elevated risk of unlawful diversion in violation of applicable sanctions and export controls. While virtually every industry is potentially at risk, the United States and its partners have issued advisories identifying high priority items that Russia is seeking to support its war effort and high-risk industries, for which trade with Russia is severely curtailed. Buyers should be on the lookout for trading patterns of a target that show a substantial shift in trade away from Russia to identified diversion points, or sudden spikes in sales to higher risk jurisdictions.

3. Export Controls

Many targets, including targets that are not traditional “manufacturers” (such as many producers of software), will also carry compliance obligations under export controls set forth in the Export Administration Regulations (“EAR”). Export controls are used by the United States and other nations to restrict the export of items that would contribute to the military potential of adversary countries or to restrict the export of items necessary to further foreign policy objectives and uphold treaty obligations. U.S. export controls have a broad extraterritorial reach, since the obligation to comply with requirements follows U.S. items wherever they are located and, in some instances, extends to foreign-made products that rely upon U.S.-origin technology, software, or tools. Export control requirements can apply based on the technical parameters and performance capabilities of an item or based upon the intended destination, end user, or end use. In some circumstances, the release of technology to a foreign national may require an export license as a “deemed export” to the country of residence of the recipient of the information.

Export control risks are most commonly presented in acquisitions of target companies that produce items with potential defense applications (i.e., “dual-use” items). These targets oftentimes operate in the aerospace, software, connected devices, and specialized and high-tech manufacturing industries. Of special relevance to targets operating in the software and high-tech industries, most encryption technology and software is subject to specialized export controls. Companies operating in these sectors, therefore, must maintain adequate policies and procedures in order to classify and, if applicable, fulfill the reporting requirements set forth in license exception ENC.

Export controls are a fast-developing area of international trade law. For example, on September 6, 2024, BIS published new regulations to control certain advanced and emerging technologies, including quantum computing, semiconductor manufacturing equipment, and additive manufacturing. These regulations represent an early step towards establishing a plurilateral export control regime to eventually replace the Wassenaar Arrangement, the legacy multilateral export control regime that includes Russia. BIS has also signaled its intent to increase penalties and enhance its enforcement efforts, in conjunction with international export control authorities. It is especially likely, therefore, that export controls-related due diligence obligations will expand during 2025.

4. CFIUS Risk

The Committee on Foreign Investment in the United States (“CFIUS“) reviews foreign direct investments in U.S. businesses for national security risks. CFIUS examines certain transactions in which foreign entities gain control or make certain non-controlling investments in U.S. businesses. At the conclusion of its assessment, CFIUS may impose restrictions that address U.S. national security risks arising from those transactions. In 2018, the Foreign Investment Risk Review and Modernization Act expanded the scope of transactions subject to CFIUS review to include (i) certain non-controlling investments in U.S. businesses that implicate critical technology, critical infrastructure, or sensitive personal data of U.S. citizens and (ii) real estate located near sensitive U.S. military installations. CFIUS devotes particular attention to transactions with investors from adverse jurisdictions and transactions that implicate defense and other key supply chains or emerging technologies, such as AI.

The CFIUS review process, which typically begins with the transaction parties filing a mandatory or voluntary notice to CFIUS, can take 4-6 months or longer. Consequently, where an acquisition implicates CFIUS jurisdiction, deal timing should accommodate the time to submit a notification and receive clearance prior to closing. A completed CFIUS review grants “safe harbor,” preventing future scrutiny from CFIUS. Without this safe harbor, CFIUS retains discretion to review and place conditions on transactions after they have been completed. There is no statute of limitations to CFIUS’s ability to review closed transactions. In relatively rare circumstances, CFIUS may also recommend that the President block or unwind a transaction. CFIUS can assess monetary penalties on parties for failure to make a mandatory filing, for making material misstatements or omissions in a filing, or for failure to comply with a national security mitigation agreement.

5. Outbound Investment: “Reverse CFIUS” Risk

It is widely anticipated that the Department of the Treasury will promulgate “reverse CFIUS” outbound investment regulations during the next year. Currently, these regulations are expected to target investments made by U.S. persons in China, Hong Kong, or Macau and involving certain categories of technologies, including the development and production of semiconductors and microelectronics, quantum information technologies, and artificial intelligence systems. Proposed rules would impose recordkeeping and notification requirements on U.S.-person investors. Additionally, certain investments in advanced critical technologies may be prohibited. Diligence obligations during acquisitions will likely mirror those under current CFIUS regulations to identify transactions within the scope of the outbound investment regime.

6. Forced Labor and Importation Concerns

Some targets will present risks under the Uighur Forced Labor Prevention Act (“UFLPA”). The UFLPA presumptively bars from entry into the United States all products that are manufactured in China’s Xinjiang Uyghur Autonomous Region or produced by a list of entities that have been designated by the interagency Forced Labor Enforcement Task Force (“FLETF”), unless the importer can present “clear and convincing” evidence that the product has not been tainted by the use of forced labor. U.S. Customs and Border Protection (“CBP”), which enforces the UFLPA, has been remarkably aggressive in enforcing these provisions. The UFLPA does not contain a de minimis exception, and CBP has barred shipments from entry into the United States where the goods contained under 1% of Xinjiang-origin content by value.

Accordingly, in addition to reviewing the target’s documentation and conducting interviews with management, it may be necessary in some cases to use business intelligence platforms to “screen” targets and their counterparties for risks related to forced labor in the supply chain. Notably, owing to the absence of a de minimis exception, the UFLPA authorizes CBP to detain shipments that are not themselves manufactured in Xinjiang but contain inputs that originate, in whole or in part, in Xinjiang. As such, even targets that depend on imports from third countries, such as Vietnam, may present elevated risk of violating the UFLPA depending on the products involved.

7. Defense Sector Controls

There are unique considerations for targets operating in the defense sector, even if the target only handles defense-related items as a minority of its sales. In particular, the International Traffic in Arms Regulations (“ITAR”) apply to defense articles, defense services, and related technology. The ITAR, like the EAR, “follow the item” and therefore have broad extraterritorial application. Under the ITAR, persons engaged in the business of manufacturing, exporting or temporarily importing defense articles, or furnishing defense services, are required to register with the Department of State’s Directorate of Defense Trade Controls (“DDTC”). When a registered target is acquired, the target and the buyer are required to notify DDTC within five days of the closing. Where a buyer is a non-U.S. person, the buyer and target must submit a notice to DDTC at least 60 days before closing. These requirements apply even if the transaction is an acquisition of assets or a sale in the course of bankruptcy. A transaction that involves an ITAR registrant that occurs in a multi-step process could trigger multiple notifications. In addition to registration, any export licenses that the target holds authorizing it to send defense articles outside of the United States must be requested to transfer to the new parent entity. It is essential that deal timelines accommodate registration, notification, and transfer requirements, as failure to do so could result in a disruption of business activities.

8. Managing Legacy International Trade Issues

If a target company has failed to adhere to relevant international trade controls, post-closing remediation may be necessary, including the possibility of self-disclosure to relevant government agencies. Under enforcement policies of the U.S. Department of Justice’s National Security Division and the U.S. Department of Commerce, the prompt self-disclosure of a target company’s apparent violations of sanctions and export control laws that occurred prior to acquisition may be eligible for significant mitigation credit. Conversely, a target company that has made serial self-disclosures may have systemic compliance issues, which may result in significant penalties for the buyer. In addition, compliance commitments and consent agreement terms may apply to buyers and related entities, even following acquisition.

Our attorneys are leading industry experts, and we regularly advise on international trade matters on behalf of the world’s largest companies. We efficiently identify the costs and resources needed to implement post-acquisition remediation and assist in integrating the international trade practices of target companies into buyers’ global organizations. We also help manage target companies’ pre-existing compliance gaps and provide holistic assessments on the impacts of such events on the transaction or the buyer’s business.

The following Gibson Dunn lawyers prepared this update: Adam M. Smith, Christopher Timura, Stephenie Gosnell Handler, Robert Little, Saee Muzumdar, George Sampas, Samantha Sewall, Michelle Weinbaum, and Zach Kosbie.

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

International Trade:
Adam M. Smith – Washington, D.C. (+1 202.887.3547, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, [email protected])
Samantha Sewall – Washington, D.C. (+1 202.887.3509, [email protected])
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, [email protected])

Mergers and Acquisitions:
Robert B. Little – Dallas (+1 214.698.3260, [email protected])
Saee Muzumdar – New York (+1 212.351.3966, [email protected])
George Sampas – New York (+1 212.351.6300, [email protected])

Private Equity:
Richard J. Birns – New York (+1 212.351.4032, [email protected])
Ari Lanin – Los Angeles (+1 310.552.8581, [email protected])
Michael Piazza – Houston (+1 346.718.6670, [email protected])
John M. Pollack – New York (+1 212.351.3903, [email protected])

From the Derivatives Practice Group: On October 2, the U.S. Court of Appeals for the D.C. Circuit upheld the order that permits KalshiEX LLC to list contracts that allow Americans to bet on election outcomes.

New Developments

US Appeals Court Clears Kalshi to Restart Elections Betting. On October 2, the U.S. Court of Appeals for the D.C. Circuit upheld the D.C. District Court’s order that permitted derivatives trading platform KalshiEX LLC to list contracts that allow Americans to bet on election outcomes. The Court said that the CFTC did not show how the agency or the public interest would be harmed by the “event” contracts. The CFTC’s motion was denied “without prejudice to renewal should more concrete evidence of irreparable harm develop during the pendency of appeal.” [NEW]
CFTC’s Division of Clearing and Risk Announces Staff Roundtable Discussion on New and Emerging Issues in Clearing. On September 27, the CFTC announced that the Division of Clearing and Risk will hold a public roundtable on October 16, to discuss existing, new, and emerging issues in clearing. The roundtable will be held in the Conference Center at CFTC’s headquarters at Three Lafayette Centre, 1155 21st Street N.W., Washington, D.C. The roundtable will include participants from derivatives clearing organizations, futures commission merchants (“FCM”), FCM customers, end-users, custodians, proprietary traders, public interest groups, state regulators, and others. The goal of the roundtable is to gather information and receive expert input from a wide variety of stakeholder groups. Topics to be covered include the custody and delivery of digital assets, digital assets and margin, full collateralization, 24/7 trading, non-intermediated clearing with margin, and conflicts of interest related to vertically integrated entities. [NEW]
CFTC Requests Public Comment on a Rule Certification Filing by KalshiEX LLC. On September 26, the CFTC requested public comment on a rule certification filing by KalshiEX LLC, which would amend its rulebook to include rules for a request for quote functionality and amendments to its prohibited transactions rule. The CFTC previously stayed KalshiEX LLC’s filing because, according to the CFTC, the submission presents novel or complex issues that require additional time to analyze and is potentially inconsistent with the Commodity Exchange Act or the CFTC’s regulations. Comments must be submitted on or before October 28, 2024.
CFTC Staff Extends No-Action Position for Certain Reporting Obligations Under the Ownership and Control Reports Final Rule. On September 25, the CFTC’s Division of Market Oversight (“DMO”) issued a no-action letter that extends the current no-action position for reporting obligations under the ownership and control reports final rule (“OCR Final Rule”). The OCR Final Rule, approved in 2013, requires the electronic submission of trader identification and market participant data for special accounts and volume threshold accounts through Form 102 and Form 40. DMO said that it is extending its no-action position to address continuing compliance difficulties associated with certain ownership and control reporting obligations identified by reporting parties and market participants. The position extends DMO’s position under CFTC Letter No. 23-14, stating that DMO will not recommend the CFTC commence an enforcement action for non-compliance with certain obligations. These obligations include, among others, the timing of ownership and control report form filings; certain information required to be reported regarding trading account controllers and volume threshold account controllers on Form 102; the reporting threshold that triggers the reporting of a volume threshold account on Form 102; the filing of refresh updates for Form 102; and responses to certain questions on Form 40. The no-action position will remain in effect until the later of the applicable effective date or compliance date of a CFTC action, such as a rulemaking or order, addressing such obligations.
CFTC Announces Four Orders Granting Whistleblower Awards – Marking the Most in a Single Day. On September 23, the CFTC announced awards totaling approximately $4.5 million for whistleblowers who, collectively, provided information that led to the success of multiple enforcement actions brought by the CFTC and another authority. The four orders granting awards, to a total of seven whistleblowers, are the most the CFTC has issued on a single day.
CFTC Staff Extends Temporary No-Action Letter Regarding Capital and Financial Reporting for Certain Non-U.S. Nonbank Swap Dealers Domiciled in the EU and the UK. On September 20, the CFTC’s Market Participants Division (“MPD”) announced it issued a temporary no-action letter extending CFTC Staff Letters No. 21-20 and 22-10 to certain nonbank swap dealers (“SDs”) domiciled in the EU and the UK that are the subject of pending CFTC reviews for comparability determinations regarding capital and financial reporting requirements. As part of the capital and financial reporting requirements for nonbank SDs, the CFTC adopted a substituted compliance framework that permits certain nonbank SDs to rely on compliance with home-country capital and financial reporting requirements in lieu of meeting all or parts of the CFTC’s capital adequacy and financial reporting requirements, provided the CFTC finds the home-country requirements comparable to the CFTC’s requirements. Through CFTC Staff Letter No. 24-13, issued on September 20, MPD is extending a no-action position to eligible nonbank SDs domiciled in the EU and the UK that are not covered by existing CFTC orders addressing capital and financial reporting requirements. The no-action position is conditioned upon the nonbank SDs remaining in compliance with applicable home-country capital and financial reporting requirements and submitting certain financial reporting information to the CFTC. The no-action position will expire by December 31, 2026 or the effective date of any final CFTC action addressing the comparability of capital and financial reporting requirements applicable to the relevant nonbank SDs.
CFTC Approves Final Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts. On September 20, the CFTC approved final guidance regarding the listing for trading of voluntary carbon credit derivative contracts. The guidance applies to designated contract markets (“DCMs”), which are CFTC-regulated derivatives exchanges, and outlines factors for DCMs to consider when addressing certain Core Principle requirements in the Commodity Exchange Act and CFTC regulations that are relevant to the listing for trading of voluntary carbon credit derivative contracts. The guidance also outlines factors for consideration when addressing certain requirements under the CFTC’s Part 40 Regulations that relate to the submission of new derivative contracts, and contract amendments to the CFTC.

New Developments Outside the U.S.

ESMA Launches New Consultations Under the MiFIR Review. On October 3, ESMA launched two consultations on transaction reporting and order book data under the Markets in Financial Instruments Regulation (“MiFIR”) Review. ESMA is seeking input on the amendments to the regulatory technical standards (“RTS”) for the reporting of transactions and to the RTS for the maintenance of data relating to orders in financial instruments. [NEW]
Joint UK Regulators Issue Press Release on the End of LIBOR. On October 1, the Bank of England published a joint press release with the FCA and the Working Group on Sterling Risk-Free Reference Rates on the end of LIBOR. On September 30, the remaining synthetic LIBOR settings were published for the last time and LIBOR came to an end. All 35 LIBOR settings have now permanently ceased. The Working Group has met its objective of finalizing the transition away from LIBOR and will be wound down effective as of October 1. Market participants are encouraged to continue to ensure they use the most robust rates for the relevant currency and should ensure their use of term risk-free reference rates are limited and remain consistent with the relevant guidance on best practice on the scope of use. [NEW]
ESAs Appoint Director to Lead their DORA Joint Oversight. On October 1, the European Supervisory Authorities appointed Marc Andries to lead their new joint Directorate in charge of oversight activities for critical third-party providers established by the Digital Operational Resilience Act (“DORA”). In his role as DORA Joint Oversight Director, Marc Andries will be responsible for implementing and running an oversight framework for critical third-party service providers at a pan-European scale, contributing to the smooth operations and stability of the EU financial sector. [NEW]
ESMA 2025 Work Programme: Focus on Key Strategic Priorities and Implementation of New Mandates. On October 1, ESMA published its 2025 Annual Work Programme (AWP). A significant portion of ESMA’s work in 2025 will comprise policy work to facilitate the implementation of the large number of mandates received in the previous legislative cycle, and the preparation of new mandates, such as the European Green Bonds and the ESG Rating Providers Regulations. [NEW]
ESMA Announces Next Steps for the Selection of Consolidated Tape Providers. On September 30, ESMA announced it will launch the selection procedure for Consolidated Tapes Providers (“CTPs”) bonds on January 3, 2025. In June 2025, ESMA will launch the selection procedure for the CTP for shares and Exchange-Traded Funds with the objective to adopt a reasoned decision on the selected applicant by the end of 2025. [NEW]
SFC and HKMA Publish Conclusions on Enhancements to OTC Derivatives Reporting Regime for Hong Kong. On September 26, the Securities and Futures Commission and the Hong Kong Monetary Authority jointly published conclusions on proposed enhancements to the over-the-counter (“OTC”) derivatives reporting regime for Hong Kong, indicating that they will mandate (i) the use of unique transaction identifiers, (ii) the use of unique product identifiers and (iii) the reporting of critical data elements beginning on September 29, 2025.

New Industry-Led Developments

ISDA Responds to UK FCA Consultation on DTO and PTRRS. On September 30, ISDA responded to Financial Conduct Authority (“FCA”) consultation CP24/14 on the derivatives trading obligation (“DTO”) and post-trade risk reduction services (“PTRRS”). In the response, ISDA highlights its support for including certain overnight index swaps based on the US Secured Overnight Financing Rate within the classes of derivatives subject to the DTO and expanding the list of PTRRS exempted from the DTO and other obligations. [NEW]
ISDA Publishes Results of Survey on AT1 Treatment in DRM Model. On September 27, ISDA published a survey of its members on the development of the dynamic risk management (“DRM”) model. The survey sought to understand the accounting and regulatory treatment of Alternative Tier 1 (“AT1”) financial instruments and to contribute this information to the development of the International Accounting Standards Board’s DRM model. The survey shows that for balance sheet classification under International Financial Reporting Standards, the majority of respondents classify their AT1s as equity; the majority of respondents include their AT1s for interest rate risk in the banking book (“IRRBB”) as equivalent to financial liabilities; and there is strong desire for the inclusion of AT1s in the current net open position. [NEW]
ISDA Publishes Updated Best Practices for Confirming Reference Obligations or Standard Reference Obligations. On September 25, ISDA published updated Best Practices for Single-name Credit Default Swaps regarding Reference Obligations or Standard Reference Obligations. The document sets out suggested best practices for confirming the Reference Obligation or Standard Reference Obligations for single-name Credit Default Swaps and is an update to the Best Practice Statement that was published by ISDA on November 18, 2014.
Joint Trade Association Issues Statement on EMIR 3.0 Effective Implementation Dates. On September 23, ISDA, the Alternative Investment Management Association, the European Banking Federation, the European Fund and Asset Management Association and FIA sent a letter urging the European Commission and European supervisory authorities to clarify that market participants are not required to implement the European Market Infrastructure Regulation (“EMIR 3.0”) Level 1 provisions prior to the date of application of the associated Level 2 regulatory technical standards (“RTS”). In the letter, the associations state that they are seeking clarification to avoid firms being required to implement the requirements of EMIR 3.0 twice—first, to comply with the Level 1 provisions once EMIR 3.0 enters into force and then when the associated Level 2 RTS becomes applicable.
ISDA Publishes Standing Settlement Instructions Suggested Operational Practices. On September 20, ISDA published the ISDA Standing Settlement Instructions (“SSI”) suggested operational practices (“SOP”), which outlines a set of guidelines for the communication, management and usage of SSIs. According to ISDA, the document aims at increasing standardization and efficiency in performing payments for over-the-counter (“OTC”) derivatives and it is an update to the Best Practice Statement that was published by ISDA on August 11, 2010. SOPs for the exchange of SSIs for the purposes of collateral are available in section 1.7 of the Suggested Operational Practices for the OTC Derivatives Collateral Process.
ISDA Publishes Results of DC Review Consultation. On September 19, ISDA published the results of a market-wide consultation on proposed changes to the structure and governance of the Credit Derivatives Determinations Committees (“DCs”). ISDA reported that the consultation indicated broad market support to implement many of the recommendations, including establishing a separate governance body, implementing certain transparency proposals relating to the publication of DC decisions and appointing up to three independent members of the DCs. Some of the proposals received a significant minority of objections.

