As the COVID-19 global pandemic continues to devastate economies, trading prices for many bank loans have fallen significantly. Private equity sponsors are looking at debt buybacks as a potential opportunity to de-lever their portfolio companies at a significant discount. This client alert highlights some of the critical issues for private equity sponsors when considering these opportunities.

Debt Buybacks: Loan Documentation in the Asia-Pacific Region

Compared to the US and European markets, it is much harder to make generalisations about loan documentation in the Asia-Pacific region as many countries within the region have distinct approaches to loan documentation. However, it is fair to say that where the loan documents contemplate debt buybacks at all they most typically follow (with a few negotiated points) the Loan Market Association (“LMA“) options of permitting debt buybacks by the borrower provided that specific processes and conditions are followed (and by sponsors and affiliates subject to disenfranchisement provisions (discussed below)). There are exceptions to this, particularly in the context of US-style Term Loan B facilities which typically permit debt buybacks subject to certain conditions and similar Dutch auction processes; however, they also often allow open market purchases without prescription as to the process. Additionally, there are many loan agreements in the Asia-Pacific region that do not contemplate debt buybacks at all. The LMA’s standard form also provides an option for debt buybacks to be expressly prohibited, but this is rarely seen in practice.

Liquidity Considerations

When considering debt buybacks, a threshold issue to address is who will purchase the debt and how will they fund the purchase. For borrowers (or other companies within the borrowing group) considering a debt buyback, they must first be comfortable that they have sufficient liquidity to continue to meet their debts as they fall due after giving effect to the cash outlay required to effect the purchase. Where there would be insufficient liquidity, sponsors can consider either funding the purchase through the injection of new equity or subordinated debt or making the purchase directly themselves, through an affiliate or an unrestricted subsidiary.

We have also seen purchases of unfunded commitments where the purchaser is paid to assume the unfunded commitments (note that the LMA standard form does not provide an option for the purchase of revolving loans or other unfunded commitments). These situations require special consideration as they can create additional issues; for example, whether the purchaser is sufficiently credit-worthy to fund future drawdowns, and in the case of buybacks by the sponsor, the potential conflicts for sponsor directors of whether to drawdown on such facilities where it would be prudent for the company to do so but there is a significant risk that the sponsor would not make a full recovery. In some purchases of unfunded commitments, sponsors/companies have used the proceeds received by them for the purchase to fund further buybacks of funded debt.

LMA Debt Buyback Processes

Where debt buybacks by a member of the group are to be permitted, the LMA has proposed certain conditions that must be satisfied before the borrower can effect a debt buyback. These conditions are:

(i) the borrower makes the purchase (often negotiated to include other members of the restricted group);

(ii) the consideration for the purchase is below par;

(iii) no default is continuing at the time of the purchase (sometimes this standard is negotiated to event of default);

(iv) the consideration is funded from retained excess cash (with an option to restrict this to the immediately preceding financial year), or new equity/subordinated debt (this condition is often negotiated also to permit funding from (a) excluded disposal proceeds, excluded insurance proceeds, excluded acquisition proceeds and excluded IPO proceeds; (b) permitted financial indebtedness; (c) cumulative retained cash; (d) any overfunding amounts; and (e) cash and cash equivalents to the extent that it could be used to fund certain (highly negotiated) permitted payments); and

(v) the purchase is implemented using either the solicitation process or the open order process.

The solicitation process provides for the parent to approach all of the relevant term loan lenders to enable them to offer to sell an amount of their participation to the relevant borrower. Any lender wishing to sell provides details of the amount of the participation that they want to sell and the price at which they are willing to sell. The parent has no obligation to accept any of the offers from the lenders. However, if it agrees to any such proposals, it must do so in inverse order of the price offered (with the lowest price being accepted first). If two or more offers to sell a particular term facility at the same price are received, such offers may only be accepted on a pro rata basis.

The open order process provides for the parent (on behalf of the relevant borrower) setting out to each of the lenders of a particular facility the aggregate amount of such facility it is willing to purchase and the price at which it is willing to buy. The lenders then notify the parent if they are willing to sell on such terms. If the aggregate amount which lenders are willing to sell exceeds the aggregate amount that the parent had notified the relevant borrower it was willing to purchase, then such offers shall be accepted on a pro rata basis.

In respect of a debt purchase transaction complying with the LMA conditions:

(i) the relevant portion of the term loan to which it relates are extinguished, and any related repayment instalments will be reduced pro rata accordingly;

(ii) the borrower shall be deemed to be a permitted transferee;

(iii) the extinguishment of any portion of any such loan shall not constitute a prepayment of the facilities;

(iv) no member of the group shall be in breach of the general undertakings as a result of such purchase;

(v) the provisions relating to sharing among the finance parties shall not apply; and

(vi) no amendment or waiver approved by the requisite lenders before the extinguishment shall be affected by such extinguishment.

The LMA debt buyback provisions are drafted widely and apply not only to purchases by way of assignment or transfer but also to sub-participations and any other agreement or arrangement having an economic effect substantially similar to a sub-participation. This is to safeguard against such methods being employed to circumvent restrictions relating to assignments or transfers.

There are also obligations on any sponsor affiliate who enters into a debt purchase transaction (whether as the direct purchaser of the loan or as a participant) to notify the agent by no later than 5.00 pm on the business day following entry into such transaction. The agent is then obliged to disclose this to the other lenders.

Tax

Depending on the jurisdiction, extinguishment of debt can create taxable income on the amount of the cancellation of debt. For this reason, sponsors often negotiate for debt buybacks to be permitted by any member of the group (rather than only the relevant borrower). Tax advice should be obtained before entering into a debt buyback to address this and other issues such as ensuring that the lender is in a favourable tax jurisdiction for withholding tax purposes.

Disenfranchisement

Where the loan documentation contemplates debt buyback transactions, purchases by the sponsor are typically permitted without following the solicitation or open order processes but subject to certain conditions. These include:

in determining whether any applicable lender thresholds have been met to approve any consent, waiver, amendment or other vote under the finance documents the commitment of the sponsor shall be deemed to be zero and the sponsor shall be deemed not to be a lender;
the sponsor shall not attend or participate in any lender meeting or conference call or be entitled to receive any such agenda or minutes of such meeting or call unless the agent otherwise agrees; and
in its capacity as a lender the sponsor shall not be entitled to receive any report or other documents prepared on behalf of or at the instructions of the agent or any lenders.

These conditions also apply to affiliates (broadly defined) of the sponsor unless they have been established for at least [6] months solely for the purpose of making, purchasing or investing in loans or debt securities and are managed or controlled independently from all other trusts, funds or other entities managed or controlled by the sponsor. Sponsors will typically expressly carve-out any existing affiliated bona-fide credit funds. Again, the drafting is broad to also capture transactions effected by way of sub-participation and any other agreement or arrangement having an economic effect substantially similar to a sub-participation. Typically in the Asia-Pacific region there is no cap on the amount of the commitments which can be held by the sponsor or its affiliates. An exception to this is found in US-style term loan B facilities which typically have caps of 20-30% of the term loan commitments. The disenfranchisement provisions can typically be amended with majority lender consent (66.66% in most deals in the Asia-Pacific region) and in some cases we have seen sponsors purchase a majority stake but require the selling lenders to consent to the removal of such restrictions as a condition precedent to the buyback becoming effective. In such circumstances the sponsor then has the ability to strip the covenants and, depending on the documentation, may have the ability to restructure its acquired debt as super-priority.

Equitable Subordination

Sponsors should also consider whether there is a risk that the purchased debt could be subject to equitable subordination. Equitable subordination is a doctrine that enables the court to lower the priority of a creditor claim to that of equity. It can have the effect of converting certain senior secured claims into claims that rank pari passu with other unsecured claims (or in some jurisdictions even behind unsecured creditor claims and treated as equity). It is not a universal doctrine; for example, there is no doctrine of equitable subordination under English, Hong Kong or Singapore law and often where the doctrine does exist it is used sparingly by the courts and cases often have elements of inequitable conduct, breach of fiduciary duty, fraud, illegality or undercapitalisation. However, this is not always the case and in some jurisdictions all shareholder loans are automatically ranked behind all unsecured creditor claims.

Regulatory Issues

Another issue to be considered on a case-by-case basis is whether there are any applicable regulatory issues; for example, is the potential purchaser required to be a licensed lender under applicable laws and regulations? Similarly, consideration should be given to whether any rules relating to material nonpublic information, insider trading or analogous rules apply – typically, in the case of loans (as opposed to bonds) they do not apply; however, this should be confirmed before entering into the transaction.

Equity Cure

How debt buybacks impact the financial covenants turns on the drafting in the loan document and the purchaser. Typically, intra-restricted group debt is excluded from the covenant calculations, but if the debt is purchased by an affiliate outside of the restricted group it will not benefit in this way. In many loan agreements in Asia, equity cures can be added to EBITDA. In these cases, can a debt purchase by the sponsor be contributed to the borrower and added to EBITDA? In some cases it can but more often the equity contribution must be received in cash – in which case the sponsor can contribute the cash to the borrower group to increase EBITDA and the borrower or another member of the restricted group can effect the debt buyback. In such circumstances, can the borrower also claim the benefit of the reduction in debt thereby gaining a double benefit? Often there are restrictions around this. However, it is not unusual that the cure amount added to EBITDA cannot be used to reduce net debt with respect to the test period in which the cure was made but may be included in subsequent test periods.

During the great recession where the agreements typically didn’t contemplate debt buybacks there were examples of some very aggressive positions taken by sponsors, including where they: (i) contributed the purchase price to the group which was deemed to be added to EBITDA as a cure amount; (ii) deducted the face amount of the debt purchased from net debt; and (iii) the amount of the discount to face value being added back to EBITDA as a one-off item to obtain a triple benefit for covenant purposes.

Key issues to consider when the Loan Agreement is silent on Debt Buybacks

Where the loan agreement is silent on debt buybacks, in addition to the liquidity, tax, equitable subordination and regulatory issues, it is necessary to consider a number of other issues.

First, is the proposed purchaser a permitted transferee? Careful analysis of the loan document and the specific facts regarding the potential purchaser are required here as to the scope of permitted transferees. In the Asia-Pacific region, in many cases, even where the loan agreement does not follow the LMA, the permitted transferee language tracks the LMA position and permits transfers to “another bank or financial institution or to a trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets”. This is extremely wide and from an English law perspective a relatively low threshold to meet. In fact, even where the language is limited to “another bank or financial institution”, under English law this is still a relatively low bar as the Court of Appeal decision in The Argo Fund Ltd v Essar Steel [2006] held that “the terms ‘financial institution’ meant an entity having a legally recognised form or being, which carried on its business in accordance with the laws of its place of creation and whose business concerned commercial finance”. In a number of jurisdictions in Asia-Pacific such as Hong Kong, Singapore and Australia this may be persuasive; however, this must always be considered in the context of the applicable governing law of the loan agreement.

Second, if the potential purchaser is a permitted transferee, whether there are any other contractual restrictions in the finance documents; for example, the holding company undertaking in the loan agreement or where the debt will not be extinguished, restrictions in the intercreditor agreement requiring such debt to be unsecured and subordinated?

Third, does the buyback constitute a prepayment? Where the debt is purchased by an entity other than the borrower (another member of the group or a sponsor affiliate) the debt will clearly continue to exist and the purchase cannot be characterised as a prepayment. However, the position may be less clear where the buyback is by the borrower of its own debt. Again, this needs to be considered under the applicable governing law. From an English law perspective there is case law that a party cannot contract with itself (as it cannot sue itself) and is argued that by extension, a party cannot owe a debt to itself and therefore a buyback by the borrower may cause the debt to be automatically extinguished. This position is not settled under English law in the loan buyback context. Section 61 of the Bills of Exchange Act 1882 states “When the acceptor of a bill is or becomes the holder of it at or after its maturity, in his own right, the bill is discharged”. This provides an argument that an unmatured debt can be held by that debtor. However, it is fair to say that the more widely held market view is that under English law a buyback by the borrower of its own debt triggers an automatic extinguishment. The relevance of this issue is that if the extinguishment constitutes a prepayment, the provisions relating to prepayments would apply and the sharing among finance parties provisions would also likely apply. Whether such an extinguishment could be recharacterised as prepayment has not been settled as a matter of English law. However, the more widely held market view is that under English law, the extinguishment resulting from a borrower buyback would not constitute a prepayment. Therefore the prepayment provisions should not apply.

If the buyback is by the borrower and the debt extinguished, then the borrower is not a lender and would have no right to vote or receive information. However, if the buyback is by another member of the group or an affiliate and the debt is not waived or forgiven then, typically, absent any contractual disenfranchisement, the purchaser will be able to vote, attend lender meetings and receive lender information on the same basis as it would if it was an unrelated party.

Where there are contractual impediments to a debt buyback in a loan agreement which is otherwise silent on debt buybacks (for example, the potential purchaser not being a permitted transferee), it may be possible to structure around such restrictions through a sub-participation, total return swap or similar arrangement. Note, however, that while it may be possible to confer voting discretion on the sub-participant, such methods will not usually assist the borrower from a financial covenant perspective.

How We Can Help

Reviewing the finance documents to understand the potential options available to buyback debt is a complicated task. Each case will need to be examined based on the particular facts and the specific drafting (or lack of drafting on the issue) in the finance documents. We have extensive experience in guiding sponsors and their portfolio companies through successful debt buybacks both in circumstances where there are processes prescribed by the finance documents and where the finance documents do not contemplate debt buybacks at all. Gibson Dunn’s global finance team is available to answer your questions and assist in evaluating your finance documents to identify any potential issues and work with you on the best strategy to address them.

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Global Finance or Private Equity practice groups, or the authors:

Michael Nicklin – Hong Kong (+852 2214 3809, mnicklin@gibsondunn.com)
Jamie Thomas – Singapore (+65 6507.3609, jthomas@gibsondunn.com)

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

As governments contemplate lifting COVID-19 restrictions, businesses looking to reopen their doors face numerous questions about the legal risks of operating in the midst of a pandemic. Some of the most pressing concerns include identifying the precautions needed to avoid transmission of the virus to employees, customers, or others in proximity to their operations and the potential for liability if individuals become severely ill or die from a COVID-19 infection. Personal injury claims based on COVID-19 are already being filed against businesses in courts across the country,[1] and some fear that a wave of litigation in the wake of the pandemic will threaten economic recovery.[2] Plaintiffs have claimed that defendants failed to properly warn others of the presence of a COVID-19 outbreak,[3] and failed to take reasonable steps to prevent the virus from spreading.[4] Some plaintiffs have even claimed that businesses that do not take sufficient precautions create a public nuisance,[5] which strategy echoes efforts by the plaintiffs’ bar to assert public nuisance claims in other contexts, such as opioid, tobacco, and environmental litigation. Indeed, the potential for a high volume of lawsuits has prompted nursing homes to seek executive orders granting immunity from negligence claims involving COVID-19.[6] And others have called for legislation to provide liability protections across many industries.[7]^,[8]

Here, we preview just a few of the issues likely to shape the scope of liability in personal injury actions related to COVID-19.

Standard of Care

A plaintiff asserting a personal injury tort claim generally must prove that the defendant breached a duty of care owed to the plaintiff. Businesses owe their employees, customers, and others with whom they interact a duty to exercise the level of care that would be exercised by a reasonably prudent person under the same or similar circumstances to avoid or minimize the risk of foreseeable harm. This duty may include warning of dangerous conditions and taking reasonable steps to minimize the risks presented by known hazards.

Courts recognize a general obligation of “one who has a contagious disease” to “take the necessary steps to prevent the spread of the disease.”[9] The “necessary steps” depend on the circumstances. As one court explained, “[t]he degree of diligence required to prevent exposing another to a contagious or infectious disease depends upon the character of the disease and the danger of communicating it to others.”[10] In that case, the court reversed dismissal of a complaint alleging that the defendant, who owned a two-family residence and occupied one of the units, was negligent in failing to warn the other family that she had tuberculosis and in failing to avoid close personal contact. A similar duty may extend to others who have some relationship with the sick person and knowledge of their condition, and are thus in the best position to prevent the spread of the disease. For example, a physician whose patient receives an HIV-contaminated blood transfusion has been found to owe a duty of care to the patient’s future, unidentified sexual partners to inform the patient of the potential for HIV transmission.[11]

In the context of COVID-19, the applicable standard of care is an open issue, and various plausible scenarios present particular challenges. For example, while it seems uncontroversial to ask symptomatic employees to stay home, to what extent should that employee’s potential contacts within the workplace be similarly restricted even if they have not manifested any symptoms? How long should sick employees remain away after recovering, especially when COVID-19 infection, which resembles other common illnesses, has not been confirmed by a positive test result? And given the current limitations on access to reliable testing, are businesses obligated to take affirmative steps to detect sick employees and customers?[12] How much certainty is needed before a duty arises to warn other employees and customers about the potential infection? The level of precautions a business can reasonably take has implications not only for personal injury liability, but also, as noted above, for nuisance claims arguing that insufficient protective measures in the workplace threaten the entire community.

Guidance from public health agencies, such as that recently issued for employers by CDC[13]^,[14] and OSHA,[15] will have an important role in shaping the standard of care.[16] Businesses should monitor current guidance from state and federal agencies and act with that guidance in mind. Acting consistently with guidance from public health authorities or other governmental authorities is likely to benefit a defendant faced with personal injury tort claims. Conversely, a defendant that has not followed public health authority guidance is likely to see that same guidance asserted by future tort plaintiffs as the basis for a standard of care that plaintiffs will argue was breached.[17] However, since current guidance is subject to change, is typically presented at a high level of generality, and often leaves details to the discretion of the employer based on circumstances, businesses should not assume compliance with agency guidelines necessarily provides a safe harbor against tort liability just as compliance with statutory and regulatory obligations generally does not bar tort claims.

Additional sources of information on the standard of care include trade association guidance and common practice in the industry. After all, “[c]ourts will not lightly presume an entire industry negligent.”[18] Thus, it is advisable to be aware of the measures similarly situated businesses have adopted to mitigate the spread and risks associated with COVID-19 in considering the reasonableness of measures for your business.

The contours of the standard of care will also continue to solidify as scientific understanding of the virus—and the nature of the risks it presents—grows. Relevant factors include the means and likelihood of transmission at various stages of infection and the risk of serious illness or death upon infection. These characteristics of COVID-19, which inform whether it is reasonable to take very stringent precautions, remain poorly understood, though research is advancing rapidly.

Causation

A personal injury tort plaintiff must also prove that the defendant’s breach of the duty of care proximately caused the claimed injury. Here, plaintiffs are likely to face challenges. COVID-19 is already widespread and highly contagious, and symptoms may not develop for several days after infection; indeed, some may be infected and infectious without any symptoms at all. As a result, many people who become sick could have difficulty establishing by a preponderance of the evidence where and when they contracted the virus. This was true in the case of a nurse whose estate claimed she had been negligently exposed to H1N1 when she was asked to care for suspected H1N1 patients without an N95 mask, contrary to CDC guidance. The court found that given the absence of evidence that the nurse actually treated an H1N1 positive patient and the fact that the virus was present in the community at large, the plaintiff’s claim of causation did not rise above the level of speculation.[19] In a case involving Valley Fever, which is caused by a soil fungus common in the San Joaquin Valley of Central California, causation could not be proved beyond a mere possibility, as opposed to a reasonable medical probability, “[g]iven that over one-third of the population in the San Joaquin Valley tests positive for exposure to the fungus, and due to the great number of reasons for soil disturbance.”[20]

COVID-19 presents similar causation issues, although cases arising in nursing homes, prisons, and other locations in which residents, or plaintiffs, had little contact with the outside world during the likely period of infection present a possible exception. These dynamics also could change once the initial wave of COVID-19 cases subsides and it becomes more feasible to trace the origins of individual outbreaks.

Workers’ Compensation Exclusivity

Many injuries sustained in the workplace are redressed exclusively through the states’ workers’ compensation systems,[21] which generally provide for more streamlined resolution of claims and cap recoveries for certain injuries. Not all workplace injuries are subject to workers’ compensation exclusivity, however, and the scope of exceptions varies from state to state. In California, for example, exclusivity does not apply where the employee’s injury is aggravated by the employer’s “fraudulent concealment” of the existence of the injury and its connection with the employment.[22]

For infectious diseases, workers’ compensation is generally available only where the job subjects the employee to a heightened risk of contracting the disease as compared to the general public.[23] A healthcare worker who contracts COVID-19 after treating infected patients presents a straightforward example of an occupational disease, but application of the rule is less clear for workers whose jobs merely require regular interaction with the general public, since the general public itself is the source of the worker’s risk. Concerns about the volume of workers’ compensation claims and the difficulty of demonstrating a causal connection to the workplace have motivated some states to adopt presumptive eligibility measures for certain classes of employees, including law enforcement, healthcare, and other essential workers.[24]

* * *

In sum, COVID-19 personal injury lawsuits have already made an appearance, and the volume of this litigation is likely to grow as businesses reopen and Americans increasingly encounter the virus in their workplaces, crowded venues, and interactions in business centers. Businesses and employers face uncertainty regarding the undeveloped standard of care for COVID-19 personal injury claims, but should frequently have reasonable causation defenses under traditional principles of tort law. Further, the extent to which the workers’ compensation system will absorb employees’ claims against their employers may depend on the risks of infection specific to the employee’s job and exceptions to workers’ compensation exclusivity that vary from state to state. For a more comprehensive review of workers’ compensation issues raised by the COVID-19 pandemic, please refer to the Gibson Dunn Labor and Employment practice group client alert entitled, “Employer Liability and Defenses From Suit for COVID-19-Related Exposures in the Workplace.”

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[1] Daniel Wiessner, Estate of Walmart worker who died from COVID-19 sues for wrongful death, Reuters, Apr. 7, 2020.

[2] Editorial Board, Stopping a Lawsuit Epidemic, Wall St. J., Apr. 23, 2020.

[3] Tim Reid, Seattle-area nursing home hit with wrongful death lawsuit over coronavirus death, Reuters, Apr. 10, 2020.

[4] See Wiessner, supra note 1.

[5] Noam Scheiber and Michael Corkery, Smithfield Meat Plant Conditions Assailed as Public Nuisance, N.Y. Times, Apr. 24, 2020.

[6] Marau Dolan, Harriet Ryan, and Anita Chabria, Nursing homes want to be held harmless for death toll. Here’s why Newsom may help them, L.A. Times, Apr. 23, 2020.

[7] Evan Greenberg, What Won’t Cure Corona: Lawsuits, Wall St. J., Apr. 21, 2020.

[8] Natalie Andrews, Mitch McConnell Wants to Shield Companies From Liability in Coronavirus-Related Suits, Wall St. J., Apr. 28, 2020.

[9] Mussivand v. David, 544 N.E.2d 265, 269 (Ohio 1989) (collecting cases).

[10] Earle v. Kuklo, 98 A.2d 107, 109 (N.J. Super. Ct. App. Div. 1953) (quoting 25 Am. Jur., Health, § 45).

[11] Reisner v. Regents of University of Cal., 31 Cal. App. 4th 1195, 1198-99 (1995).

[12] Compare, Bogard’s Administrator v. Illinois Cent. R. Co., 139 S.W. 855, 857 (Ky. 1911) (rejecting argument that railroad had an affirmative duty to maintain the capability to diagnose measles in a passenger who allegedly spread the disease to plaintiff’s child), with In re September 11 Litigation, 280 F. Supp. 2d 279, 293-94 (S.D.N.Y. 2003) (recognizing a duty of airlines to screen passengers for contraband that could be used to hijack the airplane).

[13] Centers for Disease Control and Prevention, Interim Guidance for Business and Employers to Plan and Respond to Coronavirus Disease 2019 (COVID-19).

[14] Centers for Disease Control and Prevention, Implementing Safety Practices for Critical Infrastructure Workers Who May Have Had Exposure to a Person with Suspected or Confirmed COVID-19.

[15] Occupational Safety and Health Administration, Guidance on Preparing Workplaces for COVID-19.

[16] See, e.g., In re City of New York, 522 F.3d 279, 285-86 (2d Cir. 2008) (“Governmental safety regulations can . . . shed light on the appropriate standard of care.”); Rolick v. Collins Pine Co., 975 F.2d 1009, 1014 (3d Cir. 1992) (holding OSHA regulations were relevant to the standard of care).

[17] See, e.g., Ebaseh-Onofa v. McAllen Hospitals, L.P., No. 13-14-00319-CV, 2015 WL 2452701, at *6 (Tex. Ct. App., May 21, 2015) (noting plaintiff’s argument in lawsuit based on nurse’s death from H1N1 that the standard of care was determined by CDC’s purported requirement that healthcare workers use N95 masks when treating patients suspected of having the virus).

[18] See In re City of New York, 522 F.3d at 285.

[19] See Ebaseh-Onofa, 2015 WL 2452701, at *7.

[20] See, e.g., Miranda v. Bomel Construction Co., Inc., 187 Cal. App. 4th 1326, 1336 (Cal. Ct. App. 2010).

[21] See, e.g., Cal. Labor Code § 3602(a); 19 Del. Code § 2304.

[22] Cal. Labor Code § 3602(b)(2).

[23] See, e.g., Bethlehem Steel Co. v. Industrial Accident Commission, 21 Cal.2d 742, 744 (Cal. 1943).

[24] Russell Gold and Leslie Scism, States Aim to Expand Workers’ Compensation for COVID-19, Wall St. J., Apr. 28, 2020.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Coronavirus (COVID-19) Response Team or its Environmental Litigation and Mass Tort practice group, or the following authors:

Daniel W. Nelson – Washington, D.C. (+1 202-887-3687, dnelson@gibsondunn.com)
Patrick W. Dennis – Los Angeles (+1 213-229-7568, pdennis@gibsondunn.com)
Alexander P. Swanson – Los Angeles (+1 213-229-7907, aswanson@gibsondunn.com)

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

On 20 April 2020, the UK Government announced the launch of an investment fund intended to deliver up to £500 million of investment and liquidity to high-growth companies impacted by the Covid-19 pandemic (the “Future Fund”). The Future Fund will provide UK-based companies with convertible loans ranging from £125,000 to £5 million, provided that the amount loaned by the UK Government is matched by third party investors. The UK Government’s total commitment to the Future Fund is £250 million. This new form of support is an important step in providing liquidity and investment to innovative high-growth companies as they are typically loss-making and thus ineligible to access financial support through the Coronavirus Business Interruption Loan Scheme (the “CBILS”) during the Covid-19 pandemic.

A term sheet issued by the UK Government sets out the primary terms on which convertible loans will be provided. The main points of the term sheet are considered in further detail below. In summary, the convertible loans are provided on market standard terms for high risk-assets. The UK Government’s funding must be matched by one or more investors (each a “matched investor”) for a company to be able to access the scheme. The loans will automatically convert into equity on the company’s next qualifying funding round (i.e. where the company raises equity capital for an amount at least equal to the total funding of the bridge finance), or at the end of the loan if the debt has not been repaid. The use of convertible loans rather than direct equity investments means that funds can be provided to a company without requiring a prior valuation, making them more cost and time efficient. They also provide a higher return for investors with the additional benefit of an equity ‘kicker’ through the conversion mechanism, which makes them suitable for high-growth but also less-certain business propositions.

Eligibility

In order to participate in the scheme, a business must be an unlisted UK registered private company that has raised at least £250,000 in equity investment from third party investors in the last five years. The company is also required to have a substantial economic presence in the UK, which is generally being interpreted as having the company’s headquarters and/or production or trading facilities located in the UK. Unlike the CBILS and some of the UK Government’s other support schemes, there is, however, no requirement to demonstrate that the company is struggling as a result of the COVID-19 pandemic. The Future Fund is set to open in mid-May and close to applications in September 2020. Funding will not be available through the Future Fund in respect of recently closed funding rounds.

Use of capital

The funding can solely be used for working capital purposes and cannot be used to repay any borrowings, declare or pay any dividends or bonus payments or, in respect of the UK Government’s portion of the funding, pay any advisory or placement fees or bonuses to external advisers.

Terms of the convertible loans

Term

The convertible loans have a term of three years. This presents issues for venture capital trusts and certain venture capital investment funds as they are typically restricted from holding convertible loan securities that have a minimum term of less than five years. This may make finding matched investors difficult for some venture capital portfolio companies, meaning they would need to seek additional matched investors from outside of their current group of investors.

Interest rate

Although the initiative, which has been drawn up with the British Business Bank, may provide a much needed boost to certain start-ups, the terms of the convertible loans make this program equivalent to the UK Government investing tax payer money in high-risk, non-investment grade bonds. These investments are accordingly on the riskier end of the spectrum and this is reflected in the terms that the UK Government is prepared to provide for the funding. With the current market uncertainty, the high yield bond market is currently offering yields of between 8-10%, up from approximately 3.5% in early March. The term sheet issued by the UK Government provides that it shall receive a minimum of 8% per annum (non-compounding) interest to be paid on the maturity of the loan, although, the interest rate shall be higher if a higher rate is agreed by the company and a matched investor. While this interest rate is commensurate with interest rates for convertible loans issued to venture capital and angel investors, it is intended to reflect the high-risk nature of the investment and reward an investor accordingly.

Discount rate

To compensate for the higher risk categorisation, the convertible loans will automatically convert to equity at the next qualifying funding round, with an option to convert on a non-qualifying funding round. A “qualifying funding round” is a funding round where the company in raises at least the same amount in equity investment as that raised by the UK Government’s bridge finance.

On conversion, a minimum discount of 20% applies which, as with the interest rate, shall be higher if a higher discount is agreed by the company and a matched investor. As an example, if the Future Fund provides a £1 million convertible loan to Company A, and in a future fundraising, Company A raises equity finance at £1 per share from a new investor, the loan will automatically convert into 1.25 million shares (equivalent to £0.80 per share). The conversion discount applies only to the principal amount outstanding under the loan and not to any accrued interest, which shall convert at the price of the funding round without the discount.

Repayment and redemption premium

To further offset the risk of the investment and encourage the companies to seek additional equity investment, the convertible loans carry a redemption premium of 100%. On maturity of the loan, if the majority of the matched investors prefer not to convert into equity at the discount rate to the price set by the most recent funding round of the company, they shall be entitled to receive a premium of 100% in addition to the outstanding amount of the loan, plus the accrued interest. Following the above example, the investors in Company A would be entitled to receive £2.24 million from Company A at the end of a three year term, which is equivalent to an internal rate of return of approximately 30%. Redemption premiums are normally only acceptable for high risk investments as, from the company’s perspective, the loan can become a very expensive form of finance if the investors do not convert into equity prior to or at maturity of the loan.

The term sheet issued by the UK Government does not provide for the option of early repayment prior to the next funding round and specifically provides that the UK Government’s portion of the loan shall automatically convert into equity unless it specifically requests repayment. This indicates that the UK Government does not intend for this to be merely bridge financing and wishes to participate in the potential equity upside.

While the interest rate, discount rate and redemption premium attached to the convertible loans may be considered market standard for some venture capital firms investing in high risk enterprises in a stable economy, these terms illustrate a high-level of risk that the UK Government is willing to take with tax payers’ money in order to provide liquidity to businesses that may otherwise fail. As the scheme is reliant on the involvement and investment decisions of the matched investors, it is open to the risk of poor judgment by less successful investors and floundering companies that are willing to take on exceptionally expensive debt as a last resort.

Other terms

The UK Government is to receive limited corporate governance rights during the term of the loan and as a shareholder following conversion of the loan into equity. The term sheet contains a ‘Most Favoured Nation’ provision whereby, if the company issues further convertible loan instruments to new or existing investors on terms which are more favourable than those of the scheme, those terms will apply to the convertible loans provided by the Future Fund. There is also a negative pledge which prohibits the issuing company from creating any indebtedness that is senior to the convertible loan other than any bona fide senior indebtedness from a person that is not an existing shareholder or a matched investor.