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

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])

Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])

Darius Mehraban, New York (212.351.2428, [email protected])

Jason J. Cabral, New York (212.351.6267, [email protected])

Adam Lapidus – New York (212.351.3869, [email protected] )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

William R. Hallatt , Hong Kong (+852 2214 3836, [email protected] )

David P. Burns, Washington, D.C. (202.887.3786, [email protected])

Marc Aaron Takagaki , New York (212.351.4028, [email protected] )

Hayden K. McGovern, Dallas (214.698.3142, [email protected])

Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])

Data center developers, investors, AI companies, and energy companies all stand to benefit from the Administration’s support for AI data center development.

With four months left in his administration, President Biden is making a play for the future with a concerted focus on developing infrastructure to support artificial intelligence (AI). A limiting factor in the advancement of AI is the need to build data centers and their associated energy infrastructure to process the extraordinary quantities of information involved in AI computations and development of large language models. Over the past weeks, the Administration has taken several significant steps to promote the development of AI data centers. Data center developers, investors, AI companies, and energy companies all stand to benefit from the Administration’s support for AI data center development.

Several months ago, Gibson Dunn formed an interdisciplinary task force of partners specializing in energy, infrastructure, real estate, digital and AI, environment, litigation, national security, and public policy to provide integrated advice to clients who are actively pursuing opportunities in the data center sector. We are closely tracking the Administration’s efforts regarding AI data centers and are available to help clients to share their insights with the Administration, as well as to take advantage of the opportunities these high-level initiatives may offer in the coming months.

I. White House Roundtable, Interagency Efforts to Promote AI Data Centers

On September 12, 2024, the Biden Administration convened AI industry leaders, utility companies, and high-level Administration officials to discuss how to ensure the United States continues to lead in AI. After the roundtable, the White House announced several new initiatives to promote AI in ways that will advance national security and protect the environment.

Most significantly, the Administration launched its Task Force on AI Datacenter Infrastructure to coordinate federal government policy across agencies. Led by the National Economic Council, National Security Council, and the White House Deputy Chief of Staff’s office, the Task Force involves the highest levels of the Biden Administration, indicating the importance the Administration is placing on this initiative. The Task Force will work with private sector leaders to identify growth opportunities, as well as with agencies to prioritize AI data center projects.

The Administration also announced that it is tasking the Federal Permitting Improvement Steering Council to work with AI data center developers and federal agencies to set comprehensive timelines for project development, provide technical assistance to the permitting agencies, and distribute funding to agencies to expedite the permitting process for data centers. The U.S. Army Corps of Engineers also will be identifying nationwide permits to expedite the construction of AI data centers. AI data centers require substantial amounts of land, water, and energy—all resources protected or regulated by federal, state, and local permitting regimes. This focus on easing the permitting process for data center developers may give investors some comfort about the shorter-term return on their investments and potentially serve as a model for broader infrastructure permitting reform.

II. Department of Energy Developments

Given AI data centers’ need for significant amounts of energy, combined with the Administration’s clean-energy goals, it is no surprise that the Department of Energy (DOE) is taking the lead on several significant projects to support AI data centers. Of interest to clients, the DOE is planning a series of convenings with industry stakeholders to discuss the challenges associated with data centers’ energy needs.

Moreover, multiple offices within the DOE are working to provide solutions to stakeholders. In August, the DOE Office of Policy developed a list of resources to help data center developers, owners and operators, and interconnection stakeholders take advantage of tax credits, financing programs, and technical assistance.

In July, the DOE Secretary of Energy Advisory Board convened a Working Group on Powering AI and Data Center Infrastructure and presented its recommendations to Jennifer Granholm, the Secretary of Energy.

The Working Group’s report encouraged the DOE to adopt several key immediate and longer-term impact recommendations for supporting AI-driven data center power demand while limiting harm to existing customers and greenhouse gas emissions. The Working Group’s three immediate impact recommendations to the DOE encouraged the DOE to:

explore flexible siting and geographic distribution of AI large language model data centers in an effort to reduce highly concentrated loads;
foster dialogue between energy utilities, data center developers and operators, and other key stakeholders to manage current electricity supply bottlenecks and encourage real-time data sharing; and
rapidly assess reliability, cost, performance, and supply chain issues facing generation, storage, and grid technologies to support data center expansion.

As longer term recommendations, the Working Group encouraged the DOE to:

establish an AI testbed within the DOE to allow researchers to develop and assess algorithms for energy-efficient AI training, and advance the United States’ AI capabilities;
work with other government agencies and the private sector to develop a standardized and adaptable framework for orchestrating grid services; and
accelerate and de-risk private investment in emerging technologies, particularly nuclear, geothermal, long-duration storage, and carbon capture and sequestration.

The DOE’s focus on providing data center solutions will continue as it works in conjunction with other government agencies and the private sector to drive development, provide incentives, and discover efficiencies with respect to AI-driven data center power demands.

III. Department of Commerce Developments

Along with the DOE, the Department of Commerce will play a significant role in the Administration’s efforts to promote data center development. The National Telecommunications and Information Administration (NTIA), a component of the Department of Commerce, has invited comments on data center security and supporting data center growth in the United States. The NTIA is tasked with advising the President on issues related to the internet economy, including internet infrastructure, cybersecurity, and online privacy. Much of its work focuses on expanding broadband access and adoption, particularly in rural parts of the country, and the NTIA administers grant funding programs to support expansion of broadband infrastructure.

The NTIA will use the comments to inform its work on a comprehensive report for the executive branch offering policy recommendations about how the federal government can promote data center development. The NTIA is coordinating its efforts with the DOE. The Administration seeks comments on a variety of data center development topics including AI data center usage, barriers to data center competition, supply chain vulnerabilities, risk management practices, staffing shortages, and power supply challenges.

Offering comments to the NTIA will allow interested parties to shape the recommendations made within the executive branch on the best path toward maximizing data center infrastructure. The NTIA’s advisory role and its coordination with the DOE on this report will allow commenters to reach multiple interested executive agencies through this comment process. Comments are due November 4.

Given the economic, strategic, and national security implications of the AI race, these efforts are likely just the start of a federal government campaign to support AI data centers, regardless of outcome of the November elections. In light of the Administration’s keen interest in collaborating with the private sector on AI data center development, industry participants who want to shape the future of AI and data center policy should take this opportunity to make their voices heard.

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

The following Gibson Dunn lawyers prepared this update: F. Joseph Warin, Eric Feuerstein, Stephenie Gosnell Handler, William R. Hollaway, Ph.D., Michael D. Bopp, Tory Lauterbach, Amanda Neely, David Casazza, and Simon Moskovitz.

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

Vivek Mohan – Co-Chair, Artificial Intelligence Practice Group, Palo Alto (+1 650.849.5345, [email protected])

William R. Hollaway, Ph.D. – Chair, Energy Regulation & Litigation Practice Group, Washington, D.C. (+1 202.955.8592, [email protected])

Tory Lauterbach – Partner, Energy Regulation & Litigation Practice Group, Washington, D.C. (+1 202.955.8519, [email protected])

Stephenie Gosnell Handler – Partner, National Security Practice Group, Washington, D.C. (+1 202.955.8510, [email protected])

Michael D. Bopp – Co-Chair, Public Policy Practice Group, Washington, D.C. (+1 202.955.8256, [email protected])

Eric M. Feuerstein – Co-Chair, Real Estate Practice Group, New York (+1 212.351.2323, [email protected])

F. Joseph Warin – Co-Chair, White Collar Defense & Investigations Practice Group, Washington, D.C. (+1 202.887.3609, [email protected])

Amanda H. Neely – Of Counsel, Public Policy Practice Group, Washington, D.C. (+1 202.777.9566, [email protected])

From the Derivatives Practice Group: This week, the Hong Kong Monetary Authority and Financial Services and the Treasury Bureau published the Consultation Conclusions on the Legislative Proposal to Implement the Regulatory Regime for Stablecoin Issuers in Hong Kong.

New Developments

President Biden Announced Intent to Nominate Julie Brinn Siegel as a Commissioner of the CFTC. On July 11, President Biden announced his intent to nominate Julie Brinn Siegel to be a Commissioner of the CFTC. Siegel currently serves as the federal government’s deputy chief operating officer as Senior Coordinator for Management at the Office of Management and Budget (OMB). Prior to that, Siegel served as Secretary of the Treasury Janet Yellen’s Deputy Chief of Staff and served as Senior Counsel and Policy Advisor to U.S. Senator Elizabeth Warren (D-MA). Last month, President Biden nominated CFTC Commissioner Johnson to be Assistant Secretary for Financial Institutions at the Department of Treasury and nominated CFTC Commissioner Christy Goldsmith Romero to be Chair and Member of the Federal Deposit Insurance Corporation (FDIC) which, if confirmed by the Senate, would leave open two Democratic Commissioner seats at the CFTC. Siegel, if nominated and confirmed by the Senate, would take the seat of Commissioner Goldsmith Romero.
First Interagency Fraud Disruption Conference Focuses on Combatting Crypto Schemes Commonly Known as “Pig Butchering.” On July 11, the CFTC and the DOJ’s Computer Crime and Intellectual Property Section’s National Cryptocurrency Enforcement Team (“NCET”) convened the first Fraud Disruption Conference to work on efforts to combat a type of fraud commonly known as “pig butchering”. It is estimated that Americans are scammed out of billions per year, making this a top law enforcement priority. The working group addressed strategies to prevent victimization; using technology to disrupt the fraud; and collaboration on enforcement efforts. Several agencies also collaborated on an anti-victimization messaging campaign to warn Americans to remain vigilant against emerging fraud threats.
Supreme Court Overrules Chevron, Sharply Limiting Judicial Deference To Agencies’ Statutory Interpretation. On June 28, the Supreme Court overruled Chevron v. Natural Resources Defense Council, a landmark decision that had required courts to defer to agencies’, including the CFTC’s, reasonable interpretations of ambiguous statutory terms. For a more detailed analysis of the ruling please refer to Gibson Dunn’s client alert, available here.
CFTC Announces Supervisory Stress Test Results. On July 1, the CFTC issued Supervisory Stress Test of Derivatives Clearing Organizations: Reverse Stress Test Analysis and Results, a report detailing the results of its fourth Supervisory Stress Test (“SST”) of derivatives clearing organization (“DCO”) resources. Among other findings, the 2024 report concluded the DCOs studied hold sufficient financial resources to withstand many extreme and often implausible price shocks. The purpose of the analysis was twofold: (1) to identify hypothetical combinations of extreme market shocks, concurrent with varying numbers of clearing member (“CM”) defaults, that would exhaust prefunded resources (DCO committed capital, and default fund), and unfunded resources available to the DCOs (this represents the reverse stress test component), and (2) to analyze the impacts of DCO use of mutualized resources on non-defaulted CMs.

New Developments Outside the U.S.

ESAs Establish Framework to Strengthen Coordination in Case of Systemic Cyber Incidents. On July 17, the European Supervisory Authorities (“ESAs”) announced they will establish the EU systemic cyber incident coordination framework (“EU-SCICF”), in the context of the Digital Operational Resilience Act (“DORA”), that will aim to facilitate an effective financial sector response to a cyber incident that poses a risk to financial stability, by strengthening the coordination among financial authorities and other relevant bodies in the European Union, as well as with key actors at international level. [NEW]
ESAs Publish Second Batch of Policy Products under DORA. On July 17, the ESAs published the second batch of policy products under DORA. This batch consists of four final draft regulatory technical standards, one set of Implementing Technical Standards and 2 guidelines, all of which aim at enhancing the digital operational resilience of the EU’s financial sector. [NEW]
Hong Kong HKMA and FSTB Publishes Results from Stablecoin Consultation. On July 17, 2024, the Hong Kong Monetary Authority (“HKMA”) and Financial Services and the Treasury Bureau (“FSTB”) published the Consultation Conclusions on the Legislative Proposal to Implement the Regulatory Regime for Stablecoin Issuers in Hong Kong (“Consultation Conclusions”). The Consultation Conclusions outlined the legislative proposal to implement a regulatory regime for fiat-referenced stablecoin (“FRS”) issuers in Hong Kong. The regime will primarily focus on representations of value which rest on ledgers that are operated in a decentralized manner in which no person has the unilateral authority to control or materially alter its functionality or operation. Under this regime, FRS issuers will require a license. Foreign entities intending to apply for a license will be required to establish a Hong Kong subsidiary and have key management personnel in the territory. [NEW]
ESMA Consults on Firms’ Order Execution Policies Under MiFID II. On July 16, ESMA launched a consultation on draft technical standards specifying the criteria for how investment firms establish and assess the effectiveness of their order execution policies. The objective of the proposed technical standards is to foster investor protection by enhancing investment firms’ order execution. [NEW]
ESMA Publishes 2023 Data on Cross-Border Investment Activity of Firms. On July 15, ESMA announced they completed an analysis of the cross-border provision of investment services during 2023. The main findings include that a total of around 386 firms provided services to retail clients on a cross-border basis in 2023; compared to 2022, the cross-border market for investment services grew by 1.6% in terms of firm numbers, and by 5% in terms of retail clients, while the number of complaints increased by 31%; and Germany, France, Spain, and Italy are the most significant destinations (in terms of number of retail clients) for investment firms providing cross-border services in other Member States. [NEW]
ESAs Consult on Guidelines under the Markets in Crypto-Assets Regulation. On July 12, the ESAs published a consultation paper on Guidelines under Markets in Crypto-assets Regulation (“MiCA”), establishing templates for explanations and legal opinions regarding the classification of crypto-assets along with a standardized test to foster a common approach to classification.
ESAs Report on the Use of Behavioral Insights in Supervisory and Policy Work. On July 11, the ESAs published a joint report following their workshop on the use of behavioral insights by supervisory authorities in their day-to-day oversight and policy work. The report provides a high-level overview of the main topics discussed during the workshop held in February 2024 for national supervisors and other competent authorities, where participants explored the added value of behavioral insights in their work by exchanging their experiences and discussing the challenges they face.
ESMA Publishes the 2024 ESEF Reporting Manual. On July 11, ESMA published the update of its Reporting Manual on the European Single Electronic Format (“ESEF”) supporting a harmonized approach for the preparation of annual financial reports. ESMA has also updated the Annex II of the Regulatory Technical Standards (“RTS”) on ESEF.
ESMA Publishes Statement on Use of Collateral by NFCs Acting as Clearing Members. On July 10, ESMA issued a public statement on deprioritizing supervisory actions linked to the eligibility of uncollateralized public guarantees, public bank guarantees, and commercial bank guarantees for Non-Financial Counterparties (“NFCs”) acting as clearing members, pending the entry into force of EMIR 3.
ESMA Launches New Consultations. On July 10, ESMA published a new package of public consultations with the objective of increasing transparency and system resilience in financial markets, reducing reporting burden and promoting convergence in the supervisory approach.
ESMA Consults on Rules to Recalibrate and Further Clarify the Framework. On July 9, ESMA launched new consultations on different aspects of the Central Securities Depositories Regulation (“CSDR”) Refit. The proposed rules relate to the information to be provided by European CSDs to their national competent authorities (“NCA”s) for the review and evaluation, the information to be notified to ESMA by third-country CSDs, and the scope of settlement discipline.
ESMA Consults on Liquidity Management Tools for Funds. On July 8, ESMA announced it is seeking input on draft guidelines and technical standards under the revised Alternative Investment Fund Managers Directive (“AIFMD”) and the Undertakings for Collective Investment in Transferable Securities (“UCITS”) Directive. Both Directives aim to mitigate potential financial stability risks and promote harmonization of liquidity risk management in the investment funds sector.
ESMA Consults on Reporting Requirements and Governance Expectations for Some Supervised Entities. On July 8, ESMA launched two consultations on proposed guidance for some of its supervised entities. The consultations are aimed at the following entities supervised by ESMA: Benchmark Administrators, Credit Rating Agencies, and Market Transparency Infrastructures. The Consultation Paper sets out the information ESMA expects to receive and a timeline for supervised entities to provide the required information. The objective of the Draft Guidelines is to ensure consistency in cross-sectoral reporting.
ESMA Puts Forward Measures to Support Corporate Sustainability Reporting. On July 5, ESMA published a Final Report on the Guidelines on Enforcement of Sustainability Information (“GLESI”) and a Public Statement on the first application of the European Sustainability Reporting Standards (“ESRS”). ESMA reports that these documents will support the consistent application and supervision of sustainability reporting requirements.
ESMA Releases New MiCA Rules To Increase Transparency for Retail Investors. On July 4, ESMA published the second Final Report under the Markets in Crypto-Assets Regulation (MiCA) covering eight draft technical standards that aim to provide more transparency for retail investors, clarity for providers on the technical aspects of disclosure and record-keeping requirements, and data standards to facilitate supervision by National Competent Authorities (“NCAs”). The report covers public disclosures, as well as descriptions on how issuers should disclose price-sensitive information to the public to prevent market abuses, such as insider dealing.
ESMA Reappoints Three Members to its Management Board. On July 4, ESMA announced that it has reappointed three current members to its Management Board. The appointments took place at the Board of Supervisors meeting on July 3. The Management Board, chaired by Verena Ross, Chair of ESMA, is responsible for ensuring that the Authority carries out its mission and performs the tasks assigned to it under its founding Regulation.

New Industry-Led Developments

ISDA Publishes Whitepaper: Hedge Accounting Under US GAAP. On July 16, ISDA published a whitepaper that explores the issues faced by financial and non-financial institutions in applying hedge accounting for interest rate risk, foreign exchange risk and other risks. It highlights both the prescriptive nature of Accounting Standards Codification 815 and the inconsistent interpretations among auditors, which together create operational burdens and can limit hedging strategies. The paper proposes potential solutions to these challenges, including the expansion of hedge eligibility and the revision of hedge accounting criteria, to allow better use of existing risk management tools. [NEW]
ISDA and SIFMA Submit Addendum on GIRR Curvature to US Basel III NPR. On July 15, ISDA and the Securities Industry and Financial Markets Association (“SIFMA”) submitted an addendum to the joint US Basel III “endgame” notice of proposed rulemaking. The addendum contains a proposal for general interest rate risk (“GIRR”) curvature to fix an issue that was recently identified. [NEW]
ISDA Chief Executive Officer Scott O’Malia Offers Informal Comments on Terminating Derivatives Contracts. On July 15, ISDA CEO Scott O’Malia opined on the process to terminate a derivatives contract. ISDA is developing wo initiatives – the ISDA Close-out Framework and the ISDA Notices Hub – that will help ensure a key part of the termination process is more efficient. The ISDA Close-out Framework is designed to illustrate the various steps and decisions firms need to take and is intended as a preparatory tool for future stress events. The ISDA Notices Hub allows the instantaneous delivery and receipt of notices via a secure online platform, eliminating risk exposures and potential losses that can result from delays in terminating derivatives contracts. [NEW]
Trade Associations Submit Letter on EMIR IM Model Validation. On July 8, ISDA, the Alternative Investment Management Association (“AIMA”), the European Fund and Asset Management Association (“EFAMA”) and the Securities Industry and Financial Markets Association’s asset management group (“SIFMA AMG”) submitted a letter to the ESAs and the European Commission on initial margin (“IM”) model approval requirements set out in the European Market Infrastructure Regulation (“EMIR 3.0”). The letter highlights challenges posed by the three-month period granted to the European Banking Authority and NCAs to validate changes to an IM model and describes how the ISDA Standard Initial Margin Model (“ISDA SIMM”) schedule can be amended to address these issues.
ISDA Proceeds with Development of an Industry Notices Hub. On July 1, ISDA announced it will proceed with the development of an industry-wide notices hub, following strong support from buy- and sell-side institutions globally. The new online platform will allow instantaneous delivery and receipt of critical termination-related notices and help to ensure address details for physical delivery are up to date, reducing the risk of uncertainty and potential losses for senders and recipients of these notices.

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

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])

Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])

Darius Mehraban, New York (212.351.2428, [email protected])

Jason J. Cabral, New York (212.351.6267, [email protected])

Adam Lapidus – New York (212.351.3869, [email protected] )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

William R. Hallatt , Hong Kong (+852 2214 3836, [email protected] )

David P. Burns, Washington, D.C. (202.887.3786, [email protected])

Marc Aaron Takagaki , New York (212.351.4028, [email protected] )

Hayden K. McGovern, Dallas (214.698.3142, [email protected])

Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])

From the Derivatives Practice Group: This week, the CFTC released a report detailing the results of its fourth Supervisory Stress Test of derivatives clearing organization resources. The report concluded the derivatives clearing organization hold sufficient resources to withstand extreme price shocks.

New Developments

Supreme Court Overrules Chevron, Sharply Limiting Judicial Deference To Agencies’ Statutory Interpretation. Last week, the Supreme Court overruled Chevron v. Natural Resources Defense Council, a landmark decision that had required courts to defer to agencies’, including the CFTC’s, reasonable interpretations of ambiguous statutory terms. For a more detailed analysis of the ruling please refer to Gibson Dunn’s client alert, available here. [NEW]
CFTC Announces Supervisory Stress Test Results. On July 1, the CFTC issued Supervisory Stress Test of Derivatives Clearing Organizations: Reverse Stress Test Analysis and Results, a report detailing the results of its fourth Supervisory Stress Test (“SST”) of derivatives clearing organization (“DCO”) resources. Among other findings, the 2024 report concluded the DCOs studied hold sufficient financial resources to withstand many extreme and often implausible price shocks. The purpose of the analysis was twofold: (1) to identify hypothetical combinations of extreme market shocks, concurrent with varying numbers of clearing member (“CM”) defaults, that would exhaust prefunded resources (DCO committed capital, and default fund), and unfunded resources available to the DCOs (this represents the reverse stress test component), and (2) to analyze the impacts of DCO use of mutualized resources on non-defaulted CMs. [NEW]
CFTC Staff Issues a No-Action Letter Regarding Certain Reporting Requirements for Swaps Transitioning from CDOR to CORRA. On June 27, the CFTC Division of Market Oversight (“DMO”) and Division of Data (“DOD”) issued a staff no-action letter regarding certain Part 43 and Part 45 swap reporting obligations for swaps transitioning under the ISDA LIBOR fallback provisions from referencing the Canadian Dollar Offered Rate (“CDOR”), to referencing the risk-free Canadian Overnight Repo Rate Average (“CORRA”) following the cessation of CDOR after June 28, 2024. The letter states DMO and DOD will not recommend the CFTC take enforcement action against an entity for failure to timely report under Part 45 the change in a swap’s floating rate. This letter covers those floating rate changes that are made under the ISDA LIBOR fallback provisions from CDOR to CORRA, but only in the event the entity uses its best efforts to report the change by the applicable deadline in Part 45 and in no case reports the required information later than five business days from, but excluding, July 2, 2024. The letter also states DMO and DOD will not recommend the CFTC take enforcement action against an entity for failure to report under Part 43 the change in the floating rate for a swap modified after execution to incorporate the ISDA LIBOR fallback provisions to transition from referencing CDOR to referencing CORRA.
CFTC Extends Public Comment Period for Proposed Amendments to Event Contracts Rules. On June 27, the CFTC announced it is extending the deadline for public comment on a proposal to amend its event contract rules. The extended comment period will close on August 8, 2024. The CFTC is providing an extension to allow interested persons additional time to analyze the proposal and prepare their comments. The proposal would amend CFTC Regulation 40.11 to further specify types of event contracts that fall within the scope of Commodity Exchange Act (“CEA”) Section 5c(c)(5)(C) and are contrary to the public interest, such that they may not be listed for trading or accepted for clearing on or through a CFTC-registered entity.
CFTC Grants ForecastEx, LLC DCO Registration and DCM Designation. On June 25, the CFTC announced that it has issued ForecastEx, LLC an Order of Registration as a DCO and an Order of Designation as a designated contract market (“DCM”) under the CEA. DCO registration was granted under Section 5b of the CEA. DCM designation was granted under Section 5a of the CEA. ForecastEx is a limited liability company registered in Delaware and headquartered in Chicago, Illinois.
CFTC Approves Final Capital Comparability Determinations for Certain Non-U.S. Nonbank Swap Dealers. On June 25, the CFTC announced it has approved four comparability determinations and related comparability orders granting conditional substituted compliance in connection with the CFTC’s capital and financial reporting requirements to certain CFTC-registered nonbank swap dealers organized and domiciled in Japan, Mexico, the European Union (France and Germany), or the United Kingdom. Pursuant to the orders, non-U.S. nonbank swap dealers subject to prudential regulation by the Financial Services Agency of Japan, the National Banking and Securities Commission of Mexico and the Mexican Central Bank, the European Central Bank, or the United Kingdom Prudential Regulation Authority may satisfy certain CEA capital and financial reporting requirements by being subject to, and complying with, comparable capital and financial reporting requirements under the respective foreign jurisdiction’s laws and regulations, subject to specified conditions.

New Developments Outside the U.S.

ESMA Puts Forward Measures to Support Corporate Sustainability Reporting. On July 5, ESMA published a Final Report on the Guidelines on Enforcement of Sustainability Information (“GLESI”) and a Public Statement on the first application of the European Sustainability Reporting Standards (“ESRS”). ESMA reports that these documents will support the consistent application and supervision of sustainability reporting requirements. [NEW]
New MiCA Rules Increase Transparency for Retail Investors. On July 4, ESMA published the second Final Report under the Markets in Crypto-Assets Regulation (MiCA) covering eight draft technical standards that aim to provide more transparency for retail investors, clarity for providers on the technical aspects of disclosure and record-keeping requirements, and data standards to facilitate supervision by National Competent Authorities (“NCAs”). The report covers public disclosures, as well as descriptions on how issuers should disclose price-sensitive information to the public to prevent market abuses, such as insider dealing. [NEW]
ESMA Reappoints Three Members to its Management Board. On July 4, ESMA announced that it has reappointed three current members to its Management Board. The appointments took place at the Board of Supervisors meeting on July 3. The Management Board, chaired by Verena Ross, Chair of ESMA, is responsible for ensuring that the Authority carries out its mission and performs the tasks assigned to it under its founding Regulation. [NEW]
EBA and ESMA Publish Guidelines on Suitability of Management Body Members and Shareholders for Entities Under MiCA. On June 27, EBA and ESMA published joint guidelines on the suitability of members of the management body, and on the assessment of shareholders and members with qualifying holdings for issuers of asset reference tokens (“ARTs”) and crypto-asset service providers (“CASPs”), under the MiCA. The first set of guidelines covers the presence of suitable management bodies within issuers of ARTs and CASPs. The second set of guidelines concerns the assessment of the suitability of shareholders or members with direct or indirect qualifying holdings in a supervised entity.
ESAs Propose Improvements to the Sustainable Finance Disclosure Regulation. On June 18, the EBA, the European Insurance and Occupational Pensions Authority (“EIOPA”), and ESMA (the three European Supervisory Authorities , i.e., “ESAs”)
published a Joint Opinion on the assessment of the Sustainable Finance Disclosure Regulation (“SFDR”). In the joint opinion, the ESAs call for a coherent sustainable finance framework that caters for both the green transition and enhanced consumer protection, considering the lessons learned from the functioning of the SFDR.

New Industry-Led Developments

ISDA Proceeds with Development of an Industry Notices Hub. On July 1, ISDA announced it will proceed with the development of an industry-wide notices hub, following strong support from buy- and sell-side institutions globally. The new online platform will allow instantaneous delivery and receipt of critical termination-related notices and help to ensure address details for physical delivery are up to date, reducing the risk of uncertainty and potential losses for senders and recipients of these notices. [NEW]
ISDA Publishes Framework to Prepare for Close Out of Derivatives Contracts. On June 27, ISDA published the ISDA Close-out Framework that market participants can use to help prepare for potential terminations of collateralized derivatives contracts. ISDA stated that the launch of the ISDA Close-out Framework is in response to the March 2023 failure of Signature Bank and SVB in the US, which, according to ISDA, highlighted the complexities of potentially terminating over-the-counter derivatives trading relationships following various post-crisis regulatory reforms. Specifically, the reforms require that in-scope entities post margin for non-cleared derivatives transactions, while various jurisdictions have introduced mandatory stays on termination rights and remedies as part of bank resolution regimes. ISDA stated that the ISDA Close-out Framework is intended to be used as a preparatory resource to help firms coordinate internal business functions and stakeholders and internal and external legal, operational, risk management, infrastructure and other relevant service providers to ensure they are adequately prepared for any potential future stress events.
ISDA Responds to CCIL on Proposal for USD/INR FX Options. On June 21, ISDA submitted a response to a consultation paper from the Clearing Corporation of India Limited (“CCIL”) on a proposal to introduce an electronic trading platform and clearing and settlement services for USD/INR FX options of up to one year maturity initially. The response sets out the features of the trading platform, the risk management framework and a questionnaire on the parameters of the product. ISDA’s response focuses mainly on the risk management framework aspect, including the margin models and default management framework. It asks for more clarity and transparency on the choice of margin models and encourages the implementation of scheduled variation margin calls and stress-based anti-procyclicality measures.
ISDA Responds to FSB Consultation on Liquidity Preparedness for Margin and Collateral Calls. On June 18, ISDA submitted a response to the Financial Stability Board’s (FSB) consultation on liquidity preparedness for margin and collateral calls. The response notes that the recommendations are generally sensible and seek to incorporate a proportionate and risk-based approach. It also highlights a number of considerations relevant to the non-bank financial intermediation (“NBFI”) sector’s liquidity preparedness for margin and collateral calls.

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

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])

Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])

Darius Mehraban, New York (212.351.2428, [email protected])

Jason J. Cabral, New York (212.351.6267, [email protected])

Adam Lapidus – New York (212.351.3869, [email protected] )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

William R. Hallatt , Hong Kong (+852 2214 3836, [email protected] )

David P. Burns, Washington, D.C. (202.887.3786, [email protected])

Marc Aaron Takagaki , New York (212.351.4028, [email protected] )

Hayden K. McGovern, Dallas (214.698.3142, [email protected])

Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])

In Ryan, LLC v. Federal Trade Commission, the Northern District of Texas concluded “The role of an administrative agency is to do as told by Congress, not to do what the agency think[s] it should do.”

On July 3, 2024, the United States District Court for the Northern District of Texas concluded that the Federal Trade Commission’s Non-Compete Rule, which would retroactively invalidate over 30 million employment contracts and preempt the laws of 46 states, exceeds the FTC’s statutory authority and is arbitrary and capricious in violation of the Administrative Procedure Act. The court preliminarily enjoined enforcement of the Rule and stayed its effective date, but limited the scope of relief to the parties to the case. The court did not issue a nationwide preliminary injunction.

Background

Section 5 of the FTC Act authorizes the FTC “to prevent” the use of “unfair methods of competition” through case-by-case adjudication. Section 6(g) of the Act grants the FTC ancillary powers to support administrative adjudication, including the powers to make recommendations, publish reports, classify corporations, and “make rules and regulations for the purposes of carrying out the provisions of this subchapter.”

On April 23, the FTC promulgated the Non-Compete Rule by a 3-2 vote. The Rule invokes the FTC’s purported authority under Sections 5 and 6 and declares that nearly all non-compete agreements between employers and employees are “unfair methods of competition.” The Rule accordingly prohibits businesses from entering into new non-competes except for those associated with the sale of certain business interests and bans the enforcement of nearly all non-competes (with narrow exceptions for the sale of certain business interests and for agreements with certain senior executives). The Rule also expressly preempted the laws of the 46 states that allow non-compete agreements.

Ryan, LLC, is a global tax-consulting firm headquartered in Dallas. Its principals and other workers are sought-after tax experts, many of whom agree to temporally limited non-compete agreements.

Represented by Gibson Dunn, Ryan filed suit against the FTC in the Northern District of Texas, alleging that the Non-Compete Rule exceeds the FTC’s statutory authority, violates the Administrative Procedure Act, and defies the major questions doctrine, which instructs that federal agencies cannot regulate questions of deep economic and political significance absent clear authority from Congress. A group of trade associations led by the United States Chamber of Commerce intervened in the case to challenge the Rule as well.

The Court’s Opinion

The court determined that the Non-Compete Rule exceeds the scope of the FTC’s statutory authority. “By a plain reading, Section 6(g) of the Act does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition.” The court emphasized that, unlike Section 5, Section 6(g) “contains no penalty provision—which indicates a lack of substantive force.” Further, the court noted that “the location of the alleged substantive rulemaking authority is suspect . . . . Section 6(g) is the seventh in a list of twelve almost entirely investigative powers.”
The court further concluded that the Non-Compete Rule is arbitrary and capricious in violation of the Administrative Procedure Act. First, the Rule “is unreasonably overbroad without a reasonable explanation.” The FTC “lack[ed] . . . evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes.” Second, “the FTC insufficiently addressed alternatives to issuing the Rule.” It “dismissed any possible alternatives, merely concluding that either the pro-competitive justifications outweighed the harms, or that employers had other avenues to protect their interests.”
The court did not address the major questions doctrine.
The court determined that Ryan and the intervenors would suffer irreparable harm if the Rule takes effect because they would face “financial injury” and expend “nonrecoverable costs [when] complying with the Rule.”
The court declined to enter a nationwide preliminary injunction. The preliminary injunction and stay are limited to Ryan and the intervenors, and do not extend to intervenors’ member companies or other nonparties.

What It Means:

The Non-Compete Rule was scheduled to take effect on September 4. As long as the preliminary injunction and stay are in place, the FTC cannot enforce the Rule against Ryan or the intervenors. Their existing non-compete agreements remain enforceable under federal law, and they are free to enter into new non-compete agreements.
In the absence of nationwide relief, the Rule will go into effect on September 4 as to all other employers, meaning that state non-compete laws will be preempted, existing non-compete agreements will be retroactively invalidated, and businesses will be unable to enter into new non-compete agreements unrelated to certain sales of businesses.
The decision is not binding precedent on other courts.
Proceedings before the district court will continue. The court indicated that it would enter a final ruling on the merits by August 30.

Gibson Dunn attorneys Eugene Scalia, Allyson N. Ho, Amir C. Tayrani, Andrew Kilberg, Elizabeth A. Kiernan, Aaron Hauptman, and Josh Zuckerman represent Ryan, LLC.

The following Gibson Dunn lawyers prepared this update: Eugene Scalia, Allyson N. Ho, Amir C. Tayrani, Andrew Kilberg, Elizabeth A. Kiernan, Aaron Hauptman, and Josh Zuckerman.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Appellate & Constitutional Law, Labor & Employment, Administrative Law & Regulatory, or Antitrust & Competition practice groups:

Appellate and Constitutional Law:
Thomas H. Dupree Jr. – Washington, D.C. (+1 202.955.8547, [email protected])
Allyson N. Ho – Dallas (+1 214.698.3233, [email protected])
Julian W. Poon – Los Angeles (+ 213.229.7758, [email protected])

Labor and Employment:
Andrew G.I. Kilberg – Washington, D.C. (+1 202.887.3759, [email protected])
Karl G. Nelson – Dallas (+1 214.698.3203, [email protected])
Jason C. Schwartz – Washington, D.C. (+1 202.955.8242, [email protected])
Katherine V.A. Smith – Los Angeles (+1 213.229.7107, [email protected])

Administrative Law and Regulatory:
Eugene Scalia – Washington, D.C. (+1 202.955.8673, [email protected])
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, [email protected])

Antitrust and Competition:
Rachel S. Brass – San Francisco (+1 415.393.8293, [email protected])
Svetlana S. Gans – Washington, D.C. (+1 202.955.8657, [email protected])
Cynthia Richman – Washington, D.C. (+1 202.955.8234, [email protected])
Stephen Weissman – Washington, D.C. (+1 202.955.8678, [email protected])

In the lead up to the election, the Labour Party proposed extensive reforms to UK employment law as part of “Labour’s Plan to Make Work Pay: Delivering A New Deal for Working People.” Legislation is expected to be put before Parliament within the first 100 days of the Labour Party’s entry into government.

On July 5, 2024, the Labour Party was announced to have won a substantial majority in the UK General Election that was held on July 4, 2024, marking an end to the Conservative Party’s 14 years in power. In the lead up to the election, the Labour Party proposed extensive reforms to UK employment law as part of “Labour’s Plan to Make Work Pay: Delivering A New Deal for Working People” (the “New Deal”), and legislation is expected to be put before Parliament within the first 100 days of the Labour Party’s entry into government. In this update, we outline these anticipated developments in UK employment law.

A brief overview of the potential developments which we believe will be of interest to our clients is provided below, with more detailed information on each topic available by clicking on the links.

1. Implementing Workforce Changes(view details)

We summarise changes proposed to an employer’s ability to terminate employees who have acquired less than two years of service, as well as the impact on employers of proposed changes: (i) to the controversial practice of dismissing and re-hiring employees as a means of changing terms of employment; and (ii) designed to strengthen employee rights and protections in connection with both collective redundancy situations (lay-offs) and business transfers, strategic sourcing transactions, and other transfers subject to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (“TUPE”).

2. Enforcement of UK Employment Law (view details)

We summarise proposed reforms to the practice of enforcing UK employment laws, including the establishment of a single enforcement body and the extension of the time limit for bringing the majority of employment claims before the Employment Tribunal. We also consider the potential new ability for employees to collectively raise grievances about their workplace with Advisory, Conciliation and Arbitration Service (“ACAS”).

3. Discrimination, Diversity, Equity and Inclusion (view details)

We summarise the proposed new obligations on employers to address the gender pay gap, reduce workplace harassment, strengthen whistleblower rights, extend the gender pay gap regime to include race and disability, and carry out ethnicity and disability pay gap reporting. We also consider potential changes to family-friendly rights.