International equivalents

The UK Government is not the only state government currently willing to invest in high risk assets. On 9 April, the U.S. Federal Reserved announced plans that, as part of its quantitative easing package, it was going to expand its ETF (exchange traded funds) buying program to include credit that has recently been downgraded to BB-/Ba3 (i.e. junk). However, the program is not open to all struggling companies and is aimed at those who have been recently impacted by the COVID-19 pandemic as the Federal Reserve is only permitted to invest in corporates that were listed as investment grade as recently as 22 March 2020.

The French government is also providing a comprehensive support plan for start-ups with financing and liquidity measures representing €4 billion euros. Only €80 million of this is to be available as bridge financing to start-ups that were in the process of raising investment and is aimed to be step-in measure to assist those entities where an investor has pulled out since the start of the crisis. This is in stark contrast to the £250 million to be provided by the Future Fund to any high-growth company that meets the criteria set out above. The majority of the support from the French government is being provided through early payments of certain tax credits, worth €1.5 billion, and public guarantees over cash-flow costs, worth €2 billion. Germany has also implemented a special support program to provide up to €2 billion to start-ups who have a market value of more than €50 million and plans to work through venture capital firms who will distribute the support to businesses who are struggling as a result of the crisis. The minimum market capital requirement means that it is likely that these funds will be distributed to more established businesses, rather than fledgling entities who would struggle to survive in a normal socio-economic environment. It could be said therefore, that the Future Fund, when compared to positions taken by the governments of other leading economies, represents an investment in innovation and entrepreneurship in the UK.

Response of the VC community

The response to the concept of the Future Fund amongst venture capital firms and industry bodies has been overwhelmingly positive and it is seen as a big success for the Venture capital industry. Many feel that this level of investment in high-growth companies indicates that the UK Government recognises the immense value that the start-up industry provides to the economy as a whole. However, concerns have been raised about the detail of the plan. As the matched funding has to be provided through use of convertible loans, investors will not be eligible for EIS (enterprise investment scheme) relief, which applies only to new share issuances and provides income tax and capital gains tax relief to the holders of the shares. As referenced above, venture capital trusts (“VCT”) will generally be unable to participate in the scheme as a matched investor as (i) they are only able to hold convertible loans that have a minimum term of five years (whereas the convertible loans under the Future Fund have a maximum term of three years); and (ii) the loans held by a VCT can have an annual return of no more than 10% (which given the redemption premium is not the case with the convertible loans). Industry bodies such as the British Private Equity and Venture Capital Association have been engaging in ongoing discussions with the UK Government and hope to be able to iron out some of these issues in the coming weeks before the Future Fund launches.

Conclusion

The scheme is unprecedented and represents a bold move by the UK Government to provide support to the start-up industry. However, it also raises a number of questions, such as: (i) should the UK Government be providing tax payer support to high-risk fledgling entities backed by venture capital firms; and (ii) should state support to struggling companies be provided on such one-sided terms? While the intent of the governments of Germany and France is similar to that of the UK, the risk profile of their support programs appears at first glance to be markedly different. Rather than protecting and facilitating the growth of the UK’s tech industry, which may be better served through cash-flow relief measures, tax credits and loans on favourable terms, the terms of the convertible loans detailed above, particularly the lack of an early repayment option and the automatic conversion of the UK Government’s loan to equity, provides for the possibility of large upsides in the long-run but entails taking on considerable risk. This could leave the program open to being misused by entities that either were already struggling or are not yet sufficiently established and who are willing to take on expensive debt that they will be unable to repay. Additionally, the scheme will only work to the extent that there is sufficient participation by venture capital firms who are prepared to provide the matched funding and are prepared to have the UK Government as a co-shareholder.

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This client update was prepared by Jeremy Kenley, James R. Howe, Amar Madhani and Ciarán Deeny.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team. In the UK, the contact details of the authors and other key practice group lawyers are as follows:

The Authors:

Jeremy Kenley – London, M&A, Private Equity & Real Estate (+44 (0)20 7071 4255, jkenley@gibsondunn.com)
James R. Howe – London, Private Equity (+44 (0)20 7071 4214, jhowe@gibsondunn.com)
Amar Madhani – London, Private Equity and Real Estate (+44 (0)20 7071 4229, amadhani@gibsondunn.com)
Ciarán Deeny – London, M&A and Private Equity (+44 (0)20 7071 4248, cdeeny@gibsondunn.com)

London Key Contacts:

Sandy Bhogal – London, Tax (+44 (0)20 7071 4266, sbhogal@gibsondunn.com)
Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, tbudd@gibsondunn.com)
Gregory A. Campbell – London, Restructuring and Finance (+44 (0)20 7071 4236, gcampbell@gibsondunn.com)
Ben Fryer – London, Tax (+44 (0)20 7071 4232, bfryer@gibsondunn.com)
Christopher Haynes – London, Corporate (+44 (0)20 7071 4238, chaynes@gibsondunn.com)
Anna Howell – London, Energy, Oil & Gas (+44 (0)20 7070 9241, ahowell@gibsondunn.com)
Michelle M. Kirschner – London, Financial Institutions (+44 (0)20 7071 4212, mkirschner@gibsondunn.com)
Selina S. Sagayam – London, Corporate (+44 (0)20 7071 4264, ssagayam@gibsondunn.com)
Alan A. Samson – London, Real Estate & Real Estate Finance (+44 (0)20 7071 4222, asamson@gibsondunn.com)
Mark Sperotto – London, Private Equity (+44 (0)20 7071 4291, msperotto@gibsondunn.com)
Nick Tomlinson – London, Private Equity (+44 (0)20 7071 4272, ntomlinson@gibsondunn.com)
Jeffrey M. Trinklein – London, Tax (+44 (0)20 7071 4264, jtrinklein@gibsondunn.com)

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

The COVID-19 pandemic has resulted in unprecedented governmental actions at the federal, state, and local levels. Those actions have raised substantial constitutional questions. In previous alerts, we discussed the constitutional implications of various proposed legislative and executive actions in response to COVID-19, including under the Takings, Contracts, Due Process, and Equal Protection Clauses of the U.S. Constitution.[1] Here, we flag additional business-related constitutional questions raised by the government’s restrictions on travel, with a particular focus on the extent of a state’s authority to impose restrictions on out-of-state visitors and to restrict interstate travel. As governments continue to take swift and often unprecedented action in response to the pandemic, additional novel constitutional challenges are likely to arise.

As COVID-19 has spread, some state and local governments have erected checkpoints at which they stop, order quarantine of, and even turn away travelers arriving from states with substantial community spread of the virus.[2] Other states have barred short-term rentals to individuals arriving from out of state, making it impractical to travel to those locations.[3] And all over the country, states and localities have imposed significant restrictions on their own citizens’ ability to travel even within the state or locality. While some state quarantine restrictions provide broad exceptions for travelers engaging in commerce, others do not, and in the latter group of states businesses may find routine commercial activity—e.g., interstate transport of goods and employee business travel—far more difficult to conduct.[4]

These and similar restrictions implicate the constitutional right to travel. That right—whose textual source has long remained “elusive”[5]—“embraces at least three different components[:] the right of a citizen of one State to enter and to leave another State, the right to be treated as a welcome visitor rather than an unfriendly alien when temporarily present in the second State, and, for those travelers who elect to become permanent residents, the right to be treated like other citizens of that State.” Saenz v. Roe, 526 U.S. 489, 500 (1999). Under Supreme Court precedent, the right to travel is typically applied to an individual who wishes to travel—not necessarily to goods she wishes to transport. But since commercial transport today depends in large part upon the movement of people—from the truck driver to the pilot—restraints on an individual’s right to travel necessarily inhibit the transport of goods.

State laws implicate the right to travel where, inter alia, they deter, intend to impede, or utilize classifications that punish interstate travel. Soto-Lopez, 476 U.S. at 903. And a law that burdens the right to travel is unconstitutional “[a]bsent a compelling state interest.” Dunn v. Blumstein, 405 U.S. 330, 342 (1972).[6] In keeping with the right’s multifaceted nature, courts have relied on it to invalidate state restrictions in a variety of contexts. See, e.g., Soto-Lopez, 476 U.S. at 911 (invalidating New York restriction of civil service preference to veterans entering armed forces while living in state); Mem’l Hosp. v. Maricopa Cty., 415 U.S. 250 (1974) (invalidating Arizona 1-year residency requirement for receiving nonemergency hospitalization or medical care); Crandall v. Nevada, 6 Wall. 35 (1868) (invalidating Nevada tax imposed on individuals leaving state by railroad, coach, or other vehicle transporting passengers for hire).

Quarantine and travel restrictions may also raise related questions under the dormant Commerce Clause, which is more often litigated in the commercial context. Although the Commerce Clause “is framed as a positive grant of power to Congress,” the Supreme Court has “long held that this Clause also prohibits state laws that unduly restrict interstate commerce.” Tenn. Wine & Spirits Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2459 (2019).[7] If a state law affirmatively discriminates against interstate transactions, it is presumptively invalid, passing constitutional muster only if its “purpose could not be served as well by available nondiscriminatory means.” See Maine v. Taylor, 477 U.S. 131, 138 (1986); see also Granholm v. Herald, 544 U.S. 460 (2005). If a law is nondiscriminatory, courts require that the law’s benefits to the state exceed its burden on interstate commerce. See Taylor, 477 U.S. at 138. But the dormant Commerce Clause doctrine admits two exceptions: (i) state laws authorized by valid federal laws, and (ii) states acting as “market participants,” which covers distribution of state benefits and the actions of state-owned businesses. See Ne. Bancorp v. Bd. of Governors of Fed. Reserve Sys., 472 U.S. 159, 174 (1985); White v. Mass. Council of Constr. Emp’rs, 460 U.S. 204, 206–08 (1983).[8] Dormant Commerce Clause analysis is often fact-intensive, especially when the balancing test for nondiscriminatory laws is applied. See Pike v. Bruce Church, 397 U.S. 137, 139–42 (1970).

The more restrictive dormant Commerce Clause standard may well apply in the COVID-19 context, where certain quarantine requirements appear facially discriminatory by applying only to out-of-state travelers. As a result, such requirements would be presumed invalid unless there are no available nondiscriminatory means that can advance its purposes. While a high threshold, this test is not a death knell for the travel restrictions. The Supreme Court and other courts have upheld discriminatory laws at times, with significant deference to the factual findings of lower courts. See Taylor, 477 U.S. at 141, 146–48 (upholding Maine restriction on importation of out-of-state baitfish, finding no “clear[] err[or]” in the district court’s factual findings regarding the effects of baitfish parasites and non-native species on Maine’s wild fish population); see also Shepherd v. State Dep’t of Fish & Game, 897 P.2d 33, 41–43 (Alaska 1995) (holding that requirements giving hunting preferences to Alaska residents adequately promoted state interest in “conserving scarce wildlife resources for Alaska residents”).

Any challenge under either the right to travel or the dormant Commerce Clause would likely be evaluated based on the breadth and severity of the restrictions on travel, the difference (if any) on the treatment of in-state and out-of-state residents, the exigencies and public health needs faced by the geographic area at issue, the impact on interstate commerce of the restrictions challenged, the feasibility and efficacy of alternative, narrower constraints on movement that just as successfully combat the spread of the virus, and whether quarantine requirements and other restrictions are properly calibrated to achieve their public-health objectives. In addressing these issues, courts may also consider whether states are acting pursuant to federal law and, where it is the federal government that is acting, whether it is acting pursuant to the Spending Clause. See U.S. Const. art. I, § 8, cl. 1.

In evaluating challenges under both the right to travel and the dormant Commerce Clause doctrines, courts will look to the limited precedent arising in the context of quarantines. In cases that generally pre-date modern jurisprudence on the right to travel and the dormant Commerce Clause, the U.S. Supreme Court has upheld quarantines—particularly those imposed pursuant to states’ police powers—for public health reasons. In Compagnie Francaise de Navigation a Vapeur v. Board of Health of State of Louisiana, 186 U.S. 380 (1902), for example, the Court upheld a New Orleans ordinance prohibiting all domestic and foreign travelers—regardless of health status—from entering the city because of a yellow fever outbreak, noting that it was “not an open question” that state quarantine laws are constitutional, even where they affect interstate commerce. Id. at 387. On the other hand, some courts have rejected quarantine measures when imposed against individuals for whom the state had no reasonable basis to suspect individual infection or exposure to the disease. See, e.g., In re Smith, 40 N.E. 497, 499 (N.Y. 1895) (rejecting Brooklyn quarantine of individuals who had refused smallpox vaccination as overbroad under New York health law which, because it affected “the liberty of the person,” was to be “construed strictly,” without explicitly referencing the right to travel).

In the event that states’ quarantine requirements in response to COVID-19 face constitutional challenges, courts may be called upon to reconcile these lines of precedent—weighing the fundamental right to free travel and entitlement to equal treatment for out-of-state citizens against the compelling need to prevent the spread of contagion. Courts will likely also consider precedent recognizing the states’ well-established “police power” in addressing public health crises. See, e.g., Jacobson v. Massachusetts, 197 U.S. 11, 38 (1905) (upholding state’s mandatory vaccination during smallpox outbreak); Phillips v. City of New York, 775 F.3d 538, 542 (2d Cir. 2015) (relying on Jacobson in rejecting substantive due process and free exercise challenges to New York mandatory school vaccination requirement). Courts may likewise consider the fact that quarantines necessarily require establishing boundaries, which logically may be drawn using existing state or municipal borders.

Furthermore, in an environment in which states have adopted divergent approaches to quarantines and similar restrictions, courts may bear important principles of federalism in mind. Nearly a century ago, Justice Brandeis lauded the states as “laborator[ies]” for “novel social and economic experiments,” New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932)—a famous phrase that may sound more literal than metaphorical today. While the Constitution guarantees liberty in interstate travel and trade, it also seeks to protect the autonomy and creativity of the individual states. And those principles may well conflict if, for instance, one state determines that more restrictive quarantine measures are appropriate than a sister state. Resolution of any such conflict may require, as with many issues related to COVID-19, a challenging balance of individual liberty and federalism interests.

As federal, state, and local governments continue to restrict the movement of people and goods in response to COVID-19, it is unclear whether their actions will be challenged under the constitutional provisions outlined above, much less how those challenges would fare in court. Nonetheless, constitutional constraints on governmental action remain significant. Even in these unprecedented times, all levels of government must make sure to implement responses that grant proper deference to the principles and precedent underlying the constitutional provisions discussed above.

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[1] See Constitutional Implications of Government Regulation and Actions in Response to the COVID-19 Pandemic (Mar. 27, 2020), https://www.gibsondunn.com/constitutional-implications-of-government-regulations-and-actions-in-response-to-the-covid-19-pandemic/; Constitutional Implications of Rent- and Mortgage-Relief Legislation Enacted in Response to the COVID-19 Pandemic (Apr. 15, 2020), https://www.gibsondunn.com/constitutional-implications-of-rent-and-mortgage-relief-legislation-enacted-in-response-to-the-covid-19-pandemic/; New York Governor v. New York City Mayor: Who Has the Last Word on New York City’s Business Shutdown? (Apr. 18, 2020), https://www.gibsondunn.com/new-york-governor-v-new-york-city-mayor-who-has-the-last-word-on-new-york-citys-business-shutdown/.

[2] See, e.g., Fla. Exec. Order No. 20-86 (Mar. 27, 2020) (directing establishment of road checkpoints and mandating self-quarantine for travelers from states with substantial community spread of COVID-19), available at https://www.flgov.com/wp-content/uploads/orders/2020/EO_20-86.pdf; R.I. Exec Order No. 20-12 (Mar. 26, 2020), (requiring travelers from New York to self-quarantine for 14 days), available at http://www.governor.ri.gov/documents/orders/Executive-Order-20-12.pdf; see also Joe Barrett, Tourist Towns Say, ‘Please Stay Away,’ During Coronavirus Lockdowns, Wall St. J., Apr. 6, 2020 (discussing Florida Keys ban on visitors but not property owners, and Cape Cod petition to turn away visitors and nonresident homeowners from bridges that provide the only road access to the area), https://www.wsj.com/articles/tourist-towns-say-please-stay-away-during-coronavirus-lockdowns-11586165401?.

[3] See, e.g., Fla. Exec. Order No. 20-87 (Mar. 27, 2020) (suspending certain vacation rentals on the basis that “vacation rentals and third-party platforms advertising vacation rentals in Florida present attractive lodging destinations for individuals coming into Florida”), available at https://www.flgov.com/wp-content/uploads/orders/2020/EO_20-87.pdf.

[4] Compare, e.g., Fla. Exec. Order No. 20-86 (exempting “persons involved in any commercial activity” from self-quarantine requirement), with Second Supplementary Proclamation – COVID-19, Office of the Governor, State of Hawaii (Mar. 21, 2020) (exempting only “persons performing emergency response or critical infrastructure functions who have been exempted by the Director of Emergency Management” from Hawaii out-of-state self-quarantine requirement), available at https://governor.hawaii.gov/wp-content/uploads/2020/03/2003152-ATG_Second-Supplementary-Proclamation-for-COVID-19-signed.pdf.

[5] Attorney Gen. of N.Y. v. Soto-Lopez, 476 U.S. 898, 902 (1986). The right to travel “has been variously assigned to the Privileges and Immunities Clause of Art. IV, to the Commerce Clause, and to the Privileges and Immunities Clause of the Fourteenth Amendment.” Id. (citations omitted); see also Jones v. Helms, 452 U.S. 412, 418 (1981) (“Although the textual source of this right has been the subject of debate, its fundamental nature has consistently been recognized by this Court.”). The Supreme Court has also stated that the right is “part of the ‘liberty’ protected by the Due Process Clause of the Fourteenth Amendment.” City of Chicago v. Morales, 527 U.S. 41, 53 (1999) (plurality opinion).

[6] The Supreme Court has distinguished the constitutional right to interstate travel from the freedom to travel abroad; the former is “virtually unqualified,” while the latter is “no more than an aspect of the ‘liberty’ protected by the Due Process Clause [and] can be regulated within the bounds of due process.” Haig v. Agee, 453 U.S. 280, 306–07 (1981) (quoting Califano v. Aznavorian, 439 U.S. 170, 176 (1978)).

[7] In recent years, “some Members of the [Supreme] Court have authored vigorous and thoughtful critiques” of the dormant Commerce Clause. Tenn. Wine, 139 S. Ct. at 2460 (collecting opinions of Justices Gorsuch, Scalia, and Thomas). “But,” the Court noted last term, “the proposition that the Commerce Clause by its own force restricts state protectionism is deeply rooted in our case law.” Id.

[8] Where governmental actions are challenged on a basis other than the dormant Commerce Clause (e.g., the Due Process Clause), other considerations may of course be relevant to an analysis of the action’s constitutionality.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Coronavirus (COVID-19) Response Team or its Appellate or Public Policy practice groups, or the following authors:

Akiva Shapiro – New York (+1 212.351.3830 , ashapiro@gibsondunn.com)
Avi Weitzman – New York (+1 212-351-2465, aweitzman@gibsondunn.com)
Patrick Hayden – New York (+1 212.351.5235, phayden@gibsondunn.com)
Alex Bruhn* – New York (+1 212.351.6375, abruhn@gibsondunn.com)
Jason Bressler – New York (+1 212.351.6204, jbressler@gibsondunn.com)
Parker W. Knight III* – New York (+1 212.351.2350, pknight@gibsondunn.com)

* Not admitted to practice in New York; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.

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

On Thursday, April 30, 2020, the Internal Revenue Service (the “IRS”) issued Notice 2020-32 (the “Notice”).[1] The Notice clarifies that, in the IRS’s view, expenses funded using the p

roceeds of Small Business Administration (“SBA”) loans extended pursuant to the Paycheck Protection Program are not deductible if the loan is forgiven.

Paycheck Protection Program Background

The Paycheck Protection Program was created by the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116–136 (116th Cong.) (Mar. 27, 2020) (the “CARES Act”), and significantly expands SBA loan availability for certain businesses.[2]

Under Section 1106(b) of the CARES Act, if certain conditions are satisfied, recipients of these new SBA loans are eligible for loan forgiveness in an amount equal to the qualifying payroll costs, mortgage interest payments, rent, and utilities incurred or paid by the recipient during the eight weeks following the origination of the loan.[3]

Tax Treatment of SBA Loan Forgiveness and Associated Deductions

In general, when a loan is forgiven, the borrower includes the forgiven amount in gross income. Section 1106(i) of the CARES Act modifies this rule by excluding from income any forgiven SBA loan amount that otherwise would be includible in the gross income of the recipient. The CARES Act is silent, however, about whether expenses funded with the proceeds of those loans are deductible for federal income tax purposes.

The Notice, which is the first guidance to specifically address the issue, provides that although ordinary and necessary expenses incurred in carrying on a trade or business generally are deductible, no deduction is available for expenses that are funded out of the proceeds of a forgiven SBA loan, reasoning that allowing such a deduction would confer an improper double tax benefit (a deduction for the expenses paid with the forgiven loan proceeds and no income inclusion from the amount of the loan forgiven).

The Notice clearly sets forth the IRS’s position regarding the non-deductibility of expenses funded using the proceeds of Paycheck Protection Program loans that are forgiven. It is worth observing, however, that the applicable law supporting the position taken in the Notice is not entirely clear, and the Notice does not address every practical scenario that might be confronted by a taxpayer who receives a loan under the Paycheck Protection Program.[4] For example, the Notice does not consider situations in which the related expense is incurred in a different taxable year than the taxable year in which the forgiveness of the debt is anticipated or occurs, or whether (or how) a taxpayer can determine with certainty that debt will be forgiven, particularly in light of the fact that the CARES Act requirements continue to be subject to additional regulatory refinements.

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[1] The Notice is available on the IRS website at https://www.irs.gov/pub/irs-drop/n-20-32.pdf.

[2] CARES Act section 1102. For additional details about the Paycheck Protection Program please refer to Gibson Dunn’s Frequently Asked Questions to Assist Small Businesses and Nonprofits in Navigating the COVID-19 Pandemic and prior Client Alerts about the Program: SBA “Paycheck Protection” Loan Program Under the CARES Act; Small Business Administration and Department of Treasury Publish Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed; Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program; Small Business Administration Issues Interim Final Rule on Affiliation, Summary of Affiliation Tests, Lender Application Form and Agreement, and FAQs for Paycheck Protection Program, Analysis of Small Business Administration Memorandum on Affiliation Rules and FAQs on Paycheck Protection Program; and Small Business Administration Publishes Additional Interim Final Rules and New Guidance Related to PPP Loan Eligibility and Accessibility.

[3] CARES Act section 1106(b).

[4] Virginia Blanton, Michael Q. Cannon & Jennifer A. Fitzgerald, Double Tax Benefits in the CARES Act, 167 Tax Notes Fed. 423 (2020).

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Tax Practice Group or its Coronavirus (COVID-19) Response Team, or the following authors:

Michael Q. Cannon – Dallas (+1 214-698-3232, mcannon@gibsondunn.com)
Virginia Blanton* – Washington, D.C. (+1 202-887-3587, vblanton@gibsondunn.com)

Please also feel free to contact any of the following leaders and members of the Tax group:

Jeffrey M. Trinklein – Co-Chair, London/New York (+44 (0)20 7071 4224 /+1 212-351-2344), jtrinklein@gibsondunn.com)
David Sinak – Co-Chair, Dallas (+1 214-698-3107, dsinak@gibsondunn.com)
James Chenoweth – Houston (+1 346-718-6718, jchenoweth@gibsondunn.com)
Brian W. Kniesly – New York (+1 212-351-2379, bkniesly@gibsondunn.com)
Eric B. Sloan – New York (+1 212-351-2340, esloan@gibsondunn.com)
Edward S. Wei – New York (+1 212-351-3925, ewei@gibsondunn.com)
Benjamin Rippeon – Washington, D.C. (+1 202-955-8265, brippeon@gibsondunn.com)
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, dzygielbaum@gibsondunn.com)
Dora Arash – Los Angeles (+1 213-229-7134, darash@gibsondunn.com)
Paul S. Issler – Los Angeles (+1 213-229-7763, pissler@gibsondunn.com)
Lorna Wilson – Los Angeles (+1 213-229-7547, lwilson@gibsondunn.com)
Scott Knutson – Orange County (+1 949-451-3961, sknutson@gibsondunn.com)

* Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.

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

I. Overview

The coronavirus pandemic (“COVID-19”) has had far-reaching implications on virtually every aspect of the global economy, and the private equity industry has faced its share of challenges. As investment advisers and private equity fund managers navigate this uncertain terrain, many have identified alternative types of investments, including private investments in public equity (“PIPEs”) and various types of debt investments, as promising alternatives to their existing funds’ original investment strategies. With private equity firms holding an estimated $2 trillion of ‘dry powder’ and companies in dire need of capital, it should come as no surprise that, since late March, companies have raised approximately $8 billion from private equity funds in PIPE transactions, as sponsors eye dividends and an eventual equity stake in lieu of a more customary control investment approach.[1] This client alert identifies a number of issues fund managers should consider as they evaluate opportunities outside of their existing funds’ primary investment focuses.

II. Investment Program

A. Investment Objective

Fund managers should first evaluate whether the relevant disclosure and partnership agreement language is flexible enough to permit alternative investment types. This evaluation should focus on whether the fund’s investment objective is sufficiently broad to accommodate the desired types of alternative investment strategies (such as a carve-out to allow the fund to invest in “other assets,” or similar language). Any fund manager that pursues alternative investments for a fund that fall outside of the fund’s primary investment strategy should consider whether the current disclosure documents adequately discuss the risks inherent in such types of investments, or whether such disclosure should be supplemented.

B. Investment Restrictions

Sponsors should also be mindful of applicable investment limitations, whether contained in the partnership agreement or in investor side letters. These provisions are often drafted to allow the fund’s limited partner advisory committee (“LPAC”) or limited partners to waive the restrictions on a case-by-case basis, and fund managers should consider whether to request such a waiver in light of other requests they may be making (e.g., waivers of the requirement to hold an annual meeting, extensions of fundraising and investment periods, etc.) and how they can make their requests more appealing by, for instance, including a time limitation that stresses the unique nature of the opportunity being pursued and assures the investors that the drift in investment objective will be temporary in nature.

Of particular concern to fund managers in this respect will be restrictions in investing in marketable securities, or otherwise investing in publicly traded securities in the open market. While these restrictions would typically apply to investments in publically traded debt, they generally would not apply to investments in PIPEs, as such transactions do not involve open market purchases.

Should the fund’s documentation permit the sponsor to pursue alternative investments, the sponsor may wish to consider whether any of its existing portfolio companies would benefit from a debt investment (including a bridge financing) as a means of providing working capital. Before pursuing such opportunities, however, sponsors should carefully review the fund’s governing documents to ensure that there are no relevant restrictions (e.g., a cap on follow-on investments or a requirement that they must be in the form of equity).

C. Alternative Vehicles and Supplemental Fundraises

The creation of annex or ancillary investment vehicles may provide relief to a fund manager that is not necessarily restricted from investing in PIPEs or other alternative investment strategies in an existing fund, but the existing fund is near the end of its investment period or has limited available capital (even taking into consideration recycling mechanisms and scope to complete follow-on investments).

1. Co-Investment Vehicles

To the extent that a fund lacks the flexibility to pursue a compelling opportunistic investment strategy (whether due to fund-level investment restrictions or a lack of sufficient capital) and is unable to (or otherwise does not wish to) seek relief from its LPAC or limited partners, the fund manager may wish to consider allocating the remainder of the targeted investment to a newly formed co-investment vehicle. This approach has the benefit of allowing the fund to take only as much of the targeted investment as the fund manager deems appropriate (due to capacity constraints, investment restrictions, or other factors). The approach has the additional advantage of allowing the fund manager to raise additional capital relatively quickly (particularly to the extent the manager has an established form of co-investment agreement and has completed co-investments with its existing limited partners in the past). Sponsors should of course first evaluate whether the fund documents (including investor side letters) permit the formation of a co-investment vehicle and whether they obligate the sponsor to offer co-investment opportunities to specific investors.

1. Annex Funds

To assist in raising additional capital, fund managers may also wish to consider forming an annex fund, which is a newly formed fund vehicle intended to supplement the existing fund’s investment program. Annex funds are typically first offered to the existing fund’s investors on a pro rata basis. Investors who already subscribed are then offered their pro rata share of any unclaimed capacity, and any remaining capacity can then be offered to outside investors. Management fees and carried interest are typically heavily reduced (or, in the case of management fees, eliminated entirely).

1. Independent Investment Vehicles

Even if the fund documentation permits the manager to pursue its desired type of alternative investments, the manager may wish to create a completely independent investment vehicle focused on such alternative investments. While this approach should allow the manager to achieve economics that are not obtainable in the co-investment or annex fund contexts, establishing a standalone investment vehicle has a longer time horizon than the alternatives discussed above. This approach also presents the most risk, particularly in the current uncertain fundraising climate where travel and the ability to conduct onsite due-diligence with prospective investors may be drastically curtailed.

1. Supplemental Fundraises

Finally, to the extent practicable, sponsors may wish to consider conducting a supplemental fundraise within the sponsor’s existing fund. Assuming that there is no outer limit on the period during which the sponsor may accept new investor commitments (or the limited partners or LPAC have agreed to an extension of such period), the sponsor may allow existing investors to increase their capital commitments (or, potentially, allow a select number of new investors to join the fund). While this may allow the sponsor to maintain the core economics of the existing fund and to raise new capital quickly, it involves a number of important questions that must be addressed, including whether the increasing (or new) investors will be able to dilute existing investors in existing investments.

Under any of these approaches, sponsors will likely want to raise capital in an accelerated timeframe in order to capitalize on the applicable opportunities. Accordingly, we recommend that interested managers immediately begin preparing highly tailored marketing presentations that provide detailed overviews of the relevant opportunities and schedule virtual conferences with lead investors in order to address any questions or concerns. Sponsors should also be mindful that an effective ancillary vehicle will not simply duplicate the primary fund’s terms, but rather adjust them in a manner that reflects the relevant facts in order to minimize investor negotiation and proceed quickly to closing. Additionally, even if a sponsor is not looking into alternative investments and is not preparing for a traditional fundraise, we encourage a careful review of the existing fund’s terms and structure in order to be prepared to quickly return to market as desirable opportunities arise, given the current uncertainty in the market.

The formation of annex or ancillary investment vehicles requires careful consideration of a number of potential hurdles, as discussed more fully in Part III below.

III. Time and Attention and Related Considerations

A. Time and Attention; Key Person

Before forming a new investment vehicle to pursue alternative investment strategies, a fund manager should analyze a number of provisions in its existing funds’ governing documents. Chief among these are the key persons’ time commitment covenants, which are often heavily negotiated and should be analyzed carefully if the fund’s key persons are expected to play significant roles in the new investment vehicle. For example, a key person essentially would be precluded from involvement in the new investment vehicle if an existing fund’s partnership agreement requires that the key person devote “substantially all” of his or her business time and attention to the fund’s affairs. However, a key person clause that only requires a “reasonably necessary” amount of time offers more latitude, particularly in a scenario where, for example, the existing fund only has enough dry powder to make one additional investment. Sponsors should also consider their fiduciary responsibilities when evaluating time and attention and key person obligations to a fund. Time commitment requirements typically are customized so these analyses tend to be highly fact-specific. We are very familiar with helping fund managers analyze the relevant considerations.

B. Successor Fund Restrictions

Sponsors should also consider whether and to what extent successor fund restrictions may limit flexibility to establish a new vehicle. Many partnership agreements restrict fund managers from forming new vehicles with investment strategies that are “substantially similar” to the current fund’s investment strategy, until the current fund deploys a specified amount of capital or reaches the end of its investment period. This of course requires careful consideration of how the documents describe each fund’s investment objective, as discussed in Part II above. Co-investment vehicles are often specifically carved out from the definition of “successor funds” (i.e. permitted), but annex funds typically are not. In many cases, a fund’s LPAC has the explicit ability to waive this restriction, which may be the most efficient option for managers interested in setting up an annex fund (or a co-investment vehicle, to the extent it is not already carved out).