4. Working Arrangements (view details)

We consider the proposed changes to an employer’s ability to engage workers on “zero hour” contracts, changes to national minimum wage (“NMW”) rates, and the introduction of fair pay agreements to the adult social care sector. We also summarise the potential new right for employees to disconnect from work outside of working hours, enhancements to the right to flexible working, and the strengthening of trade unions.

5. Employment Status (view details)

We consider the possible move away from the three-tier system of employee, worker and self-employed contractor that currently exists in the UK towards a simpler two-part framework of employment status, and the proposal to strengthen the rights and protections of the self-employed.

We will provide a further update once the Labour government publishes draft legislation implementing these changes. In the meantime, we will continue to work with our clients to navigate the changing employment landscape in the UK.

APPENDIX

Implementing Workforce Changes

Unfair Dismissal

UK employees with less than two years of continuous service do not currently benefit from protection against unfair dismissal, except in certain limited circumstances. Unfair dismissal protection restricts an employer’s ability to terminate their employment other than for reasons of: (i) capability; (ii) conduct; (iii) redundancy; or (iii) some other substantial reason, while also requiring employers to follow a fair dismissal process.

The Labour government has indicated that a form of unfair dismissal protection will be extended to employees from day one of their employment to ensure that new hires are not terminated without cause. In response to protests from employer organisations, the Labour government has suggested that employers will still be able to operate probationary periods to assess new hires, although for how long such probation periods may last remains to be seen.

Dismissal and Re-engagement

The Labour government has also committed to ending the practice known as “fire and rehire” as a lawful means of imposing unilateral changes to an employee’s contractual terms of employment. This was an area that the previous government attempted to reform by implementing a Statutory Code of Practice on Dismissal and Re-engagement (the “Code”) which employers should follow when seeking to change employment terms and conditions using the method of dismissal and re-engagement. This Code was expected to come into force on July 18, 2024, although it is yet to be seen whether the new Labour government will implement it in its current form.

Instead, it is anticipated that the Code will be replaced by new laws designed to regulate the practice of firing and rehiring employees in order to change their terms of employment.

Redundancy and TUPE

Currently, UK employers are required to follow a collective consultation process when proposing to make at least 20 redundancies in a single establishment (often interpreted as one workplace) within a 90-day period. The Labour government has committed to strengthening employee redundancy rights and protections, which includes making the right to redundancy consultation determined by the number of people impacted across the business rather than in one workplace.

Employees who are subject to TUPE processes also currently enjoy protection from termination of employment and/or changes to their contractual terms that are imposed by reason of a TUPE transfer. The Labour government has stated that they will strengthen existing rights and protections under TUPE, although it is not clear in what way these rights would be strengthened.

Enforcement of UK Employment Law

Establishing a Single Enforcement Body

Save in relation to equality and human rights, the current enforcement of UK employment rights relies on individual employees or trade unions bringing a claim before the Employment Tribunal. The Labour government plans to establish a single enforcement body to enforce workers’ rights going forward, to include not only equality and human rights but other areas of employment law such as health and safety, minimum wage, and worker exploitation. This body will have strong powers to undertake targeted and proactive enforcement work, such as carrying out unannounced inspections, following up on anonymous tip-offs, and bringing civil proceedings to uphold employment rights.

Employment Tribunal Claims

The time limit for bringing many types of UK employment claims in an employment tribunal currently expires three months from the date the claim arises, subject to an extension of up to six weeks for pre-claim conciliation. The Labour government plans to extend the time limit to bring all UK employment claims to six months.

Collective Grievances

UK employees can currently formally raise individual grievances about conduct in the workplace with their employer through ACAS. The Labour government has stated that it will provide employees with the ability to raise collective grievances about conduct in their place of work directly to ACAS.

Discrimination, Diversity, Equity and Inclusion

Pay Gap Reporting and Action Plans

UK employers with more than 250 staff are currently required to report their gender pay gap data by April 4 of each year. There is currently no mandatory requirement for employers to report on their ethnicity or disability pay gap.

The Labour government has stated that the publication of ethnicity and disability pay gaps will become mandatory for employers with more than 250 employees, mirroring gender pay gap reporting. Although not mentioned in the New Deal, the Labour government has indicated that it would implement new legislation to tackle structural racism, including the issue of low pay for ethnic minorities, with fines for employers not taking appropriate action on their pay gap data.

Large employers are expected to be required to develop, publish, and implement action plans to close their gender pay gaps, and to include outsourced workers in their gender pay gap and pay ratio reporting. Similarly, employers with more than 250 employees are expected to be required to produce Menopause Action Plans, setting out how they will support employees going through the menopause at work.

Another proposed policy, not mentioned in the New Deal but included in the Labour manifesto, is to extend the current gender equal pay regime to include race and disability. This will be enforced by a new regulatory unit with trade union backing.

Workplace Harassment and Whistleblowing

The Labour government has stated that it will “require employers to create and maintain workplaces and working conditions free from harassment, including third parties”, and will also strengthen the legal duty for employers to take all reasonable steps to stop harassment, including sexual harassment, before it starts. Although not mentioned in the New Deal, the Labour government also previously indicated that women who report sexual harassment at work would be provided with the same protections from dismissal and detriment as other whistleblowers.

The previous government also sought to implement a new mandatory duty to prevent sexual harassment in the workplace, which had been expected to come into force in October 2024, however this duty does not currently cover harassment by third parties. It remains to be seen if the new mandatory duty will be implemented in its current form.

The Labour government has committed to strengthening whistleblowers’ rights, and we await details of this new policy.

Family Leave Rights

Whilst UK employment law already provides for extensive family leave rights, the Labour government has stated it would make various enhancements:

parental leave, which entitles parents with at least one years’ service to take up to 18 weeks of unpaid leave for each child until the child is 18, will become available to employees from day one of their employment;

it will be unlawful to dismiss a woman during pregnancy or within six months of her return to work following maternity leave, other than in specified circumstances. This is expected to build on the existing protections afforded to pregnant women or women on maternity leave; and

entitlement to bereavement leave will be clarified and extended to all employees. Currently, employees do not have a statutory right to paid time off when someone dies, unless they are entitled to parental bereavement leave.

The Labour government has also stated that the system of parental leave will be reviewed within its first year and that the implementation of the legislation for unpaid carers’ leave, which entitles employees to take up to one week every 12 months to help a dependent who needs long-term care and was introduced in April 2024, will be reviewed. The Labour government also plans to examine the potential benefits of introducing paid carers’ leave.

Working Arrangements

Engagement of Casual and/or Low Paid Workers

The Labour government has committed to:

banning contracts that provide no guarantee of work, known as “zero hour” contracts, although it has been reported that this would not be a total ban and would allow workers to remain on zero hour contracts in certain circumstances; and

ensuring that workers have the right to: (i) a contract that reflects the number of hours they regularly work based on a twelve-week reference period; and (ii) reasonable notice of any change in shifts or working time, with compensation that is proportionate to the notice given for any shifts cancelled or curtailed.

The previous government had attempted to regularise the engagement of casual workers in the UK by implementing a statutory right to a predictable working pattern, which is expected to come into force in September 2024; it is currently unclear if the new Labour government will implement this provision.

The Labour government also announced various proposed enhancements to the NMW rate, which is currently split into age bands and is reviewed and updated each year. The Labour government plans to: (i) remove the age bands, which it considers discriminatory; and (ii) expand the remit of the Low Pay Commission, which currently reviews and makes recommendations on the NMW rate, to ensure that the rate considers increases in cost of living.

The Labour government has pledged to introduce a “Fair Pay Agreement” to the adult social care sector. This will offer social care workers stronger collective bargaining rights in pay negotiations.

Right to Disconnect and Work Autonomously

The Labour government has stated a new “right to switch off” would be introduced, which would give UK employees the right to disconnect from outside of working hours and not be contacted by their employers. This would follow models already in place in Ireland and Belgium, which give employers and employees the opportunity to work together on bespoke workplace policies or contractual terms that benefit both parties in this respect.

The Labour government has also stated that they will ensure that proposals by employers to use surveillance technologies will be subject to consultation and negotiation, with a view to agreement of trade unions or staff representatives.

Right to Flexible Working

The right to request flexible working recently became a day one right in the UK on April 6, 2024. The Labour government has stated that flexible working would be made the default for all workers from the first day of employment, except where not reasonably feasible, although it is currently unclear what this will involve.

Trade Unions

The Labour government plans to update trade union legislation so that, among other things, employers will be required to inform workers of their right to join a trade union. Additionally, recent legislation introduced by the previous government to restrict trade union activity, such as the minimum service level requirement in essential services, is likely to be repealed. Industrial action ballot requirements will also be eased, and limitations on union workplace access will be lifted.

Employment Status

UK employment law currently recognises three types of employment status: (i) employees; (ii) workers (which is inclusive of employees); and (iii) self-employed contractors. An individual’s employment status determines the statutory employment rights to which they are entitled to (if any), and employment status has become a hot topic before the Employment Tribunal in recent years.

The Labour government has committed to carrying out a consultation on employment status as part of a move towards a single status of ‘worker’ and a simplified two-part framework for employment status. The Labour government has also stated that they will strengthen the rights and protections of the self-employed, including the right to a written contract, action to tackle late payments, and extending health and safety and blacklisting protections to the self-employed, along with strengthening trade union rights.

Further updates

The following Gibson Dunn lawyers prepared this update: James A. Cox, Georgia Derbyshire, Olivia Sadler, and Finley Willits*.

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 leader or member of the firm’s Labor and Employment practice group, or the following authors in London:

James A. Cox (+44 20 7071 4250, [email protected])

Georgia Derbyshire (+44 20 7071 4013, [email protected])

Olivia Sadler (+44 20 7071 4950, [email protected])

*Finley Willits, a trainee solicitor in the London office, is not admitted to practice law.

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

Key Developments

On June 27, Tractor Supply issued a statement saying that it would “[e]liminate DEI roles and retire [its] current DEI goals,” along with ceasing support for Pride festivals and withdrawing its carbon emission goals. The statement came in response to a public pressure campaign waged against Tractor Supply by Robby Starbuck, a conservative activist and social media personality, who criticized Tractor Supply for its DEI commitments, support for Pride Month celebrations, contributions to the Democratic Party, and carbon emission goals, among other things. Starbuck urged his followers to boycott Tractor Supply and to send complaints to Tractor Supply’s corporate offices. After three weeks of public pressure, and a reduction in its stock price, Tractor Supply acceded to Starbuck’s demands. Starbuck immediately claimed victory following Tractor Supply’s announcement, saying that it “was the start of something big” and threatening to “expose a new company next week.” In response to Tractor Supply’s announcement, the National Black Farmers Association called on Tractor Supply’s president and CEO to step down, and threatened a boycott of its own.

On June 20, the State of Missouri filed a complaint against IBM in state court, alleging that the company is violating the Missouri Human Rights Act by using race and gender quotas in its hiring and basing employee compensation on participation in allegedly discriminatory DEI practices. See Missouri v. IBM, No. 24SL–CC02837 (Cir. Ct. of St. Louis Cty.). The complaint cites a leaked video in which IBM’s Chief Executive Officer and Board Chairman, Arvind Krishna, allegedly stated that all executives must increase representation of ethnic minorities in their teams by 1% each year in order to receive a “plus” on their bonus. The complaint also alleges that employees at IBM have been fired or suffered adverse employment actions because they failed to meet or exceed these targets. The Missouri Attorney General is seeking to permanently enjoin IBM and its officers from utilizing quotas in hiring and compensation decisions.

On July 1, a suit was filed against CBS Broadcasting by former Los Angeles news anchor Jeff Vaughn, alleging that CBS terminated his employment because he is “an older, white, heterosexual male.” See Vaughn v. CBS Broadcasting, No. 2:24-cv-05570 (C.D. Cal. 2024). Vaughn claims that CBS replaced him with a “younger minority news anchor” in violation of Section 1981, Title VII, and the Age Discrimination in Employment Act. The complaint points to public statements by CBS expressing its commitment to diversity, including statements discussing various representation goals. Vaughn, who is represented by America First Legal, is seeking over $5,000,000 in damages.

In a statement issued on June 28, the U.S. Department of Commerce said that it would not appeal the district court’s ruling in Nuziard v. Minority Business Development Agency, No. 4:23-cv-00278 (N.D. Tex. 2024). The court held that the racial presumption used by the Minority Business Development Agency (MBDA) in apportioning federal funds for minority business assistance violates the Fifth Amendment’s equal protection guarantee. The decision extended the Supreme Court’s reasoning in SFFA to federal agencies administering grant programs, holding that “[t]hough SFFA concerned college admissions, nothing in the decision indicates that the Court’s holding should be constrained to that context.” For a more detailed discussion of the Nuziard decision, see our prior update here. The Commerce Department’s statement said that while the Department “strongly disagree[s]” with the court’s ruling, its “primary goal is to ensure MBDA can continue to meet its mission to promote the growth and global competitiveness of minority business enterprises,” and it believes that the injunction imposed by the district court “does not currently prevent MBDA from continuing to fulfill its mission.”

On June 27, EEOC Commissioner Kalpana Kotagal encouraged workers’ rights attorneys to continue advocating for lawful DEI initiatives, including data collection aimed at ensuring equal employment opportunities. Kotagal’s address took place at the National Employment Lawyers Association’s annual conference in Philadelphia and followed panel discussions of conservative legal activists’ anti-DEI efforts. Kotagal commented on the “bleak” landscape but urged the audience not to give up, emphasizing that Title VII standards have not changed and citing “misinformation” and “scare tactics” as having blurred employers’ understanding of the legality of DEI programming. Kotagal acknowledged the litany of reverse-discrimination suits being brought by white employees in the wake of SFFA but insisted that “there’s a huge difference” between quotas, on the one hand, and “measuring and understanding the demographics of your workforce with an eye to breaking down barriers and equal opportunity,” on the other. She stated that employers can legally engage in “remedial and temporary affirmative action plans” and the key is ensuring that “individual decisions are not based on race.”

On June 27, a split Ninth Circuit panel reinstated a proposed class action in which the plaintiffs allege that Meta unlawfully favors visa holders over citizens when making hiring decisions in Rajaram v. Meta Platforms, Inc., No. 22-16870 (9th Cir. 2024). The plaintiff alleged that, despite being qualified, he was discriminatorily rejected by Meta for several jobs because he is as U.S. citizen and Meta prefers to hire noncitizens holding H1B visas because it can pay them lower wages. U.S. Magistrate Judge Laurel Beeler in the Northern District of California had dismissed the complaint, finding that U.S. citizens are not a protected class under Section 1981. The Ninth Circuit reversed. The majority noted that while race discrimination is different from citizenship discrimination, “it is not different in any way that is relevant to the text of 1981.” Judge VanDyke dissented, writing that “discrimination because of citizenship is not covered by Section 1981 because citizens inherently possess the rights enjoyed by citizens, even when noncitizens are preferenced over them.”

On June 24, the Equal Protection Project (EPP) filed a complaint with the U.S. Department of Education’s Office for Civil Rights (OCR) against Indiana University Columbus (IUC). The complaint alleges that IUC partners with the African American Fund Bartholomew County (AAFBC) to administer a scholarship that is restricted to African American students in violation of Title VI and the Equal Protection Clause of the Fourteenth Amendment. EPP contends that because IUC is a public institution receiving federal financial assistance, it cannot intentionally discriminate on the basis of race in any “program or activity,” regardless of any good intention. EPP requests that OCR initiate a formal investigation into IUC’s role in creating and promoting the scholarship and asks that it impose appropriate remedial relief.

On June 20, Illinois Attorney General Kwame Raoul and 18 other Democrat state attorneys general issued a public letter to the American Bar Association (ABA) defending the current criteria used in ABA accreditation, in response to a June 3 letter from Republican state AGs urging the ABA to remove this criteria from its accreditation process. The letter from the Democrat AGs argues that SFFA does not bar higher education institutions from encouraging a diverse applicant pool or creating non-hostile educational environments for underrepresented groups. The ABA is currently considering revisions to Standard 206 for accreditation, which governs diversity and inclusion within law schools. The letter was also addressed to “Fortune 100 CEOs and other organizations unfairly targeted for their commitment to diversity, equity, and inclusion,” noting that SFFA’s “narrow holding did not change the law for private businesses.”

On June 20, Do No Harm filed a complaint against the American Association of University Women (AAUW), alleging that the organization is violating Section 1981 by providing Focus Group Professions Fellowships only to “women from ethnic minority groups historically underrepresented in certain fields within the United States: Black or African American, Hispanic or Latino/a, American Indian or Alaskan Native, Asian, and Native Hawaiian or Other Pacific Islander.” See Do No Harm v. American Association of University Women, No. 1:24-cv-01782 (D.D.C. 2024). Do No Harm is proceeding on behalf of its medical student-members, who allegedly meet all of the other application requirements for the AAUW fellowship but “are ineligible to apply to the fellowship because of their race.” Do No Harm is seeking a preliminary injunction prohibiting AAUW from closing the application window, and a permanent injunction prohibiting AAUW from considering race when selecting grant recipients.

On June 20, a three-judge panel of the Michigan Court of Appeals issued an unpublished per curiam decision dismissing the appeal of two former General Motors employees who contended that they faced discrimination and were terminated because they are white. See Bittner v. General Motors, LLC, No. 366160 (Mich. Ct. App. 2024). As noted in the court’s opinion, GM terminated the plaintiffs’ employment after corroborating complaints from other employees claiming that the plaintiffs routinely used sexually derogatory, homophobic, and transphobic language. The plaintiffs asserted state-law claims of disparate treatment, disparate impact, hostile work environment, and civil conspiracy, but the trial court granted GM’s motion for summary disposition. The Court of Appeals affirmed, rejecting the plaintiffs’ assertion that a supervisor’s request that they remain respectful during a Juneteenth moment of silence was “direct evidence” of discrimination. Nor was the Court convinced by the plaintiffs’ purported circumstantial evidence of disparate treatment.

Media Coverage and Commentary:

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

The Washington Post, “DEI Programs toppled amid a surge of conservative lawsuits” (June 27): The Washington Post’s Peter Whoriskey and Julian Mark report that right-leaning legal groups filed more than 100 lawsuits challenging racial preferences and other efforts by corporations and the government to “address demographic disparities in business, government and education.” Following SFFA, according to Jason Schwartz, Gibson Dunn partner and co-chair of the firm’s Labor & Employment group, “[t]he cases are going pretty quickly and decisively against the government programs” because “[government] cases are harder to defend.” Whoriskey and Mark say that private companies have “more legal leeway to implement diversity programs,” but that recent litigation also has had a chilling effect on private companies, with many reconsidering their own diversity programs as a defensive measure to reduce litigation risk.
The Wall Street Journal, “Tractor Supply Retreats from DEI Amid Conservative Backlash” (June 27): Sarah Nassauer and Sabela Ojea of The Wall Street Journal report that Tractor Supply Company, a rural retailer best known for its animal feed and workwear sales, is abandoning its DEI and environmental initiatives in response to weeks of social media criticism from Robby Starbuck, a prominent conservative political commentator. Starbuck encouraged his followers to boycott Tractor Supply because of its stated political, diversity, and environmental goals. Nassauer and Ojea report that the company announced it would eliminative jobs focused on DEI, stop sponsoring LGBTQ+ pride festivals, and no longer submit data to LGBTQ+ advocacy group the Human Rights Campaign. Nassauer and Ojea note that “Tractor Supply’s core customer base is more rural and male than general big-box retailers,” with “customers in regions that tend to vote for more conservative political candidates.” In a statement, Tractor Supply said that it had “heard from customers that we have disappointed them,” and it had “taken this feedback to heart.”

The Associated Press, “Black farmers’ association calls for Tractor Supply CEO’s resignation after company cuts DEI efforts” (July 2): Wyatte Grantham-Philips and Haleluya Hadero of the Associated Press report on calls from the National Black Farmers Association (NBFA) for Tractor Supply’s CEO Hal Lawton to step down. Grantham-Philips and Hadero say that the calls for Lawton’s resignation come in response to Tractor Supply’s recent announcement that it would stop most of its corporate diversity and climate advocacy efforts. Tractor Supply announced the changes following a pressure campaign from conservative activists who took issue with what Grantham-Philips and Hadero call “the company’s work to be more socially inclusive and to curb climate change.” John Boyd Jr., president and founder of the NBFA, said that he was “appalled” by Tractor Supply’s decision, and warned that “Black farmers are going to start fighting back,” including by considering calling for a boycott of Tractor Supply. Indeed, Grantham-Philips and Hadero report that some customers have “already decided to take their business elsewhere,” deciding that they can “no longer support Tractor Supply if its announcement reflected its beliefs.”
The Wall Street Journal, “Banks, Law and Consulting Firms are Watering Down Their Diversity Recruiting Programs” (June 20): The Wall Street Journal’s Kailyn Rhone reports that “white-collar companies,” once champions of programs to recruit diverse employees, are now quietly downplaying these programs. Rhone says that these changes include minimizing use of terminology like “DEI,” opening diversity programs to all applicants, and omitting references to DEI programs from annual reports. Rhone cites accounting firm PricewaterhouseCoopers as an example, noting that it recently altered the eligibility criteria for its Start internship, shifting the focus from “traditionally underrepresented” minority applicants to students of “diverse backgrounds” generally. Similarly, Rhone notes that JPMorgan Chase clarified that its Black and Hispanic & Latino fellowship programs are available to all students, regardless of race. And, Rhone says, consulting firm McKinsey & Co. also recently removed the requirement that candidates for its summer business analyst program “self-identify as a member of a historically underrepresented group.” According to Rhone, some minority job seekers worry that the changes “could erode a path for diverse candidates to find internships and entry-level roles.”

The Dallas Morning News, “131 college scholarships put on hold or modified due to Texas DEI ban, documents show” (June 17): Marcela Rodrigues and Philip Jankowski of The Dallas Morning News report that a new Texas law banning DEI programs at public universities has frozen or modified over 130 college scholarships state-wide. Known as SB 17, the law prohibits Texas public colleges from administering programs designed for students of specific races or genders. Many of the scholarships affected are administered by the schools but funded through private donations. According to officials at public universities across Texas, SB 17 has triggered review of thousands of scholarships, in some cases leading to the alteration or elimination of gender and racial eligibility requirements.
The Washington Post, “Most Americans approve of DEI, according to Post-Ipsos poll” (June 18): The Washington Post’s Taylor Telford, Emmanuel Felton, and Emily Guskin report on a recent poll finding that the majority of Americans believe DEI programs are “a good thing.” The poll indicated that support is even higher for certain types of programming, like internships for underrepresented groups and anti-bias trainings, and that respondents expressed greater support for DEI programs after they were given a detailed description of them. The authors note that “one effort was universally unpopular: financial incentives for managers who achieve diversity goals.” Joelle Emerson, chief executive of Paradigm, a DEI consultancy, said that she believes “that the vast majority of peoples’ values align with what this work actually entails,” but that the concept of DEI might need some rebranding.
Law360 Employment Authority, “A Year After Justices Scrap Affirmative Action, DEI Rebounds” (June 28): Law360’s Anne Cullen reports that DEI consultants are seeing a gradual resurgence in corporate interest regarding DEI initiatives. Cullen acknowledges that, although DEI advocates have had some notable wins in the courts, lawsuits filed by conservative groups have had a dramatic chilling effect on corporate programs—including an outsized effect on small businesses and organizations without the financial capacity to mount a defense. But experts in the field say that the tide may be turning, with some noticing “a bottoming out, and some new entrants” to the corporate diversity field. Other consultants report observing “resurging interest” from corporate clients who “want to roll their sleeves up and do the work.” Experts recommend that companies be willing “to adapt and pivot,” including rebranding their programs to move away from the “DEI” label.

Case Updates:

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

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

Californians for Equal Rights Foundation v. City of San Diego, No. 3:24-cv-00484 (S.D. Cal. 2024): On March 12, 2024, the Californians for Equal Rights Foundation filed a complaint on behalf of members who are “ready, willing and able” to purchase a home in San Diego, but are ineligible for a grant or loan under the City’s BIPOC First-Time Homebuyer Program. Plaintiffs allege that the program discriminates on the basis of race in violation of the Equal Protection Clause.
- Latest update: On June 18, 2024, the City of San Diego filed a motion for judgment on the pleadings. The City argued that the complaint does not include any allegations against the City, and instead alleges a “fictitious [agency] relationship” with the other defendants, the Housing Authority of the City of San Diego and the San Diego Housing Commission. The City also argued that even if the Plaintiff’s agency allegations were accepted as true, its claim against the Housing Authority and City still fails because “a local government may not be sued under § 1983 for an injury inflicted solely by its employees or agents.”
Valencia AG, LLC v. New York State Off. of Cannabis Mgmt. et al., No. 5:24-cv-116-GTS (N.D.N.Y. 2024): On January 24, 2024, Valencia AG, a cannabis company owned by white men, sued the New York State Office of Cannabis Management for discrimination, alleging that New York’s Cannabis Law and regulations favored minority-owned and women-owned businesses. The regulations include goals to promote “social & economic equity” (SEE) applicants, which the plaintiff claims violate the Fourteenth Amendment’s Equal Protection Clause and Section 1983. On March 13, 2024, the plaintiff filed an amended complaint, naming only two New York state officials as defendants in their official capacity. The plaintiff sought a permanent injunction against the regulations and a declaration that the use of race and sex in the New York Cannabis Law violates the Fourteenth Amendment. On April 24, 2024, the defendants moved to dismiss the amended complaint for lack of standing and failure to state an Equal Protection Clause claim, arguing that even without the contested policy the plaintiff would not have received the license due to their low “position in the queue.”
- Latest update: On June 20, 2024, the defendants filed a reply in support of their motion to dismiss. The defendants argued that the plaintiff lacks standing because its microbusiness license will be reviewed in the November queue under a recently adopted board resolution. Moreover, the defendants asserted that there is no risk of injury because “the Board and Office have interpreted the Cannabis Law and implementing regulations to be satisfied by front-end measures to aid [minority] SEE applicants such as community outreach, low-burden applications, and assistance if an application is found to be defective,” and that the plaintiff has not demonstrated that the defendants will deviate from this interpretation. The defendants also noted that they have submitted affidavits indicating that “applications are being reviewed solely for completeness and correctness, and thus that the race and gender of an applicant will play no role in whether an application is approved.”

2. Employment discrimination and related claims:

Sullivan v. Howard Univ., No. 1:24-cv-01924 (D.D.C. 2024): On July 1, 2024, a male administrator at Howard University filed suit against the university, claiming that he experienced sex discrimination and retaliation when he was transferred to another department.
- Latest Update: The docket does not reflect that Howard University has been served.
Gerber v. Ohio Northern Univ., No. 2023-1107-CVH (Ohio. Ct. Common Pleas Hardin Cty. 2024): On June 30, 2023, a law professor sued his former employer, Ohio Northern University, for terminating his employment after an internal investigation determined that he bullied and harassed other faculty members. On January 23, 2024, the plaintiff, now represented by America First Legal, filed an amended complaint. The plaintiff claims that his firing was actually in retaliation for his vocal and public opposition to the university’s stated DEI principles and race-conscious hiring, which he believed were illegal. The plaintiff alleged that the investigation and his termination breached his employment contract, violated Ohio civil rights statutes, and constituted various torts, including defamation, false light, conversion, infliction of emotional distress, and wrongful termination in violation of public policy.
- Latest update: On June 17, 2024, both parties filed motions for summary judgment. The defendants argued that the court should grant summary judgment because plaintiff’s claims of retaliation for expressing his views on DEI policies are not backed by evidence, including because he “advanced through the ranks at ONU” while making prolific remarks against DEI and affirmative action since at least 2005. The plaintiff moved for summary judgment on his breach-of-contract and defamation claims.
Weitzman v. Fred Hutchinson Cancer Center, No. 2:24-cv-00071-TLF (W.D. Wash. 2024): On January 16, 2024, a white Jewish female former employee sued the medical center where she used to work, alleging that she was terminated for expressing her discomfort with DEI-related content shared in the workplace by coworkers, objecting to DEI-related training, and expressing her political opposition to DEI-aligned ideologies. She also claimed that her employer failed to act when she was allegedly discriminated against because of her religion and race by other coworkers. The plaintiff alleged that her employer’s conduct constituted racial discrimination, a hostile work environment, and retaliation in violation of the Washington Law Against Discrimination and Section 1981; discrimination and retaliation on the basis of political ideology in violation of the Seattle Municipal Code; and intentional infliction of emotional distress and wrongful termination in violation of public policy under common law.
- Latest update: On June 25, the court granted the parties’ joint stipulation for dismissal and the claim was dismissed with prejudice.
DiBenedetto v. AT&T Servs., Inc., No. 21-cv-4527 (N.D. Ga. 2021): On November 2, 2021, the plaintiff, a white male former executive, brought claims against AT&T under Title VII, Section 1981, and the Age Discrimination in Employment Act (ADEA), alleging that he was wrongfully terminated due to his race, gender, and age.
- Latest update: On June 26, the parties jointly stipulated and agreed to the dismissal with prejudice of all claims in this action.
Newman v. Elk Grove Educ. Ass’n., No. 2:24-cv-01487-DB (E.D. Cal. 2024): On May 24, 2024, a white teacher at the Elk Grove Unified School District in Sacramento, California, sued the teachers’ union after it created an executive board position called the “BIPOC At-Large Director” open only to those who “self-identify” as “African American (Black), Native American, Alaska Native, Native Hawai’ian, Pacific Islander, Latino (including Puerto Rican), Asian, Arab, and Middle Eastern.” The plaintiff alleges that he is a union member who “wants to run for union office to address the District’s recent adoption of what he believes to be aggressive and unnecessary Diversity, Equity & Inclusion (‘DEI’) policies,” but is ineligible for this board seat because of his race. The plaintiff alleges that he therefore has fewer opportunities to obtain a board seat than non-white union members. He has brought claims against the union under Title VII of the Civil Rights Act of 1964 and the California Fair Employment and Housing Act.
- Latest update: The defendant’s response to the complaint is due on August 26, 2024.
Faculty, Alumni, and Students Opposed to Racial Preferences (FASORP) v. Northwestern University, No. 1:24-cv-05558 (N.D. Ill. 2024): A nonprofit advocacy group filed suit against Northwestern University, alleging that Northwestern University is violating Title VI, Title IX, and Section 1981 by considering race and sex in law school faculty hiring decisions. The suit also claims that student editors of the Northwestern University Law Review give discriminatory preferences to “women, racial minorities, homosexuals, and transgender people when selecting their members and edits,” as well as when choosing articles to include in the Law Review. The plaintiff is seeking to enjoin Northwestern from (1) considering race, sex, sexual orientation, or gender identity in the appointment, promotion, retention, or compensation of its faculty or the selection of articles, editors, and members of the Northwestern University Law Review, and (2) soliciting any information about the race, sex, sexual orientation, or gender identity of faculty candidates or applicants for the Law Review. The plaintiff is also asking the court to order Northwestern to establish a new policy for selecting faculty and Law Review articles, editors, and members, and to appoint a court monitor to oversee all related decisions.
- Latest update: The docket does not reflect that the defendant has been served.

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

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

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

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

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, [email protected])

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, [email protected])

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, [email protected])

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, [email protected])

Many multinational companies based in or operating in the European Union will need to restructure their sanctions compliance programs to avoid potential sanctions violations and enforcement risks going forward.

Amidst a plethora of new restrictions on specific goods, vessels and parties, the EU’s 14th package against Russia (June 24, 2024) and latest Belarus sanctions (June 29, 2024) include a few fundamental changes in the territorial reach and substantive design of EU sanctions bolstering the EU’s anti-circumvention toolbox. Many multinational companies based in or operating in the European Union will need to restructure their sanctions compliance programs to avoid potential sanctions violations and enforcement risks going forward.

1. New Provision Changes the Reach of Russia Sectoral Sanctions as regards Non-EU Subsidiaries of EU Entities

According to the new Article 8a of Regulation (EU) 833/2014 (“Reg 833/2014”), EU companies shall undertake their best efforts to ensure that any non-EU company they own or control (“Non-EU Subsidiary”) does not participate in activities that undermine EU sectoral sanctions against Russia under Reg 833/2014.

This provision changes the treatment of Non-EU Subsidiaries under EU sanctions. To date, companies have been relying on general jurisdictional provisions laid down in each EU sanctions regulation (such as Article 13 of Reg 833/2014), according to which non-EU companies shall comply with EU sanctions only “in respect of any business done in whole or in part within the EU.” If a non-EU company maintained no nexus to the EU territory in its operations, it would not be obliged to comply with EU sanctions, even if it was a subsidiary of an EU company. In turn, as per Consolidated FAQs of the European Commission, the EU parent company was bound only in respect of its own actions, for example if clearing/green-lighting decisions taken by the Non-EU Subsidiary. It was understood that the EU parent company would not incur any liability for an independent conduct of a Non-EU Subsidiary it did not have any impact on. A similar understanding of who can be liable for sanctions violations is in fact common to many Western sanctions jurisdictions.

The new provision of Article 8a of Reg 833/2014 changes these dynamics. Remarkably, the jurisdictional provisions of Article 13 remain intact despite the amendment, so that non-EU companies doing business entirely outside the EU continue to be not subject to EU jurisdiction – this allows the EU legislator to uphold its regular claim that EU sanctions are never extraterritorial. However, the new provision of Article 8a forces EU parent companies, in order to avoid direct liability risks for themselves, to ensure that their Non-EU Subsidiaries practically comply with EU sanctions.

The new provision already instilled a debate of its enforceability as the “best efforts” requirement is seen to be too vague. Criminal liability will ultimately be defined by the interplay of Member State criminal laws and EU sanctions regulations, and in this respect, Article 8a might open the door for criminal enforcement agencies to prosecute EU companies in connection with the conduct of Non-EU Subsidiaries. One liability option seems to be that sanctions-undermining activities of a Non-EU Subsidiary would be attributed to the EU parent company as its own sanctions violation, if such an attribution is possible under criminal or administrative laws of the respective Member State. Alternatively, the executives of the EU parent company could be exposed to the criminal liability “by omission,” as for example practiced in German or Dutch legal systems. The respective offense would be a sanctions violation by virtue of failure to undertake necessary measures within the meaning of Article 8a of Reg 833/2014. In this regard, the widespread understanding that EU companies and their executives are not obliged (in a sense of a “guarantor’s duty” or “duty to care”) to ensure EU sanctions compliance in Non-EU Subsidiaries can no longer be upheld, at least in the context of sectoral sanctions against Russia. Instead, diligent and robust policies, procedures and systems should be put in place to avoid to the extent possible conduct by the Non-EU-Subsidiary that could be considered “undermining” EU sanctions.

With regard to the application of the new provision, Recitals 27-30 to Amending Regulation (EU) 2024/1745 provide for helpful clarifications:

“Ownership” and “control” of a non-EU company are defined in the same way as they are for party-based restrictions under financial sanctions; i.e., 50% or more of the proprietary rights for “ownership” and certain rights to exercise decisive influence for “control.”
Activities that undermine EU sanctions under Reg 833/2014 are those resulting in an effect that those restrictive measures seek to prevent. The Recitals use the example that a recipient in Russia obtains goods, technology, financing, or services of a type that is subject to prohibitions under Reg 833/2014, indicating that the prevention of such an outcome is at the core of the new provision of Article 8a.
With regard to the term “best efforts,” the Recitals clarify that:
- “Best efforts” comprise all actions suitable and necessary to achieve the result of preventing the undermining of EU sanctions under Reg 833/2014.
- Those actions can include, for example, the implementation of appropriate policies, controls, and procedures to mitigate and manage risk effectively, considering factors such as the country of establishment, the business sector, and the type of activity of the non-EU company owned or controlled by the EU company.
- At the same time, best efforts should be understood as comprising only actions that are feasible for the EU company in view of its nature, its size, and the relevant factual circumstances, particularly the degree of effective control over the non-EU company. In this context, the situation where the EU company is not able to exercise control over a non-EU company due to the legislation of a third country should be taken into account.

The placement of these clarifications in the Recitals indicates the challenges to find unanimity in introducing unequivocal requirements into the binding provisions of Reg 833/2014, so that they rather provide interpretative aid.

Notably, the new provision was adopted only within sectoral (Reg 833/2014) but not within party-based financial sanctions against Russia (Regulation (EU) 269/2014). However, within the new package of sanctions against Belarus adopted a few days later, the new provision with the same wording was added to the Belarus Sanctions Regulation (new Article 8h of Regulation (EU) 765/2006), which covers both sectoral and party-based financial measures.

It remains to be seen whether the new provision becomes a standard for EU sanctions in general. However, at least with respect the EU’s sectoral sanctions on Russia and for the EU’s Belarus sanctions, companies need to act now to extend their EU sanctions compliance programs to cover Non-EU Subsidiaries of EU parent companies.

2. Mandatory Sanctions Risk Assessment for Companies Trading with Common High Priority Items

Starting from the 12th sanctions package against Russia, the EU has begun to introduce novel obligations for companies trading with so called “common high priority items” (“CHPI”), i.e. items used in Russian military systems found on the battlefield in Ukraine or critical to the development, production or use of Russian military systems. In particular, the so called “No Russia Clause” of Article 12g of Reg 833/2014 obliged EU companies trading with CHPI in third countries (except a few partner countries) to contractually prohibit re-exportation to Russia or for use in Russia, and to provide for adequate remedies in the event of a breach of this contractual obligation.

The 14th sanctions package establishes further obligations for such companies. In particular, the new Article 12ga of Reg 833/2014 introduces a so called “No Russia IP Clause” obliging companies to contractually prohibit their third-country counterparts to use or sublicense IP rights and trade secrets in connection with CHPI being delivered to Russia or for use in Russia, and to provide for adequate remedies in the event of a breach of this contractual obligation.

Furthermore, the new Article 12gb of Reg 833/2014 obliges companies in CHPI industries, as of December 26, 2024, to conduct risk assessments as regards exportation to/for use in Russia, to ensure that those risk assessments are documented and kept up-to-date, and to implement appropriate policies, controls and procedures to mitigate and effectively manage such risks. EU persons must further ensure that non-EU companies owned or controlled by them are equally implementing these requirements. The same obligations apply within the framework of EU sanctions against Belarus by virtue of new Article 8ga of Regulation (EU) 765/2006.