C. Allocation of Investment Opportunities

Finally, fund managers should be mindful of potential conflicts of interest and restrictions that may arise when allocating investment opportunities among the manager’s various funds and clients. A fund’s partnership agreement may require that the fund manager allocate to the fund any investment opportunities that fall within its investment mandate (subject to exceptions), regardless of whether such opportunities were primarily envisioned when the fund was created. Managers should seek to articulate a clear rule that identifies investment opportunities that fall outside of an existing fund’s investment objective and that can be allocated to a new vehicle. Deal allocation provisions may create substantial hurdles for managers looking to create new fund vehicles to pursue alternative investment types. Managers must carefully analyze the existing fund’s deal allocation requirements, including a review of both the existing fund’s partnership agreement and disclosure documentation and the manager’s allocation policy. Similar issues may arise when allocating an investment between the existing fund and a co-investment or annex fund.

IV. Conclusion

COVID-19 has created a tremendous amount of uncertainty in the global economy, causing many private equity fund managers to pursue new, attractive opportunities outside of their traditional investment objectives. Such managers should carefully review their funds’ governing documents and disclosure materials to determine whether and to what extent it is possible to pursue such opportunities. Sponsors should also maintain an open dialogue with limited partners and clearly communicate the desired strategy in a concise, focused manner, including a consideration of the various tools at the sponsor’s disposal, as outlined above.

____________________

[1] Crystal Tse and Liana Baker, Buffett-Goldman Redux: Buyout Shops Fight for Lifeline Deals, Bloomberg (Apr. 27, 2020).

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding the issues and considerations discussed above. For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors:

Shukie Grossman – New York (+1 212-351-2369, sgrossman@gibsondunn.com)
Edward D. Sopher – New York (+1 212-351-3918, esopher@gibsondunn.com)
Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, jbellah@gibsondunn.com)
William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, wthomas@gibsondunn.com)
Robert Harrington – New York (+1 212-351-2608, rharrington@gibsondunn.com)

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

Despite pressure from U.S. and non-U.S. officials to ease sanctions on Iran in response to COVID-19, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) to date has not made substantial changes to the longstanding legal authorizations for humanitarian trade. Nonetheless, OFAC has in recent weeks published unprecedented guidance for those who may find themselves facing challenges to comply with OFAC’s reporting requirements in light of the pandemic, acknowledging that some businesses may be forced to reallocate sanctions compliance resources to other functions. While this is far from the substantial changes called for by some, it nonetheless indicates OFAC’s willingness to respond to the crisis with some measure of understanding for the new realities faced by many businesses affected by the pandemic.

Analysis of Recent Economic and Trade Sanctions Developments in Response to COVID-19

The COVID-19 crisis has intensified longstanding controversy over the role of economic and trade sanctions in the context of international humanitarian efforts. OFAC has in recent weeks taken unprecedented actions in this area—including offering a unique position concerning the possible reallocation of compliance resources away from sanctions matters. We provide below a summary of recent actions and public statements by senior U.S. and non-U.S. officials related to sanctions in the context of the response to COVID-19 and our reflections on what to expect in the short term.

Both before and after the United States’ participation in the Iran Nuclear Deal, the scope of activities related to Iran undertaken by non-U.S. persons that could result in U.S. secondary sanctions was and remains broad. As a result, many foreign financial institutions, manufacturers, and others have simply decided to restrict business related to Iran, regardless of whether the business would otherwise be authorized under the U.S. Iran sanctions. This widespread over-compliance with OFAC’s rules both within and outside of the United States has placed a significant practical restrain on humanitarian trade with Iran.

In response to the COVID-19 pandemic, the United Nations High Commissioner for Human Rights and the High Representative of the European Union for Foreign Affairs intensified calls on the United States to ease sanctions on Iran in response to that country’s particularly severe outbreak of the novel coronavirus.

OFAC initially responded with the addition of a new Frequently Asked Question directing attention to existing authorizations and exemptions for humanitarian trade with Iran. The FAQ described the general scope of the existing authorizations for trade in agricultural commodities, medicine, and medical devices with Iran, subject to limitations related to restricted parties and payment mechanisms.

Political pressure continued to mount, as current and former senior U.S. officials and diplomats, including former Secretary of State Madeleine Albright and Vice President Joe Biden, issued public statements urging OFAC to expand existing authorizations. Proposals for action included expanding the list of items eligible for the general authorization for trade in medicine and medical devices with Iran; issuing “comfort letters” to non-U.S. banks asked to facilitate humanitarian trade; adding staffing and resources to OFAC to accelerate the licensing process for medical items subject to a licensing requirement; offering updates on the operationalization of the Swiss Humanitarian Trade Arrangement; and expressing support for humanitarian trade facilitated by Europe’s INSTEX arrangement.

In apparent response to these public requests, OFAC has taken several steps that, while novel in certain respects, fall short of the changes that others have called for.

First, on April 16, OFAC issued a “Fact Sheet” summarizing the existing authorizations and exemptions for humanitarian trade and other assistance provided in response to COVID-19 with respect to all of the comprehensively sanctioned jurisdictions, namely Iran, Venezuela, North Korea, Syria, Cuba, and the Crimea region of Ukraine. Although no new authorizations were included in this document, the Fact Sheet is a helpful resource for industry, as it is the most complete collection published by OFAC to date of the various legal provisions applicable to humanitarian trade.

On the other hand, the length and detail of the Fact Sheet itself demonstrate the significant complexity and compliance resources needed to effectively use the existing authorizations for humanitarian trade. Particularly with respect to Iran, the number of restricted parties, including Iranian financial institutions and medical facilities that may be connected to restricted entities such as the Islamic Revolutionary Guard Corp-Qods Force, can make sales or donations of medical supplies to Iran complicated and risky. In addition, U.S. banks are not permitted to maintain direct correspondent relationships with banks in Iran, requiring all payments even for authorized trade to be routed through third-country banks in order to reach the United States.

Further, the Fact Sheet does not cover licensing requirements that apply to some exports of medical supplies from the United States to comprehensively sanctioned jurisdictions administered by the U.S. Department of Commerce.

Second, on April 20, OFAC issued an unusual public statement in which it appeared to provide limited leniency for persons subject to reporting requirements or who have received requests for information under an administrative subpoena with respect to challenges arising from the COVID-19 emergency. OFAC acknowledged that the pandemic crisis has caused “technical and resource challenges” for organizations. OFAC stated:

Accordingly, if a business facing technical and resource challenges caused by the COVID-19 pandemic chooses, as part of its risk-based approach to sanctions compliance, to account for such challenges by temporarily reallocating sanctions compliance resources consistent with that approach, OFAC will evaluate this as a factor in determining the appropriate administrative response to an apparent violation that occurs during this period. OFAC will address these issues on a case-by-case basis.

OFAC has not previously made any similar statement appearing to accommodate the choice by a regulated organization to reassign resources away from sanctions compliance.

We note that this public statement by OFAC does not authorize any apparent violation of the existing sanctions rules. It merely refers to OFAC’s assessment of an organization’s risk-based compliance procedures in the context of an administrative enforcement action. Therefore, rather than indicate any departure by OFAC from the existing requirements with respect to sanctions compliance, this rather unprecedented statement may indicate the unusual amount of pressure that OFAC finds itself under to justify its maintenance of the status quo.

In the short term, we expect that OFAC will continue to resist calls to dramatically change the scope of existing authorizations for humanitarian trade. Press releases by the U.S. Department of State and the U.S. Department of the Treasury have offered public justification for OFAC’s position. OFAC has also indicated in recent calls and panel discussions that it does not anticipate issuing new general licenses. That said, we will continue to monitor this ongoing controversy as the unusual present circumstances may yet lead to unpredictable results.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 pandemic. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Coronavirus (COVID-19) Response Team or its International Trade Practice Group, or the authors:

Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202-887-3509, ssewall@gibsondunn.com)

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

To Our Clients and Friends:

In the last week, as the U.S. Small Business Administration (“SBA”) prepared for additional Paycheck Protection Program (the “Program” or “PPP”) funding and began accepting—for the second time—applications from participating lenders, the SBA issued a series of new guidance materials related to Program eligibility, fund accessibility, and loan amount calculations.

With an additional $349 billion in funding to PPP under the Paycheck Protection Program and Health Care Enhancement Act (the “PPP and Health Care Enhancement Act”), the Program, established by the Coronavirus, Aid, Relief, and Economic Security (“CARES”) Act, is set to provide a total of $659 billion to help small businesses impacted by COVID-19 with funds to pay eight weeks of payroll and other eligible costs. The PPP and Health Care Enhancement Act, which was enacted into law on April 24, 2020, and primarily designed to replenish funds for the Program, did not substantially change the overall structure of the Program. The new law did, however, set aside $60 billion in funding for “community financial institutions” to serve underserved small businesses and nonprofit organizations[1] and directed the SBA to allow agricultural enterprises[2] to apply for Economic Injury Disaster Loans. With the additional funds Congress provided in the PPP and Health Care Enhancement Act, the SBA started accepting PPP applications from lenders again on April 27, 2020.

This client alert, the sixth in a series of alerts regarding the Program,[3] will address the SBA’s (1) Fourth Interim Rule (the “Fourth IFR”), which speaks to, among other topics, the eligibility (or ineligibility) of private equity firms, hedge funds, and the gaming industry to participate in the Program; (2) certification that a PPP loan is needed in order to support ongoing operations; (3) Fifth Interim Final Rule (the “Fifth IFR”), acknowledging a disparity in treatment under the maximum loan calculation under the CARES Act for seasonal employers and Sixth Interim Final Rule (the “Sixth IFR”) on disbursements; (4) guidance on how to calculate maximum loan amounts and related payroll documentation requirements; and (5) guidance on how to calculate the number of employees under employee-based size standards for eligibility.

Thematically, much of the new guidance is cautionary in nature; warning public, private equity-held, and other businesses with access to liquidity that PPP loans are not for them. Adding teeth to those warnings the Treasury Department also announced that all PPP loans of more than $2 million will be audited.

The Fourth Interim Final Rule

Under the Fourth IFR, hedge funds and private equity firms are explicitly prohibited from receiving a PPP loan because they are “primarily engaged in investment or speculation.” This rule is consistent with prior restrictions on Section 7(a) loans identified in 13 CFR §120.110 and described in SBA’s Standard Operating Procedure (SOP) 50 10, which prohibited loans to “speculative businesses” for the “sole purpose of purchasing and holding an item until the market price increases” or “[e]ngaging in a risky business for the chance of an unusually large profit.” Prior to the Fourth IFR “speculative” businesses included those “[d]ealing in stocks, bonds, commodity futures, and other financial instruments.”[4]

The Fourth IFR acknowledges, however, that a portfolio company of a private equity fund may still be eligible for a PPP loan and concludes that “[t]he affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control.” The acknowledgment comes with a cautionary note: that borrowers should “carefully review” the PPP loan application certifications, including that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The Fourth IFR also contains the following additional clarifying provisions:

Government-Owned Hospitals. Hospitals otherwise eligible to receive a PPP loan are not determined ineligible because of ownership by state or local government if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid.
Legal Gaming Activities. Businesses that receive legal gaming revenues are eligible for PPP loans. In a shift from the SBA’s Third Interim Rule, the Fourth IFR states that 13 CFR 120.110(g) (providing that businesses deriving more than one-third of gross annual revenue from legal gambling activities are ineligible for SBA loans) is inapplicable to PPP loans. Businesses that receive illegal gaming revenues remain ineligible.
Employee Stock Ownership Plans. Participation in an ESOP (as defined in 15 U.S.C. § 632(q)(6)) does not result in an affiliation between the business and the ESOP.
Bankruptcy Proceedings. An applicant is ineligible for PPP loans if it, or its owner, is the debtor in a bankruptcy proceeding at the time of the application or any time before the loan is disbursed.

Borrower Certification Safe Harbor

In the SBA’s FAQ, the SBA reiterates that “all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.” Regardless of eligibility requirements, borrowers must certify in good faith that the PPP loan request is necessary even though the CARES Act suspended the ordinary requirement that borrowers must be unable to obtain credit elsewhere. Specifically, the guidance states that borrowers need to consider “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” when certifying that the PPP loan request is necessary to ongoing operations.

The guidance concluded that it is “unlikely” a public company “with substantial market value and access to capital markets will be able to make the required certification in good faith, “ and cautioned that such companies should be prepared to demonstrate to the SBA, upon request, the basis for its certification. In addition, yesterday, Secretary of the Treasury Steven Mnuchin said that the government will audit any PPP loans above $2 million.

Notably, the Fourth IFR establishes a form of amnesty by allowing “borrowers [to] promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.” Under the Fourth IFR, any borrower that applied prior to April 23, 2020 and repays the loan in full by May 7, 2020 “will be deemed by SBA to have made the required certification in good faith.”

The Fifth and Sixth Interim Final Rules

On April 27, 2020, the SBA issued the Fifth Interim Final Rule (available here) to provide seasonal employers with an alternative method to calculate their maximum loan amount. In doing so, the Fifth IFR stated that without the rule, “many summer seasonal businesses would be unable to obtain funding on terms commensurate with those available to winter and spring seasonal businesses.” Under Section 1102 of the CARES Act, a seasonal employer may determine its maximum loan amount by reference to the employer’s average total monthly payments for payroll during “the 12-week period beginning February 15, 2019, or at the election of the eligible [borrower], March 1, 2019, and ending June 30, 2019.” The Fifth IFR allows seasonal employers to calculate the maximum loan amount using any consecutive 12 week period between May 1, 2019 and September 15, 2019. The Rule also clarifies that if a seasonal business was not fully operating or dormant as of February 15, 2020, it is still eligible to receive a PPP loan.

The Sixth Interim Final Rule, posted on April 28, 2020 and available here, provides that lenders must make a one-time, full disbursement of the PPP loan within ten calendar days of loan approval (defined as when the loan is assigned an SBA loan number). Loan approvals will be cancelled for any loans that are not disbursed because of a borrower’s failure to provide required loan documentation, including a promissory note, within 20 calendar days of loan approval. The Sixth IFR provides for transition rules for those loans that have received an SBA loan number prior to the posting of the Sixth IFR but are not yet fully disbursed.

Maximum Loan Calculation and Payroll Documentation Requirements

In addition, on April 24, 2020, the SBA provided guidance (available here) to assist businesses in calculating their payroll costs for determining the maximum possible PPP loan amount. Under the guidance, the SBA outlines the methodology potential borrowers should use to calculate the maximum amount they can borrow, as well as the documentation the borrower should provide to substantiate the loan amount. A table summarizing the required documentation as articulated in the guidance is below.

The SBA guidance reminds borrowers that, under most circumstances, “PPP loan forgiveness amounts will depend, in part, on the total amount spent during the eight-week period following the first disbursement of the PPP loan.”

Records from a retirement administrator, or a health insurance company or third-party administrator for a self-insured plan can be used to demonstrate employers retirement and health insurance contributions.

Supporting Documentation Requirements

No.	Eligible Borrower	2019 Documentation	2020 Documentation
1.	Self-employed with no employees	IRS Form 1040 Schedule C. IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record establishing you were self-employed in 2019.	Invoice, bank statement, or book of record establishing operation on February 15, 2020.
2.	Self-employed with employees	IRS Form 1040 Schedule C. IRS Form 941[1], or IRS Form W-2s, IRS Form W-3, or payroll processor reports, including quarterly and annual tax reports. State quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements). Documentation of any retirement or health insurance contributions.	Payroll statement or similar documentation from the pay period that covered February 15, 2020.
3.	Self-employed farmers	IRS Form 1040 Schedule 1 and Schedule F.
4.	Partnerships without employees	IRS Form 1065 (including K-1s).	Invoice, bank statement, or book of record establishing the partnership was in operation on February 15, 2020.
5.	Partnerships with employees	IRS Form 1065 (including K-1s). IRS Form 941, or IRS Form W-2s, IRS Form W-3, or payroll processor reports, including quarterly and annual tax reports. State quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements). Documentation of any retirement or health insurance contributions.	Payroll statement or similar documentation from the pay period that covered February 15, 2020.
6.	S Corporations or C Corporations	IRS Form 941, or IRS Form W-2s, IRS Form W-3, or payroll processor reports, including quarterly and annual tax reports. State quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements) Filed business tax return (IRS Form 1120 or IRS 1120-S) or other documentation of any retirement and health insurance contributions.	Payroll statement or similar documentation from the pay period that covered February 15, 2020.
7.	Eligible Non-Profit Organizations	IRS Form 941, or IRS Form W-2s, IRS Form W-3, or payroll processor reports, including quarterly and annual tax reports. State quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements) IRS Form 990 or other documentation of any retirement and health insurance contributions	Payroll statement or similar documentation from the pay period that covered February 15, 2020.

Employee-Based Size Standards and Definitions

In guidance issued on April 26, 2020 (available here), the SBA reiterated that under the 500-employee or other applicable employee-based threshold, the term “employee” under the CARES Act includes “individuals employed on a full-time, part-time, or other basis.” Although this is consistent with the original text of the CARES Act, the guidance confirms that a part-time employee working 10 hours per week should be counted the same as a full-time employee for purposes of loan eligibility. In contrast, the guidance acknowledges, to determine the extent of any reduction in the loan forgiveness amount in the event of a reduction in headcount, the CARES Act uses the standard of “full-time equivalent employees.”

Although the CARES Act and related guidance issued to date do not define the term in the context of the Program, Title II of the CARES Act defines “full-time employee” by referencing the Internal Revenue Code, 26 U.S.C. § 4980H, which defines the term as “an employee who is employed on average at least 30 hours of service per week.” In addition, the Internal Revenue Service defines “full-time equivalent employee” as “a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee.” Absent further guidance, these definitions may be instructive.

[1] A search tool for identifying all eligible lenders is available on the SBA website here.

[2] Existing law defines “agricultural enterprises” to mean “small business concerns engaged in the production of food and fiber, ranching, raising of livestock, aquaculture, and all other farming and agricultural-related industries.”

[3] For additional details about the PPP please refer to Gibson Dunn’s Frequently Asked Questions to Assist Small Businesses and Nonprofits in Navigating the COVID-19 Pandemic and prior Client Alerts about the Program: SBA “Paycheck Protection” Loan Program Under the CARES Act; Small Business Administration and Department of Treasury Publish Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed; Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program; Small Business Administration Issues Interim Final Rule on Affiliation, Summary of Affiliation Tests, Lender Application Form and Agreement, and FAQs for Paycheck Protection Program, and Analysis of Small Business Administration Memorandum on Affiliation Rules and FAQs on Paycheck Protection Program.

[4] See SBA’s Standard Operating Procedure (SOP) 50 10.

[5] Very small businesses that file an annual IRS Form 944 instead of quarterly IRS Form 941 should provide IRS Form 944.

Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)
Alisa Babitz – Washington, D.C. (+1 202-887-3720, ababitz@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com)
Alexander Orr – Washington, D.C. (+1 202-887-3565, aorr@gibsondunn.com)
William Lawrence – Washington, D.C. (+1 202-887-3654, wlawrence@gibsondunn.com)
Samantha Ostrom – Washington, D.C. (+1 202-955-8249, sostrom@gibsondunn.com)

* Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.

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

First, we hope you and your families are staying safe in the midst of this COVID-19 pandemic.

As you navigate through the implications of the pandemic on your business, below is a high level list of some of the key issues to consider with respect to one or more events or consequences caused by the COVID-19 pandemic (“COVID-19 Event”) in reviewing your project agreements and financing documents.

Impact of a COVID-19 Event under Project Agreements/Commercial Contracts (e.g., Concession Agreements, Offtake Agreements, Construction Contracts, Supply Contracts, O&M Agreements, etc.)
1. Relief Event/Compensation Event/Force Majeure Event – Determine whether the COVID-19 Event would qualify as a relief event, compensation event or force majeure event under the contract, what notices are required and the extent of relief available.Consider also if there are applicable “you snooze you lose” time frames that should be adhered to and if, in order to avoid missing any deadlines, a tolling agreement should be entered into. Discuss if there are strategic reasons to prefer entering into a tolling agreement versus filing relief event, compensation event and/or force majeure event notices with the counterparty (particularly with government entities/grantors). Finally, you should be familiar with, and proactively manage upfront, any contractual obligation to mitigate the impact of the COVID-19 Event in your (or your counterparty’s) business.

Here is a 4-step checklist and flow chart on force majeure relief under US law: https://www.gibsondunn.com/force-majeure-clauses-a-4-step-checklist-and-flowchart; and under English law: https://www.gibsondunn.com/english-law-force-majeure-clauses-a-4-step-checklist-flowchart. While the cases are primarily based on US and English law, respectively, a similar analysis would generally be undertaken under the governing law of the relevant contract.

We suggest reviewing whether and how relief events, compensation events and force majeure relief can be claimed both by your entities and your contract counterparties.

1. COVID-19 Event (whether or not it qualifies as a Relief Event, Compensation Event or Force Majeure Event) Implications on:
  1. Revenue – Analyse how the COVID-19 Event would impact your revenue stream under the contract and under any applicable business interruption or other insurance.
  2. Payment Obligation – Determine how the amount and timing of your payment obligations to counterparties would be affected by the COVID-19 Event.
  3. Schedule – Assess the impact of the COVID-19 Event on any milestone with a specific deadline or any other time-bound undertaking (e.g., completion date, commercial operations date, delivery date); review corresponding forecasts and expectations.
  4. Contract Enforceability – Assess the potential implications of the COVID-19 Event on enforceability and defences available under the applicable contract law principles (e.g., impossibility, frustration, impracticability).
  5. Ability to Perform Obligations – Analyse whether the relevant entity will continue to be able to meet its obligations. Considerations include having an appropriate business continuity plan (i.e., Does it take into account pandemics? Are there work-from-home arrangements, back-up plans if employees get sick, alternative sites for required back-office equipment? Are you experiencing supply chain disruptions that could impact construction or operation?).
  6. Non-Compliance Points / Liquidated Damages / Events of Default / Termination – Analyse whether the COVID-19 Event could potentially lead to a default and trigger a termination event under the contract or result in the assessment of non-compliance points or liquidated damages.
  7. Insurance – Determine whether insurance would cover any or all of your losses arising from the COVID-19 Event.
Financing Agreements
1. Representations & Warranties[1]
  1. “No Default” – Determine whether the COVID-19 Event would trigger actual or potential defaults by the borrower and/or the relevant contractcounterparties under the borrower’s material contracts. On occasion, this representation may also include defaults under the financing agreements.
  2. Insolvency/Bankruptcy/Inability to Pay Debts Generally When Due – Consider whether the COVID-19 Event would trigger a breach of this representation, which would also depend on the laws of the jurisdiction applicable to the subject entity/ies (including any recent pronouncements, relief measures, moratoria and the like by government entities in response to the pandemic).
  3. No Proceedings – Consider whether the relevant entity is or would be subject to litigation, disputes, claims, and the like, both actual or threatened, as a result of the COVID-19 Event, including any disputes relating to the availability of force majeure relief and labor-related disputes.
  4. MAC – Check whether the COVID-19 Event would lead to a “material adverse change” usually from the latest audited financials, or depending on the formulation, have/would/is reasonably likely to have a material adverse effect on the business, financials, operations, or prospects of the company or key contract counterparties. Note that this is a rapidly evolving area of the law in various jurisdictions and so it is prudent to check with counsel.
2. Covenants
  1. Information Covenants – Check what notice requirements will be triggered to the granting entity, lenders, trustees, bondholders and otherwise (e.g., force majeure claims, material litigation/disputes, potential or actual defaults under commercial contracts, potential delays in milestones, events that could have a material adverse effect, etc.). If the company has bonds that are publicly listed, are any reporting obligations triggered? Are voluntary disclosures recommended? In addition, certain deliverables such as financial statements (and any related audit review) may be delayed due the impact of the COVID-19 Event on both the company and the auditors.
  2. Financial Covenants and Ratio-based Distribution Tests – Review the calculation of the financial ratios both as maintenance covenants and dividend blocks (particularly for projected figures), and determine whether they are likely to be breached and how any such breach can be mitigated (e.g., equity cure, prepayments, tap into revolvers or additional facility). Note that previously contemplated dividend payments may now be delayed or prohibited.
  3. Other Covenants – Determine whether any of the other covenants would be triggered as result of the COVID-19 Event, including with respect to acts or omissions vis-à-vis counterparties under commercial contracts (e.g., enforcing rights and remedies under material contracts, not settling claims without lender consent), obligations to meet construction deadlines, meeting requirements, operating standards, etc.
  4. Reserve Accounts – To the extent that the relevant entity will experience liquidity issues, consider whether it will be able to meet any reserve account requirements. Determine also whether any failure to meet such reserve account requirements would result in a default and what mitigation measures are available.
  5. Distributions – In addition to determining the implications of the COVID 19 Event on the distribution test, consider if dividend policies should be revisited in terms of potential liquidity needs.
3. Drawstop Events

To the extent that the facility has not yet been fully drawn, a breach of representations and warranties or covenants (as described above), or the occurrence of an event of default or potential default (as described below), may prohibit subsequent draws. The implications of the COVID-19 Event on the borrower’s ability to make further borrowings and the consequences thereof on its business should be carefully reviewed.

1. Events of Default/Potential Default

The list of events of default should be reviewed to see whether any of them would be triggered by the COVID-19 Event, including by a prolonged occurrence thereof. Some examples include:

1. 1. Misrepresentation and Covenant-Related Defaults – Consider whether a breach of representations or failure to meet financial or other covenants as described above would result in a default.
  2. Failure to Meet Certain Milestones – If the borrower or a contract counterparty is required to achieve certain milestones by a date certain, e.g., commercial operations date or construction completion date, a delay resulting from a COVID-19 Event may trigger a default. Note that where such milestone in the financing agreement is not tied to the definition under the relevant commercial contract (e.g., concession agreement, construction contract, etc.), then the borrower would not be entitled to the same force majeure relief under the financing agreements as in the relevant commercial contract.
  3. MAC – In cases where the financing agreement includes a “Material Adverse Change/Effect” event of default (including through repeating representations), the formulation should be reviewed to see whether the COVID-19 Event would trigger such default.
  4. Audit Qualification – Determine whether the COVID-19 Event would lead to a qualification in the auditor’s report, and if so, whether such qualification would trigger a default.
  5. Payment-Related Defaults – Consider whether liquidity issues will result in difficulty meeting payment obligations, and whether waivers or extensions related to upcoming payments are required.

There may be other issues to consider given the specifics of your business and contractual arrangements. While this alert has been drafted to cover projects in a variety of jurisdictions globally and in all cases at a high level, we would be happy to help you on specific issues with respect to your projects in the respective geographies covered hereby. Should you have any questions please feel free to contact us.

[1] Under some loan agreements, representations and warranties are repeated periodically. If these representations and warranties have already been made and do not need to be repeated, it is likely that there would be a corresponding formulation in the Covenant or Event of Default section so the same analysis would apply.

Gibson Dunn regularly counsels clients on issues raised by this pandemic in the commercial context. For additional information, please contact the Gibson Dunn lawyer with whom you usually work or the authors:

Tomer Pinkusiewicz – New York (+1 212-351-2630, tpinkusiewicz@gibsondunn.com)

Patricia Tan Openshaw – Hong Kong (+852 2214-3868, popenshaw@gibsondunn.com)

Anita Girdhari – New York (+1 212-351-5362, agirdhari@gibsondunn.com)

Cristina Uy-Tioco – Hong Kong (+852 2214-3818, cuytioco@gibsondunn.com)

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

This briefing covers steps sponsors should consider taking when fundraising in the current environment.

Investor Sentiment

Investor interest in private investment funds is generally expected to remain subdued in the months ahead. Based on recent industry surveys:

a majority of surveyed investors are generally open for business or are at least in the market to “re-up” with existing sponsor relationships;
many investors plan to reduce, or are considering reducing, new fund commitments this year;
a minority of investors are proceeding only with investment opportunities that were in progress prior to the pandemic or are pausing investments for the time being;
fundraising is expected to be quite difficult for debut sponsors and sponsors with whom an investor has no pre-existing relationship;
travel restrictions and social distancing measures are key practical barriers hampering investors from meeting in person with sponsors and conducting on-site diligence, which is contributing to a stronger preference for re-ups;
some investors have liquidity concerns given the prospect of smaller distributions and accelerated drawdowns by some sponsors, including to pay down balances under subscription lines; and
due to the public markets “denominator effect,” institutional investors with less flexible portfolio allocation requirements (e.g., pension funds) may need to scale back their alternative investment programs.

These trends may become especially challenging for less established sponsors throughout 2020 and into 2021. Sponsors currently or soon to be fundraising should plan to be proactive in communicating with investors about the impact of the pandemic on their investments and operations.

Offering Materials

Sponsors should update disclosures in fund offering materials to ensure their continued accuracy, including:

Market/industry outlook. Discussion regarding the relevant market or industry may need to be revised to account for material changes in market conditions and expectations.
Track record. Discussion of predecessor fund performance should include disclaimers that prior performance was achieved in different market circumstances. Any detailed financial information should be accompanied by an explanation of any material changes since the relevant measurement dates.
Case studies. Sponsors should revisit whether particular case studies are appropriate under current market conditions and may need to include additional disclaimers or omit such case studies from the offering materials.
Risk factors. Risk factors should be revised to reflect the foreseeable impact of the pandemic (including macro-level and fund-specific risks), as well as other future pandemics or similar disruptions.

Investor Due Diligence

Given investor scrutiny of the impact of the COVID-19 pandemic, sponsors should consider preparing standard responses to potential inquiries, including:

Existing portfolios. What have been the adverse effects on predecessor funds’ portfolios, and what steps has the sponsor been taking in response? Is there an expanded need for follow-on investments or bridge financings with respect to existing portfolio companies under stress from the pandemic?
Pipeline concerns. What is the expected impact on the sponsor’s investment pipeline and ability to deploy capital given travel restrictions that are affecting the ability to conduct onsite research with respect to potential investments, potential changes in cost and availability of financing, risk of deal-level MAC clauses being triggered, and potential delays in closing transactions because of COVID-19 mitigation policies?
Valuation methodology. Should portfolio investments be revalued, or do recent market disruptions make publicly traded share valuations less indicative of fair market value than they normally would be? Any changes with respect to valuation methodology and assumptions need to be clearly disclosed to and discussed with investors.
Business continuity plans and disaster recovery plans. Do the sponsor’s business continuity and disaster recovery plans, both for itself and its portfolio companies, take account of disruptions from this and potentially from other pandemics?
ESG and COVID-19-related community service. How are the sponsor and its portfolio companies helping those most affected by the pandemic?
Information use. Given office closures and work-from-home arrangements, do the sponsor’s IT policies and infrastructure relating to cybersecurity, data privacy and confidentiality meet current challenges, such as affording staff remote VPN access and defending against increased phishing attempts, the emerging videoconference hacking trend, etc.?
Reporting. Does the sponsor have a plan to minimize any potential delays in providing financial reports, including potential delays by portfolio companies in providing information necessary for the sponsor’s funds to complete their financial reports?

Closings

As the fundraising pace is expected to slow over the next several months, sponsors should consider:

Fundraising period. While there are pros and cons, it may be suitable for some sponsors to seek a longer fundraising period (e.g., 18 months instead of 12 months) from the outset rather than having to seek a fundraising period extension later.
Rolling closings. As prospective investors may be subject to disparate constraints and timelines for when they can subscribe, sponsors should consider holding smaller, more frequent closings than usual in order to secure capital as it becomes available in 2020 and into 2021.
Dry closings. Making the initial closing a dry closing (i.e., delaying the commencement of the investment period and the management fee) may provide a time buffer allowing greater flexibility in extending first closing benefits to investors making commitments across a wider initial closing window.

Regulatory Considerations

For marketing efforts into non-U.S. jurisdictions that require regulatory filings or approvals to comply with local private placement rules, sponsors should build in extra time for pre-closing steps. Regulators may be less responsive (or temporarily unresponsive) during the pandemic and could remain backlogged after resuming operations.