This is not the first call for companies to implement such enhanced due diligence procedures at the EU level. On September 7, 2023, the European Commission provided its Guidance on Enhanced Due Diligence to shield against Russia sanctions circumvention, whereas the less detailed Notice 2022/C 145 I/01 called for due diligence measures as early as on April 1, 2022. Article 12gb of Reg 833/2014 is the first provision which transposes these calls into a binding obligation, albeit only for CHPI industries and in respect of CHPI items.

At the same time, Recital 36 to Amending Regulation (EU) 2024/1745 makes it clear that, if an EU operator in any industry failed to carry out appropriate due diligence, in particular on the basis of publicly or readily available information, it may not invoke the protection against liability granted under EU sanctions regulations to those who did not know, and had no reasonable cause to suspect, that their actions would infringe EU sanctions. Therefore, while companies in CHPI industries have no choice but to implement required due diligence mechanisms due to the new provision, companies in other industries can likewise be advised to do so in order to shield against substantial liability risks.

The following Gibson Dunn lawyers prepared this update: Nikita Malevanny, Benno Schwarz, Christopher Timura, Melina Kronester, Vanessa Ludwig, Irene Polieri, and Adam Smith.

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

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Patrick Doris – London (+44 207 071 4276, [email protected])
Michelle M. Kirschner – London (+44 20 7071 4212, [email protected])
Penny Madden KC – London (+44 20 7071 4226, [email protected])
Irene Polieri – London (+44 20 7071 4199, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Nikita Malevanny – Munich (+49 89 189 33 224, [email protected])
Melina Kronester – Munich (+49 89 189 33 225, [email protected])
Vanessa Ludwig – Frankfurt (+49 69 247 411 531, [email protected])

United States:
Ronald Kirk – Co-Chair, Dallas (+1 214.698.3295, [email protected])
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202.887.3547, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, [email protected])
David P. Burns – Washington, D.C. (+1 202.887.3786, [email protected])
Nicola T. Hanna – Los Angeles (+1 213.229.7269, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202.955.8685, [email protected])
Amanda H. Neely – Washington, D.C. (+1 202.777.9566, [email protected])
Samantha Sewall – Washington, D.C. (+1 202.887.3509, [email protected])
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, [email protected])
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, [email protected])
Sarah L. Pongrace – New York (+1 212.351.3972, [email protected])
Anna Searcey – Washington, D.C. (+1 202.887.3655, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202.955.8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, [email protected])
Claire Yi – New York (+1 212.351.2603, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, [email protected])

Asia:
Kelly Austin – Hong Kong/Denver (+1 303.298.5980, [email protected])
David A. Wolber – Hong Kong (+852 2214 3764, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Beijing (+86 10 6502 8534, [email protected])
Dharak Bhavsar – Hong Kong (+852 2214 3755, [email protected])
Felicia Chen – Hong Kong (+852 2214 3728, [email protected])
Arnold Pun – Hong Kong (+852 2214 3838, [email protected])

The Final Regulations generally apply to qualified facilities placed in service in tax years ending after June 25, 2024.

On June 25, 2024, the IRS and Treasury published final Treasury regulations (the “Final Regulations”) on the prevailing wage and apprenticeship requirements (the “PWA Requirements”) that taxpayers must[1] satisfy to receive the full amount[2] of certain tax credits provided for in the Inflation Reduction Act of 2022 (the “IRA”).[3] The Final Regulations build upon the proposed Treasury regulations (the “Proposed Regulations”) issued on August 30, 2023 (our earlier alert on the Proposed Regulations is available here)

The Final Regulations generally apply to qualified facilities placed in service in tax years ending after June 25, 2024. For facilities that either (1) began construction on or after January 29, 2023 and before June 25, 2024 or (2) were placed in service in taxable years ending on or before June 25, 2024, taxpayers may choose to apply either the Final Regulations or the Proposed Regulations, as long as the chosen guidance is applied consistently.[4]

Background

At a high level, the “prevailing wage requirement” requires that all laborers and mechanics employed by a taxpayer (or a contractor or subcontractor) claiming an applicable credit[5] be paid wages for construction, alteration, or repair of the applicable facility that are not less than the “prevailing” wage for the type of work performed. The “apprenticeship requirement” generally requires a certain percentage of labor hours be performed by apprentices working under the supervision of experienced laborers. Our prior alert (which is available here) summarizes these requirements in greater detail.

Key Changes to Prevailing Wage Requirements

The Final Regulations provide several crucial clarifications to earlier guidance (including the Proposed Regulations) relating to the prevailing wage requirement.

Timing of Wage Determination

Taxpayers generally must consult guidance published by the Wage and Hour Division of the Department of Labor to determine prevailing wages. Unlike the Proposed Regulations, which would have set the applicable wage rate as the one in effect at the beginning of construction, the Final Regulations stipulate that the applicable wage rate is the one in effect when a contract for the construction, alteration, or repair of a facility is executed. Only if there is no contract is the timing of the wage determination determined on when construction begins. If a taxpayer enters into a generalized contract for alteration or repair work (i.e., a contract that does not call for any specific work) for an indefinite period of time, the applicable wage rates must be refreshed on an annual basis, so taxpayers cannot lock in lower wages (or be locked into higher wages) through vague, long-term contracts.

Curing Failures to Pay Appropriate Wages

In some instances, taxpayers seeking to fix failures to pay appropriate wages can avoid penalties if they self-correct. The Final Regulations modify the Proposed Regulations by specifying that self-correction must be made by the last day of the first month following the end of the calendar quarter in which the failure occurred (as opposed to the Proposed Regulations, which would have required the correction payment to be made within 30 days after the taxpayer became aware of the error or the date on which the increased credit was claimed).

Additionally, the Final Regulations add a further clarification to these correction payments rules: if a former worker cannot be found, a taxpayer will be deemed to make a correction payment if it complies with state unclaimed property laws and all federal and state withholding information reporting requirements. This provision addresses the concern of some taxpayers, expressed after the issuance of the Proposed Regulations, that correction payments might not be possible if an underpaid worker could not be found.[6]

Key Changes to Apprenticeship Requirements

The Final Regulations also include important clarifications related to the apprenticeship requirements, including those highlighted below.

Applicability After Facility is Placed in Service

Under the Proposed Regulations, it was unclear whether the apprenticeship requirements continued to apply after a particular facility was placed in service. The Final Regulations make clear that the apprenticeship requirements cease to apply to alteration or repair work once a facility is placed in service.

Threshold Number of Construction Employees

The Final Regulations confirm that the apprenticeship requirements apply only to taxpayers, contractors, or subcontractors who employ four or more individuals to perform construction, alteration, or repair work in connection with the construction of a qualified facility. The Final Regulations clarify that the four-employee threshold applies over the course of the construction, regardless of whether the employees are employed at the same location or at the same time, increasing the likelihood that the apprenticeship requirements will apply to small contractors or subcontractors.[7]

Requests to Registered Apprenticeship Programs

The Proposed Regulations provided that if a taxpayer made a request for apprentices to a registered apprenticeship program and received a denial or nonresponse, the taxpayer must submit additional requests every 120 days in order to meet the good faith effort exception (to the extent applicable, this exception excuses a taxpayer from complying with the apprenticeship requirements). In response to comments, the Final Regulations relaxed this requirement to provide that the taxpayer only needs to submit additional requests 365 days (or, if applicable, 366 days) after the denial of a previous request to continue to satisfy the good faith effort exception.

Key Changes to Recordkeeping Requirements

The Final Regulations include some important adjustments to the recordkeeping requirements for the PWA Requirements.

Personal Identifying Information

The Proposed Regulations would have required the collection of sensitive personal identifying information, including social security numbers, with respect to the employees of the taxpayer and the employees of contractors or subcontractors. The Final Regulations alter this requirement to provide that only the last four digits of an employee’s social security number must be collected.

Options for Compliance

The Final Regulations provide three ways to comply with the recordkeeping requirements:

Taxpayers may collect and physically retain relevant records from contractors and subcontractors, with certain personally identifiable information redacted so long as unredacted information is made available to the IRS upon request.
Contractors and subcontractors may provide relevant records to a third-party vendor to physically retain on behalf of the taxpayer, with certain sensitive information redacted so long as unredacted information is made available to the IRS upon request.
Taxpayers, contractors, and subcontractors may each physically retain the relevant unredacted records for their own employees, and those unredacted records must be made available to the IRS upon request.

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

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

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

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

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

[6] The preamble to the Proposed Regulations stated, “[t]he Treasury Department and the IRS expect that taxpayers will be able to establish correction payments even when a former laborer or mechanic cannot be located.”

[7] The Final Regulations clarify that the hours devoted to the performance of construction, alteration, or repair work by any qualified apprentice in excess of the applicable ratio requirement will be counted towards the total labor hours but will not be counted as hours performed by qualified apprentices for purposes of the labor hours requirement applicable to qualified apprentices.

The following Gibson Dunn lawyers prepared this update: Mike Cannon, Matt Donnelly, Josiah Bethards, Duncan Hamilton, Blake Hoerster, and Nathan Sauers.

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

Tax:
Michael Q. Cannon – Dallas (+1 214.698.3232, [email protected])
Matt Donnelly – Washington, D.C. (+1 202.887.3567, [email protected])
Josiah Bethards – Dallas (+1 214.698.3354, [email protected])
Blake Hoerster– Dallas (+1 214.698.3180, [email protected])
Duncan Hamilton– Dallas (+1 214.698.3135, [email protected])
Nathan Sauers – Houston (+1 346.718.6715, [email protected])

Cleantech:
John T. Gaffney – New York (+1 212.351.2626, [email protected])
Daniel S. Alterbaum – New York (+1 212.351.4084, [email protected])
Adam Whitehouse – Houston (+1 346.718.6696, [email protected])

Power and Renewables:
Peter J. Hanlon – New York (+1 212.351.2425, [email protected])
Nicholas H. Politan, Jr. – New York (+1 212.351.2616, [email protected])

National Association of Manufacturers v. SEC, No. 22-51069 – Decided June 26, 2024

A unanimous Fifth Circuit panel vacated the SEC’s 2022 rescission of its 2020 proxy firm disclosure rule because the SEC failed to explain why the factual findings that supported the 2020 Rule were incorrect.

“[T]he SEC acted arbitrarily and capriciously in two ways. First, the agency failed adequately to explain its decision to disregard its prior factual finding that the notice-and-awareness conditions posed little or no risk to the timeliness and independence of proxy voting advice. Second, the agency failed to provide a reasonable explanation why these risks were so significant under the 2020 Rule as to justify its rescission.”

JUDGE JONES, writing for the Court

Background:

Shareholders of public companies are generally permitted under state law and SEC rules to vote on a variety of corporate-governance issues during shareholder meetings. Most shareholders do not attend these meetings in person, so they cast their votes by proxy. Institutional investors, who own a sizeable percentage of public company stock, vote in thousands of these meetings. They often retain proxy firms, such as Institutional Shareholder Services and Glass Lewis, to provide research and to advise them on how to vote.

SEC rules relating to proxy regulations, among other things, prohibit persons who solicit proxies from making misstatements or omissions of material fact in their solicitations and require such persons to furnish the targets of their solicitations with proxy statements containing certain disclosures. But proxy firms are also eligible for exemptions from these rules if they comply with certain conditions, and the business models of proxy firms rely on the availability of such exemptions.

Over the years, as proxy advisors grew in influence, however, concerns emerged about their practices. The proxy advisor market is “effectively a duopoly, because two firms . . . control roughly 97% of the market,” and “[i]nvestors, registrants, and others” began questioning the “accuracy of the information and the soundness of the advice that proxy firms provide” to shareholders and complaining about potential conflicts of interest and “the proxy firms’ unwillingness to engage with issuers to correct errors.” Nat’l Ass’n of Manufacturers v. SEC, No. 22-51069, 2024 WL 3175755, at *1 (5th Cir. June 26, 2024).

To address these and other concerns, the SEC undertook “nearly ten years of study and collaboration with all interested parties spanning two presidential administrations.” Id. at *2. This effort culminated in 2019, with the SEC’s proposal of a new rule that imposed additional conditions on the availability of exemptions for proxy firms. Importantly, amongst other requirements, the proposal required that proxy firms “provide registrants”—including public companies—“time to review and provide feedback on the advice before it is disseminated to the proxy firm’s clients.” Id. (cleaned up) (emphasis added). The rule’s purpose was to ensure the reliability and accuracy of the proxy firms’ advice by allowing a registrant an opportunity to correct any inaccuracies before dissemination. During the SEC’s 60-day comment period, however, some commentators expressed concern that the rule would delay and undermine the independence of the proxy firms’ advice.

When it adopted the rule in 2020 (the “2020 Rule”), the SEC addressed those concerns by requiring proxy firms (1) to provide their advice to registrants “at or prior to” the time they give their advice to their clients and (2) to allow their clients to see any written statements the registrant provided about the advice before the shareholder meeting. Id. at *3 (emphasis in original). Between the time the SEC finalized the rule and the date that proxy firms were required to comply with the new conditions, there entered a new SEC administration.

In November 2021, after all the SEC’s collaboration and deliberation, and just days before proxy firms were required to comply with the 2020 Rule, the new administration of the SEC published its proposal to rescind the 2020 Rule. It did so only after the new SEC chairman took office, held a closed-door meeting with the opponents of the 2020 Rule, suspended its enforcement, and directed his staff to reconsider the regulation in full. In July 2022, over the dissent of two commissioners, the SEC formally rescinded the 2020 Rule, citing the same “timeliness” and “independence” concerns that the agency previously concluded the 2020 Rule was designed to address—all without explaining its change in position. Id. at *4.

Issue:

Is it arbitrary and capricious for an agency to reject its previous factual findings without explaining why those findings were incorrect?

Court’s Holding:

Yes. An agency must provide a detailed explanation when rejecting prior factual findings.

What It Means:

The Fifth Circuit’s decision makes clear that, although a new administration may rescind prior rules, the agency must adequately explain any departure from its prior factual findings. Litigants seeking to challenge an agency’s flip-flop should pay careful attention to the agency’s justification for the change—particularly when it involves contradicting prior agency fact finding.
The Fifth Circuit’s decision also underscores courts’ refusal to credit agency litigation positions or other post hoc rationalizations for an agency’s change in position: “[I]n reviewing an agency’s action, we may consider only the reasoning articulated by the agency itself; we cannot consider post hoc rationalizations.” Id. at *8 (cleaned up).
The Fifth Circuit also confirmed that the “default” remedy when “an agency rule violates the APA” is “vacatur”—indeed, a court “shall—not may—hold unlawful and set aside [such] agency action.” Id. at *9 (cleaned up). Accordingly, successful challenges to any agency’s rule will generally result in the rule being set aside.
This case was one of many challenges relating to SEC rulemaking regarding the regulation of proxy advisory firms. For instance, the D.C. District Court recently held, regarding another part of the 2020 Rule defining “solicit,” that “the SEC acted contrary to law and in excess of statutory authority when it amended the proxy rules’ definition of ‘solicit’ and ‘solicitation’ to include proxy voting advice for a fee.” ISS Inc. v. SEC, No. 19-CV-3275, 2024 WL 756783, at *2 (D.D.C. Feb. 23, 2024), notices of appeal filed, Nos. 24-5105, 24-5112 (D.C. Cir.). And the Western District of Texas previously held that the SEC’s suspension of the 2020 Rule was unlawful because it was done without notice and comment. NAM v. SEC, 631 F. Supp. 3d 423 (W.D. Tex. 2022).
Future SEC rules directed at proxy firms will likely continue to face challenges in court. The proxy advisor industry is also likely to continue to face challenges over the issues that led to the 2020 Rule. Moreover, corporations, investors, and proxy advisors will need to work to address these concerns in an often politicized corporate governance environment.

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 U.S. Supreme Court. Please feel free to contact the following practice group leaders:

Related Practice: Securities Enforcement

Mark K. Schonfeld
+1 212.351.2433
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David Woodcock
+1 214.698.3211
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Related Practice: Securities Regulation and Corporate Governance

Elizabeth A. Ising
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James J. Moloney
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Lori Zyskowski
+1 212.351.2309
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Related Practice: Administrative Law and Regulatory Practice

Eugene Scalia
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Helgi C. Walker
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Stuart F. Delery
+1 202.955.8515
[email protected]

Related Practice: Securities Litigation

Monica K. Loseman
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Brian M. Lutz
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Craig Varnen
+1 213.229.7922
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Related Practice: Appellate and Constitutional Law

Thomas H. Dupree Jr. +1 202.955.8547 [email protected]	Allyson N. Ho +1 214.698.3233 [email protected]	Julian W. Poon +1 213.229.7758 [email protected]
Brad G. Hubbard +1 214.698.3326 [email protected]

This alert was prepared by associates Brian Richman, Elizabeth A. Kiernan, and Brian Sanders.

Corner Post v. Board of Governors, Federal Reserve System, No. 22-1008 – Decided July 1, 2024

Today, the Supreme Court held 6–3 that the six-year clock to bring a claim under the Administrative Procedure Act starts when an agency rule injures the plaintiff, not when the agency issues the rule.

“An APA plaintiff does not have a complete and present cause of action until she suffers an injury from final agency action, so the statute of limitations does not begin to run until she is injured.”

JUSTICE BARRETT, writing for the Court

Background:

In 2011, the Federal Reserve Board promulgated Regulation II, which caps interchange fees payment networks can charge merchants on debit-card transactions. The D.C. Circuit rejected a challenge under the Administrative Procedure Act (“APA”) to Regulation II in 2014, holding that the rule “generally rest[s] on reasonable constructions of the statute.” NACS v. Board of Governors of FRS, 746 F.3d 474, 477 (D.C. Cir. 2014). In 2018, a convenience store called Corner Post opened its doors and first paid fees under Regulation II. Three years later, Corner Post filed an APA claim challenging Regulation II.

The Eighth Circuit held that Corner Post’s suit was untimely. The APA allows suit by any person who has suffered a “legal wrong” or been “adversely affected” by an agency rule. 5 U.S.C. § 702. An APA challenge to an agency rule must be “filed within six years after the right of action first accrues.” 28 U.S.C. § 2401(a). Aligning itself with eight other circuits, the Eighth Circuit ruled that APA claims must be brought within six years of the rule’s promulgation, even if the plaintiff could not have filed its own claim within that initial six-year period. That decision split with the Sixth Circuit, which had held that an APA claim accrues (and the six-year limitations period thus starts) only once the agency rule injures the particular plaintiff. The Supreme Court granted review to resolve the conflict.

Issue:

Whether a plaintiff’s APA claim first accrues when an agency issues a rule—regardless of whether that rule injures the plaintiff on that date—or when the rule first adversely affects the plaintiff.

Court’s Holding:

An APA claim accrues, and the six-year statute of limitations begins to run, only when an agency rule injures the plaintiff.

What It Means:

Today’s decision means that the timeliness of an APA claim does not turn on when the agency rule was promulgated or when someone else could have challenged it. Instead, it turns on when the particular plaintiff challenging the agency rule was first injured by the rule. The Court relied on the APA’s “basic presumption” of judicial review and the “deep-rooted historic tradition that everyone should have his own day in court.” Op. 21–22. As a result, an APA claim challenging an agency rule is timely when the plaintiff was first injured by the rule within six years of filing suit—even if the rule was promulgated more than six years ago.
The Court’s decision also amplifies the impact of its decision in Loper Bright to overrule Chevron v. NRDC. As the Court explained, the D.C. Circuit relied on Chevron in its 2014 decision rejecting an APA challenge to Regulation II, holding that the regulation “rest[ed] on reasonable constructions of the statute.” Op. 2. On remand, the district court and Eighth Circuit will address Regulation II’s validity without deferring to the Federal Reserve Board’s interpretation of the relevant federal statutes.
In dissent, Justice Jackson predicted that the Court’s adoption of a plaintiff-specific accrual rule for APA claims could clear the way to new challenges to decades-old regulations.