Sponsors must consider where prospective investors are physically located in assessing which jurisdiction’s rules will apply to an offering. In particular, as a result of the COVID-19 pandemic, high net worth individuals may not be located in the country where they normally reside.

Communications with Existing Investors

Finally, given expected increased reliance on re-ups in any fundraising process, sponsors should be providing clear, meaningful and more frequent portfolio updates to maintain trust and maximize investor goodwill.

John Fadely – Hong Kong (+852 2214-3810, JFadely@gibsondunn.com)
Bill Thomas – Washington, D.C. (+1 202-887-3735, WThomas@gibsondunn.com)
Kevin Heilenday – Washington, D.C. (+1 202-887-3507, KHeilenday@gibsondunn.com)
Alicia Shi – Hong Kong (+852 2214-3745, AShi@gibsondunn.com)
Kobe Chow – Hong Kong (+852 2214-3769, KChow@gibsondunn.com)

The rapid spread of the COVID-19 pandemic, and stringent government orders regulating the movement and gathering of people issued in response, continues to raise concerns about parties’ abilities to comply with contractual terms across a variety of industries. As discussed previously here, force majeure clauses may address parties’ obligations under such circumstances. Even without force majeure clauses, depending on the circumstances parties may seek to invalidate contracts or delay performance under the common law based on COVID-19. To assist in considering such issues, we have prepared the following overview. As the analysis of the applicability of any of the doctrines below is fact-specific and fact-intensive, this overview is intended only as a starting point. We encourage you to reach out to your Gibson Dunn contact to discuss specific questions or issues that may arise.

Impossibility of Performance

The doctrine of impossibility is available where performance of a contract is rendered objectively impossible.[1] In assessing whether impossibility of performance applies to your situation and your contract, it is useful first to determine whether the jurisdiction applicable to your contract or dispute has codified the doctrine. As in California, the statutory language might provide guidance to or place limitations on its applicability.[2]

A party seeking to invoke the impossibility doctrine under common law must show that the impossibility was produced by an unanticipated event and the event could not have been foreseen or guarded against in the contract.[3] Courts have held that impossibility of performance during times of emergency or disaster has generally excused performance on the basis of governing law, governmental regulations, or the disruption of transportation or communication networks. However, the economic consequences of those events do not necessarily permit a claim of impossibility.

A handful of cases from the early 20th century which discuss epidemics in connection with school closures and resulting performance failures under teacher contracts are divided on whether performance was excused.[4] Federal courts have excused performance for impossibility where, in times of war, manufacturers prioritized governmental orders issued under the Defense Production Act.[5] In the wake of the September 11, 2001 terrorist attacks, courts excused performance resulting from the effective lockdown of communications in New York City.[6]

In New York, the doctrine is narrowly construed and is limited to specific circumstances, including “the destruction of the means of performance by an act of God, vis major, or by law.”[7] Thus, it will be necessary to evaluate the impact of any governmental orders relating to COVID-19, or any applicable court orders, to assess their impact on any given contract. The First Appellate Division of New York previously found that performance of music recording and management contracts was objectively impossible after a court ordered that the parties could not have any contact with each other.[8] There, the means of performance was made impossible by operation of law—the court’s order that the parties cease contact.

By contrast, historically, performance has not been excused where the impossibility or difficulty was caused “only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy.”[9] Certain New York courts have rejected claims of impossibility related to an economic downturn with the explanation that “the risk of changing economic conditions or a decline in a contracting party’s finances is part and parcel of virtually every contract.”[10]

Commercial Impracticability of Performance

As with impossibility, the doctrine of commercial impracticability may also be available where performance is rendered impracticable. The treatment and availability of commercial impracticability varies significantly across states, with some treating it as its own standalone defense and others including it under the umbrella of the impossibility defense.[11] But regardless of the form it takes, many states that recognize commercial impracticability as a defense have adopted the Restatement (Second) of Contracts Section 261, or similar language, which provides that a party’s duty to perform under a contract is excused where “performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.”[12] Looking to Section 261 for guidance, one Hawaii court found that fear and uncertainty in the aftermath of the September 11, 2001, by themselves, were insufficient grounds for showing impracticability.[13]

As in the case of the doctrine of impossibility, the impracticability at issue must be the product of unforeseen events. In general, mere economic loss or hardship is insufficient to render performance impracticable because courts generally treat it as foreseeable.[14] However, in some circumstances the defense may be available where performance “can only be done at an excessive and unreasonable cost.”[15]

The Uniform Commercial Code, which has been adopted as law in most states, covers commercial contracts, including contracts related to the sale and leasing of goods, commercial paper, banking transactions, letters of credit, auctions and liquidations of assets, storage and bailment of goods, securities, financial assets and secured transactions. For a transaction governed by the UCC, the defense of commercial impracticability may apply where performance “has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.”[16]

Frustration of Purpose

The doctrine of frustration of purpose may be available where “a change in circumstances makes one party’s performance virtually worthless to the other,” thereby frustrating the principal purpose in making the contract.[17] Whether or not frustration of purpose applies depends on the precise wording of the contract but, in any event, the frustration itself must be “substantial.”[18] Or, in other words, “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.”[19]

Similar to the doctrines of impossibility and impracticability, frustration of purpose is applied narrowly and is limited to instances where the event rendering the contract valueless is unforeseeable.[20] It has been most commonly applied by courts upon the death or incapacity of a person necessary for performance, the destruction or deterioration of a thing necessary for performance, or a change in the law that prevents a person from performing.[21]

Moreover, as with the doctrine of impossibility, frustration of purpose does not usually apply merely “because it becomes more economically difficult to perform.”[22] For example, a New York federal district court rejected an argument that losses prevented the defendant from being able to pay the plaintiff because “[t]he application of the frustration of purpose doctrine in such circumstances would ‘place in jeopardy all commercial contracts.’”[23]

Consequences of Successful Defense

If one of the above defenses were deemed to apply, the duties of the party asserting the defense may be discharged.[24] However, if impossible or impracticable performance were temporary in duration, these doctrines generally would excuse performance only for so long as the disabling condition persisted. In addition, if performance were excused, courts could potentially grant quantum meruit claims of the counterparty, in order to equitably adjust for gains and losses sustained by the parties. This could require the excused party to reimburse the counterparty for expenses incurred in expectation of the performance.[25]

We expect all of these doctrines to be tested in the context of the COVID-19 pandemic and the associated governmentally mandated shutdowns and other actions. We will continue to monitor developments in this regard and are available to discuss if you have any questions.

[1] See Kel Kim Corp. v. Central Mkts., 70 N.Y.2d 900, 902 (1987).

[2] For example, under the California Civil Code, performance is excused when a party “is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.” Cal. Civ. Code § 1511(2).

[3] Kel Kim Corp., 70 N.Y.2d at 902; see also, e.g., Citadel Builders, LLC v. Transcon. Realty Inv’rs, Inc., 2007 WL 1805666, at *4 (E.D. La. June 22, 2007) (noting that although hurricanes are foreseeable events in New Orleans during the summer, impossibility defense was available because Hurricane Katrina and her aftermath “devastated th[e] area in ways beyond what anyone predicted”); Gregg School Tp., Morgan Cty. v. Hinshaw, 76 Ind. App. 503 (Ind. App. Ct. 1921) (performance excused due to legally mandated school closure related to Spanish Influenza).

[4] Phelps v. School District No. 109, Wayne County, 302 Ill. 193, 198 (1922) rejected the defense on the basis that the closure had been foreseeable. Gregg School Tp., Morgan County, 76 Ind. App. 503, however, excused performance because the law of the land (which allowed closure of schools) was part of every contract.

[5] Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 996 (5th Cir. 1976); U.S. for Use and Benefit of Caldwell Foundry & Mach. Co. v. Texas Const. Co., 224 F.2d 289, 293 (5th Cir. 1955).

[6] See, e.g., Bush v. Protravel Int’l, Inc., 192 Misc.2d 743, 750 (N.Y. Civ. Ct. 2002) (acknowledging impossibility defense may be available where communications and transportation networks damaged by September 11, 2001 terrorist attack in New York City).

[7] Kolodin v. Valenti, 115 A.D.3d 197, 200 (N.Y. App. Div. 1st Dep’t 2014).

[8] Id.

[9] 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281 (N.Y. 1968); see also Stasyszyn v. Sutton E. Assocs., 161 A.D.2d 269, 271 (N.Y. App. Div. 1st Dep’t 1990) (absent an express contingency clause “compliance is required even where the economic distress is attributable to the imposition of governmental rules and regulations” rendering performance more costly “or the inability to secure financing”).

[10] Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 27 Misc. 3d 1222(A) (N.Y. Sup. Ct. Albany Cty. 2010), aff’d, 88 A.D.3d 1224 (N.Y. App. Div. 3d Dep’t 2011); Urban Archaeology Ltd. v. 207 E. 57th St. LLC, 68 A.D.3d 562, 562 (N.Y. App. Div. 1st Dep’t 2009) (doctrine not available because “economic downturn could have been foreseen or guarded against in the [contract]”).

[11] Courts in New York and California both treat impracticability as a form of the impossibility defense. See Axginc Corp. v. Plaza Automall, Ltd., 2017 WL 11504930, at *8 (E.D.N.Y. Feb. 21, 2017), aff’d, 759 F. App’x 26, 29 (2d Cir. 2018) (New York courts do not recognize “commercial impracticability as a separate defense to the doctrine of impossibility; rather, impracticability is treated as a type of impossibility and construed in the same restricted manner.”); Emelianenko v. Affliction Clothing, 2011 WL 13176615, at *28 (C.D. Cal. June 7, 2011) (“The enlargement of the meaning of ‘impossibility’ as a defense [] to include ‘impracticability’ is now generally recognized.”).

[12] E.g., LECG, LLC v. Unni, 2014 WL 2186734, at *6 (N.D. Cal. May 23, 2014), aff’d, 667 F. App’x 614 (9th Cir. 2016) (California); Waddy v. Riggleman, 216 W. Va. 250, 258 (W. Va. 2004) (West Virginia); Tractebel Energy Mktg., Inc. v. E.I. Du Pont De Nemours & Co., 118 S.W.3d 60, 65 (Tex. App. 14th Dist. 2003) (Texas); Step Plan Servs., Inc. v. Koresko, 12 A.3d 401, 414 (Pa. Super. Ct. 2010) (Pennsylvania).

[13] OWBR LLC v. Clear Channel Comm’cs, Inc., 266 F. Supp. 2d 1214, 1222 (D. Haw. 2003) (analyzing impracticability doctrine in context of contract containing force majeure provision).

[14] See, e.g., Karl Wendt Farm Equip. Co. v. Int’l Harvester Co., 931 F.2d 1112, 1117 (6th Cir. 1991) (dramatic downturn in farm equipment market causing defendant to go out of business did not excuse unilateral termination of its dealership agreements due to commercial impracticability).

[15] Emelianenko, 2011 WL 13176615, at *28; see also City of Vernon v. City of Los Angeles, 45 Cal.2d 710, 720 (1955).

[16] U.C.C. § 2-615(a); see also, e.g., Cal. Com. Code § 2615 (codifying language of U.C.C. § 2-615).

[17] PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508 (N.Y. App. Div. 1st Dep’t 2011) (citing Restatement (Second) of Contracts § 265 (1981)). The Restatement (Second) of Contracts § 265 provides that “[w]here, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.” The Restatement commentary further explains that Section 265 requires that (1) the purpose that is frustrated was a “principal purpose” in making the contract, such that without it the transaction “would make little sense”; (2) the frustration is substantial; and (3) the non-occurrence of the frustrating event was a basic assumption on which the contract was made. Restatement (Second) of Contracts § 265, cmt. a.

[18] Crown IT Servs., Inc. v. Koval-Olsen, 11 A.D.3d 263, 265 (N.Y. App. Div. 1st Dep’t 2004).

[19] Id.

[20] Crown IT Servs., 11 A.D.3d at 265; A + E Television Networks, LLC v. Wish Factory Inc., 2016 WL 8136110, at *12 (S.D.N.Y. Mar. 11, 2016); Warner v. Kaplan, 71 A.D.3d 1, 6 (N.Y. App. Div. 1st Dep’t 2009) (frustration of purpose “is not available where the event which prevented performance was foreseeable and provision could have been made for its occurrence”).

[21] Bayou Place Ltd. P’ship v. Alleppo’s Grill, Inc., 2020 WL 1235010, at *8 (D. Md. Mar. 13, 2020); see also Warner, 71 A.D.3d at 6.

[22] A + E Television Networks, 2016 WL 8136110, at *13.

[23] Id. (quoting 407 E. 61st Garage, Inc., 23 N.Y.2d at 282).

[24] In the event that a court rejects such defenses, a party found to be in breach of a contract may still raise the counterparty’s failure to mitigate its damages as an alternative defense or option for reducing any prospective damages award. See U.S. Bank Nat. Ass’n v. Ables & Hall Builders, 696 F. Supp. 2d 428, 440-41 (S.D.N.Y. 2010) (“In a breach of contract action, a plaintiff ordinarily has a duty to mitigate the damages that he incurs. If the plaintiff fails to mitigate his damages, the defendant cannot be charged with them.”).

[25] D & A Structural Contractors Inc. v. Unger, 25 Misc.3d 1211(A) (N.Y. Sup. Ct. Nassau Cty. 2009).

Gibson Dunn’s lawyers are available to assist with questions you may have regarding developments related to the COVID-19 outbreak. We regularly counsel clients on issues raised by this pandemic in the commercial context. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, the Gibson Dunn attorney with whom you work, or the following authors:

AUTHORS: Shireen Barday, Mary Beth Maloney, Rahim Moloo, Hannah Kirshner, and Robert Banerjea

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

In our client alert of 27 March 2020, we provided an overview of the financial support made available by the UK Government to: (i) investment grade businesses through the Covid Corporate Finance Facility (the “CCFF”); and (ii) small and medium sized enterprises (“SMEs”) through the Coronavirus Business Interruption Loan Scheme (the “CBILS”). In our client alert of 6 April 2020, we gave a brief overview of the measures that have been taken in the UK to support businesses and highlighted in that alert that the CBILS was being extended to larger business with an annual revenue of between £45 million and £500 million.

In this client alert we summarise: (i) the announcement of details on the Coronavirus Large Business Interruption Loan Scheme (the “CLBILS”); and (ii) the announcement of a new funding scheme for innovative companies that are facing financing difficulties due to the COVID-19 pandemic (the “Innovation and Development Scheme”).

See also the Gibson Dunn Coronavirus (COVID-19) Resource Centre for more resources on the response to COVID-19.

Background to the CLBILS

Design Flaws with the CBILS and Pressure from Industry

Whilst the UK Government announced a package of measures worth approximately £330 billion in mid-March 2020, in recent days, the UK Government has come under pressure to ensure that all UK businesses are able to access the financial and liquidity support measures that have been made available. As at close of business on 13 April 2020, UK Finance (the industry body for the banking and finance sector in the UK) reported that of 28,461 applications made to lenders to access the CBILS, only 6,016 loans had been approved with total lending reaching £1.1 billion. Further, it has become clear that the CCFF would only be available to a select number of investment grade companies in the UK that already had a commercial paper issuance programme or those that would otherwise meet the criteria for such a programme.

Criticism of the CBILS have been growing since its launch. Industry bodies, including the British Private Equity and Venture Capital Association (the “BVCA”) have been reporting a number of structural issues with the scheme that meant large business and portfolio companies of private equity firms were not able to access much needed financial support. This is supported by the views of our private equity clients, whose portfolio companies have encountered difficulties in accessing the scheme. Some of the issues identified have been:

Process and Timing: Difficulties with access to the scheme and the process for approving applications has had a significant impact on the liquidity position of a number of companies.
Eligibility Criteria:
- Companies and industry bodies have been reporting that banks are only lending to those companies that are credit-worthy with a strong balance sheet (i.e. those companies with retained profits/equity capital and low leverage). This is because lenders retain a 20% exposure to loans advanced under the CBILS. This has prevented many venture capital backed companies and innovative tech and healthcare companies that are not typically profitable from accessing much-needed financial support.
- Importantly for our clients, guidance from the British Business Bank to lenders also provided that companies that are majority-owned by a private equity firm would not be eligible to participate in the CBILS in circumstances where additional equity funding is available to be provided by the private equity firm.
- Lenders have also been aggregating the annual revenues of private equity firm’s majority-owned portfolio companies to determine whether a single portfolio company is eligible for a CBILS loan, which had the effect of excluding the large majority of portfolio companies backed by mid to large-cap private equity firms (estimated by the BVCA to be 750+ companies).
Level of Funding: When the CLBILS was initially announced on 3 April 2020, it was suggested that the scheme would provide £25 million of funding to businesses with an annual revenue of between £45 million and £500 million. For larger companies with an annual revenue of £500 million, a loan of £25 million would represent just over half of a business’ revenue for a month. The concern expressed is that if the current low levels of economic activity prevail for a significant period into the summer months, the loans available would not provide a sufficient liquidity buffer, even with the other support measures available, to prevent many companies from going out of business.

In the context of the growing criticism of the design flaws with the CBILS and the lack of access to the CCFF, the UK Government was forced to act by launching: (i) the CLBILS to provide genuine support to the majority of medium to large-sized UK businesses, and (ii) the Innovation and Development Scheme to support innovative development and research companies, including those backed by venture capital firms.

Regulatory Pressure

On 15 April 2020, the Financial Conduct Authority (FCA) published a “Dear CEO” letter setting out its expectations of banks, in relation to lending to SMEs.

In the letter to banks, the FCA reminded them that the priority is ensuring that the benefit of the package of measures introduced by the Government, including the CBILS, is passed through to businesses as soon as possible. The FCA also highlighted that responsibility for these specific lending activities should be allocated to one or more Senior Managers.

In the letter, the FCA also stated that a new small business unit has been established. This will, amongst other things, gather intelligence about the treatment of SMEs during the crisis. There is, therefore, a clear prospect of future enforcement action being taken by the FCA against banks where it does not consider that its expectations have been met. The pressure on commercial lending institutions to deliver the UK Government’s schemes and provide access to liquidity has, therefore, been increasing.

The Coronavirus Large Business Interruption Loan Scheme

On 3 April 2020, the UK Chancellor of the Exchequer, Rishi Sunak MP, announced that support would be provided to larger businesses in the UK (i.e. those with an annual revenue of in excess of £45 million) through the CLBILS. There followed an announcement on 16 April 2020, which set out the scope of the CLBILS, a scope broader than that initially announced on 3 April 2020. The UK Government has sought to design the CLBILS to support those businesses that hitherto had been unable to access funding through the CBILS or that had been ineligible to obtain funding through the CCFF. The CLBILS launched on Monday, 20 April 2020, and the key details of the scheme are as follows:

Businesses with UK-based business activity and annual revenue of more than £45 million are eligible.
Businesses with an annual revenue of between £45 million and £250 million will be able to access to up to £25 million of loans and businesses with an annual revenue of more than £250 million will have access to up to £50 million of loans.
The UK Government will guarantee 80% of each loan but unlike the CBILS, the UK Government will not cover the first twelve months of interest.
The business needs to have a borrowing proposal which the lender would consider viable, that will enable the business to trade out of any short-term to medium-term difficulty caused by the COVID-19 pandemic.
The business should be able to self-certify that it has been adversely impacted by the COVID-19 pandemic.
The business should not have received a facility under the CCFF.
Majority-owned portfolio companies of private equity firms will now be able to access the scheme following updated guidance to lenders, as such companies’ annual revenues will be assessed on a standalone basis (i.e. there will be no grouping of all of a private equity firm’s portfolio companies’ annual revenues).
Personal guarantees will not be permitted for loans of up to £250,000.
The scheme will be available through a series of accredited lenders, that will be listed on the British Business Bank website.
Credit institutions, insurers, reinsurers, building societies, public sector bodies, grant-funded further education establishments and state-funded schools are not eligible to participate in the scheme.

As a result of pressure from UK-businesses, the CLBILS appears to address some of the key issues relating to eligibility and levels of funding that had been identified with the CBILS. Large businesses now have access to up to £50 million of funding (depending on annual revenues) and companies that are not eligible to access the CCFF may still able to access the loans under the CLBILS. Importantly for the private equity industry, it also appears as though revenue-grouping for portfolio companies has been abolished together with the exclusion from the schemes of companies that are majority-owned by private equity firms.

However, one key point to note is that it appears as though businesses will need to still be credit-worthy with a viable business plan to access finance under the CLBILS. The decision on credit-worthiness remains in the hands of a business’ lenders and so businesses which maintain a high leverage levels may continue to be excluded.

The Innovation and Development Scheme

On 20 April 2020, the Chancellor of the Exchequer announced the establishment of a new Future Fund to support the UK’s innovative businesses currently affected by the Covid-19 pandemic, together with other measures to support businesses driving innovation in the UK. In total, the package announced represents £1.25 billion of additional funding through: (i) a £500 million investment fund for high-growth companies impacted by the Covid-19 pandemic, delivered in partnership between UK Government and the private-sector (the “Future Fund”); and (ii) £750 million of grants and loans to SMEs focussing on research and development.

The Future Fund

In an unprecedented step, the Future Fund will make convertible loans of between £125,000 and £5 million available to high-growth innovative businesses in the UK. The Fund will be delivered by the British Business Bank and will provide UK-based companies with funding from the UK Government. Private investors will be obliged to match the UK Government funding amount for companies to participate. These loans will automatically convert into equity on the company’s next qualifying funding round, or at the end of the loan if they are not repaid, meaning the UK Government will become a shareholder in these companies.

To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third party investors in the last five years.

The UK Government has also published a term sheet which sets out the terms of the convertible loans provided under the Future Fund here.

The UK Government’s initial commitment to the Future Fund will be £250 million, with the Future Fund due to open for applications in May 2020 and run until September 2020. The UK Government has announced that it will keep the scale of its investment in the Future Fund under review.

Grants and Loans for Research and Development

£750 million of targeted support will be made available for research and development intensive SMEs. The grants and loans will be provided through existing schemes of the UK’s national innovation agency, Innovate UK.

Innovate UK, will accelerate up to £200 million of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis. An extra £550 million will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding. It has been announced that the first payments will be made by mid-May.

Conclusions

We are in unprecedented times in the United Kingdom, as is the case for many leading economies globally. The UK State (and accordingly, the UK taxpayer) is being asked to underwrite British business for it to survive during the COVID-19 pandemic. The UK Government is having to make policy announcements an almost daily basis in a very fluid situation and then rush to provide guidance and infrastructure for policy to be delivered. This has led to much criticism but the new measures appear to be designed to plug the design flaws in the initial schemes that were adopted in the early days of the developing COVID-19 crisis.

However, it remains to be seen whether the new schemes and updated guidance will enable lenders to speed up processes for approving loans and funding businesses at a time when the liquidity squeeze is being keenly felt. Central to the loan approval processes is the issue that the UK Government is guaranteeing only 80% of the exposure for lenders under the schemes with 20% of the residual risk carried by commercial lenders. In the current economic environment and prevailing macro-economic uncertainty, some lenders are discouraged from approving the loans under the schemes where they carry such residual risk. It is considered likely that further measures may need to be enacted, including having the UK Government or the Bank of England step in to guarantee 100% of the loans issued under the schemes to enable lenders to have the confidence in lending to British business. In these unprecedented times, it will remain to be seen whether further unprecedented measures are needed or whether the UK Government’s latest schemes will provide sufficient funding and liquidity for UK Business to survive what is fast-turning into a global economic crisis.

This client update was prepared by Tom Budd, Greg Campbell, Michelle Kirschner, Mark Sperotto, Attila Borsos, Amar Madhani and Martin Coombes.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team. In the UK, the contact details of the authors and other key practice group lawyers are as follows:

The Authors:
Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, tbudd@gibsondunn.com)
Gregory A. Campbell – London, Restructuring and Finance (+44 (0)20 7071 4236, gcampbell@gibsondunn.com)
Michelle M. Kirschner – London, Financial Institutions (+44 (0)20 7071 4212, mkirschner@gibsondunn.com)
Mark Sperotto – London, Private Equity (+44 (0)20 7071 4291, msperotto@gibsondunn.com)
Attila Borsos – Brussels, Antitrust (+32 2 554 72 11, aborsos@gibsondunn.com)
Amar Madhani – London, Private Equity and Real Estate (+44 (0)20 7071 4229, amadhani@gibsondunn.com)
Martin Coombes – London, Financial Institutions (+44 (0)20 7071 4258, mcoombes@gibsondunn.com)

London Key Contacts:
Sandy Bhogal – London, Tax (+44 (0)20 7071 4266, sbhogal@gibsondunn.com)
Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, tbudd@gibsondunn.com)
James A. Cox – London, Employment (+44 (0)20 7071 4250, jcox@gibsondunn.com)
Patrick Doris – London, Litigation & Data Protection (+44 (0)20 7071 4276, pdoris@gibsondunn.com)
Ben Fryer – London, Tax (+44 (0)20 7071 4232, bfryer@gibsondunn.com)
Christopher Haynes – London, Corporate (+44 (0)20 7071 4238, chaynes@gibsondunn.com)
James R. Howe – London, Private Equity (+44 (0)20 7071 4214, jhowe@gibsondunn.com)
Anna Howell – London, Energy, Oil & Gas (+44 (0)20 7070 9241, ahowell@gibsondunn.com)
Charles Falconer, QC – London, Litigation (+44 (0)20 7071 4270, cfalconer@gibsondunn.com)
Jeremy Kenley – London, M&A, Private Equity & Real Estate (+44 (0)20 7071 4255, jkenley@gibsondunn.com)
Penny Madden, QC – London, Arbitration (+44 (0)20 7071 4226, pamadden@gibsondunn.com)
Ali Nikpay – London, Antitrust (+44 (0)20 7071 4273, anikpay@gibsondunn.com)
Philip Rocher – London, Litigation (+44 (0)20 7071 4202, procher@gibsondunn.com)
Selina S. Sagayam – London, Corporate (+44 (0)20 7071 4264, ssagayam@gibsondunn.com)
Alan A. Samson – London, Real Estate & Real Estate Finance (+44 (0)20 7071 4222, asamson@gibsondunn.com)
Jeffrey M. Trinklein – London, Tax (+44 (0)20 7071 4264, jtrinklein@gibsondunn.com)

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

Since the early stages of the coronavirus (COVID-19) pandemic, U.S. financial regulators have issued a flurry of guidance. This Alert analyzes select guidance from regulators to date on three key issues: (1) the additional planning that financial institutions should undertake going forward, (2) how financial institutions should adjust day-to-day banking operations during coronavirus, including complying with their Bank Secrecy Act/anti-money laundering (“BSA/AML”) obligations, and (3) how COVID-19 affects oversight of financial institutions, including supervisory priorities and deadlines.[1]

Key U.S. financial regulators presently appear focused on ensuring safety, soundness, and liquidity, but are acting with flexibility given the operational challenges facing, and the increased demands imposed on, U.S. financial institutions. We will continue to monitor developments, including whether regulators maintain this approach over the long term with respect to any COVID-19 performance gaps, as well as potential supervisory and enforcement options.

1. Planning

In the initial response to coronavirus, financial regulators have issued guidance regarding how financial institutions should plan for pandemics, the financial risks posed by them, and the specific areas of responsibility for boards of directors and senior management.

Pandemic Planning and Preparedness

FFIEC, on behalf of its member agencies, issued an update to earlier guidance on how federally regulated banks and credit unions should plan and prepare for a pandemic.[2] The new guidance explains the pandemic-related information that needs to be included in a financial institution’s business continuity plan. Specifically, the plan should include, among other things, a preventative plan to reduce the impact of a pandemic, a documented strategy for scaling a response to pandemic efforts, and a comprehensive framework of facilities, as well as testing and oversight of the program. This planning should be accompanied by a business impact analysis of the potential effects of a pandemic and appropriate risk assessment and management.

DFS issued guidance requiring “New York State Regulated Institutions” to submit a report describing their pandemic preparedness.[3] The term “New York State Regulated Institutions” is not defined and appears to apply broadly to all DFS-regulated entities. The report must describe the financial institution’s “plan of preparedness to manage the risk of disruption to its services and operations.” The report is required to cover, “at a minimum,” preventative measures to mitigate the risk of operational disruption, a documented strategy addressing the impact of the outbreak in stages, an assessment of all facilities, an assessment of potential increased cyberattacks and fraud, an assessment of the preparedness of critical outside-party service providers and suppliers, employee protection strategies, and development of a communications plan, as well as testing and governance. And, on cybersecurity specifically, DFS issued additional guidance instructing regulated entities to “assess” and “address” a number of cybersecurity risks posed by working arrangements adopted during the pandemic, including ensuring secure connections, configuring remote working video and audio conferencing applications to limit unauthorized access, revisiting phishing training and testing “at the earliest practical opportunity,” and coordinating with critical third-party vendors to determine how they are adequately addressing new risks.[4]

Financial Risk Planning

DFS issued another piece of guidance requiring the same “New York State Regulated Institutions” to submit a second report regarding assurance relating to the financial risks from COVID-19.[5] The report must “describ[e] the institution’s plan regarding managing the potential financial risk” arising from coronavirus. Specifically, the plan must include an assessment of: (i) the credit risk ratings of the customers, counterparties and business sectors impacted by coronavirus; (ii) the credit exposure to customers, counterparties and business sectors impacted by coronavirus arising from lending, trading, investing, hedging and other financial transactions; (iii) the scope and the size of credits adversely impacted by coronavirus that currently are in, or potentially may move to, non-performing/delinquent status; (iv) the valuation of assets and investments that may be, or have been, impacted by coronavirus; (v) the overall impact of coronavirus on earnings, profits, capital, and liquidity; and (vi) reasonable and prudent steps to assist those adversely impacted by coronavirus.

2. Banking Practices During an Emergency

Financial regulators have also issued guidance on how financial institutions should conduct operations during this pandemic. Three key issues the guidance has covered are remote work arrangements, providing payment relief to customers, and complying with BSA/AML obligations.

Remote Work Arrangements

As explained in a recent Gibson Dunn alert, the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (“CISA”) issued updated guidance outlining which employees in the financial services sector, among others, are considered essential.[6] In the financial services sector, this includes employees needed to process transactions, maintain orderly market operations, and provide business, commercial, and consumer access to bank and non-bank financial services and lending services. These workers “should be encouraged to work remotely when possible” but, if remote work is not possible, financial institutions should use strategies such as offsetting shift hours and social distancing to reduce the likelihood of the spread of COVID-19.

The FRB, OCC, and Treasury Department have all issued statements recognizing the CISA classifications.[7] The FRB, for example, advises that supervised financial institutions should provide essential employees and contractors with a letter explaining that the identified worker is an essential critical infrastructure worker who needs to be allowed access to their place of work.[8] DFS has issued guidance permitting employees to work from home,[9] and FINRA has temporarily suspended the requirement to maintain updated Form U4 information for registered persons who are temporarily working in alternate locations due to COVID-19.[10] DFS has also issued guidance providing that New York State-chartered institutions may conduct meetings by teleconference or videoconference during the declared Disaster Emergency and 60 days thereafter.[11]

Lending, Borrower Accommodation, and Customer Assistance

The U.S. financial regulators have also issued extensive guidance encouraging financial institutions to assist consumers that may be struggling financially due to COVID-19. The FDIC and OCC issued similar guidance, which is consistent with the FRB’s pre-existing guidance regarding responses to major disasters or emergencies, encouraging financial institutions to try to provide relief to customers affected by the pandemic.[12] The FRB, FDIC, NCUA, OCC, and CFPB issued a joint statement encouraging banks, savings associations, and credit unions to offer responsible small-dollar loans to both consumers and small business.[13]

The guidance from all these regulators generally follows a similar pattern of (1) acknowledging the likely financial hardship for individuals and small businesses due to the pandemic; (2) encouraging financial institutions to do their part to alleviate the adverse impact caused by COVID-19; and (3) providing suggested measures that financial institutions may take to do so. Examples of suggested measures include offering payment accommodations, waiving overdraft and ATM fees, easing credit terms for new loans, waiving late fees for loan balances and credit card balances, increasing ATM daily cash withdrawal limits, waiving early withdrawal penalties on time deposits, and increasing credit card limits for creditworthy customers. The FRB, DFS, the FDIC, and OCC also provided assurances that prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism.[14]

Although the above guidance is voluntary, some consumer relief guidance is not optional. DFS promulgated regulations requiring banks to grant 90-day forbearances on residential mortgages for borrowers that are suffering financial hardship as a result of the COVID-19 pandemic and also to waive ATM, overdraft, and credit card late payment fees. Those regulations were previously summarized by Gibson Dunn here.

Bank Secrecy Act Compliance

U.S. regulators, notably FinCEN, have issued a number of pieces of guidance on how financial institutions should continue to comply with their BSA/AML obligations during the pandemic.

FinCEN issued guidance stating that compliance with the BSA “remains crucial to protecting our national security by combating money laundering and related crimes, including terrorism and its financing,” and, as such, “FinCEN expects financial institutions to continue following a risk-based approach” and “diligently adhere to their BSA obligations.”[15] At the same time, FinCEN “recognizes that certain regulatory timing requirements with regard to BSA filings may be challenging during the COVID-19 pandemic and that there may be some reasonable delays in compliance.” Nevertheless, financial institutions are advised to “contact FinCEN and their functional regulator as soon as practicable [regarding] concern[s] about any potential delays in [their] ability to file required Bank Secrecy Act (BSA) reports.”[16] To that end, FinCEN has created a new mechanism to contact the agency through its website for COVID-19-related issues.[17] Such communications “are strongly encouraged but not required.”[18] FinCEN also encourages financial institutions to contact their regulators or examiners “as soon as practicable if a financial institution has BSA compliance concerns because of the COVID-19 pandemic.”

The OCC has issued guidance supporting FinCEN’s approach to BSA/AML compliance, stating that it “encourages all banks to follow a risk-based approach to managing their BSA compliance programs.”[19] Specifically, “[w]hen evaluating a bank’s BSA compliance program, the OCC will consider the actions taken by banks to protect and assist employees, customers, and others in response to the COVID-19 pandemic, including any reasonable delays in BSA report filings, beneficial ownership verification or re-verification requirements, and other risk management processes.”[20] Again, banks are encouraged to contact examiners if they anticipate delays.

At a more granular level, FinCEN has also issued guidance regarding filing SARs for COVID-19-related activity and complying with beneficial ownership obligations when dispensing loans under the Paycheck Protection Program (“PPP”). As financial institutions continue to monitor transactions in compliance with their obligations under the Bank Secrecy Act and relevant anti-money laundering laws, FinCEN has specifically identified various COVID-19-related scams that may occur, including companies selling unapproved or misbranded products making false health claims and bad actors soliciting donations or stealing personal information by impersonating health-related government agencies, international organizations, or healthcare organizations.[21] In the event that financial institutions detect any of these typologies or suspect suspicious transactions linked to COVID-19, they are asked to enter “COVID19” in Field 2 of the Suspicious Activity Report (“SAR”) template.

Regarding loans issued under the PPP, analyzed in detail in a separate Gibson Dunn client alert, FinCEN issued guidance clarifying that if PPP loans are being made to existing customers and their necessary information was previously verified, it does not need to be re-verified for FinCEN Rule CDD purposes.[22] As for new customers, FinCEN clarified that, for all natural persons with a 20% or greater ownership stake in the applicant business, collection of their owner name, title, ownership percentage, TIN, address, and date of birth will be deemed to satisfy applicable BSA requirements and FinCEN regulations governing the collection of beneficial ownership information.

Relief on CECL Implementation

Even before the effects of the pandemic began to make themselves felt, the new current expected credit losses (“CECL”) methodology promulgated by the Financial Accounting Standards Board concerned many banking institutions, which feared pro-cyclical effects on credit loss allowances, and ultimately, reductions to capital. In 2019, U.S. banking regulators modified their capital rules to permit banks to phase in over a period of three years the day-one effects of the transition to CECL, to smooth out those effects over time.

On March 27, 2020, the U.S. regulators issued an interim final rule that provided alternative relief, by permitting banking organizations to phase-in over a period of five years the effects of the transition to CECL that occur during the first two years of implementation. Under this approach, no effects of CECL implementation will be recognized for the first two years; banking organizations will phase in the effects over years three through five.[23] In addition, Section 4014 of the CARES Act provides banking organizations with the option not to comply with CECL until the earlier of the end of 2020 or the end of the COVID-19 emergency.[24] On March 31, 2020, the banking regulators issued a statement to the effect that the regulatory relief and Section 4014 are not mutually exclusive; a banking organization that elects to use the statutory relief may also elect the regulatory capital relief after the expiration of the statutory relief period. The two-year period in the regulatory relief would be reduced by the number of quarters that the banking organization made use of the statutory relief.[25]

3. Supervisory Priorities and Deadlines

U.S. financial regulators have also provided guidance on how COVID-19 will affect examination priorities and reporting deadlines.

Regarding examinations, the FRB released guidance stating that it “is reducing its focus on examinations and inspections at this time” and that “[a]ny examination activities will be conducted off-site until normal operations are resumed.”[26] For supervised institutions with less than $100 billion in assets, the FRB intends to cease all regular examination activity unless there is an urgent need, or it is critical for consumer protection. The FRB intends to reassess its approach in the last week of April. Supervisors are also focusing efforts to ensure that supervisory findings are still relevant and appropriately prioritized in light of changing circumstances. And, as noted above, the FRB, DFS, the FDIC, and OCC have provided assurances that prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism.

Regulators have also extended various reporting and submission deadlines. A selected list of reporting deadlines that have been extended to date is included in the table below. Please consult the website of your financial regulators to confirm current deadlines and extensions. In general, if a financial institution will not be able to meet a submission deadline as a result of COVID-19, the best practice is to contact your financial institution’s regulator.[27]

Table 1 – Deadlines Extended by U.S. Financial Regulators

Agency	Task	Extension / Deadline
FDIC	Q1 2020 Regulatory Report Filings	30-day grace period[28]
FDIC	Reports of Condition and Income (Call Report) due March 31, 2020	30-day grace period
FinCEN	FIN-2020-R001 ruling on CTR filing obligations when reporting transactions involving sole proprietorships and entities operating under a “doing business as” (DBA) name	Indefinitely
FRB	Deadline for remediating existing supervisory findings unless the FRB notifies the institution otherwise	90 days
FRB	Revised Control Framework for determining when one company controls another company for purposes of the Bank Holding Company Act and Home Owners’ Loan Act	Effective date delayed six months, until September 30, 2020[29]
FINRA	Comment Period for Regulatory Notice 20-05	May 31, 2020
FINRA	Comment Period for Regulatory Notice 20-04	May 15, 2020
FINRA	Annual Reports	10-day extension for reports related to fiscal years ending January 2020 through March 2020
FINRA	FOCUS Reports	10-day extension for FOCUS reports related to periods ending in February 2020 through April 2020
FINRA	· Rule 3120 Report · Rule 3130 Certification	Deadlines that fall between March 1 and May 1, 2020 are extended until May 31, 2020
FINRA	Fingerprinting requirements for FINRA members and employees	Temporary exemption until May 30, 2020
FINRA	Timeframe for individuals designated as principals under FINRA Rule 1210.04 prior to February 2, 2020 to pass appropriate examination(s)	Extended to May 31, 2020
NY DFS	Annual stockholder meetings	Institutions will have seven months instead of four months from the beginning of an institution’s fiscal year end if the prior deadline for the stockholder meeting occurs during the disaster emergency
NY DFS	· Annual reports and comparative statements of commercial banks · Annual reports of licensed lenders · Quarterly reports of budget planners · Audited financial statements of budget planners · Annual reports and audited financial statements of check cashers · Certifications of compliance with cybersecurity requirements · Transaction monitoring and filtering · Volume of operation reports · Volume of servicing reports · Quarterly financial statements of virtual currency licensees · Annual reports of student loan servicers	45-day extension

[1] This alert covers select guidance issued by the Federal Reserve Board (“FRB”), the Federal Financial Institutions Examination Council (“FFIEC”), the New York Department of Financial Services (“DFS”), the Office of the Comptroller of the Currency (“OCC”), the Financial Industry Regulatory Authority (“FINRA”), the Federal Deposit Insurance Corporation (“FDIC”), and the Financial Crimes Enforcement Network (“FinCEN”). It does not cover every COVID-19-related guidance issued by these regulators nor does it discuss guidance issued by the U.S. Department of Justice, the Securities and Exchange Commission, or state financial regulators other than DFS.

[2] Federal Financial Institutions Examination Council, Interagency Statement on Pandemic Planning (Mar. 6, 2020), https://www.ffiec.gov/press/pr030620.htm. The member agencies of the FFIEC are the FRB, FDIC, OCC, and the National Credit Union Administration (“NCUA”) and the Consumer Financial Protection Bureau (“CFPB”).

[3] N.Y. Dep’t of Fin. Servs., Re: Guidance to New York State Regulated Institutions and Request for Assurance of Operational Preparedness Relating to the Outbreak of the Novel Coronavirus (Mar. 10, 2020), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20200310_risk_coronavirus.

[4] N.Y. Dep’t of Fin. Servs., Re: Guidance to Department of Financial Services (“DFS”) Regulated Entities Regarding Cybersecurity Awareness During COVID-19 Pandemic (Apr. 13, 2020), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20200413_covid19_cybersecurity_awareness.

[5] N.Y. Dep’t of Fin. Servs., Re: Guidance to New York State Regulated Institutions and Request for Assurance Relating to Potential Financial Risk Arising from the Outbreak of the Novel Coronavirus (Mar. 10, 2020), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20200310_financial_risk_coronavirus.

[6] Cybersecurity and Infrastructure Security Agency (CISA) of the Dep’t of Homeland Security, Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response (Apr. 17, 2020), https://www.cisa.gov/publication/guidance-essential-critical-infrastructure-workforce.

[7] For example, the Treasury Department also includes “key third-party providers who deliver core services” in its definition of essential financial services sector workers. U.S. Department of the Treasury, Memorandum: Financial Services Sector Essential Critical Infrastructure Workers (Mar. 22, 2020), https://www.aba.com/-/media/documents/incident-response/Financial-Services-Sector-Essential-Critical-Infrastructure-Workers.pdf.

[8] Bd. of Governors of the Fed. Reserve Sys., SR 20-6: Identification of Essential Critical Infrastructure Workers in the Financial Services Sector During the COVID-19 Response (Mar. 27, 2020), https://www.federalreserve.gov/supervisionreg/srletters/sr2006.htm.

[9] N.Y. Dep’t of Fin. Servs., Order (Mar. 12, 2020), https://www.dfs.ny.gov/system/files/documents/2020/03/ea20200312_covid19_relief_order.pdf.

[10] Financial Industry Regulatory Authority, Regulatory Notice 20-08: Pandemic-Related Business Continuity Planning, Guidance and Regulatory Relief, https://www.finra.org/rules-guidance/notices/20-08.

[11] N.Y. Dep’t of Fin. Servs., Order (Apr. 16, 2020), https://www.dfs.ny.gov/system/files/documents/2020/04/ea200416_banking_order_re_virtual_and_stockholder_meetings_due_to_c_19.pdf.

[12] Fed. Deposit Ins. Corp., Regulatory Relief: Working with Customers Affected by the Coronavirus, FIL-17-2020 (Mar. 13, 2020), https://www.fdic.gov/news/news/financial/2020/fil20017.html; Office of the Comptroller of the Currency, Pandemic Planning: Working With Customers Affected by Coronavirus and Regulatory Assistance (Mar. 13, 2020), https://www.occ.treas.gov/news-issuances/bulletins/2020/bulletin-2020-15.html; Bd. of Governors of the Fed. Reserve Sys., SR 13-6 / CA 13-3: Supervisory Practices Regarding Banking Organizations and their Borrowers and Other Customers Affected by a Major Disaster or Emergency (Mar. 29, 2013), https://www.federalreserve.gov/supervisionreg/srletters/sr1306.htm.

[13] Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19 (Mar. 26, 2020), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200326a1.pdf. This March 26 guidance follows a March 19 joint statement from the Federal Reserve, FDIC, and OCC stating that the agencies will look favorably on retail banking and lending activities that meet the needs of small businesses and farms, in connection with the Community Reinvestment Act. See Office of the Comptroller of the Currency, Pandemic Planning: Joint Statement on CRA Consideration for Activities in Response to COVID-19 (Mar. 19, 2020), https://www.occ.gov/news-issuances/bulletins/2020/bulletin-2020-19.html.

[14] In the FDIC’s “Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019,” the FDIC stated that it would be acceptable for a bank to offer borrowers affected by COVID-19 payment accommodations, such as allowing borrowers to defer or skip some payments or extending the payment due date. See Fed. Deposit Ins. Corp., Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 (Referred to as COVID-19) – As of April 15, 2020, https://www.fdic.gov/coronavirus/faq-fi.pdf. Additionally, on April 7, 2020, the FRB, the CFPB, the FDIC, NCUA, and OCC issued an updated statement “encouraging financial institutions to work prudently with borrowers” affected by COVID-19 and providing additional information regarding loan modifications. Specifically, the agencies “encourage financial institutions to work prudently with borrowers” and “will not criticize institutions for working with borrowers in a safe and sound manner[] and will not direct supervised institutions to automatically categorize all COVID-19-related modifications as TDRs (troubled debt restructurings).” Bd. of Governors of the Fed. Reserve Sys. et al., Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) (Apr. 7, 2020), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200407a1.pdf.

[15] Financial Crimes Enforcement Network, Press Release, The Financial Crimes Enforcement Network Provides Further Information to Financial Institutions in Response to the Coronavirus Disease 2019 (COVID-19) Pandemic (Apr. 3, 2020), https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-provides-further-information-financial.

[16] Financial Crimes Enforcement Network, The Financial Crimes Enforcement Network (FinCEN) Encourages Financial Institutions to Communicate Concerns Related to the Coronavirus Disease 2019 (COVID-19) and to Remain Alert to Related Illicit Financial Activity (Mar. 16, 2020), https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-fincen-encourages-financial-institutions.

[17] Specifically, parties are advised to go to https://www.fincen.gov/contact and select “COVID19” in the “Subject” drop down menu.

[18] Financial Crimes Enforcement Network, Press Release, The Financial Crimes Enforcement Network Provides Further Information to Financial Institutions in Response to the Coronavirus Disease 2019 (COVID-19) Pandemic (Apr. 3, 2020), https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-provides-further-information-financial.

[19] Office of the Comptroller of the Currency, Bank Secrecy Act/Anti-Money Laundering: OCC Supports FinCEN’s Regulatory Relief and Risk-Based Approach for Financial Institution Compliance in Response to COVID-19 (Apr. 7, 2020), https://www.occ.treas.gov/news-issuances/bulletins/2020/bulletin-2020-34.html.

[20] Id.

[21] Financial Crimes Enforcement Network, Press Release, The Financial Crimes Enforcement Network (FinCEN) Encourages Financial Institutions to Communicate Concerns Related to the Coronavirus Disease 2019 (COVID-19) and to Remain Alert to Related Illicit Financial Activity (Mar. 16, 2020), https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-fincen-encourages-financial-institutions.

[22] Financial Crimes Enforcement Network, Press Release, Paycheck Protection Program Frequently Asked Questions (FAQs) (Apr. 13, 2020), https://www.fincen.gov/news/news-releases/paycheck-protection-program-frequently-asked-questions.

[23] Joint Press Release: Agencies Announce Two Actions to Support Lending to Households and Businesses (Mar. 27, 2020), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200327a.htm.

[24] Coronavirus Aid, Relief, and Economic Security Act § 4014, Pub. L. No. 116-136, 134 Stat. 281 (Mar. 27, 2020).

[25] Joint Statement on the Interaction of Regulatory Capital Rule: Revised Transition of the CECL Methodology for Allowances with Section 4014 of the Coronavirus Aid, Relief, and Economic Security Act (Mar. 31, 2020), https://www.fdic.gov/news/news/financial/2020/fil20032a.pdf.

[26] Bd. of Governors of the Fed. Reserve Sys., Federal Reserve Statement on Supervisory Activities (Mar. 24, 2020), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200324a1.pdf.

[27] The Federal Reserve, for example, has explicitly stated it does not expect to take supervisory action against a banking organization that takes reasonable and prudent steps to comply with the Board’s reporting requirements but is unable to do so in these difficult times. See Bd. of Governors of the Fed. Reserve Sys., SR 13-6 / CA 13-3: Supervisory Practices Regarding Banking Organizations and their Borrowers and Other Customers Affected by a Major Disaster or Emergency (Mar. 29, 2013), https://www.federalreserve.gov/supervisionreg/srletters/sr1306.htm.

[28] FDIC-supervised institutions are encouraged to contact the FDIC in advance of the official filing date if they anticipate a delayed submission.

[29] For more information on the Federal Reserve’s Revised Control Framework, see our previously published client alert on this topic, available at https://www.gibsondunn.com/federal-reserve-new-control-framework-somewhat-greater-opportunities-for-minority-investments/.

Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. For additional information, please consult the firm’s Coronavirus (COVID-19) Resource Center. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Financial Institutions Group, or the authors.

The following Gibson Dunn lawyers assisted in preparing this client alert: Matthew Biben, Stephanie Brooker, Joel Cohen, Kendall Day, Mylan Denerstein, Arthur Long, Adam Smith, Joseph Warin, Linda Noonan, Chris Jones, Susanna Schuemann, and Tory Roberts.

*Mr. Jones and Ms. Schuemann are admitted only in New York and Washington, D.C. Ms. Roberts is admitted only in California. All are practicing under the supervision of Principals of the Firm.

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

After more than one month of widespread measures to fight the Coronavirus,[1] we can observe the first enforcement actions throughout Europe for alleged misconduct illustrating the wide spectrum of issues facing enforcement agencies. For instance, on April 2, 2020, the Public Prosecutor’s Office of Braunschweig announced that it is investigating the COVID-19-related deaths of elderly people in a nursing home in Wolfsburg/Germany under the suspicion of negligent homicide.[2] Sadly, twenty-two people had died as a consequence of the infection with the virus. According to the allegations the hygienic measures taken to protect the inhabitants from contagion were insufficient and a prohibition to allow third party visits to the inhabitants was ordered too late. On the other end of the spectrum, courts in the United Kingdom and the Netherlands have recently sentenced defendants for assault/threatening to custodial sentences because they coughed/threatened to cough at policemen.[3]

These are drastic cases, but they illustrate that with the proceeding of the COVID-19 crisis new exposure arises for business leaders and compliance officers alike.

The changing enforcement and risk landscape is partly a result of the quick adjustment of enforcement agencies to the “new normal” under restrictive measures stipulated through a series of ad hoc regulations that dramatically change the way businesses and their employees used to operate a few weeks ago.

1. Sources of liability and exposure

Businesses, whether run by individuals or by companies, have a responsibility to appropriately protect their employees, customers, and business partners from dangers deriving from business operations. The COVID-19 pandemic should remind managers of this fundamental obligation when running the business during the current crisis. Given the dynamic of the situation, this might involve a series of measures to be taken or adjusted ad hoc, that in the short or mid-term have potentially substantial impact on the way the business is run or even may have to discontinue the business.

Under German law, liability can be of criminal, regulatory or civil law nature:

Individual managers may be held criminally responsible, if they fail to comply with required safety standards that cause bodily harm of others (e.g. for negligent bodily harm or negligent killing), or be held liable for regulatory/criminal offenses if they fail to comply with official orders and regulations based (e.g. orders under the Infectious Diseases Protection Act, IfSG[4]). They can also be held responsible and fined with a fine of up to €10 million for committing a regulatory offense if they fail to duly oversee their employees and therefore facilitate or enable that they commit offenses;
Companies and partnerships can be held administratively responsible and fined, if an offense was committed by a representative of the company/partnership, e.g. a board member, or a person having managing responsibilities (Leitungsperson) and as a result thereof, (i) duties incumbent on the business have been violated, or (ii) the business has been enriched or (iii) was intended to be enriched. In addition, any economic gain derived from the violation may be subject to disgorgement;
Finally, individual managers as well as companies/partnerships represented by them may be held responsible under civil law for damages if as a result of their business decisions other people, including employees, suffer bodily harm.

2. Attributing criminal responsibility to management for business decisions in situations of crisis

If employees, customers, or business partners become infected with the virus due to poor organizational and safety standards, it is conceivable that managers can be held responsible for not having prevented the infection. This does not only apply to a single executive board member responsible for occupational health and safety. Rather, in the current situation, every board member needs to have these issues in mind.

The German Federal Court of Justice held in a famous judgment^[5] that the entire board can be made criminally responsible for bodily harm, no matter whether the individual board member was internally responsible for health and safety matters. In that particular case, the board members of a company were convicted for dangerously inflicting bodily harm on customers because they unanimously decided to refrain from a recall of a shoe leather spray that was detrimental to health when used.[6]

The court, by invoking principles of company law, set out the following:

“The principles of general responsibility and general competency of the management attach if for a particular reason, such as in situations of crisis and exception, the enterprise as a whole is concerned. In such a situation, the entire management is called upon to act.”^[7]

When neglected or inadequate safety and health measures can lead to a potentially fatal infection of employees, business partners and customers, as in the current COVID-19 pandemic, it is an exceptional situation that affects the entire company. Therefore, the current crisis triggers the general responsibility of the entire management meaning that business leaders must feel responsible that adequate organizational measures be taken to prevent harm to both employees and third parties such as customers, visitors and business partners. It is therefore recommendable to Compliance Officers to put such measures on the agenda of the entire board and make members aware of their duties to inform themselves, to decide on adequate measures and to ascertain their implementation.

3. Holding the business responsible for offences of its business leaders

As set out above, companies and partnerships can be held administratively responsible and fined, if an offense was committed by a representative of the company/partnership, e.g. a board member, or a person having managing responsibilities (Leitungsperson) and as a result thereof, (i) duties incumbent on the legal entity have been violated, or (ii) the legal entity has been enriched or (iii) was intended to be enriched.

For instance, if a company hires employees, it is a duty incumbent to the company that runs the business to protect its employees from dangers arising at the workplace. In contrast, a mere break of a curfew by a manager outside of the business cannot lead to fining the company because observing a curfew is a duty that entirely attaches to the individual.

4. Creating civil liability exposure

In addition, individual managers as well as companies/partnerships represented by them may be held responsible as joint obligors under civil law for damages if as a result of their business decisions other people suffer bodily harm. For instance, if a company were to sell a protective mask that due to its composition is knowingly harmful to the customers making use of it.

Such liability usually arises under sec. 280(1), 241(2), 823(1) and/or (2) of the German Civil Code if an offense that serves to protect individual interests is committed (e.g. negligent bodily harm). In the case of employees, civil liability can also arise on the basis of employment law but will often be excluded due to the provisions of the mandatory accident insurance (sec. 104 Social Code VII).

The amount to be compensated under German civil law does not include punitive damages that is known in other jurisdictions, but is calculated as the difference between the victims hypothetical financial situation had the event causing the damage not occurred and its real financial situation, supplemented by a sum for non-material damage for pain and suffering.

5. Special Recommendations by Public Authorities in re COVID-19

Apart from special requirements for particular businesses that may require specific instructions relating to the operation of the business (e.g. dealing with customers and business partners), as a minimum measure, we would recommend implementing and controlling the effective use and application of the workplace-related recommendations by public authorities.

Adhering to such recommendations would, absent more specific circumstances mandating more stringent measures, allow management to show that it did not act negligently and would further demonstrate compliance with its general obligation set out in Sec. 4 Work Protection Act (ArbSchG) stipulating that work must be organized in such a way that risks to physical and mental health are avoided and minimized.

In this regard, we deem the following recommendations as particularly useful which are targeted at the need of employers:

Recommendations by the Federal Center for Health Education (BzGA): https://www.infektionsschutz.de/fileadmin/infektionsschutz.de/Downloads/Infoblatt-Arbeitgeber-Coronavirus.pdf (in German; last visited April 20, 2020);
Recommendations by the World Health Organization: https://www.who.int/docs/default-source/coronaviruse/getting-workplace-ready-for-covid-19.pdf?sfvrsn=359a81e7_6 (in English, last visited April 20, 2020);
The Robert Koch Institute^[8] has published specific information with respect to the prevention of infections in nursing homes and hospitals: https://www.rki.de/DE/Content/InfAZ/N/Neuartiges_Coronavirus/nCoV.html (in German, last visited April 20, 2020);
Lastly, the Federal Ministry of Health has put together a website with hotlines, podcasts and useful links for many topics affected by COVID-19: https://www.bundesgesundheitsministerium.de/coronavirus.html#c17634 (mostly in German, partly in further languages including English, last visited April 20, 2020).

Additional helpful guidance can often be found for members on the websites of the respective industry associations. These are more specific to the specific industry requirements relevant from case to case.

[1] See in this regard, https://www.gibsondunn.com/covid-19-german-infectious-diseases-protection-act-what-makes-you-stay-at-home/ (last visited April 20, 2020).

[2] https://www.sueddeutsche.de/gesundheit/gesundheit-wolfsburg-corona-tode-in-seniorenheim-staatsanwaltschaft-ermittelt-dpa.urn-newsml-dpa-com-20090101-200402-99-565664 (in German, last visited April 20, 2020).

[3] https://www.sueddeutsche.de/panorama/coronavirus-grossbritannien-polizei-1.4866309 (in German, last visited April 20, 2020).

[4] See in this regard, https://www.gibsondunn.com/covid-19-german-infectious-diseases-protection-act-what-makes-you-stay-at-home/ (last visited April 20, 2020).

[5] See Federal Court of Justice, Judgment of July, 6, 1990, 2 StR 549/89.

[6] The defendants were sentenced to fines and imprisonment (up to 18 months) with probation.

[7] Our translation, the original quote has the following wording: „Doch greift der Grundsatz der Generalverantwortung und Allzuständigkeit der Geschäftsleitung ein, wo – wie etwa in Krisen- und Ausnahmesituationen – aus besonderem Anlaß das Unternehmen als Ganzes betroffen ist; dann ist die Geschäftsführung insgesamt zum Handeln berufen […].“ Federal Court of Justice, Judgment of July 6, 1990, 2 StR 549/89, para. 51.

[8] For the role of the Robert Koch Institute, see https://www.gibsondunn.com/covid-19-german-infectious-diseases-protection-act-what-makes-you-stay-at-home/ (last visited April 20, 2020).

Authors: Benno Schwarz, Ralf van Ermingen-Marbach and Andreas Dürr

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

I. New York Executive Orders Tolling Limitations Periods

On March 20, 2020, New York Governor Cuomo issued his eighth executive order following his March 7th declaration of a State disaster emergency in response to the COVID-19 pandemic. Executive Order No. 202.8, among other things, directs that

any specific time limit for the commencement, filing, or service of any legal action, notice, motion, or other process or proceeding as prescribed by the procedural laws of the state, . . . or by any other statute, local law, ordinance, order, rule, or regulation, or part thereof, is hereby tolled from [March 20, 2020] until April 19, 2020.

The governor’s Executive Order No. 202.14 extends the suspension, or tolling period, until May 7, 2020. The Order’s tolling provision, in effect, has stopped the clock from running on a vast pool of claims’ statutes of limitations.

The gubernatorial power to issue an order suspending the statute of limitations derives from Executive Law § 29-a. Initially promulgated in 1978, Section 29-a was amended by the state legislature just a few days before the COVID-19 disaster emergency to, among other revisions, provide the governor with authority not just to suspend laws in response to an emergency event, but also to “issue any directive” in response to the emergency.[1]

(It is this “directive” authority that the governor has relied upon for his various stay-at-home orders.) The amendment to Section 29-a will expire on April 30, 2021.

As amended, Section 29-a provides that the governor may suspend any law “if compliance with such provisions would prevent, hinder, or delay action necessary to cope with the disaster or if necessary to assist or aid in coping with such disaster.”[2] The statute also makes such suspensions subject to certain “standards and limits,” including that (1) suspensions may be for no longer than 30 days, although the governor may extend the suspension for additional 30-day periods; (2) suspensions must be “in the interest of the health or welfare of the public” and must be “reasonably necessary to aid the disaster effort”; and (3) suspensions shall “provide for the minimum deviation from the requirements” of the law “consistent with the goals of the disaster action deemed necessary.”[3]

II. Previous Orders Affecting Statutes of Limitations

In a certain respect, Governor Cuomo’s orders are not novel. Prior emergencies affecting New York have prompted both executive orders impacting statutes of limitations, as well as subsequent litigation upholding those orders. The two most recent instances are the September 11, 2001 terrorist attacks and Hurricane Sandy. Governor Pataki’s Executive Order No. 113.7, issued after the September 11 attacks, “temporarily suspend[ed], from the date the disaster emergency was declared . . . until further notice” select civil and criminal rules to the extent that they barred actions “whose limitation period conclude[ed] during the period commencing from the date that the disaster emergency was declared . . . until further notice . . . .” Governor Pataki later issued Executive Order No. 113.28, setting the end-date for the suspension as October 12, 2001, and as November 8, 2001 for litigants or attorneys directly impacted by the terrorist attacks. The Second Department later interpreted the orders as creating a “grace period until [one of two end-dates] to satisfy the statute [of limitations]” for certain litigants whose limitations periods were to expire within the grace periods.[4] Following Hurricane Sandy, Governor Cuomo issued an Executive Order almost identical to the one issued by Governor Pataki that was interpreted similarly by courts.[5]

While there is a history of orders affecting statutes of limitations, Governor Cuomo’s Order No. 202.8 is wider in scope and will result in different calculations for limitations periods. The prior orders extended the statutes of limitations for only certain claims—those with limitations periods expiring during the state disaster emergency. The earlier orders thereby impacted a narrower set of claims than Order No. 202.8, which creates a blanket toll for all claims subject to New York state laws and procedural rules. The earlier orders created for those subset of cases a grace period ending on a set date, whereas Executive Order No. 202.8, and its extension under Executive Order No. 202.14, implements a uniform toll that suspends the running of the limitations clock for the number of days between March 20 and May 7 (and any further extension that the governor may order).

III. Long-Term Impact of Orders

Executive Order Nos. 202.8 and 202.14 will impact litigants’ calculation of their statute of limitations periods for years to come. Unlike prior executive orders, these recent orders will affect many more claims that will each require individual calculations rather than looking to a single end-date. Parties should be mindful, however, of some plain exceptions to the orders’ scope, which reaches only state laws and procedures. The calculation of the limitations periods for federal claims will remain subject to federal rules and statutes. Contracts that contain parties’ own negotiated limitations periods and procedures likely will fall outside the orders’ ambit as well. States are treating statutes of limitations differently, with some states choosing not to extend the periods at all, some following the New York tolling approach, and others using the grace period approach. While there is often litigation concerning which state’s law may govern the claims asserted in any particular lawsuit, such disputes may take on added significance based on the different approaches being taken to the statute of limitations. Additionally, as states take varying approaches to their statutes of limitations, litigants that can file in multiple jurisdictions may also find value in comparing the different rules concerning tolling and calculation of the statute of limitations before commencing suit.

While courts held previous emergency orders concerning statutes of limitations to be constitutional and within executive powers, these most recent orders could conceivably be subject to future challenge. Litigants might argue, for instance, that (particularly with the benefit of hindsight) the tolling of the statute of limitations was not “necessary to cope with the disaster” or went beyond the “minimum deviation” necessary. In 2002, Paul G. Feinman, then a Manhattan Civil Court judge but now an Associate Judge of the New York Court of Appeals, wrote about potential bases for challenging Governor Pataki’s executive order suspending speedy criminal trials after the 9/11 attacks.[6] He explained that the powers authorized under Section 29-a are subject to “standards and limits”[7] requiring orders to be “reasonably necessary”[8] to the disaster effort and to maintain “the minimum deviation” from statutory or other legal requirements.[9] Applying such limitations to Governor Pataki’s executive order, Judge Feinman questioned whether the order’s suspension of speedy prosecutions not “only in New York City, close to the WTC site . . . . [but also] in upstate and western counties” would be justified. He also raised the possibility of challenging the order’s scope or applicability to certain limitations periods. Such grounds for challenge may be deployed against Governor Cuomo’s Executive Order Nos. 202.8 and 202.14, but it remains to be seen whether such challenges will be successful.