The Court’s opinion is available here.

Appellate and Constitutional Law

Thomas H. Dupree Jr. +1 202.955.8547 [email protected]	Allyson N. Ho +1 214.698.3233 [email protected]	Julian W. Poon +1 213.229.7758 [email protected]
Lucas C. Townsend +1 202.887.3731 [email protected]	Bradley J. Hamburger +1 213.229.7658 [email protected]	Brad G. Hubbard +1 214.698.3326 [email protected]

Related Practice: Administrative Law and Regulatory Practice

Eugene Scalia
+1 202.955.8210
[email protected]

Helgi C. Walker
+1 202.887.3599
[email protected]

Stuart F. Delery
+1 202.955.8515
[email protected]

This alert was prepared by associates Grace Hart and Patrick Fuster.

Gibson Dunn discusses the background of the Opinion, the key findings and our main takeaways for both States and private actors, including the potential influence of the Opinion on future climate change litigation.

On 21 May 2024, the International Tribunal for the Law of the Sea (“ITLOS” or “Tribunal”) became the first international court to issue an advisory opinion on States’ obligations in respect to climate change (“Opinion”). The Tribunal concluded that anthropogenic (i.e. human-caused) greenhouse gas emissions (“GHGs”) constitute “pollution of the marine environment” under the United Nations Convention on the Law of the Sea (“UNCLOS” or “Convention”), triggering certain positive obligations of States, including a duty to prevent, reduce and control both land- and sea-based anthropogenic GHGs.

The Opinion is the first in a trio of advisory opinions by international courts that will likely be issued within twelve months of each other. It is envisaged that next, the Inter-American Court of Human Rights (“IACHR”) will deliver its opinion regarding States’ obligations derived from human rights norms in relation to the climate emergency. The International Court of Justice (“ICJ”) will then opine on the obligations of States under international law to ensure the protection of the climate system from anthropogenic GHGs for present and future generations, as well as the legal consequences for States where they, by their acts and omissions, have caused significant harm to the climate system. These opinions are expected in early- and mid- 2025, respectively.

Notably, the Opinion was issued just six weeks after the European Court of Human Rights’ (“ECtHR’s”) judgment in KlimaSeniorinnen v. Switzerland, in which the ECtHR, for the first time in its history, prescribed the content of States’ positive obligations under Article 8 of the European Convention on Human Rights (“ECHR”) in the context of climate change. According to the ECtHR, States have a primary duty to adopt, and to effectively apply in practice, general measures for achieving carbon neutrality—and with a view to achieving neutrality within the next three decades. (We previously reported on KlimaSeniorinnen here.)

In this Client Alert, we discuss the background and the potential implications of the Opinion for both States and private actors as well as offering our key takeaways.

Background

The Advisory Opinion was issued pursuant to a request (“Request”) by the Commission of Small Island States on Climate Change and International Law (“COSIS”). COSIS was established in 2022 and comprises eight States, which are low emitters of GHGs, but highly vulnerable to the impacts of climate change.

On 12 December 2022, COSIS asked ITLOS to opine on the specific obligations of States Parties to UNCLOS, including under Part XII (“Protection and Preservation of the Marine Environment”) to:

prevent, reduce and control pollution of the marine environment in relation to the deleterious effects that result or are likely to result from climate change, including through ocean warming and sea level rise, and ocean acidification, which are caused by anthropogenic GHGs into the atmosphere; and
protect and preserve the marine environment in relation to climate change impacts, including ocean warming and sea level rise and ocean acidification.

Part XII of the Convention sets out an affirmative and overarching general obligation “to protect and preserve the marine environment” (Article 192) followed by specific obligations—including to “take … all measures … necessary” to “prevent, reduce and control pollution of the marine environment from any source” (Article 194(1)) and “ensure that activities under their jurisdiction or control are so conducted as not to cause damage by pollution to other States and their environment” (Article 194(2)).

More than 50 States, inter-governmental and non-governmental organisations made written and oral submissions in the ITLOS proceedings, presenting a range of views as to how the questions in the Request should be answered.

ITLOS’ Key Conclusions

(a) Anthropogenic GHGs constitute “pollution of the marine environment”

Importantly, the Tribunal found that anthropogenic GHGs in the atmosphere constitute “pollution of the marine environment” within the meaning of Article 1(1)(4) of the Convention as it satisfies the three criteria of: (i) there being a substance or energy; (ii) the substance or energy is introduced by humans, directly or indirectly, into the marine environment; and (iii) such introduction results, or is likely to result, in deleterious effects. This finding triggered certain obligations for States under UNCLOS Part XII (and other relevant UNCLOS provisions)—some of which are discussed below.

In coming to this conclusion, the Tribunal (similarly to the ECtHR) relied on reports from the Inter-governmental Panel on Climate Change (“IPCC”) as authoritative assessments of the scientific knowledge on climate change. In this regard, the Tribunal noted that none of the participants had challenged the authoritative value of the IPCC reports.

(b) State Parties have an obligation to prevent, reduce and control pollution from anthropogenic GHGs

Article 194(1) of UNCLOS imposes an obligation upon States to take “all necessary measures” to reduce and control marine pollution from any source including anthropogenic GHGs—and eventually prevent such pollution from occurring at all. However, consistent with the Paris Agreement, this obligation does not require “immediate cessation” of marine pollution from anthropogenic GHGs.

Whilst the concept of “all necessary measures” is not defined in UNCLOS, the Tribunal considered that among such measures are those designed to reduce GHG emissions—commonly referred to as “mitigation measures” in the climate context. Similar to KlimaSeniorinnen, ITLOS explained that it is up to the State to determine what measures are necessary, but such measures must be determined “objectively”: (i) first, on the basis of the “best available science”—in which context the IPCC reports “deserve particular consideration”; and second, with reference to relevant international rules and standards—where the United Nations Framework Convention on Climate Change (“UNFCCC”) and the 2015 Paris Agreement “stand out … as primary treaties”, and in particular the objective in the Paris Agreement of limiting the temperature increase to 1.5° compared to pre-industrial levels.

(c) The nature of the obligation to prevent, reduce and control pollution (including transboundary pollution) is one of stringent due diligence, i.e. an obligation of conduct

The obligation to prevent, reduce and control pollution is an obligation of conduct. In other words, by this obligation, States are required to act with due diligence in taking necessary measures—and the level is stringent because of the high risks of serious and irreversible harm to the marine environment that anthropogenic GHGs present. The obligation of due diligence requires a State “to put in place a national system, including legislation, administrative procedures and an enforcement mechanism necessary to regulation … and to exercise adequate vigilance … with a view to achieving the intended objective”. The obligation is “particularly relevant” in a situation in which activities are mostly carried out by private actors. States must also apply the precautionary approach in their exercise of due diligence.

According to ITLOS, the standard of due diligence will vary according to scientific information, relevant international rules and standards, the risk of harm and the urgency involved. The implementation of the obligation may also vary according to the relevant States’ capabilities and resources.

(d) State Parties have an obligation to prevent, reduce and control transboundary pollution

Further, State Parties have a particular obligation with respect to transboundary pollution. States must “take all necessary measures” to ensure GHG emissions under their jurisdiction or control do not cause damage to other States and their environment, and pollution arising from such emissions does not spread beyond the areas where they exercise sovereign rights. The standard of due diligence in this context “can be even more stringent” because of the nature of transboundary pollution.

(e) State Parties have an obligation to implement laws and regulations to prevent, reduce and control marine pollution—including from land-based sources

As the Tribunal went on to discuss, there also exist complimentary obligations (Articles 207, 211 and 212), whereby State Parties must implement laws and regulations, to prevent, reduce and control marine pollution from land-based sources, as well as aircraft and vessels, taking account of treaties such as the UNFCCC and the Paris Agreement. The Tribunal explained that “central to” those laws and regulations is the reduction of anthropogenic GHG emissions, and measures “can be wide-ranging, from the establishment of administrative procedures for the regulation of pollution to the monitoring of risks and effects of marine pollution”.

(f) State Parties are required to undertake Environmental Impact Assessments (“EIAs”)

State Parties are, additionally, required to conduct EIAs under Article 206—which are “an essential part of a comprehensive environmental management system”. The EIA obligation is triggered when there are “reasonable grounds for believing” that the activities “may cause substantial pollution of or significant and harmful changes to the marine environment”.

Article 206 does not prescribe the scope and content of EIAs and so the Tribunal proceeded to fill in the gaps. On scope, it explained that activities under assessment are those within a State’s jurisdiction or control and comprise those of both private and State entities. Further, both sea- and land-based activities are included. Concerning content, the Tribunal noted that EIAs should embrace not only the specific aspects of the planned activities but the cumulative impacts of these and other activities on the environment. The Tribunal observed that the Agreement on the Conservation and Sustainable Use of Marine Biological Diversity of Areas Beyond National Jurisdiction contains detailed provisions on EIAs, implying that such provisions provide a suitable benchmark.

(g) State Parties must keep under surveillance the effects of activities that States have permitted, or in which they are engaged

State Parties must also keep under surveillance the effects of activities that States have permitted, or in which they are engaged. This obligation applies irrespective of the place where the activities are conducted or the nationality of the individuals or entities carrying out the activities.

(h) State Parties have the specific obligation to protect and preserve the marine environment from climate change impacts and ocean acidification

Under Article 192 of UNCLOS, State Parties have the specific obligation to protect and preserve the marine environment from climate change impacts and ocean acidification (which entails maintaining ecosystem health and the natural balance of the marine environment). This obligation has a broad scope, encompassing any type of harm or threat to the marine environment. Where the marine environment has been degraded, this obligation may call for measures to restore marine habitats and ecosystems. Again, the obligation is one of due diligence of a stringent standard.

Our Key Takeaways

The Opinion delivered by ITLOS is of considerable significance for many reasons. We have the following key takeaways:

First, while an advisory opinion from ITLOS does not create legally enforceable obligations on State Parties, they are nonetheless highly persuasive authorities for both international and domestic courts, in that an advisory opinion contributes to the clarification and development of international law.

The Opinion will, in our view, prove influential in the context of both pending and future climate change-related claims before international and domestic courts—particularly in cases against States[1] and / or State actors where it is alleged that actions being taken to mitigate against the effects of climate change are insufficient. This may include claims that supervision of non-State actors is lacking—and, in that regard, the Opinion referred, at paragraph 396, to the obligation on States to “ensure that non-State actors under their jurisdiction or control comply with such measures”.

It is worth noting that the Tribunal emphasised that failure to comply with the obligation to “take all necessary measures” would engage State responsibility. This suggests that a failure by a State Party to act leaves it vulnerable to UNCLOS proceedings pursuant to Article 235(1) in future (“States are responsible for the fulfilment of their international obligations concerning the protection and preservation of the marine environment”)—and/or claims that a State Party has failed to provide recourse to prompt and adequate compensation (or other relief) in respect of damage caused by marine pollution by juridical persons under their jurisdiction pursuant to Article 235(2).

Second, the Opinion is likely to have a “cross-fertilisation” effect. We expect that the IACHR and ICJ will seek to render advisory opinions that are consistent with the thrust of the ITLOS Opinion, albeit within their respective and somewhat different normative frameworks (and also to core elements of the ECtHR’s judgment in KlimaSeniorinnen). The task of the ICJ, however, will be a broader exercise since it will also deal with the question of “legal consequences” of State obligations in relation to climate change.

Third, the Opinion may prompt a regulatory response from States in terms of limiting GHG emissions from both sea- and land-based sources—though our view is that the ICJ advisory opinion may prove more influential in that regard to the extent that the ICJ opines on the substance of the Paris Agreement. Private actors should monitor changes to the regulatory landscape that may impact their operations.

Fourth, with respect to the Paris Agreement, the Opinion makes clear that UNCLOS exists alongside it (and the UNFCCC) as a legal basis for obligations to address climate change and its effects. Thus, the Opinion treats the UNCLOS and Paris Agreement regimes as distinct noting that States’ compliance with the Paris Agreement alone will not be sufficient to discharge the obligation to prevent, reduce and control pollution of the marine environment under UNCLOS. Likewise, ITLOS did not seek to tie “necessary measures” to the requirements under the Paris Agreement—such as the commitment in Article 4(2) to prepare, communicate and maintain successive nationally determined contributions that a State Party intends to achieve.

Fifth, the positive obligation to conduct EIAs where an activity may cause substantial pollution to the marine environment articulated in the Opinion is noteworthy. It may, for example, affect oil and gas licensing processes for exploration and production (both on- and offshore) as well as other high GHG-emitting projects. Of course, EIAs are routinely carried out in any event in many States. However, as noted, the EIA contemplated by the Tribunal includes “continuing surveillance” and an assessment of the “cumulative impact” of a project. EIAs will also now (in theory) have to be conducted in the context of the Tribunal’s clarification that anthropogenic GHGs constitute pollution of the marine environment. One can expect climate litigants to closely scrutinise the processes and outcomes of EIAs for high GHG emitting projects.

Finally, whilst the Opinion was unanimous, there was discussion by some judges in their Declarations to the Opinion of the relevance of human rights in interpreting obligations under UNCLOS. In the Opinion, the Tribunal merely states, in brief, that “climate change represents an existential threat and raises human rights concerns”.

In Judge Pawlak’s view, the Opinion could have gone further, “reflect[ing] the broader implications of recent developments in climate change justice”, specifically referring to the ECtHR’s KlimaSeniorinnen judgment. He acknowledged that pursuant to KlimaSeniorinnen, States have the responsibility to combat climate change to protect human rights and the decision “created preceden[t]” for other judicial institutions. Indeed, in Judge Pawlak’s view, KlimaSeniorinnen (as well as the UN Human Rights Committee’s decision in the Torres Strait Islanders case)—”which added human rights considerations to the global fight against climate change”—are “essential” and “not isolated.”

Judge Infante Caffi meanwhile thought the reference to human rights in the Opinion could have been supplemented by further arguments, noting the reference to human rights in the preamble to the Paris Agreement and the UN General Assembly’s resolution 76/300 with [t]he human right to a clean, healthy and sustainable environment”.

[1] In that context, please note that UNCLOS has been ratified by 168 parties. Notably, whilst the European Union has ratified the Convention, the United States has not.

The following Gibson Dunn lawyers prepared this update: Robert Spano, Ceyda Knoebel, Stephanie Collins, Alexa Romanelli, Sophie Hammond, and Daniel Szabo*.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s International Arbitration and Transnational Litigation or Environmental, Social and Governance (ESG) practice groups, or the following authors:

Robert Spano – Paris/London (+33 1 56 43 14 07, [email protected])
Ceyda Knoebel – London (+44 20 7071 4243, [email protected])
Stephanie Collins – London (+44 20 7071 4216, [email protected])
Alexa Romanelli – London (+44 20 7071 4269, [email protected])
Sophie Hammond – London (+44 20 7071 4077, [email protected])

*Daniel Szabo, a trainee solicitor in the London office, is not admitted to practice law.

The Directive extends the list of criminal offenses to the environment on EU level. EU Member States have two years to transpose the directive into national law after the its entry into force on May 20, 2024.

On April 30, 2024, the European Union (the “EU”) published directive 2024/1203 on the protection of the environment through criminal law (the “Directive”) in its official journal.[1] The Directive was adopted by the European Parliament (the “Parliament”) on February 27, 2024[2] and by the European Council (the “Council”) on March 26, 2024[3].

The goal of the Directive is to combat environmental offenses more effectively. To this end, it introduces (i) new environment-related criminal offenses, (ii) detailed requirements regarding sanctioning levels for both natural and legal persons and (iii) a variety of measures that Member States must take in order to either prevent or effectively prosecute offenses.

The Directive will come into force on May 20, 2024[4], after which the Member States (with the exception of Ireland and Denmark[5]) will have 24 months to transpose it into national law.[6] Importantly, the Directive by its nature only establishes minimum requirements. Member States may choose to go beyond those minimum requirements and adopt stricter criminal laws when implementing the Directive.

Key Takeaways

The Directive provides for 20 environment-related criminal offenses.
The Directive introduces “qualified offenses” with more severe punishment in cases of “ecocide” consisting of “(a) the destruction of, or widespread and systematic damage, which is either irreversible or long-lasting to, an ecosystem of considerable size or environmental value or a habitat within a protected site, or (b) widespread and substantial damage which is either irreversible or long lasting to the quality of air, soil, or water”.
Conduct shall be deemed unlawful even if it is carried out under an authorization issued by a competent authority of a Member State if such authorization was obtained fraudulently or by corruption, extortion or coercion, or if such authorization is in manifest breach of relevant substantive legal requirements.
The Directive stipulates severe penalties, including maximum terms of imprisonment of not less than ten years for individuals and maximum fines for legal entities of not less than 5 % of the worldwide turnover or EUR 40 million.
Member States have jurisdiction if the damage is one of the constituent elements of the offense and occurs on their territory. In cases where the damage occurs in a Member State other than the Member State in which the act causing the damage occurred, this may lead to prosecution in more than one EU Member States and in return to a further enhancement of the cooperation between enforcement authorities in different states.
The Directive stipulates a variety of measures that Member States must take in order to either prevent or effectively prosecute offenses. These include, among others, the provision of dedicated investigative tools, awareness-raising campaigns and education programs, the provision of training, and the implementation of a national strategy on combating environmental criminal offenses.

A. Background

In its founding treaties, the EU has committed itself to ensuring a high level of protection of the environment.[7] To this end, in 2008, the EU adopted the Directive on the protection of the environment through criminal law, obligating Member States to criminalize certain environmentally harmful activities. A subsequent evaluation of the effectiveness of the Directive identified considerable enforcement gaps in all Member States. Further, it concluded that the number of cross-border investigations and convictions in the EU for environmental crime had not grown substantially as expected.[8] Since environmental crime is growing at annual rates of 5% to 7% globally[9], creating lasting damage for habitats, species, people’s health, and the revenues of governments and businesses, the European Commission concluded the current directive to be insufficient and proposed a new directive.