____________________

[1] Act of Mar. 3, 2020, ch. 23, 2020 N.Y. Sess. Laws 1 (McKinney).

[2] N.Y. Exec. L. § 29-a(1) (amended 2020).

[3] Id. § 29-a(2)(a)-(b), (e).

[4] See Scheja v. Sosa, 4 A.D.3d 410, 411-12 (2d Dep’t 2004).

[5] No. 52: Temporary Suspension and Modification of Statutory Provisions Establishing Time Limitations on Actions and Time in Which to Take an Appeal, Office of New York State Governor (Oct. 31, 2012), https://www.governor.ny.gov/news/no-52-temporary-suspension-and-modification-statutory-provisions-establishing-time-limitations; see Williams v MTA Bus Co., 44 Misc. 3d 673, 685 (Sup. Ct., N.Y. Cty. 2014) (interpreting Governor Cuomo’s order as creating a grace period for litigants), vacated in part on other grounds, 2017 WL 1362690 (Sup. Ct., N.Y. Cty. 2017).

[6] Paul G. Feinman & Brooks Holland, Grounds May Exist to Challenge Orders Suspending Speedy Trials in Aftermath of September Attack, N.Y. St. B.J., Feb. 2002, at 34.

[7] N.Y. Exec. L. § 29-a(2).

[8] Id. § 29-a(2)(b).

[9] Id. § 29-a(2)(e).

Authors: Marshall King and Bina Nayee*

* Not licensed to practice in New York; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.

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

I. Overview

In a previous alert, we discussed the constitutional principles governing legislative responses to COVID-19 under the Takings, Contracts, Due Process, and Equal Protection Clauses of the U.S. Constitution.[1] Here, we apply those principles to proposals currently being debated in state legislatures that would provide broad residential and commercial rent and mortgage relief. For example, a recent amendment to California Assembly Bill No. 828 would both prohibit residential eviction proceedings for failure to pay rent during the declared state of emergency, and, upon the resumption of such proceedings after the emergency, provide that a tenant could have her rent judicially reduced by 25% for 12 months if the pandemic has adversely affected the tenant’s ability to pay, absent material economic hardship to the landowner. Importantly, under the California bill, landowners owning 10 or more rental units would be presumed not to suffer material economic hardship due to rent reduction.

New York also is considering several bills suspending rent payments for residential or small-business commercial tenants. One such bill (Senate Bill S8125A) suspends rent payments for 90 days, without any obligation to later pay back the suspended rent, for those tenants who have lost income or shuttered their place of business due to government-ordered COVID-19 restrictions. The bill also would provide mortgage relief to landowners experiencing financial hardship from the lost rental payments.[2] Another bill (Senate Bill S8140A) would provide vouchers to tenants whose rent burden is more than 30% of their income and have experienced a substantial loss of income due to COVID-19, although those vouchers would have market-price caps.

These and other novel rent- and mortgage-relief schemes may raise constitutional considerations, both for landowners and for lenders with loans secured by the property in question.

II. Regulatory Takings

Landowners and lenders may be able to challenge rent- and mortgage-relief legislation by arguing that they are subject to a compensable regulatory taking. Whether a landowner or lender has been subjected to a regulatory taking will depend on the specific features of the particular legislation at issue and, to the extent the claim is brought on an “as-applied” basis, the landowner’s or lender’s specific circumstances. To raise a takings challenge, the challengers would want to highlight, inter alia, “the extent to which the regulation interferes with reasonable investment-backed expectations.” Palazzolo v. Rhode Island, 533 U.S. 606, 617 (2001).

To be sure, some courts have previously upheld certain rent-control regimes in states like California and New York, based on the specific characteristics of those regimes at the time of the legal challenges. See, e.g., Guggenheim v. City of Goleta, 638 F.3d 1111, 1120-22 (9th Cir. 2010) (en banc); Fed. Home Loan Mortg. Corp. v. New York State Div. of Hous. & Cmty. Renewal, 83 F.3d 45, 48 (2d Cir. 1996) (collecting cases). But the recently proposed legislation appears to be unlike anything either state has previously enacted. For example, some of the proposed COVID-19 bills contemplate permanently depriving at least some landowners of their contractually expected rent, and depriving at least some lenders of the revenue stream that enable debt payments and the maintenance of their collateral, which are a sort of “interfere[nce] with distinct investment-backed expectations” unlike that presented in these prior court challenges. Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 539 (2005) (internal quotation marks omitted).

Cienega Gardens v. United States, 331 F.3d 1319 (Fed. Cir. 2003), is one example of a successful challenge to an onerous rent-regulation regime. There, the court held that federal legislation that forced certain landowners to provide low-income housing beyond the originally-agreed-upon period of twenty years constituted a taking requiring just compensation. The court concluded that the character of the government’s action was akin to a physical taking, as the developers were able to rent their properties only to low-income tenants for up to an additional twenty years. Id. at 1337-40. In addition, the law destroyed the owners’ reasonable investment-backed expectations, as they expected to be able to free themselves from the low-income housing restrictions at the end of the initial twenty years. Id. at 1346-53. Other cases, too, have contemplated that preventing a landowner from recouping the costs to maintain the property—thereby creating “negative value”—may amount to a regulatory taking. See, e.g., Love Terminal Partners v. United States, 126 Fed. Cl. 389, 425 (2016), rev’d on other grounds, 889 F.3d 1331 (Fed. Cir. 2018). Landowners thus may be able to rely on these cases in arguing that legislation akin to that proposed in California and New York constitutes an unlawful taking by forcing them to continue renting apartments to non-paying tenants, thereby severely diminishing—or even eliminating—their rental revenue and significantly impairing their investment-backed expectations in their rental properties. And in the same way, lenders may be able to argue that mortgage-relief schemes would undermine their reasonable expectations in the loans secured by the property.

The strength of each individual Takings claim will depend on the particular features of the challenged legislation, the particular characteristics of the affected buildings, and the particular harms inflicted on the plaintiffs and those similarly situated. Landowners and lenders facing COVID-19-related legislation should therefore keep in mind that they may have a viable regulatory-takings claim and should seek further guidance where appropriate.

III. Other Constitutional Challenges

A. The Contracts Clause

Landowners and lenders may also be able to challenge state rent- and mortgage-relief legislation as violating the Contracts Clause of the U.S. Constitution when the law effectively overwrites the terms of existing agreements—for example, by reducing or suspending rent payments under the California and New York proposals—and thereby forces landowners and lenders to bear an outsized portion of the economic burden resulting from the COVID-19 pandemic.

State laws that “operate[ ] as a substantial impairment of a contractual relationship” and that are not “drawn in an ‘appropriate’ and ‘reasonable’ way to advance ‘a significant and legitimate public purpose’” violate the Contracts Clause. Sveen v. Melin, 138 S. Ct. 1815, 1821-22 (2018) (internal quotation marks omitted)). Landowners and lenders may argue that a statute permanently depriving them of all or part of their rental and mortgage payments—in addition to undermining the contractual bargain and interfering with their reasonable expectations under their rental and mortgage agreements—would exceed a reasonably necessary response to the pandemic and inappropriately shift to landowners and lenders the financial burdens of the economic interruption. Moreover, depending on the legislation being challenged, landowners and lenders may be able to identify more reasonable alternatives that the state legislature eschewed. For instance, if the legislation permanently deprives landowners of rental payments, it could be argued that the legislation is unreasonable, particularly in light of the fact that some other proposed bills contemplated a voucher-based system that would spread the costs of rent relief across taxpayers without undermining or altering previously entered contracts. But to the extent the voucher system does not permit full recoupment of the lost rental payments, even a voucher or other cost-spreading measure could be subject to constitutional scrutiny if challenged by landowners.

Some courts have previously upheld certain rent regulations against Contracts Clause attacks, primarily on the ground that residential leasing is a “heavily-regulated industry” and that, according to these courts, landowners therefore “cannot claim surprise that [their] relationships with certain tenants are affected by governmental action.” Kraebel v. N.Y.C. Dep’t of Hous. Pres. & Dev., 959 F.2d 395, 403 (2d Cir. 1992). Cases like Kraebel, however, are distinguishable on multiple grounds. For example, Kraebel involved a rent-relief law that ultimately reimbursed landowners for any loss of expected rent payments. 959 F.2d at 398. Some of the California and New York bills, however, appear to contemplate permanently depriving at least some landowners of the reduced or suspended rent payments. Moreover, even if a particular landowner could anticipate regulations similar to those previously enacted by the state or locality in which the landowner’s properties are located, it could “not contemplate th[e] departure” from previous measures embodied in legislation that goes far beyond traditional limitations and requirements, including the permanent loss of their contractually expected rent payments. West End Tenants Ass’n v. George Washington Univ., 640 A.2d 718, 735 (D.C. 1994).

Thus, the Contracts Clause may offer landowners and lenders a potential avenue for challenging state COVID-19 rent-relief legislation that interferes in their ongoing contractual relationships and shifts to them the financial burdens of the pandemic’s economic interruption.

B. The Due Process and Equal Protection Clauses

The Due Process Clause of the Fourteenth Amendment may also provide a potential ground for challenging state laws that deprive landowners and lenders of revenue. A plaintiff asserting a substantive due process claim must prove: (1) a valid property interest and (2) that defendants “infringed on that property right in an arbitrary or irrational manner.” Royal Crown Day Care LLC v. Dep’t of Health & Mental Hygiene of City of New York, 746 F.3d 538, 545 (2d Cir. 2014) (internal quotation marks omitted). As with the Contracts Clause challenge, affected entities could argue that a particular rent- or mortgage-relief law arbitrarily and irrationally infringes on landowners’ and lenders’ property rights. See, e.g., Regina Metro. Co. v. New York State Div. of Hous. & Cmty. Renewal, — N.E.3d —, 2020 WL 1557900 (N.Y. Apr. 2, 2020) (per curiam) (holding that retroactive extension of statute of limitations for time-barred rent-overcharge claims violated due process on rational basis review); Richardson v. City & Cty. of Honolulu, 759 F. Supp. 1477, 1494 (D. Haw. 1991) (holding that ordinance imposing maximum ceiling on renegotiated lease rents for condominiums did not rationally further the legitimate goal of reducing the cost of leasehold housing because it applied to condominiums not used for residential purposes, did not limit rates charged to sublessors, did not consider the market value of the property, and designated no government authority to oversee its application).

Similarly, the Equal Protection Clause of the Fourteenth Amendment may provide another path to challenge COVID-19 rent- or mortgage-relief legislation, particularly where the proposals would place unique burdens on landowners and lenders. The legislation could also be challenged under the corollary provisions of state constitutions. See, e.g., Pennell v. City of San Jose, 721 P.2d 1111, 1117 (Cal. 1986) (rejecting the claim that “equal protection is . . . denied simply because some landlords may receive rents different (albeit nonconfiscatory) from those received by other landlords with similarly situated apartments,” but noting that it “might be inclined to hold such a scheme unconstitutional if the disparity in approved rents among landlords with and without hardship tenants was shown to be so great as to be characterized as arbitrary or grossly unfair”).

Granted, some cases discussing the Due Process and Equal Protection Clauses in the rent-control or rent-stabilization context have concluded that the specific controls at issue in those cases were rationally related to a legitimate government purpose. See, e.g., Pennell v. City of San Jose, 485 U.S. 1, 12-14 (1988); Harmon v. Markus, 412 F. App’x 420 (2d Cir. 2011). But these cases did not involve anything like the proposals being discussed in response to COVID-19, including provisions that would retroactively and permanently deprive landowners of their contractually expected rent payments. Thus, notwithstanding decisions declining to grant Due Process Clause challenges to particular rent-control measures, the COVID-19-related rent-relief legislation may be sufficiently irrational—both in its substance and in targeting landowners—to constitute violations of the Due Process and Equal Protection Clauses.

IV. Conclusion

We cannot prejudge the constitutionality of any contemplated COVID-19 rent-relief legislation. The analyses under the clauses of the federal and state constitutions that most readily apply to economic regulation turn on the specific features of the challenged legislation, among other case-specific considerations. But as the nation moves through this crisis, and legislatures consider relief to those impacted by COVID-19, it bears remembering that the operations of federal, state, and local governments remain subject to constitutional scrutiny, and rent- and mortgage-relief legislation may raise significant constitutional questions in response to which affected landowners or lenders may be able to bring suit.

[1] See Gibson Dunn’s March 27, 2020 Client Alert, Constitutional Implications of Government Regulations and Actions in Response to the COVID-19 Pandemic, available at https://www.gibsondunn.com/constitutional-implications-of-government-regulations-and-actions-in-response-to-the-covid-19-pandemic/

[2] Some states are considering or have already passed mortgage-forbearance legislation that may similarly impact constitutional protections afforded to lenders, as discussed in this alert. See, e.g., DC Act 23-286 COVID-19 Response Supplemental Emergency Amendment Act of 2020 (enacted Apr. 10, 2020) (establishing a system for deferred mortgage payments); N.J. Bill A3948 (as introduced) (establishing a system for deferred mortgage payments and rent suspensions) (introduced Apr. 13, 2020).

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Litigation, Appellate, Public Policy, or other practice groups, or the following authors:

Authors: Avi Weitzman, Akiva Shapiro, Lochlan Shelfer, and Declan Conroy

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

On March 28, 2020, the German Federal legislature’s response to the Corona crisis entered into force, introducing a varied array of far-reaching legislative measures to stabilize and support the German economy. In the sphere of corporate law, such statutory implementation measures are, in particular, contained in the Act on the Mitigation of the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedural Law (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht – hereinafter the “COVID-19 Pandemic Mitigation Act”) and the so-called Act on the Introduction of an Economic Stabilization Fund (Wirtschaftsstabilisierungsfondsgesetz – WStFG). A selective overview of some of these implementation measures adopted in the corporate law domain is given in Section 1.1 (Corporate Caw “Light” in the Context of State Measures under the WStFG) and 1.2 (Other Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act).

The Corona crisis also triggers intricate issues related to current and future financial statements: The German Institute of Auditors (Institut der Wirtschaftsprüfer – IDW) has dealt with these questions via three separate official communications in March and April 2020 (both in terms of accounting issues under the German HGB-accounting standards and IFRS). A legal overview is given below in Section 2 (Dealing with the Corona Crisis in the Annual Financial Statements for the Business Years 2019 and 2020).

The well-documented concerns regarding increased foreign acquisition activities in sensitive industry sectors during the Corona crisis has seen the EU Commission react a couple of days ago by publishing a Communication providing additional guidance on the foreign investment control mechanisms of the Member States. On April 8, 2020, the German government has resolved a draft of the „Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes” (First Statute on the Amendment of the Foreign Trade and Payments Act). We provide a brief summary of the current German legal situation and the prospective changes under Section 3 (Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes).

Last but not least, several anti-trust authorities have issued statements either specifically with regard to merger control issues or, more generally, regarding the application of the competition rules in the current crisis situation, including, inter alia, the EU Commission and the German Federal Cartel Office (Bundeskartellamt – BKartA). We briefly analyze these latest developments below in Section 4 (Anti-Trust and Merger Control in Times of COVID-19).

TABLE OF CONTENTS

1.1 Corporate Law “Light” in the Context of State Measures under the WStFG
1.2 Other Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act
2.       Dealing with the Corona Crisis in the Annual Financial Statements for the Business Years 2019 and 2020
3.       Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes
4.       Anti-Trust and Merger Control in Times of COVID-19

1.1 Corporate Law “Light” in the Context of State Measures under the WStFG

The Act on the Introduction of an Economic Stabilization Fund (Gesetz zur Errichtung eines Wirtschaftsstabilisierungsfonds – WStFG), which entered into force on March 28, 2020, provides the statutory framework for the German Federal state‘s measures aimed at stabilizing the national economy and securing jobs. The measures provided for in this new Act flank the stabilization measures at the Federal level via the support programmes of the Kreditanstalt für Wiederaufbau (KfW) as well as the additional measures taken at the level of the regional German states (Bundesländer).[1]

The decision on the stabilization measures provided for in the WStFG rests with the Federal Finance Ministry (Bundesministerium für Finanzen) which decides based on the due exercise of its discretion and after consultation with the Federal Ministry for the Economy and Energy (Bundesministerium für Wirtschaft und Energie) following an application of the respective enterprise. Relevant criteria for this discretionary decision are the importance of the applicant enterprise for the German economy, the urgency involved, the potential effects on the job market and on competition, as well as the principles of the most cost-efficient, prudent, economic use of the financial means of the Economic Stabilization Funds (Wirtschaftsstabilisierungsfonds – WSF). The applicant enterprises of real economy must, furthermore, meet at least two of the following requirements (i) balance sheet sum of more than € 43 million, (ii) more than € 50 million sales revenues, and (iii) more than 249 employees on average. Any legal entitlement to receive funds under the WStFG is expressly excluded.

In addition to providing guarantees, the WSF may also participate in recapitalization measures. The measures at its disposal include the acquisition of subordinated debt instruments, profit-sharing rights (Genussrechte), silent partnerships or convertible bonds and the acquisition of shares. The measures are in principle time-limited until December 31, 2021, but can be extended in the individual case, in particular, if such extension is required to safeguard such a stabilization measure.

In order to implement these measures, a number of corporate law provisions applicable to the respective corporate format are temporarily superimposed by the WStFG with a view to facilitating the involvement of the WSF. This concerns, in particular:

Benefitting companies, as a rule, will have to issue a self-commitment declaration (with the approval of the supervisory board), which contains rules on the due use of funding, the entry into of future liabilities, the remuneration of the company bodies, the dividend policies and other measures and which is also effective vis-à-vis the respective company and its shareholders. Such a self-commitment does not clash with the principle of the management board’s independent management capacities and responsibilities even in a stock corporation.
The exclusion of the subscription rights of existing shareholders for the benefit of the WSF in the context of capital measures has been facilitated.
New shares can be issued to the WSF with a profit or liquidation preference.
Irrespective of any contrasting provisions in the articles of association, a capital increase against contribution can be resolved with the majority of the votes cast. The necessary majority to resolve an exclusion of subscription rights is at least 2/3 of the votes cast or of the represented registered share capital (Grundkapital); if at least 50% of the registered share capital are represented, the simple majority is also sufficient in such case.
Prepayments by the WSF on its contribution obligation have discharging effect.
Further measures were introduced to simplify and accelerate capital decreases, as well as to facilitate the creation of conditional and/or authorized capital (bedingtes und/oder genehmigtes Kapital).
Resolutions regarding capital measures are effective already prior to their registration in the commercial register, provided they are published on the internet webpage of the company.
The rules on affiliated companies regarding stock corporations are not applicable until December 31, 2021 for the benefit of the WSF, as well as the German Federal Republic and its public corporations and bodies (öffentlicher Körperschaften). The rules on the representation of employees in the supervisory board of a company controlled by the WSF are, however, exempt from this exclusion and remain applicable.
Shareholders who delay or frustrate required recapitalization measures inter alia by their voting behavior or legal remedies may end up being liable to the company for damages.
Corresponding simplifications for capital measures also apply for benefitting companies in the legal format of partnerships limited by shares (KGaA) and European stock corporations (SE). In limited liability companies (GmbH) capital increases only require a simple majority of votes present; shareholders can be excluded from the company against compensation with a majority of ¾ of the votes present, if this is necessary for the stabilization measure to be successful. The WSF may be accepted as new limited partner of limited partnerships with a limited liability company as general partner (GmbH & Co. KG) or other limited partnerships by partner resolution taken by the partners present with simple majority.
Information duties vis-à-vis the economic committee (Wirtschaftsausschuss) or the works council (Betriebsrat) are excluded for participation of the WSF.
Furthermore, for stock corporations the notification duties arising under capital market rules (wertpapierhandelsrechtliche Mitteilungspflichten) do not apply, and the obligation to submit a mandatory offer to acquire shares pursuant to the Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz) is derogated from even if the thresholds are exceeded by the WSF. In tandem, the threshold for the squeeze-out of minority shareholders is lowered to 90% for the benefit of the WSF.
Further-reaching rules in favor of the WSF concern the large-scale exclusion of the rules on hidden contributions in kind (verdeckten Sacheinlagen) and of contestation rights of stabilization measures as well as the subordination of shareholder loans pursuant to the Insolvency Code (Insolvenzordnung – InsO). Contractual provisions, which otherwise would give contracting partners a right to terminate the contract on account of a change of control because the WSF joins or exits a business, are deemed to be invalid. The same applies to compensation or severance payments in favor of company organs in the case of a change of control.
By contract, self-commitment or administrative act, mitigating measures to avoid any distortions of competition can be placed on the beneficiary businesses. The limited applicability of the German Law against Restraints on Competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB) to the WSF itself is clarified for completeness sake, notably that only part 4 (Procurement law) and part 5 (Applicability of the GWB to public enterprises) are applicable.

1.2 Other Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act

The main focus on the corporate law changes was initially put on the relaxation of the requirements for staging general meetings of German stock corporations (Aktiengesellschaft – AG), allowing them to proceed in an entirely electronic manner, as well as the possibility of delaying the ordinary general meeting (ordentliche Hauptversammlung) beyond the hitherto applicable eight month deadline.[2]

But there is a number of other, temporary provisions of company law which can be relevant for the management of corporate entities:

Shareholder resolutions of German limited liability companies (GmbH) may be adopted in text form or by written vote in the year 2020 even if there is no express enabling clause to do so in the relevant articles of association. It is not necessary that all shareholders consent to such procedure. Text form will not require a personal signature by hand. It is sufficient that the declaration is legible and the name of the person making the declaration is given and that the declaration is embodied on a lasting data medium (e.g. a hard drive, USB stick, but also an e-mail). Such derogation from the holding of presence meetings even without consent of all shareholders, however, does not remove the other formalities for the adoption of resolutions. In particular, whenever resolutions on potentially contentious matters are proposed, the deadline accorded for the submission of written votes should match the regular convocation or resolution announcement periods (Fristen für die Beschlussankündigung). Such a waiver of holding a presence meeting also does not derogate any other form requirements applicable to the adoption of shareholder resolutions, which means that changes to the articles of association or measures under the German Conversion Act (Umwandlungsgesetz – UmwG) continue to require notarial recordings.
If proposed measures under the Conversion Act (UmwG) require the submission of closing balance sheets (Schlussbilanz) as an attachment of the mandatory commercial register filings (for instance the balance sheet of the transferring entity in the case of mergers), under the current law, the balance sheet reference date (Bilanzstichtag) used in such filings could not be older than eight months by the time the register filing was submitted to the registry court. This time period has now been extended to twelve months for register filings made in 2020. For example, the register filing of a merger, which is proposed to be submitted on June 1, 2020, would now be permitted to make use of the annual financial statements with reference date as of June 30, 2019 rather than having to prepare an interim balance sheet of a more recent date.
The management bodies of companies, who benefit from the conditional derogation of the duty to file for insolvency due to COVID-19 for an interim period until, at present, September 30, 2020 despite being in a state of over-indebtedness or illiquidity,[3] may make continued payments in the ordinary course of business during such period despite the existence of over-indebtedness or illiquidity without incurring the personal liability they would otherwise incur. Such payments in a COVID-19-caused technical state of insolvency are deemed by law to be in line with the standards of care of a prudent business person and manager. The reform law lists, by way of examples, payments aimed at maintaining or restarting business operations or designed to implement an operational restructuring concept. However, this new rule places a significant standard of care on the management of companies in financial distress. The necessary assessment notwithstanding whether any measures proposed to be taken is part of the ordinary course of business operations, management will furthermore have to ensure in advance that the company can indeed avail itself of this interim insolvency filing derogation by falling within the scope of the rule. In particular, the state of financial distress must be on account of COVID-19 and there has to be a (reasonable) expectation that such financial distress can be overcome. Management can, however, rely on an (albeit rebuttable) legal presumption that both these requirements apply to the company if the state of over-indebtedness/illiquidity did not already exist as of December 31, 2019.

2. Dealing with the Corona Crisis in the Annual Financial Statements for the Business Years 2019 and 2020

Since the first COVID-19 cases had already been publicized in December 2019 but the cataclysmic consequences for public health and the economy in Germany and Europe only started to be felt in earnest from the end of February 2020, the question whether and if so, how the Corona crisis might also have to be taken into account in the financial statements for the completed fiscal year 2019 quickly became a topic of discussion. Two separate official communications published by the German Institute of German Auditors (Institut der Wirtschaftsprüfer – IDW) dated March 4, 2020[4] and dated March 25, 2020[5] provided crucial guidelines. On April 8, 2020, the IDW has published a third communication that specifically deals with specific questions asked in response to the two earlier guidelines.[6]

In summary, it can be said that the IDW does not view the Corona crisis as a point in time event and, thus, as a value-enhancing event (wertaufhellend) under the German HGB-accounting standards or an adjusting event under IFRS but rather as an ongoing process of a certain duration, which therefore is deemed to be value-justifying (wertbegründend) under the HGB-rules or a non-adjusting event under IFRS. The crisis is, thus, of particular relevance for the reporting in the current fiscal year 2020 and potentially future fiscal years beyond.

Based on this assessment of the crisis as an, in principle, value-justifying event, the developments surrounding the corona virus, nevertheless, are to be reflected in the (consolidated) notes to the HGB financial statements 2019 in the individual case if they qualify as a “matter of particular importance” according to § 285 No. 33 or § 314 para. 1 No. 25 HGB. According to the IDW that is the case if the effects of COVID-19 are likely to influence the picture conveyed by the financial statements 2019 and, without subsequent supplemental reporting, the developments after the balance sheet date would be judged significantly differently by the addressees of the financial statements. The IDW reaches similar conclusions also for the assessment to be made under IFRS.

Further, it should be noted that developments surrounding the coronavirus will in many cases be reflected in the (Group) management reports for the completed fiscal year 2019, at least, in the risk and forecast reporting. According to the IDW such an inclusion in the risk report is warranted in principle if the possible further developments lead to negative deviations from the forecasts and goals of the business, such circumstances are a material individual risk and the financial statements would otherwise not provide an accurate picture of the risk position of the group.

It is also possible that the current dramatic changes of the economic parameters result in a situation where management has to revise its expectations of the forecast performance indicators in such a way that an appropriate reflection in or revision of the forecast report in the financial statements 2019 is required.

In the ongoing auditing season for the fiscal year 2019 special focus should, thus, be placed on subsequent, critical developments and close coordination with external advisors is particularly well advised. The European Securities and Market Authority (ESMA) has, in this context, appealed to issuers to create transparency with regard to the actual and potential consequences of COVID-19 and include corresponding clarifying assessments in the financial statements for the fiscal year 2019 to the extent they are not yet finalized and established.[7] This is even more critical in cases where the crisis affects a business in such an impactful way that makes it apparent at this stage that it can no longer be assumed that the company will be able to continue its business operations (§ 252 para. 1 No. 2 HGB). It is possible that under certain circumstances the going concern assumption must be retroactively abandoned also for the fiscal year 2019. The IDW states in its communication that in those concrete individual cases where the Corona pandemic no longer allows the company to justify the continuation of its business activities based on a going concern assumption, „the financial statements must be prepared in accordance with the provisions of IDW RS HFA 17 (e.g. valuation from a liquidation perspective), and the going concern assumption must be abandoned” which applies “even if the reason for the departure did not occur until after the balance sheet date.”[8]

3. Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes

As a reaction not least to concerns that weakened enterprises might be acquired by investors from abroad, a global trend to tighten the controls on foreign investment in local business is noticeable. For instance, Australia has recently announced that all foreign investments will now be subject to control.[9] The USA had tightened their investment control rules already in February (the so-called 2018 Foreign Investment Risk Review and Modernization Act (FIRRMA)) and extended the competencies of the U.S. Committee on Foreign Investment in the United States (CFIUS). Now certain investments into the life sciences sector below the regular control thresholds are nevertheless subject to the CFIUS filing requirement.[10]

The EU Commission has also published a communication on March 26, 2020,[11] in which it urged the member states to introduce mechanisms to comprehensively control foreign investment or make full use of such already existing[12] control mechanisms in order to jointly protect strategically important industries against acquisition by foreign investors during the times of crisis. The communication expressly is not limited to the health industry only, but puts special focus on this industry. Already in its earlier communication of March 13, 2020,[13] the Commission had asked the Member states to protect critical installations and technologies. Such communications are not binding, but provide important guidelines for the shaping of the national investment control regimes by the member states – and, thus, relevant clues as to what investors can expect in future.

While Spain, for instance, has already reacted to the Commission’s communication with a provisional obligation to obtain an ex ante clearance for foreign direct investments into strategic sectors,[14] it otherwise remains to be seen how the other EU member states will position themselves. Certain EU member states had already tightened their investment control regimes before the COVID-19 pandemic struck.[15] But even if it turns out that there might not be a full-scale across the board adaptation of national legislation, a more stringent practical implementation can certainly be expected.

The drive to attempt to harmonize the investment control regimes in the member states pre-dates the COVID-19 crisis: On October 11, 2020 the Regulation establishing a framework for the screening of foreign direct investments into the Union (EU-Screening-Regulation)[16] will enter into force. It provides, inter alia, for a consultation procedure between the Commission and/or member states, on the one hand, and the competent member state, on the other hand, in the context of which the Commission and the member states can suggest mitigation measures or prohibitions for investments which go beyond the initial decision of the competent member state.

With the aim of adapting German law to this EU Regulation, and consequently not purely in direct response to the COVID-19 pandemic and its consequences, the Federal government cabinet on April 8, 2020 launched a draft bill called the First Statute on the Amendment of the Foreign Trade and Payments Act and other Laws (Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes (AWG) und anderer Gesetze),[17], which is based on a ministerial draft bill dated January 30, 2020.[18]

The pre-existing fundamental differentiation in the German foreign direct investment control rules between the so-called cross-sectoral control (§§ 55-59 of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV)) and the so-called sector-specific control (§§ 60-62 AWV) is maintained in principle:

The cross-sectoral control, in principle, covers all acquisition transactions which give an acquirer from outside the Union direct or indirect control over at least 25 per cent of the voting rights in a national enterprise. If the national enterprise conducts its business in a particularly security-relevant sector, as conclusively listed in § 55 para. 1 S. 2 AWV, the control threshold is set at 10 per cent of the voting rights. Acquisitions within the Union are only covered in so far as they are deemed to be a circumvention of the investment control rules. A prohibition of the acquisition currently may only be issued if the public order and security of the Federal Republic of Germany is endangered.[19] The acquirer, furthermore, has the option – e.g. whenever there are uncertainties regarding the applicability and scope of §§ 55 et seq. of the AWV and/or to ensure deal security – of applying for a certificate of non-objection.

The sector-specific control, in contrast, exclusively covers acquisition transactions pursuant to which a foreigner (including foreigners from other EU member states) acquires, directly or indirectly, at least 10 per cent of the voting rights in a national enterprise which produces or develops one of the goods listed conclusively in § 60 AWV. Pursuant to the government draft bill, in the future, not only the production and development of such goods would qualify for a sector-specific control, but also expressly the modification or use of such goods. A prohibition of the acquisition may only be issued if material security interests of the Federal Republic of Germany are endangered.[20]

In addition, the draft bill, in particular, provides for two further key changes: On the one hand, the current concept of endangering in the AWG (“… if the public order or security of the Federal Republic of Germany is endangered by the acquisition“, § 5 para. 2 AWG, current version) stands to be adapted to the concept of endangering in the EU-Screening-Regulation (“…if the public order or security of the Federal Republic of Germany or another member state of the European Union … are likely endangered by the acquisition“, § 5 para. 2 AWG in the version in the draft of April 8, 2020). Via the cross-reference to § 4 para. 1 No. 4 AWG (as amended) this would apply accordingly to the public security and order regarding projects and programmes of Union interest within the meaning of Article 8 of the EU-Screening-Regulation. This will consequently result in more future transactions being within the remit of the German foreign direct investment control regime. On the other hand, it is stipulated that the underlying contractual (schuldrechtliche) acquisition transactions shall be subject in future to a dissolving condition of a prohibition both within the scope of the cross-sectoral and the sector-specific investment control procedures until such time when the control procedure is completed. The duty to notify the underlying contractual transaction continues to arise from § 55 para. 4 AWV. The implementation of transactions subject to a notification requirement shall in future in all cases only become valid upon completion of the control proceedings. This aims at reducing the risk that irreversible facts are created in the time window until the control procedure is completed by, for instance, implementing the acquisition transaction de facto in practice or the irreversible loss of information and technologies. This legal change is flanked by adding specific prohibition scenarios to § 15 para. 4 AWG, like the exercise of voting rights by the acquirer, accepting instructions how to vote, profit payments or the submission of enterprise-specific, investment control relevant information to the acquirer. The relevant Foreign Trade and Payments Ordinance shall be amended accordingly.

4. Anti-Trust and Merger Control in Times of COVID-19

There are several varying consequences of the pandemic on the timelines for merger control proceedings. Some anti-trust authorities have communicated that delays to the customary timeframes are likely,[21] while others have engaged in reviving „fast-track“ programs.[22] The European Commission has published on its website that – due to the present situation – it is currently facing difficulties to collect the necessary information from the notifying parties and other third parties like, for example, their customers, competitors and suppliers.[23] In view of the existing procedural deadlines, it will therefore be forced to make generous use of „stop-the-clock“ provisions. However, the Commission expressly remains willing and capable of accepting new merger filing applications and processing them to the best of its abilities if the notifying parties can provide very compelling reasons that militate for a speedy implementation of merger control proceedings in the individual case. The German Federal Cartel Office (BKartA) has merely issued a reminder that any currently proposed new merger control notifications should be “re-considered”,[24] but remains in full working mode and has opened additional communication channels to facilitate “remote” work and the submission of documentation. Any parties currently considering mergers and acquisitions which may be subject to filing requirements under one or several merger control regimes would, thus, be well advised under the current circumstances to re-assess the anticipated timeframes and take into account potential time delays and other procedural hurdles in obtaining merger control clearance.[25]

Even in times of crisis, the applicable anti-trust and merger control laws allow for flexible cooperation mechanisms. In a joint statement by the European Competition Network on the COVID-19 crisis,[26] it was already established that the European competition authorities will not actively intervene against cooperation forms which are aimed at securing the access for all consumers to otherwise scarce goods. Further, on April 8, 2020, the European Commission published a “Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak”.[27] The Commission’s communication is meant to provide antitrust guidance to companies cooperating in response to urgent situations related to the current coronavirus outbreak which includes, in particular, medicines and medical equipment that are used to treat coronavirus patients but also applies to similar supply emergencies resulting from the coronavirus outbreak for essential goods and services outside the health sector. On the other hand, the competition authorities have left no doubt that they will stringently quash any attempts to profiteer from the current emergency situation by way of concerted efforts or the abuse of market power. They have therefore clearly highlighted that the rules on anti-competitive behaviors, and prime amongst them the prohibition of cartels in Art. 101 TFEU/§ 1 German Competition Act (Gesetz gegen Wettbewerbsbeschränkungen – GWB), also apply as the guiding principle in these unprecedented times of crisis. Ultimately, this means that it remains incumbent on the enterprises and their legal advisors to assess the admissibility under competition law of any proposed measures in each individual case. Recognizant of the fact that such assessments are difficult enough in “normal times”, let alone in times of a global health pandemic, the European Commission has been engaging with companies and trade associations to help them in assessing the legality of their cooperation plans and putting in place adequate safeguards against longer-term anticompetitive effects, and collected and published additional information and guidelines on its website regarding “Antitrust rules and coronavirus”.[28] The key feature among this information is a specially designated email address which can be used by businesses to obtain informal advice on specific company initiatives. The German BKartA has expressly declared its support for this initiative and serves as national point of contact to discuss national concerns and matters in this regard.[29] In addition, the European Commission exceptionally declared its willingness to issue so-called ‘comfort letters’ in cases where there may still be uncertainty about whether such initiatives are compatible with EU competition laws.[30]

Special provisions apply to cooperation among businesses during the coronavirus outbreak to avoid supply shortages of critical hospital medicines and other medical products and services. For this purpose, and in addition to the Temporary Framework outlined above, the European Commission has published “Guidelines on the optimal and rational supply of medicines to avoid shortages during the COVID-19 outbreak” on April 8, 2020. These communications outline the main criteria that will be applied when assessing these possible cooperation projects.[31] In particular, antitrust guidance is provided to companies willing to temporarily cooperate and coordinate their activities in order to increase production in the most effective way and, specifically, to optimize the supply of urgently needed hospital medicines, e.g. by coordinating production, stock management, distribution and logistics. Furthermore, the European Commission has already issued a comfort letter as described above for a cooperation project among pharmaceutical producers that targets the risk of shortage of critical hospital medicines for the treatment of coronavirus patients.

[1] Also see in this context: https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/.

[2] See in this context also: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/, Section III.

[3] In this context, also see: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/, section II.2.

[4] In German available under: https://www.idw.de/idw/im-fokus/coronavirus/auswirkungen-der-ausbreitung-des-coronavirus-auf-rechnungslegung-und-pruefung–teil-1–fachlicher-hinweis-des-idw-/122498.

[5] In German available under: https://www.idw.de/idw/im-fokus/coronavirus/auswirkungen-der-ausbreitung-des-coronavirus-auf-rechnungslegung-und-pruefung–teil-2–fachlicher-hinweis-des-idw-/122878. A combined English language version of the two German communications can be found under the address: https://www.idw.de/idw/im-fokus/coronavirus/effects-of-the-spread-of-the-corona-virus-on-the-financial-statements-as-of-31-12-2019-and-their-audit/122914.

[6] In German available under: https://www.idw.de/idw/im-fokus/coronavirus/auswirkungen-der-ausbreitung-des-coronavirus-auf-rechnungslegung-und-pruefung–teil-3–fachlicher-hinweis-des-idw-/123092 and again as an English translation: https://www.idw.de/idw/im-fokus/coronavirus/questions-concerning-the-impact-of-the-spread-of-coronavirus-on-the-financial-statements-and-their-audit–part-3-/123132.

[7] https://www.esma.europa.eu/about-esma/covid-19.

[8] Guidelines of the IDW dated March 27, 2020, Page 10/37, https://www.idw.de/blob/122914/8b4b3722606c025e741eb7ac59988ded/down-corona-englische-fassung-teil-1-und-2-data.pdf.

[9] Press release dated March 29, 2020, available under: https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/changes-foreign-investment-framework

[10] Further information on the CFIUS reform see Client Alert „CFIUS Reform: Top Ten Takeaways from the Final FIRRMA Rules“ dated February 19, 2020: https://www.gibsondunn.com/cfius-reform-top-ten-takeaways-from-the-final-firrma-rules/.

[11] Communication from the Commission dated March 25, 2020, Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), C(2020) 1981, available under: https://data.consilium.europa.eu/doc/document/ST-7028-2020-INIT/de/pdf (German, without annexes) or https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158676.pdf (English, full text).

[12] So far the following 14 member states have established control mechanisms: Austria, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Rumania, Spain; in addition, corresponding rules also exist in Great Britain.

[13] Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Investment Bank and the Eurogroup: Coordinated economic response to the COVID-19 Outbreak; available under https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0112.

[14] Real Decreto 8/2020 dated March 18, 2020, available under: https://www.boe.es/boe/dias/2020/03/18/pdfs/BOE-A-2020-3824.pdf (in Spanish).

[15] Germany and others notwithstanding, France had already tightened its foreign investment control legislation at the beginning of last year and extended the list of sectors subject to control, see press release of January 3, 2019, available under: https://www.gouvernement.fr/en/strengthening-control-of-foreign-investments-in-sensitive-companies.

[16] Regulation (EU) 2019/452 of the European Parliament and of the Council of March 19, 2019 establishing a framework for the screening of foreign direct investments into the Union, available under: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0452&from=EN.

[17] The draft law’s text can be found under https://www.juris.de/jportal/portal/page/homerl.psml?nid=jnachr-JUNA200401047&cmsuri=%2Fjuris%2Fde%2Fnachrichten%2Fzeigenachricht.jsp.

[18] Referentenentwurf Bundesministerium für Wirtschaft und Energie, Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes dated January 30, 2020, available under https://www.bmwi.de/Redaktion/DE/Downloads/E/erstes-gesetz-zur-aenderung-des-aussenwirtschaftsgesetzes.pdf?__blob=publicationFile&v=6.

[19] It can be expected that the concept of endangering in the AWV will be modified in accordance with the First Statute on the Amendment of the Foreign Trade and Payments Act and other Laws to match the concept of endangering in the EU-Screening Regulation.

[20] It can be expected that the concept of endangering in the AWV will be modified in accordance with the First Statute on the Amendment of the Foreign Trade and Payments Act and other Laws to match the concept of endangering in the EU-Screening Regulation.

[21] France: Autorité de la concurrence, „Adaptation of the time limits and procedures of the Autorité de la concurrence in times of health emergency“, press release of March 27, 2020, available in English under https://www.autoritedelaconcurrence.fr/en/press-release/adaptation-time-limits-and-procedures-autorite-de-la-concurrence-times-health; Denmark: Konkurrence- og Forbrugerstyrelsen, „Time limits for merger control are suspended for 14 days“, press release of March 18, 2020, available in English under https://www.en.kfst.dk/nyheder/kfst/english/news/2020/20200318-time-limits-for-merger-control-are-suspended-for-14-days/.

[22] U.S. Federal Trade Commission, „Resuming early termination of HSR reviews“, blog post of March 27, 2020, available in English under https://www.ftc.gov/news-events/blogs/competition-matters/2020/03/resuming-early-termination-hsr-reviews.

[23] Notice of the EU Commission dated March 7, 2020, „Special Measures due to Coronavirus / COVID-19: Update of 7th April 2020“, available in English under https://ec.europa.eu/competition/mergers/covid_19.html.

[24] Bundeskartellamt, „Kommunikation mit dem Bundeskartellamt (Corona–Maßnahmen)“, Notice of March 17, 2020, available under https://www.bundeskartellamt.de/SharedDocs/Meldung/DE/AktuelleMeldungen/2020/17_03_2020_Kommunikation_Bundeskartellamt.html.

[25] In this regard also refer to our Client Alert, „U.S. Federal Trade Commission and DG COMP Implement Changes to U.S. and EU Merger Filing Procedures in Response to COVID-19“, March 16, 2020, available in English under https://www.gibsondunn.com/us-ftc-and-dg-comp-implement-changes-to-us-and-eu-merger-filing-procedures-in-response-to-covid-19/.

[26] European Competition Network, „Antitrust: Joint statement by the European Competition Network (ECN) on application of competition law during the Corona crisis“, Statement of March 23, 2020, available in English under https://ec.europa.eu/competition/ecn/202003_joint-statement_ecn_corona-crisis.pdf

[27] Communication from the Commission dated April 8, 2020, “Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak”, C(2020) 3200, available in English under: https://ec.europa.eu/info/sites/info/files/framework_communication_antitrust_issues_related_to_cooperation_between_competitors_in_covid-19.pdf.

[28] https://ec.europa.eu/competition/antitrust/coronavirus.html.

[29] Bundeskartellamt „EU-Kommission informiert zu Wettbewerbsregeln in der Coronavirus-Krise“, Notice dated March 31, 2020, available in English under https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/AktuelleMeldungen/2020/01_04_2020_EU_Commission_competition_rules_coronavirus.html?nn=4136442.

[30] See Communication from the Commission dated April 8, 2020, “Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak”, C(2020) 3200, available in English under: https://ec.europa.eu/info/sites/info/files/framework_communication_antitrust_issues_related_to_cooperation_between_competitors_in_covid-19.pdf.

[31] Communication from the Commission dated April 8, 2020, “Guidelines on the optimal and rational supply of medicines to avoid shortages during the COVID-19 outbreak”, C(2020) 2272, available in English under: https://ec.europa.eu/info/sites/info/files/communication-commission-guidelines-optimal-rational-supply-medicines-avoid.pdf.

_______________________

Authors: Lutz Englisch, Birgit Friedl, Marcus Geiss, Kai Gesing, Franziska Gruber, Selina Grün, Johanna Hauser, Sonja Ruttmann and Michael Walther.

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

On April 13, the Supreme Court announced that for the remainder of this Term, it will hear (by telephone) only 10 of the 20 cases that were previously scheduled for oral argument in March and April 2020.[1] The remaining cases apparently “will be carried over and the arguments will be conducted early in the 2020 term.”[2]

Much has been made of the 10 cases the Court has scheduled for extraordinary telephonic arguments in May.[3] The 10 cases that were carried over, however, have thus far received less attention. They are:

Google LLC v. Oracle America, Inc., No. 18-956 (U.S.);
Ford Motor Co. v. Montana Eighth Judicial District Court, No. 19-368 (U.S.), and Ford Motor Co. v. Bandemer, No. 19-369 (U.S.);
City of Chicago v. Fulton, No. 19-357 (U.S.);
Rutledge v. Pharmaceutical Care Management Association, No. 18-540 (U.S.);
Tanzin v. Tanvir, No. 19-71 (U.S.);
Carney v. Adams, No. 19-309 (U.S.);
Texas v. New Mexico, No. 65, Original (U.S.);
United States v. Briggs, No. 19-108 (U.S.), and United States v. Collins, No. 19-184 (U.S.);
Pereida v. Barr, No. 19-438 (U.S.); and
Torres v. Madrid, No. 19-292 (U.S.).

Those 10 cases (including consolidated cases) include several of significant importance to the business community. We summarize them below.

I. The Supreme Court’s Actions in Response to the COVID-19 Pandemic

The Supreme Court’s latest rescheduling decision comes on the heels of several other accommodations the Court has made to minimize the spread of COVID-19 and ease the burden of its docket on litigants. On March 19, 2020, the Court extended the filing deadline for petitions for certiorari and expressed its willingness to grant motions for extensions of time, including motions to delay distribution to permit the filing of a reply brief in support of a petition for certiorari.[4] Then, on March 16 and April 3, 2020, the Court indefinitely postponed the oral arguments originally scheduled for its March and April sessions.[5]

On April 13, the Court clarified when it will consider the remaining cases scheduled for argument this Term. It will resolve only half of the 20 cases that were scheduled for oral argument in March and April. Ten cases will be heard telephonically on May 4, 5, 6, 11, 12, and 13 depending on the availability of counsel, and the Court will provide the news media with a live audio feed for those arguments.[6] The Court will not hear or resolve the remaining cases until the start of the October 2020 Term.

II. The Cases That Will Be Carried Over to Next Term

Seven of the carried-over cases are civil.

In Google LLC v. Oracle America, Inc., No. 19-956—a highly anticipated case potentially worth billions of dollars—the Court will consider whether and to what extent the copyright laws apply to application program interfaces, specifically, lines of Oracle’s Java code. Google used lines of Oracle’s Java code to build the Android smartphone platform so that applications developed using Java coding could run on its smartphones. Oracle argues that Google infringed its valid copyrights. Google argues that copyright protection does not extend to the specific lines of Java code at issue and, even if it did, Google’s reuse of the lines of code was fair use. Gibson Dunn filed an amicus brief on behalf of Rimini Street, Inc. in support of Google.

The consolidated cases of Ford Motor Co. v. Montana Eighth Judicial District Court, No. 19-368, and Ford Motor Co. v. Bandemer, No. 19-369, concern the exercise of specific personal jurisdiction over out-of-state corporations. The Montana and Minnesota state courts exercised personal jurisdiction over Ford in two product liability actions even though the cars at issue were designed, made, and sold outside the two states and were brought into the states by another party. The courts reasoned that they had personal jurisdiction over Ford largely because the company sells other cars in each state and its cars caused injury in each state. Ford argues that these contacts are insufficient to permit the exercise of specific personal jurisdiction.

In City of Chicago v. Fulton, No. 19-357, the Court will decide whether an entity retaining possession of bankruptcy-estate property must immediately return the property to a debtor or trustee upon the filing of a bankruptcy petition. The City of Chicago impounded several debtors’ cars and refused to turn over the cars when the debtors filed for bankruptcy. The debtors argue that the City violated the Bankruptcy Code’s automatic-stay provision by refusing to return the cars.

Rutledge v. Pharmaceutical Care Management Association, No. 18-540, presents the question whether the Employee Retirement Income Security Act of 1974 (ERISA) preempts state regulation of the rates at which pharmacy benefits managers reimburse pharmacies. An Arkansas statute effectively establishes minimum prices that pharmacy benefit managers—including pharmacy benefit managers acting on behalf of ERISA plans—must pay and the procedures they must follow to reimburse pharmacies for drugs dispensed to ERISA plan participants and beneficiaries. The Pharmaceutical Care Management Association argues that ERISA expressly preempts this state law. Gibson Dunn filed an amicus brief on behalf of the U.S. Chamber of Commerce in support of the Pharmaceutical Care Management Association.

In Tanzin v. Tanvir, No. 19-71, the Court will decide whether the Religious Freedom Restoration Act of 1993 permits suits seeking money damages against federal employees in their personal capacities. The case specifically involves three Muslim men who seek to recover money damages against federal agents who allegedly placed them on the No Fly List in retaliation after they refused to serve as informants for the government.

Carney v. Adams, No. 19-309, presents several questions related to the validity of a Delaware state constitutional provision that both limits judges affiliated with any one political party to no more than a “bare majority” on Delaware’s three highest courts and reserves the other seats for judges affiliated with the “other major political party.” Together, the provisions effectively require membership in one of the two major political parties to serve on the three highest courts. The parties dispute (1) whether respondent James Adams, a political independent, has standing to challenge the constitutional provision; (2) whether the constitutional provision violates the First Amendment; and (3) whether the “bare majority” requirement is severable and should continue in effect if the Court invalidates the provision reserving the remaining seats for members of the “other major political party.”

Finally, in Texas v. New Mexico, No. 65, Original, the Court will consider whether the “River Master”—a technical expert appointed by the Court—clearly erred when he calculated New Mexico’s water-delivery obligations under the Pecos River Compact between Texas and New Mexico.

The remaining three carried-over cases are criminal.

In the consolidated cases of United States v. Briggs, No. 19-108, and United States v. Collins, No. 19-184, the Court will decide whether a five-year statute of limitations applies to rape prosecutions under the Uniform Code of Military Justice (UCMJ). Each of the three respondents were convicted of rape following courts-martial that took place more than five years after the offenses were committed. The United States primarily argues that the prosecutions were permissible because at the time the rapes were committed, the UCMJ included a five-year statute of limitations unless a crime was “punishable by death,” and rape was “punishable by death.” Briggs responds that the default five-year statute of limitations applies because the death penalty could not be lawfully imposed on individuals convicted of rape. Gibson Dunn filed an amicus brief on behalf of Members of Congress in support of the United States.

Pereida v. Barr, No. 19-438, turns on the proper application of the modified categorical approach and the allocation of the burden of proof when deciding whether a noncitizen may seek relief from removal. The Immigration and Nationality Act provides a list of offenses that disqualify a noncitizen from applying for relief from removal. A state conviction is disqualifying if the conviction necessarily establishes all elements of the potentially corresponding federal offense. The question presented is whether a state conviction bars a noncitizen from applying for relief from removal when he was convicted under a statute defining multiple crimes and the record is inconclusive as to which crime formed the basis of the conviction.

The final criminal case—Torres v. Madrid, No. 19-292—considers whether an unsuccessful attempt to detain a suspect by use of physical force is a “seizure” within the meaning of the Fourth Amendment. Roxanne Torres, the petitioner, was shot twice by two police officers while she was fleeing. She argues that the application of physical force, even if it failed to prevent her escape, was a seizure for purposes of determining its constitutionality.

III. Conclusion

As explained in previous guidance, the Supreme Court will “continue to proceed with the resolution of all cases argued this Term.”[7] Thus, before the summer Recess we can expect decisions in the 29 cases that, as of April 13, had been argued but not yet decided. In light of this week’s developments, we can also expect decisions in the 10 cases that will be argued telephonically in May. The other 10 cases, summarized above, will be argued when the Court returns to work in October 2020. It remains to be seen whether or not “business as usual” in our judicial system will have resumed by then.

[1] Press Release, U.S. Supreme Court, Press Release Regarding May Teleconference Oral Arguments (Apr. 13, 2020), https://www.supremecourt.gov/publicinfo/press/pressreleases/pr_04-13-20.

[2] Jimmy Hoover, Supreme Court to Hold Arguments by Teleconference, Law360 (Apr. 13, 2020), https://www.law360.com/articles/1262483/supreme-court-to-hold-arguments-by-teleconference.

[3] See id.; Amy Howe, Court Sets Cases for May Telephone Arguments, Will Make Live Audio Available, SCOTUSblog (Apr. 13, 2020), https://www.scotusblog.com/2020/04/court-sets-cases-for-may-telephone-arguments-will-make-live-audio-available/; Jess Bravin & Brent Kendall, Supreme Court to Break Tradition, Hold Oral Arguments by Teleconference, Wall St. J. (Apr. 13, 2020), https://www.wsj.com/articles/supreme-court-to-break-tradition-hold-oral-arguments-by-teleconference-11586789676.

[4] Order (Mar. 19, 2020), https://www.supremecourt.gov/orders/courtorders/031920zr_d1o3.pdf.

[5] Press Release, U.S. Supreme Court, Press Release Regarding Postponement of April Oral Arguments (Apr. 3, 2020), https://www.supremecourt.gov/publicinfo/press/pressreleases/pr_04-03-20; Press Release, U.S. Supreme Court, Press Release Regarding Postponement of March Oral Arguments (Mar. 16, 2020), https://www.supremecourt.gov/publicinfo/press/pressreleases/pr_03-16-20.

[6] Press Release, U.S. Supreme Court, Press Release Regarding May Teleconference Oral Arguments, supra note 1.

[7] Press Release, U.S. Supreme Court, Press Release Regarding Postponement of April Oral Arguments, supra note 5.

Authors: Mark A. Perry, Allyson N. Ho and Megan McGlynn

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

The European Securities and Markets Authority (“ESMA”) has published a public statement[1] detailing actions to mitigate fund managers’ reporting obligations. This client alert provides EU alternative fund managers (“AIFMs”), and non-EU AIFMs marketing their funds in the EU, with an overview of the impact of the public statement on the obligation to publish an annual report for the funds they manage.

Why has ESMA published the public statement?

The public statement is intended to promote coordinated action between EU national competent authorities (“NCAs”) in light of the coronavirus outbreak. Fund managers, including EU AIFMs and non-EU AIFMs marketing their funds in the EU, are subject to the requirement to publish annual reports with respect to the funds they manage.

ESMA states that fund managers are expected to exercise their best efforts to prepare the annual reports and publish them by the relevant deadline. However, ESMA acknowledges that fund managers (and their auditors) are subject to constraints which may substantially impair their ability to publish the annual reports in respect of their funds by the deadline. ESMA has, therefore, suggested that NCAs exercise regulatory forbearance when considering taking action against fund managers for failing to publish annual reports on time for certain reporting periods.

Which reporting periods does the public statement cover?

The public statement concerns the publication of reports for the reporting periods ending from 31 December 2019 to 30 April 2020 inclusive.

How does the public statement impact EU AIFMs?

EU AIFMs are required to publish an annual report with respect to each EU alternative investment fund (“AIF”) they manage and for each AIF they market in the EU, no later than six months following the end of the AIF’s financial year. For the financial year end of 31 December 2019, the latest publication date is 30 June 2020.

Does the public statement impact non-EU AIFMs?

To the extent that a non-EU AIFM manages an AIF that has been marketed in the EU via a member state’s national private placement regime under Article 42 of the AIFMD, it will be subject to the requirement to publish an annual report. This report is due no later than six months following the end of the AIF’s financial year. Again, for the financial year end 31 December 2020, the latest publication date is 30 June 2020.

What regulatory forbearance does ESMA suggest?

ESMA expects NCAs to act in accordance with national rules set out in their member states and not to prioritise supervisory actions against fund managers in respect of the upcoming deadlines with respect to:

annual reports referring to a year-end occurring on or after 31 December 2019 but before 1 April 2020 for a period of two months following the relevant deadline; and
annual reports referring to a year-end occurring on or after 1 April 2020 but before 1 May for a period of one month following the relevant deadline.

What steps should fund managers take now?

ESMA states that where fund managers reasonably anticipate that publication of annual reports will be delayed beyond the normal regulatory deadlines, they are expected to inform their NCA promptly of this and to inform investors as soon as practicable of the delay, the reasons for such a delay and to the extent possible the estimated publication date.

Fund managers should, therefore, assess now whether they will be in a position to publish the annual reports for the funds they manage by the relevant deadline. If your firm has any concerns regarding the publication of annual reports, or any of its other regulatory obligations during the current outbreak, we would be more than happy to discuss this with you.

[1] https://www.esma.europa.eu/sites/default/files/library/esma34-45-896_public_statement_on_publication_deadlines_in_fund_management_area.pdf

Authors: Michelle Kirschner, Martin Coombes and Chris Hickey

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

The COVID-19 crisis has prompted a barrage of legislative and regulatory activity affecting drug and device manufacturers. In addition to the CARES Act, one of the most sweeping pieces of legislation in recent memory, the U.S. Food & Drug Administration (FDA) has been releasing new policies and guidance documents on a nearly daily basis.

There are both opportunities and risks for companies trying to respond to the COVID-19 crisis. On the one hand, companies can bring new and newly-adapted products to market under FDA enforcement discretion and emergency pathways. On the other hand, companies are proceeding rapidly with incomplete information, and in an uncharted and evolving regulatory landscape.

This round-up details the CARES Act provisions and recent FDA actions taken to expedite the availability of diagnostics, treatments, vaccines, medical devices, and personal protective equipment (PPE) to combat COVID-19. Gibson Dunn attorneys are advising companies on a daily basis with regard to these issues, and are here to assist with any questions you may have.

I.              CARES Act Provisions for Medical Product Development and Deployment
II.            Overview of FDA’s Approach to the COVID-19 Crisis
III.           Diagnostic Devices
IV.           Personal Protective Equipment (PPE)
V.            Ventilators and Other Respiratory Devices
VI.           COVID-19 Drugs and Vaccines
VII.         Other Medical Products to Prevent or Treat COVID-19
VIII.        Conclusion

I. CARES Act Provisions for Medical Product Development and Deployment

Several provisions of the CARES Act aim to promote the development and distribution of medical products needed to respond to COVID-19 and future public health emergencies. Below is an overview of key provisions.[1]

A. Bolstering Supply and Promoting Development of Medical Products

In response to the recognized shortfall of respirators, masks and other PPE, and diagnostic testing products, Section 3102 of the CARES Act requires the Strategic National Stockpile to include “personal protective equipment, ancillary medical supplies, and other applicable supplies required for the administration of drugs, vaccines and other biological products, medical devices, and diagnostic tests.”

Additionally, the CARES Act includes emergency appropriations to the Public Health and Social Services Emergency Fund for the development, procurement, and deployment of COVID-19 medical products.

The Act appropriates $27 billion to the Public Health and Social Services Emergency Fund for the prevention, preparation, and response to COVID-19. This money is intended to fund the development of medical countermeasures and vaccines as well as the purchase of vaccines, therapeutics, diagnostics, and necessary medical supplies in accordance with Federal Acquisition Regulation (FAR) guidance. Medical products purchased by the appropriated funds may, at the discretion of the U.S. Department of Health and Human Services (HHS), be deposited in the Strategic National Stockpile. Up to $16 billion of the appropriation may be used to purchase products for the Strategic National Stockpile. Further, the Act calls for not less than $3.5 billion to go to the Biomedical Advanced Research and Development Agency (BARDA) within the HHS to fund the manufacturing, production, and purchase of vaccines, therapeutics, diagnostics, pharmaceuticals, and active pharmaceutical ingredients (APIs). The BARDA funding is also intended to scale up production of countermeasures by supporting “the development, translation, and demonstration at scale of innovations in manufacturing platforms.”
The Act calls for HHS to distribute, in the form of grants or other mechanisms, a separate $100 billion in appropriations to the Public Health and Social Services Emergency Fund to hospitals and other health care providers who “provide diagnoses, testing, or care for individuals with possible or actual cases of COVID-19.” The funds are intended to “prevent, prepare for, and respond to coronavirus, domestically or internationally,” and are to be available for, among other things, “medical supplies and equipment including personal protective equipment and testing supplies.” The Act defines “eligible health care providers” to mean public entities, Medicare and Medicaid enrolled suppliers and providers, and any other for-profit and not-for-profit entities specified by HHS that are in the United States and engaged in COVID-19 diagnosis, testing, or treatment. On April 10, 2020, HHS announced the immediate infusion of $30 billion into the health care system through the CARES Act Provider Relief Fund.[2] HHS is working rapidly on targeted distributions of the remaining $70 billion that will focus on “providers in areas particularly impacted by the COVID-19 outbreak, rural providers, providers of services with lower shares of Medicare reimbursement or who predominantly serve the Medicaid population, and providers requesting reimbursement for the treatment of uninsured Americans.” Additional HHS guidelines around eligibility for funding are expected soon.
The emergency appropriations also include extensive funding to various agencies for coronavirus research and medical product procurement, including the Centers for Disease Control and Prevention (CDC) and the National Institutes of Health (NIH). NIH received $945 million, the largest share of such funding, $706 million of which goes to the National Institute of Allergy and Infectious Diseases (NIAID), which is actively funding research on the development of vaccines, diagnostics, and treatments to combat COVID-19.

B. Anticipating and Preventing Critical Drug and Device Shortages

To better anticipate and prevent shortages of emergency drugs and medical devices, the CARES Act includes new and additional FDA reporting requirements for critical drugs and medical devices during a public health emergency. It also requires FDA to prioritize and expedite review of supplements to new drug applications (NDAs) and inspections of establishments that could help mitigate or prevent such drug shortages. The CARES Act supplemented these provisions with $80 million in funding to support FDA’s capacity to oversee “the development of necessary medical countermeasures and vaccines, advanced manufacturing for medical products, [and] the monitoring of medical product supply chains.”

Drug reporting. Section 3112 of the CARES Act amends Section 506C of the Federal Food, Drug, and Cosmetic Act (FDCA) to expand mandatory reporting on anticipated discontinuances or disruptions to the supply of certain drugs (“critical drugs”), including their APIs.[3]

First, it extends the categories of drugs covered by the reporting requirements to include drugs that are “critical to the public health during a public health emergency” declared by HHS.[4] Previously, the reporting requirements only applied to manufactures of “life-supporting” drugs, “life-sustaining” drugs, and drugs “intended for use in the prevention or treatment of a debilitating disease or condition.”

Second, manufacturers must now notify FDA of anticipated shortages of APIs used in a critical drug. Previously, drug manufacturers were only required to report the expected discontinuation or shortage of the critical drug itself. Because many finished drug products cannot be made without APIs and such APIs are often manufactured abroad, this added requirement ensures that FDA is notified in advance of anticipated shortages in key ingredients that could impact the supply of critical drugs in the United States.

Third, this mandatory reporting must now include information regarding the reasons for the discontinuation or disruption in supply, and, if an API is the cause of or risk factor in the disruption, the source of the API and any known alternative sources. Manufacturers also must describe the anticipated duration of the supply issue and whether it relates to any devices used in the preparation or administration of the drug.

Finally, Section 3112 requires manufacturers of critical drugs—as well as manufacturers of any API or associated device used for the preparation or administration of such drugs—to maintain a redundancy risk management plan identifying and evaluating risks to the supply of the drug. We expect that FDA will soon issue guidance elaborating on what these risk management plans should entail. In the meantime, manufacturers of critical drugs as well as of APIs or medical devices used in the preparation or administration of such drugs should review their existing risk management plans and prepare to update them in light of these new requirements.