The Directive should be seen in the context of other recent EU regulations that have already been passed or are still in the legislative process, which aim at protecting the environment in the context of the EU’s transition to a climate-neutral and green economy (“Green Deal”[10]). For example, the Corporate Sustainability Reporting Directive (CSRD), which has come into force on January 5, 2023, requires certain companies to report on impacts as well as risk and opportunities related to sustainability matters.[11] On April 24, 2024, after lengthy negotiations and several postponements, the Corporate Sustainability Due Diligence Directive (CSDDD) which sets out due diligence obligations for companies regarding actual and potential adverse impacts on the environment and human rights in their value chains was finally passed by the Parliament.[12]

B. Environmental Crime Defined

The Directive provides for 20 basic criminal offenses addressing various ways of conduct.[13] Conduct in this respect relates, for example, to

the harmful discharge, emission or introduction of materials or substances, energy (such as heat, sources of energy and noise)[14] or ionising radiation into air, soil or water.[15]
the placing on the market of a product that is potentially harmful when used on a large scale, in breach of a prohibition or another requirement aimed at protecting the environment.[16]
the manufacturing, placing or making available on the market, export or use of certain harmful substances.[17]
the harmful collection, transport, recovery or disposal of waste, the supervision of such operations and the after-care of disposal sites, including action taken as a dealer or a broker.[18]
trade with timber in violation of the EU Regulation[19] on Deforestation-free products.[20]

Unlawful Conduct – Conduct in Breach of the Union’s Policy on the Environment

The offenses defined by the Directive require unlawful conduct, i.e. either (1) a breach of Union law contributing to the pursuit of at least one of the objectives of the Union’s policy on the environment or (2) a law, regulation or administrative provision of a Member State or a decision taken by a competent authority of a Member State that gives effect to such Union law.[21] Pursuant to Article 191 (1) of the Treaty on the Functioning of the European Union (“TFEU”), Union policy on the environment shall contribute to pursuit of the following objectives:

preserving, protecting and improving the quality of the environment,
protecting human health,
prudent and rational utilization of natural resources,
promoting measures at international level to deal with regional or worldwide environmental problems, and in particular combating climate change.

Importantly, the Directive makes clear that conduct shall be deemed unlawful even when it is carried out under an authorization if such authorization was obtained fraudulently or by corruption, extortion or coercion, or is in manifest breach of relevant substantive requirements.[22] The recitals suggest that ‘in manifest breach of relevant substantive legal requirements’ should be interpreted as referring to an obvious and substantial breach of relevant substantive legal requirements, and is not intended to include breaches of procedural requirements or minor elements of the authorization.[23]

Common constituent element

The majority of the offenses described by the Directive require that the conduct “causes or is likely to cause the death of, or serious injury to, any person or substantial damage to the quality of air, soil or water, or substantial damage to an ecosystem, animals or plants”[24]. While the Directive provides for elements that should be taken into account when assessing whether the damage to the quality of air, soil or water, or to an ecosystem or to animals or plants is “substantial”[25], the recitals stipulate that this qualitative threshold as well as the term “ecosystem” should be generally understood in a broad sense suggesting a possibly wide scope of application.[26]

“Qualified Offenses”

The Directive introduces “qualified offenses” with more severe penalties consisting of (a) the destruction of, or widespread and systematic damage, which is either irreversible or long-lasting to, an ecosystem of considerable size or environmental value or a habitat within a protected site, or (b) widespread and substantial damage which is either irreversible or long lasting to the quality of air, soil, or water”.[27] In its recitals, the EU describes such offenses as “comparable to Ecocide”.[28] The term “ecocide” was originally coined in the 1970s during the Vietnam war and was eventually recognized as a war crime under the Rome Statute[29].[30] The language of the Directive further resembles the definition of crimes against humanity.[31]

Intentional or Serious Negligence Required

As a general rule, the offenses set out by the Directive require that the conduct is intentional.[32] For 18 modalities, Member States must ensure that the respective conduct constitutes a criminal offense where that conduct is carried out with at least serious negligence.[33]

Complicity and Inchoate Offending

Pursuant to the Directive, Member States must ensure that inciting, and aiding and abetting the commission of an intentionally committed offense are punishable.[34] For 16 modalities of conduct, the Directive instructs that attempts be a crime.[35]

Penalties

Criminal penalties for individuals must be effective, proportionate and dissuasive.[36] The Directive stipulates that these must include maximum terms of imprisonment of at least ten, eight, five, or three years depending on the specific offense.[37] Accessory criminal or non-criminal penalties or measures may include the (a) obligation to restore the environment or pay compensation for the damage to the environment; (b) fines; (c) exclusion from access to public funding; (d) disqualification from holding, within a legal person, a leading position of the same type used for committing the offense; (e) withdrawal of permits and authorizations; (f) temporary bans on running for public office; (g) where there is a public interest, following a case-by-case assessment, publication of all or part of the judicial decision that relates to the criminal offense committed and the sanctions or measures imposed.[38]

C. Corporate Liability

The Directive not only addresses individual misconduct, but also criminal offending on behalf of legal persons. In this respect, Member States must ensure that legal persons can be held liable for offenses conducted by any person who has a leading position within the legal person concerned, either based on a power of representation, an authority to take decisions, or an authority to exercise control within the legal person.[39] Liability must also include the lack of supervision or control by a person who has a leading position when it has made possible the commission of an offense for the benefit of the legal person by a person under its authority.[40]

In terms of sanctions, Member States must ensure that liable legal person can be punished by effective, proportionate and dissuasive criminal or non-criminal[41] penalties or measures.[42] This is supposed to include fines which shall be proportionate to the seriousness of the conduct and to the “individual, financial and other circumstances of the legal person concerned”.[43] Member States are to ensure that the maximum level of fines is, depending on the specific type of offending, not less than

5 % of the worldwide turnover[44] or EUR 40 million;[45] or
3 % of the worldwide turnover or EUR 24 million.[46]

Beyond that, the Directive obliges Member States to take the necessary measures to ensure that legal persons held liable for “ecocide” are punishable by more severe penalties or measures.[47]

Further measures or sanctions with respect to legal persons may include (a) the obligation to restore the environment or pay compensation for the damage to the environment; (b) exclusion from entitlement to public benefits or aid; (c) exclusion from access to public funding, including tender procedures, grants, concessions and licenses; (d) temporary or permanent disqualification from the practice of business activities; (e) withdrawal of permits and authorizations to pursue activities that resulted in the relevant criminal offense; (f) placing under judicial supervision; (g) judicial winding-up; (h) closure of establishments used for committing the offense; (i) an obligation to establish due diligence schemes for enhancing compliance with environmental standards; and (j) where there is a public interest, publication of all or part of the judicial decision relating to the criminal offense committed and the penalties or measures imposed, without prejudice to rules on privacy and the protection of personal data.[48]

D. Jurisdiction

Member States have jurisdiction over an offense, (a) if the offense was committed either in part or in whole within its territory, (b) on board a ship or an aircraft registered in the Member State concerned or flying its flag, (c) the damage which is one of the constituent elements of the offense occurred on its territory or (d) the offender is one of its nationals.[49]

In particular the establishment of jurisdiction when the damage that is one of the constituent elements of the offense occurred on the territory of a EU Member State, may lead to a wide applicability of the Directive and may even lead to multiple prosecution and in return to a further enhancement of the cooperation between enforcement authorities in different states.[50] By way of example, if a national of a non-EU Member State disposed waste illegally in a river that runs through both a non-EU Member State and one or more EU Member States and the waste killed a substantial part of the fish population, the Member State’s jurisdiction could be triggered.

In addition, a Member State may exercise jurisdiction if (a) the offender is a habitual resident in its territory, (b) the offense is committed for the benefit of a legal person established in its territory, (c) the offense is committed against one of its nationals or its habitual residents or (d) the offense has created a severe risk for the environment on its territory.[51]

Where an offense falls in the jurisdiction of more than one Member State, those Member States are required to cooperate to determine which Member State shall conduct the criminal proceedings.[52]

E. Preventive and Other Measures

The Directive stipulates a variety of measures that Member States must take in order to either prevent or effectively prosecute offenses.

Freezing and Confiscation: Member States shall take the necessary measures to enable the tracing, identifying, freezing and confiscation of instrumentalities and proceeds from the criminal offenses.[53]
Investigative Tools: Member States shall take the necessary measures to ensure that effective and proportionate investigative tools are available for investigating or prosecuting offenses.[54]
Campaigns and Education Programs: Member States shall take appropriate measures, such as information and awareness-raising campaigns targeting relevant stakeholders from the public and private sector as well as research and education programs, which aim to reduce environmental criminal offenses and the risk of environmental crime.[55]
Sufficient Resources: Member States shall ensure that national authorities which detect, investigate, prosecute or adjudicate environmental criminal offenses have a sufficient number of qualified staff and sufficient financial, technical and technological resources for the effective performance of their functions related to the implementation of the Directive.[56]
Training: Member States shall take necessary measures to ensure that specialized regular training is provided to judges, prosecutors, police and judicial staff and to competent authorities’ staff involved in criminal proceedings and investigations with regard to the objectives of the Directive.[57]
Coordination and Cooperation: The Directive stipulates that Member States take the necessary measures to establish appropriate mechanisms for coordination and cooperation between competent authorities within a Member State and between Member States and the Commission, and Union bodies, offices or agencies.[58]
National Strategy: Member States shall establish, publish, implement and regularly[59] review a national strategy on combatting environmental criminal offenses.[60]
Data Collection and Statistics: Member States shall ensure that a system is in place for the recording, production and provision of anonymized statistical data in order to monitor the effectiveness of their measures to combat environmental criminal offenses.[61]

[1] See EU Official Journal April 30, 2024 and the legislative text.

[2] See Press Release of the Parliament (February 27, 2024).

[3] See Press Release of the Council (March 26, 2024).

[4] Pursuant to Article 29 the Directive will come into force on the twentieth day following that of its publication in the Official Journal of the European Union.

[5] Recitals 69, 70.

[6] Article 28 of the Directive.

[7] Art. 3 (3) of the Treaty on European Union and Art. 191 TFEU.

[8] See the European Commission’s Proposal for the Directive (COM (2021) 851 final), p. 1.

[9] See https://ec.europa.eu/commission/presscorner/detail/en/ip_23_5817.

[10] See Communication from the Commission on the European Green Deal, COM/2019/640 final.

[11] See European Union’s Corporate Sustainability Reporting Directive — What Non-EU Companies with Operations in the EU Need to Know and European Corporate Sustainability Reporting Directive (CSRD): Key Takeaways from Adoption of the European Sustainability Reporting Standards.

[12] See the Letter of the Chair of the JURI Committee of the European Parliament of March 15, 2024..

[13] Article 3(2) of the Directive.

[14] Recital 15.

[15] Article 3(2)(a) of the Directive.

[16] Article 3(2)(b) of the Directive.

[17] Article 3(2)(c) of the Directive.

[18] Article 3(2)(f) of the Directive.

[19] Regulation (EU) 2023/1115.

[20] Article 3(2)(p) of the Directive.

[21] Article 3(1) of the Directive.

[22] Article 3(1) of the Directive.

[23] Recital 10.

[24] See e.g. Article 3(2)(a) of the Directive.

[25] Article 3(6) of the Directive.

[26] Recital 13.

[27] Article 3(3) of the Directive.

[28] Recital 21.

[29] Rome Statute, article 8(2)(b)(iv);

[30] European Law Institute – Ecocide.

[31] Rome Statute, article 7(1).

[32] Article 3(2) of the Directive.

[33] Article 3(4) of the Directive.

[34] Article 4(1) of the Directive.

[35] Article 4(2) of the Directive.

[36] Article 5(1) of the Directive.

[37] Article 5(2) of the Directive.

[38] Article 5(3) of the Directive.

[39] Article 6(1) of the Directive.

[40] Article 6(2) of the Directive.

[41] Depending on whether the Member States’ national law provides for the criminal liability of legal persons; see recital 33.

[42] Article 7(1) of the Directive.

[43] Article 7(2), (3) of the Directive.

[44] Either in the business year preceding that in which the offense was committed, or in the business year preceding that of the decision to impose the fine.

[45] Article 7(3)(a) of the Directive.

[46] Article 7(3)(b) of the Directive.

[47] Article 7(4) of the Directive.

[48] Article 7(2) of the Directive.

[49] Article 12(1) of the Directive.

[50] Regarding the application of the double jeopardy-/ne bis in idem-principle between multiple jurisdictions, see also Extraterritorial Impact of New UK Corporate Criminal Liability Laws.

[51] Article 12(2) of the Directive.

[52] Article 12(2) of the Directive.

[53] Article 10 of the Directive.

[54] Article 13 of the Directive.

[55] Article 16 of the Directive.

[56] Article 17 of the Directive.

[57] Article 18 of the Directive.

[58] Articles 19, 20 of the Directive.

[59] The intervals should be no longer than 5 years.

[60] Article 21 of the Directive.

[61] Article 22 of the Directive.

The following Gibson Dunn lawyers prepared this client alert: Benno Schwarz, Katharina Humphrey, Andreas Dürr, and Julian Reichert.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact the Gibson Dunn lawyer with whom you usually work, any member of Gibson Dunn’s White Collar Defense and Investigations practice group, or the following authors in Munich.

Benno Schwarz (+49 89 189 33-110, [email protected])
Katharina Humphrey (+49 89 189 33-155, [email protected])
Andreas Dürr (+49 89 189 33-219, [email protected])
Julian Reichert (+49 89 189 33-229, [email protected])

The Asia-Pacific countries are experiencing exponential growth in renewables projects, as they seek to transition away from power generated through fossil fuels. Disputes inevitably arise as stakeholders navigate complex challenges in the rapidly evolving field, and a number of trends have emerged insofar as these disputes are concerned.

In the next 10 years, some $3.3 trillion of investments into power generation across the Asia-Pacific region is expected; half in renewables. Indeed, more than half of the world’s power will be generated in the Asia-Pacific, of which almost half is expected to be from renewable sources. While these ambitious projects present enormous opportunities for stakeholders, there are also significant commercial risks and challenges that have in turn led to an increase in disputes. This update highlights some of the key risks for parties to consider in allocating risks, and proposes steps to better prepare for any disputes.

The Asia-Pacific countries are experiencing exponential growth in renewables projects, as they seek to transition away from power generated through fossil fuels. Notably, Japan and South Korea have pledged to achieve net zero by 2050. Recently, China for the first time made clear policy statements on carbon neutrality, declaring its goal to achieve carbon neutrality by 2060. At the same time, many Asia-Pacific countries have experienced an unprecedented surge in energy demand. These factors have accelerated the growth in the renewables sphere. Disputes inevitably arise as stakeholders navigate complex challenges in the rapidly evolving field. A number of trends have emerged insofar as these disputes are concerned.

Disputes caused by the rapid evolution of underlying technologies

First, a significant number of disputes relate to defective or ineffective technology. This is due to a number of reasons, including:

Reliance on novel technologies that are rapidly evolving. In many projects, the technology being implemented is still in infancy. It is not uncommon for these technologies to falter or fail to perform to the expectations of various stakeholders.
Inexperienced labor may contribute to inability to properly develop projects utilizing novel technologies.
The lack of established industry standards such that parties are unable to accurately gauge how the project will operate upon completion.

Disputes may then crystallize, involving claims of misrepresentation or breach of contract. Ascertaining the party at fault (designers, suppliers and contractors) and to what extent require extensive scientific and engineering expertise, oftentimes in areas where research is limited.

A further issue that the technology gives rise to is that the technology employed at the start of the project may quickly (and unexpectedly) become outdated by completion, leading to buyer’s remorse.

Complex interplay of project and finance structures

Renewables projects typically require significant investment. Whether the financing is by debt or equity, a couple of issues tend to arise:

The project assets and revenue streams are typically used as collateral. This requires energy generation within an economically viable time period. Therefore, any delays in achieving the generation required (often the case) have knock-on effects on the financing arrangement.
Moreover, the capital-intensive nature of such projects often means having to pool investment from multiple investors, potentially giving rise to divergent interests.

In addition to complex finance structures, stakeholders must also navigate a web of relationships with an array of third-party contractors and suppliers, governed by a multitude of contracts including engineering, procurement and construction contracts, service agreements, and operation and maintenance agreements.

Increased vulnerability to climate change

The operational efficacy of the technologies utilized in renewables projects may be substantially impacted by the adverse effects of climate change. Solar panels (ironically) experience diminished functionality and output amid warmer temperatures and wind turbines may shut down in response to excessively high wind speeds. Decreased precipitation and increasing evaporation rates caused by rising temperatures also pose significant challenges to hydropower generation. Even mild weather fluctuations – such as a drop in wind speed or increases in cloud cover – can significantly affect the power output of renewable sources.

Asia, the continent with the greatest land mass extending to the Artic, is warming significantly quicker than the global average. Extreme weather and climate change impacts are also increasing in Asia, with the continent having experienced numerous severe droughts and floods in recent years. For example, the Lower Sesan 2 Dam in Cambodia, which became operational in 2018, has struggled to reach full generation capacity due to prolonged droughts.

Stakeholders must thus proactively assess climate-related risks and cater for the allocation of such risks in the project documents.

Heightened regulatory risks

The renewables sector is exposed not only to commercial or counterparty risks faced by conventional construction and energy projects, but also distinctly greater regulatory risk. In particular, renewable energy projects are typically located in remote areas over large areas of land, making environmental and land use permits more difficult to obtain compared to other construction projects. In an age of environmental consciousness, approval processes for renewables projects are often subject to considerable public and political scrutiny, sometimes even after the project has been approved.

Delays in obtaining licenses will likely lead to disputes when deadlines and milestones set out in the project documents are not satisfied; or worse, a refusal to license or a revocation of a license could jeopardise the project entirely.

Supply chain issues

In an increasingly fractious world, and a ‘war’ on technological advancement being waged openly by major powers, there is every risk that technology or components or material needed from one country could, at moment’s notice, become the subject of export control, disrupting supply chains and the completion of a project.

Proactive engagement and careful allocation of risks

The risks associated with renewables projects require careful attention to a number of substantive and procedural issues.

First, and most obviously, risk allocation. Among others, a few key points should be considered.

Possibly the most challenging aspect of renewables projects are the disputes that arise from the implementation of the technology, the degradation of the technology, and how the efficacy of the technology could be affected by the environment. These issues are unlike typical construction disputes because the causes and effects of any damage done to the project are not necessarily linear or not easily assignable to any particular party. Careful thought as to who should bear the risk of such damage is advisable.
The need for express stipulation may depend on the governing law chosen. Particularly when it comes to the ability of a party to rely on external circumstances to discharge one’s liability, different laws are stricter than others. The English (and Singapore) common law for instance requires the external event to be both unforeseeable and to affect the root of the contract. Any circumstances short of this high threshold will therefore require contractual stipulation.
Parties should also stipulate the extent of compensation or damages that they could be liable for in the event of default. Again, different laws may impose limitations: for example, on the extent of liquidated damages or exclusions of liability.
Where relevant, exit options should also be negotiated and stipulated. Any compensation for the exercise of options should also comply with any relevant laws. For example, there was a period when options governed by Indian law were being challenged until the Supreme Court resolved the uncertainty.

Second, the risk of government interference or action adversely affecting the project makes it advisable for investors to structure their investment so that they are able to avail themselves of investment treaty protection should it become necessary. If the project involves the government as a counterparty, stabilization clauses and other guarantees should be considered as well.

Third, disputes may involve multiple parties and contracts. While most major institutional rules today allow for consolidation or joinder, their permissiveness and the timing of when the necessary applications should be made vary slightly. Moreover, thought should be given to whether to include advance consent to consolidation, joinder and claims under multiple contracts in order to avoid prolonged jurisdictional and admissibility fights when the dispute arises.

Last but not least, we have consistently found that parties who pro-actively manage their projects by consulting with their legal advisers and experts throughout the life-cycle of the project tend to be better prepared when a dispute arises.

The following Gibson Dunn lawyers prepared this update: Paul Tan, Jonathan Lai, and Viraen Vaswani.

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

Paul Tan – Singapore (+65 6507 3677, [email protected])
Jonathan T.R. Lai – Singapore (+65 6507 3678, [email protected])
Viraen Vaswani – Singapore (+65.6507.3690, [email protected])