Medical device reporting. Section 3121 of the CARES Act creates a new reporting framework for medical devices that requires manufacturers to report to FDA any discontinuation or anticipated disruption to the supply of covered medical devices, similar to that applicable to critical drugs discussed above. These reporting requirements apply to manufacturers of medical devices that are “critical to public health during a public health emergency, including devices that are life-supporting, life-sustaining, or intended for use in emergency medical care or during surgery,” as well as medical devices for which HHS determines that the reporting is needed for a public health emergency. As noted above, Section 3112 requires manufacturers of associated devices used in the production or administration of life-saving drugs to maintain risk management plans aimed at preventing or mitigating disruptions to the supply of the device that could cause or be a risk factor in disrupting supply of the drug.

This provision is significant because FDA previously did not have the authority to require medical device manufacturers to notify the agency when they became aware of a circumstance that could lead to a device shortage or meaningful disruption in the device supply.

C. Expedited Review of COVID-19 Product Applications

Section 1111 of the CARES Act further amends Section 506C of the FDCA to provide that FDA “shall, as appropriate,” prioritize and expedite (1) review of a supplement to an NDA, abbreviated NDA (ANDA), or a supplement to an ANDA for a drug candidate that could help mitigate or prevent shortages to critical drugs; and (2) inspection or re-inspection of an establishment that could help mitigate or prevent such a drug shortage. Previously, Section 506C provided that FDA “may” “expedite” such reviews and inspections.[5] These amendments clarify that FDA must, as appropriate, both expedite and prioritize such reviews and inspections when there is, or is likely to be, a shortage of a critical drug.

Section 3302 of the CARES Act also creates Section 512A of the FDCA, which provides for expedited review of animal drugs through the new Priority Zoonotic Animal Drug designation. The designation is intended to address diseases that spread from animals to humans. This is significant given that several recent epidemics and pandemics have been or are believed to have been zoonotic diseases, including Avian Flu, Swine Flu, Ebola, Severe Acute Respiratory Syndrome (SARS), and COVID-19.

D. Liability Protection Extended to Respiratory Protective Devices

The CARES Act expressly extends the targeted liability protection under the Public Readiness and Emergency Preparedness Act (PREP Act) to include respiratory protective devices that are approved by the National Institute for Occupational Safety and Health (NIOSH) and that the Secretary of HHS determines to be “a priority for use during a public health emergency.”[6] As discussed in a prior alert, a declaration by the HHS Secretary under the PREP Act immunizes manufacturers and distributors of “covered countermeasures” from liability under federal and state law with respect to all claims relating to the administration or use of the countermeasure under certain circumstances during a public health emergency. The PREP Act had defined “covered countermeasure” to include devices, drugs, and biologics as defined under the FDCA, in addition to other specifically enumerated countermeasures, but the provision did not contain language specific to respiratory protective devices until Section 3103 of the CARES Act.

E. Proposed Supplemental Legislation

Lawmakers are considering additional measures to supplement the CARES Act. Although Republicans and Democrats in Congress agree that more funding is needed, the parties continue to negotiate the details, including the scope of emergency funding through an interim bill. The Democrats have proposed an interim bill that would provide an additional $100 billion to bolster hospitals and health care providers, with funds targeting the production of COVID-19 diagnostic tests and protective medical equipment, and $150 billion to support state and local governments in fighting the COVID-19 pandemic—in addition to $250 billion in supplemental funding for small businesses. Republicans favor limiting interim relief to support for small businesses and addressing supplemental funding, including for hospitals and health care providers, later. The Senate officially reconvenes on April 20, 2020, and negotiations over the next stimulus package are likely to continue in the interim. We will monitor these negotiations and continue to provide updates on key developments.

II. Overview of FDA’s Approach to the COVID-19 Crisis

FDA is swiftly issuing new emergency guidance to address the pandemic. To date, FDA has issued more than a dozen substantive COVID-19 guidance documents, nearly all of which aim to expedite the availability of products to diagnose and treat COVID-19, primarily through the exercise of enforcement discretion.

During the public health emergency, FDA has modified its usual process to speed the availability of guidance. FDA is issuing periodic Notices of Availability (NOA) that provide a consolidated announcement of new guidance rather than issuing an NOA for each new COVID-19 guidance document. While FDA is implementing guidance immediately without prior public comment (which would not be feasible under Section 701(h)(1)(C)(i) of the FDCA and 21 C.F.R. § 10.115(g)(2)), FDA is also soliciting and reviewing all public comments received on the guidance documents. Like other guidance, the COVID-19 guidance documents represent FDA’s current thinking on a particular subject, and stakeholders may use alternative approaches if they satisfy applicable laws and regulations.[7] Furthermore, FDA emphasized in the guidance documents that certain exercises of enforcement discretion are limited to the duration of the public health emergency.

FDA is also engaged in an unprecedented effort to authorize medical products using its emergency powers. Under Section 564 of the FDCA, FDA may permit unapproved medical products or unapproved uses of approved medical products to be used in certain emergency circumstances after the HHS Secretary makes a declaration of an emergency or a threat that justifies authorization of emergency use. FDA’s Emergency Use Authorizations (EUAs) are distinct from the usual investigational product pathways, such as INDs, IDEs, and the expanded access pathways described in Section 561 of the FDCA. EUAs also are distinct from Section 564A emergency use, which allows FDA to facilitate the availability of FDA-approved products without first issuing an EUA. Products authorized under an EUA may be eligible for immunity protections under the PREP Act (42 U.S.C. § 247d-6d), which we discussed in a prior alert.[8] During the COVID-19 outbreak, FDA has issued EUAs covering a broad range of products, including in vitro diagnostic tests, complex molecular-based laboratory developed tests, PPE, ventilators and other medical devices, and therapeutics.

In the sections that follow, we discuss recent guidance and EUAs that FDA has issued during the course of the COVID-19 crisis. We first cover each of the product categories that have been receiving the bulk of attention—diagnostic devices, PPE, ventilators, COVID-19 therapies—and then address some of the other, more discrete topics and products where new FDA guidance and EUAs apply.

The table below summarizes the major actions by FDA to date. Each of these actions is generally limited to the duration of the COVID-19 public health emergency, and subject to conditions set forth in the guidance, as described in the sections that follow.

Impacted Product(s)	FDA Action
Diagnostic Testing	Exercise of enforcement discretion as to development and deployment of COVID-19 testing; issuance of EUAs
Personal Protective Equipment	Exercise of enforcement discretion as to manufacture and use of personal protective equipment; issuance of EUAs
Ventilators, Ventilator Accessories, and Other Respiratory Devices	Exercise of enforcement discretion on modifications to existing, cleared/approved devices and streamlined process to permit additional devices to be marketed; issuance of EUAs
COVID-19 Drugs & Vaccines	Coronavirus Treatment Acceleration Program (CTAP), and use of expedited pathways and expanded access; issuance of EUA
Alcohol Sanitizers	Exercise of enforcement discretion as to production of alcohol sanitizers, including by nontraditional manufacturers
Blood Purification Systems	EUA for certain blood purification systems
Extracorporeal Membrane Oxygenation and Cardiopulmonary Bypass Devices	Permission to use devices for longer than FDA-approved time limits
Remote Monitoring Devices	Exercise of enforcement discretion to enable increased development and use of noninvasive remote monitoring tools in hardware and software
Ophthalmic Assessment and Monitoring Devices	Exercise of enforcement discretion for remote ophthalmic assessments to minimize the need for in-person visits to nonessential medical facilities
Infusion Pumps and Accessories	Exercise of enforcement discretion as to modifications to FDA-cleared pumps and accessories
Clinical Electronic Thermometers	Exercise of enforcement discretion as to distribution of clinical electronic thermometers that are not currently FDA cleared
Sterilizers, Disinfectant Devices, and Air Purifiers	Relaxation of premarketing requirements; issuance of EUAs
Portable Cryogenic Containers	Exercise of enforcement discretion as to current good manufacturing practice (cGMP) requirements for portable gas containers
3D Printing	Facilitating development and production of needed medical products via 3D printing

III. Diagnostic Devices

Given the aggressive spread of COVID-19, on the one hand, and the Administration’s focus on re-opening the American economy, on the other, a rapid expansion of testing capabilities—including serological testing for past exposure—will continue to be crucial to the efforts to contain the pandemic. To that end, FDA (in conjunction with CDC) is actively promoting efforts to develop and bring to market new diagnostic tests.

The CDC labs developed a diagnostic assay for which FDA issued an EUA on February 4, 2020. On March 16, 2020, FDA expanded a prior guidance[9] to accelerate the development and use of new and additional COVID-19 diagnostic tests by labs and commercial manufacturers in hopes of quickly expanding the nation’s ability to detect the disease and control its spread. To date, FDA has worked with hundreds of test developers who have or will seek EUAs. FDA has, as of April 10, 2020, issued 33 EUAs for diagnostic tests, including an EUA for a serological test, and received notice from 170 labs that they have initiated testing under the guidance.

The diagnostic testing guidance addresses policies for (1) accelerating development of COVID-19 lab testing (resulting either in EUA submissions to FDA or, in certain states, testing developed under the oversight of state authorities), (2) facilitating distribution of COVID-19 diagnostics to labs for specimen testing after validation while the commercial manufacturer of the diagnostics prepare EUA submissions, and (3) using serological testing with an EUA. The expanded guidance also reflects FDA recommendations regarding validation of COVID-19 tests, given the significant impact of false testing results during the public health emergency.[10]

CLIA-Certified Labs and EUA Process. FDA does not intend to object to the use of COVID-19 testing by labs certified under the Clinical Laboratory Improvement Amendments (“CLIA”) program (and compliant with its requirements for high-complexity testing) for a “reasonable period of time after validation and while they are preparing their EUA requests.” Under the expanded guidance, labs should notify FDA (by email) that they have validated their assay and then follow up with the EUA submission within 15 days of validation. FDA asked that labs also submit information regarding their testing capacity to enable FDA and HHS to monitor testing availability nationwide. When providing results under this policy, labs should inform the recipient that the test has been validated but FDA’s independent review is pending; further, FDA noted that labs should immediately notify federal, state, and local public health agencies of positive COVID-19 tests (and confirm initial positive and negative testing results with a second lab).[11] The expanded guidance also provides information about the EUA request process, including steps FDA will take to collaborate with labs on analysis of the testing and validation data.[12]
CLIA-Certified Labs and State Oversight. FDA also does not intend to object to testing conducted by CLIA-certified labs authorized by a state or territory to perform COVID-19 testing, so long as the state or territory “takes responsibility” for testing by labs during the outbreak. Under the expanded guidance, FDA asked states or territories that intend to do so to notify FDA of that decision—and requested that labs operating under this policy inform FDA that they have started testing (and share information on their testing capacity).[13]
Commercial Manufacturers and Pre-EUA COVID-19 Testing. Further, FDA does not intend to object to the development and distribution of COVID-19 test kits by commercial manufacturers to clinical labs or health care workers for point-of-care testing, but FDA has not yet authorized a test for COVID-19 testing at home.[14] Again, the policy permits testing during a 15-day period post-validation while the manufacturer prepares an EUA submission (subject to similar obligations to notify FDA, report testing results with a caveat about FDA’s pending review, and submit an EUA with specified information).
Commercial Manufacturers and Serological Testing without an EUA. To hasten the availability of antibody testing, FDA does not intend to object to the development and distribution of validated serological tests for COVID-19, so long as the testing is not for home use, notice is provided to FDA, and the manufacturer discloses certain information to the test recipient (e.g., that FDA has not reviewed the test and negative results do not rule out COVID-19).[15]

In the expanded guidance, FDA also recommended that diagnostics developers implement certain minimum testing characteristics for COVID-19 molecular, antigen detection, and serological diagnostics.[16]

IV. Personal Protective Equipment (PPE)

In light of the ongoing public health emergency, FDA issued several guidance documents and EUAs to address the availability of PPE, including face masks, particulate filtering facepiece respirators, gowns, and gloves.

A. Enforcement Policies for PPE

On March 30 and April 2, 2020, FDA issued guidance aimed at expanding the availability of general-use face masks for the public, and particulate filtering facepiece respirators (including N95 respirators),[17] gowns, gloves, and other apparel[18] for health care professionals (HCPs). Because FDA does not exercise jurisdiction over protective apparel that is marketed to the general public for non-medical purposes, the guidance focuses on medical-grade equipment. To determine whether such products are intended for a medical purpose, FDA considers labeling (such as whether they are labeled or otherwise for use by an HCP or in a health care facility), and whether the products include any drugs, biologics, or anti-microbial/antiviral agents.

Unavailability of FDA-Approved Masks and Respirators. For the duration of the pandemic, when FDA- or NIOSH-approved N95 respirators are unavailable, FDA does not intend to object to the importation, distribution, and use of acceptable alternative respirators published on the CDC’s website. In such cases, FDA will not enforce compliance with the certain regulatory requirements, including (1) premarket notification under Section 510(k) of the FDCA and 21 C.F.R. § 807.81; (2) registration and listing under 21 C.F.R. Part 807; (3) Quality System Regulation under 21 C.F.R. § 820; (4) reports or corrections and removals under 21 C.F.R. Part 806; and (5) Unique Device Identification (“UDI”) under 21 C.F.R. Part 830 and 21 C.F.R. § 801.20. Additionally, the guidance makes explicit FDA’s position that when FDA-cleared masks or respirators are unavailable, individuals (but not companies), including HCPs, can improvise PPE. FDA does not intend to object to an individual’s use or distribution of improvised PPE when alternates are unavailable.

Face Masks Intended for a Medical Purpose. FDA does not intend to object to the distribution and use of face masks, with or without a face shield (not including respirators), by medical personnel or the general public that are intended for a medical purpose, without compliance with the above-listed regulatory requirements where the face mask does not create an undue risk in light of the public health emergency. Face masks intended for a medical purpose do not create an undue risk where: (1) the product is accurately labeled (for example, as a face mask as opposed to a surgical mark); (2) the labeling makes recommendations that would reduce sufficiently the risk of use (for example, recommendations against use in surgical settings); and (3) the product is not intended for any use that would create an undue risk in light of the public health emergency (for example, the product does not indicate it is meant for antiviral protection).

Face Shields Intended for a Medical Purpose. FDA does not intend to object to the distribution and use of face shields that are intended for a medical purpose (whether used by medical personnel or the general public) where the face shield does not create an undue risk in light of the public health emergency, without compliance with the above-listed regulatory requirements. Undue risk is assessed based on the accuracy of the product’s labeling, the shield’s flammability and related disclosures, as well as the product’s intended use.

Surgical Masks Intended to Provide Liquid Barrier Protection. FDA does not intend to object to the distribution and use of surgical masks without compliance with all of the above-listed regulatory requirements where the surgical mask does not create an undue risk in light of the public health emergency. These products do not create undue risk where they (1) meet fluid resistance testing consistent with federal standards; (2) meet flammability requirements under 16 C.F.R. § 1610; (3) are labeled accurately; and (4) not intended for any use that would create an undue risk in light of the public health emergency.

Nonsurgical Gowns and Minimal-to-Low Barrier Protection Surgical Apparel. FDA does not intend to object to the distribution and use nonsurgical gowns[19] and other low-to-minimal barrier protection surgical apparel[20] that do not comply with the above-listed regulatory requirements where the gowns and apparel do not create an undue risk in light of the public health emergency. These devices do not create an undue risk where: (1) the product is accurately labeled; (2) the labeling makes recommendations that would reduce sufficiently the risk of use (for example, recommendations against use in surgical settings); and (3) the product is not intended for any use that would create an undue risk in light of the public health emergency.

Moderate-to-High Barrier Protection Surgical Gowns. FDA does not intend to object to the distribution and use of moderate-to-high barrier protection surgical gowns (e.g., ANSI/AAMI PB70 barrier protection Level 3 or 4) that do not comply with the regulatory requirements related to premarket notification, registration and listing, and unique device identification, where such surgical gowns do not create an undue risk in light of the public health emergency. These devices do not create an undue risk where they meet required liquid barrier protection and flammability standards, are labeled accurately, and are not intended for any use that would create an undue risk in light of the public health emergency.

Patient Examination Gloves. FDA does not intend to object to the distribution and use of patient examination gloves[21] that do not comply with the above-listed regulatory requirements, where the gloves do not create an undue risk in light of the public health emergency. These devices do not create an undue risk where they are accurately labeled, and are not intended for any use that would create an undue risk in light of the public health emergency.

Surgeon’s Gloves. FDA does not intend to object to the distribution and use of surgeon’s gloves[22] that do not comply with the regulatory requirements related to premarket notification, registration and listing, and unique device identification, where the surgeon’s gloves do not create an undue risk in light of the public health emergency. These devices do not create an undue risk where they meet the standard specification for surgical gloves, are accurately labeled, and are not intended for any use that would create an undue risk in light of the public health emergency.

Nonstandard PPE Practices for Sterile Compounding by Pharmacy Compounders. FDA will not enforce Section 501(a)(2)(A) of the FDCA governing insanitary conditions with respect to the compounding of drugs intended to be sterile if the following requirements are met:

The compounder is unable to obtain sufficient supply of standard PPE to assure compliance with the insanitary conditions provision;
The drug is compounded in compliance with other applicable FDCA requirements;
The compounder employs (a) the mitigation strategies described in the guidance to reduce the risk of product contamination; or (b) terminal sterilization where standard PPE is not used, as long as basic garbing expectations (e.g., hairnet, clean garment, non-sterile gloves, other appropriate coverings) are followed; and
The compounder keeps records of all compounding performed without standard PPE and of all changes in the sterilization approach and documents mitigation strategies in a new or updated standard operating procedure.

The guidance also recommends modifications to a compounder’s practices when the PPE it relies on is in limited supply, including limiting the number of personnel conducting sterile compounding activities, reducing sterile compounding activities in consideration of the risks and need for the compounded product, and, if applicable, using other PPE that confers equivalent or better protection for the compounded product as outlined in FDA’s separate PPE guidance documents.

B. Emergency Use Authorizations (EUAs) for PPE

FDA has also issued several EUAs related to PPE, as summarized below.

NIOSH-Approved Air Purifying Respirators for Use in Health Care Settings During Response to the COVID-19 Public Health Emergency.[23] On March 28, 2020, FDA reissued the EUA for the following NIOSH-approved respirators in health care settings by HCPs when used in accordance with CDC’s recommendations, despite the fact that they do not meet certain requirements otherwise required by applicable federal law: (1) non-powered air-purifying particulate FFRs and reusable respirators (such as elastomeric half and full facepiece respirators); (2) certain powered air-purifying respirators (PAPRs); (3) expired FFRs that are not damaged, and have been held in accordance with manufacturers’ storage conditions in strategic stockpiles; and (4) authorized respirators under (1) or (3) above that have been decontaminated pursuant to the terms and conditions of an authorized decontamination.

Imported, Non-NIOSH-Approved Disposable Filtering Facepiece Respirators (FFRs).[24] On March 28, 2020, FDA reissued the EUA to allow for the use of (1) certain imported disposable FFRs that are not NIOSH-approved and (2) authorized respirators that have been decontaminated pursuant to the terms and conditions of an authorized decontamination system,[25] when used in accordance with CDC recommendations. Temporarily authorized imported disposable FFRs include those with acceptable product classifications and marketing authorizations in one of the following regulatory jurisdictions: European CE Marking; Australian Register of Therapeutic Goods (ARTG) Certificate of Inclusion; Health Canada License; Japan Pharmaceuticals and Medical Device (PMDA)/Ministry of Health Labour and Welfare (MHLW).

Non-NIOSH-Approved Disposable Filtering Facepiece Respirators Manufactured in China.[26] On April 3, 2020, FDA authorized the use of disposable non-NIOSH-approved respirators manufactured in China that meet one of the following criteria for authentication: (1) manufactured by an entity that holds one or more NIOSH approvals for other models of FFRs produced in accordance with the applicable standards of authorization in other countries that can be verified by FDA; (2) have regulatory authorization under a jurisdiction other than China that can be authenticated and verified by FDA; or (3) demonstrate acceptable performance to applicable testing standards as documented by test reports from a recognized independent test laboratory that can be verified by FDA.

Face Shields.[27] On April 9, 2020, FDA approved the use of certain face shields for use by HCPs as PPE in health care settings in accordance with CDC recommendations to cover the front and sides of the face and provide barrier protection during this public health emergency. FDA recognized that authorized face shields may be effective at preventing HCP exposure to fluid biological airborne particulates during face shield shortages by providing minimal or low barrier HCP protection to the wearer. The face shields must be labeled accurately, and not represent that use of the authorized face shield alone will prevent infection from microbes or viruses.

Sterilization Systems for Decontamination of N95 Respirators. FDA has issued three EUAs for sterilization systems used to decontaminate N95 or N95-equivalent respirators for single-user reuse by HCPs where there is otherwise insufficient supply due to the pandemic.[28] Each of the systems decontaminates using vaporized hydrogen peroxide, which is readily available in approximately 2,000 hospitals around the country. FDA estimates that the second EUA, for the STERIS Sterilization System, will support decontamination of approximately 750,000 N95 respirators per day,[29] and the third EUA, for the STERRAD Sterilization System, will support decontamination of approximately four million N95 or N95-equivalent respirators per day in the United States.[30]

FDA’s Future Approach to EUAs for Face Masks and Respirators.[31] FDA recently specified its willingness to issue further EUAs to increase availability of critical PPE. Specifically, FDA has expressed interest in interacting with manufacturers on (1) the decontamination of otherwise disposable face masks and filtering facepiece respirators to facilitate marketing authorization through an EUA for decontaminated devices; and (2) additional EUAs for face masks intended for a medical purpose, surgical face masks and N95 respirators, including for devices that are not currently legally marketed in the United States and from manufacturers who have not previously manufactured such devices.

V. Ventilators and Other Respiratory Devices

One of the most urgent needs to combat the COVID-19 pandemic has been for additional ventilators. While politicians and pundits debate just how dire the United States’ shortage of ventilators is, everyone agrees there is a shortage, and FDA has moved to relax requirements for the production, modification, and use of ventilators.

A. Enforcement Policy for Ventilators and Accessories and Other Respiratory Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

Ventilators were highly regulated by FDA coming into the COVID-19 crisis,[32] but FDA recognized the need to “expand the availability of devices that facilitate respiration, including ventilators and their accessories, as well as other respiratory devices.”[33] In its March 2020 enforcement guidance, FDA announced that it would not object to “limited modifications to the indications, claims, functionality, or to the hardware, software, or materials of FDA-cleared devices.” In practice, the FDA guidance provides flexibility in several key regards for existing devices.[34]

Ventilators may be used for non-cleared uses and outside cleared environments, for example through the use of “powered emergency ventilators and anesthesia gas machines for patients needing mechanical ventilation” or “use of a ventilator in a health care facility when it is only cleared for use at home or during transport.”

Manufacturers may make modifications to FDA-cleared hardware, software, or materials, without prior submission of a premarket notification, for example by making changes to components used in the devices or through the addition of software to allow for remote monitoring.
Ventilators and anesthesia gas machines may be used beyond their cleared durations of use and shelf life.

These relaxed requirements apply only to existing FDA-cleared devices, and are subject to the process outlined in the EUA governing ventilators (discussed below).

While relaxing the rules around ventilators, there are still important limitations on what manufacturers may do. First, all of these exceptions and permissions are subject to the requirement that they not be done in a manner that would “not create an undue risk in light of the public health emergency.” Second, FDA requires that manufacturers “document changes to their device in their device master record and change control records and make this information available to FDA, if requested.” And third, FDA requires that manufacturers clearly label the devices to help “users better understand the device modifications.”[35]

B. Emergency Use Authorizations (EUAs) for Ventilators and Other Respiratory Devices

In addition to relaxing regulations for existing FDA-cleared devices, FDA also has signaled a willingness to consider emergency authorizations for devices approved for use in other countries and work with manufacturers that had “not previously been engaged in medical device manufacturing but with capabilities to increase supply of these devices.”[36]

Ventilators, Ventilator Tubing Connectors, and Ventilator Accessories. On March 24, 2020, FDA issued an EUA to allow for the emergency use in health care settings of certain ventilators and related devices.[37] The EUA establishes a process for companies to submit abbreviated information to FDA about uncleared devices and modifications to FDA-cleared ventilators and related accessories. FDA has requested information about how the device has been designed and evaluated, whether it is approved in another jurisdiction, and whether the device is manufactured according to recognized quality systems.[38] The EUA also waives certain cGMP requirements, including the quality system requirements, and certain registration and listing requirements.[39] If a ventilator, ventilator tubing connector, or ventilator accessory meets the criteria established under the EUA, FDA will add it to Appendix B to the EUA, which it has been able to do on an extremely expedited timeframe. As of April 9, 2020, FDA had authorized submissions for 24 ventilators and one ventilator tubing connector.[40]

VI. COVID-19 Drugs and Vaccines

There are no FDA-approved drugs or vaccines to treat or cure COVID-19, but at the end of March, FDA launched the Coronavirus Treatment Acceleration Program (CTAP), a special emergency program to expedite the development of COVID-19 therapies. The CTAP program is using “every tool at the agency’s disposal” to provide “ultra-rapid, interactive input.”[41] FDA has turned around reviews on COVID-19 development plans within 24 hours and completed reviews of single-patient expanded-access requests within three hours. FDA has redeployed medical and regulatory staff to serve on review teams dedicated to COVID-19 therapies. FDA also has streamlined the process for developers and physicians to contact FDA with inquiries and to submit requests for the emergency use of investigational products. FDA is prioritizing these requests based on factors such as the product’s scientific merits and the stage of development. In addition to clinical studies, FDA is looking at real-world data sources to inform its evaluation of potential therapies, and FDA is leveraging scientific information being generated in China, Italy, Japan, and South Korea.

According to FDA, there are currently 10 therapeutic agents in active trials and 15 therapeutic agents in planning stages, and the Agency will publish updates as these therapies progress through the development process. Examples of potential therapies and vaccines include the following:

Remdesivir. Remdesivir is an investigational broad-spectrum antiviral treatment, which was previously tested to treat diseases caused by other coronaviruses, such as Ebola. FDA has been working with Gilead Sciences, Inc. to expedite the clinical studies of remdesivir in adults diagnosed with COVID-19 and to permit the emergency use of the drug through an expanded access program. In March, Gilead began enrolling patients in two Phase 3, randomized, open-label, multicenter clinical studies. One of the studies will evaluate the safety and efficacy of two dosing durations in addition to the standard of care for patients with severe COVID-19. The other study will evaluate the same dosing regimens in addition to the standard of care for patients with moderate COVID-19. Other ongoing studies of remdesivir include the NIAID Phase 2 adaptive, randomized, double-blind, placebo-controlled trial and studies in China and France.
Convalescent Plasma. Convalescent plasma, collected from individuals who have recovered from COVID-19, contains antibodies to severe acute respiratory syndrome coronavirus 2 or SARS-CoV-2 (the virus that causes COVID-19). Use of convalescent plasma as a therapeutic agent has been studied in prior outbreaks of respiratory infections, such as the H1N1 influenza pandemic. Earlier this month, FDA entered a collaboration with BARDA, the American Red Cross, and the Mayo Clinic to simplify the process for health care providers to collect, distribute, and use convalescent plasma in patients. As a result of this collaboration, FDA estimates that thousands of units of plasma will be available to patients within the coming weeks. FDA also is working with NIAID to coordinate a study of hyperimmune globulin, which is a biological product manufactured from convalescent plasma.

On April 8, 2020, FDA issued guidance on the administration and study of investigational convalescent plasma during the public health emergency.[42] Prior to this guidance, FDA had approved emergency INDs for the use of convalescent plasma in very ill COVID-19 patients. The guidance provides recommendations regarding the regulatory pathways for using investigational COVID-19 convalescent plasma, patient eligibility, the collection of COVID-19 convalescent plasma from donors, labeling, and record-keeping. In addition to the traditional IND pathway (21 C.F.R. Part 312), convalescent plasma may be permitted for investigational use through an expanded access IND for patients with serious or immediately life-threatening COVID-19 disease who are not eligible or who are unable to participate in randomized clinical trials (21 C.F.R. § 312.305) or through single patient emergency INDs following the request by a licensed physician (21 C.F.R. § 312.310). The convalescent plasma should be obtained from an FDA-registered blood establishment that follows the donor eligibility criteria and donor qualifications. Donors should have complete resolution of symptoms at least 28 days prior to donation or complete resolution of symptoms at least 14 days prior to donation and negative COVID-19 test results. FDA is relaxing requirements relating to the registration, licensure, and procedures of blood establishments that collect and distribute the convalescent plasma for investigational use.

Chloroquine. On March 28, 2020, FDA issued an EUA for the use of chloroquine phosphate and hydroxychloroquine in COVID-19 patients who cannot participate in a clinical trial. In laboratory testing, these drugs have been shown to prevent the growth of the virus that causes COVID-19, and there have been “a few reports” of patients who improved on these drugs, but “[i]t is not known whether it was the drug that led to the improvement or whether there were other factors involved,” according to FDA.[43] After being highlighted by some federal officials, including President Trump, as a potential treatment, there have been shortages of these drugs, which are FDA-approved for the treatment of malaria and autoimmune diseases, and a person died following consumption of chloroquine products that are sold to treat aquarium fish. FDA’s Center for Veterinary Medicine subsequently issued a letter stating that chloroquine aquarium products should not be used as a treatment for COVID-19 in humans.[44] On April 14, 2020, FDA published guidances on the generic development of chloroquine phosphate and hydroxychloroquine sulfate in order to address the increased demand for these drugs.[45]
Vaccine Candidates. According to the World Health Organization (WHO), there are three COVID-19 vaccine candidates in clinical trials and 67 vaccine candidates in preclinical phases of development.[46] CanSino Biologics is the furthest along and advancing to Phase 2 clinical trials in China for Ad5-nCoV, a genetically engineered vaccine candidate, which is based on a vaccine platform previously used for an Ebola vaccine. In March, Moderna, in collaboration with NIAID, launched a Phase 1 clinical trial of SARS-CoV-2 mRNA-1273, an experimental gene-based vaccine, which uses messenger RNA rather than inactive virus to trigger an immune response. Last week, FDA accepted the IND from Inovio Pharmaceuticals to start Phase 1 studies of INO-4800, a DNA vaccine candidate, while additional preclinical trials are conducted in parallel; the company previously tested a vaccine for the treatment of Middle East Respiratory Syndrome (MERS), which is caused by a coronavirus.

Experts estimate 12 to 18 months, at a minimum, for the commercial availability of a COVID-19 vaccine. We expect that FDA will consider, and developers may request, emergency or expedited availability of the vaccine candidates before FDA approval or licensure. FDA is poised to apply these pathways to vaccines: the Agency announced its intent “to use all of the regulatory flexibility granted to it by Congress to ensure the most efficient and timely development of vaccines to fight COVID-19.”[47]

FDA’s strategy to speed the development of COVID-19 therapies and vaccines is focused on providing “regulatory flexibility, advice, guidance, and technical assistance.”[48] Former FDA Commissioner Scott Gottlieb recently called on FDA “to step up its pace” and to apply the regulatory strategies used for rare and deadly cancers, such as conducting real-time reviews of clinical data from ongoing trials rather than waiting for the trial’s completion.[49] As the clinical trials on the investigational drugs and vaccines progress, a key issue to watch will be how FDA handles the regulatory assessment of these clinical data to balance the need for urgency with the evidence required to demonstrate safety and effectiveness.

VII. Other Medical Products to Prevent or Treat COVID-19

In addition to the enforcement policies, guidance, and EUAs released for diagnostics, PPE, ventilators, and COVID-19 therapies, FDA has also issued guidance and/or enforcement policies relating to other medical devices and products used in the treatment of COVID-19. We summarize each of these below.

A. Alcohol Sanitizers

Hand hygiene is an important part of the U.S. response to COVID-19. If soap and water are not readily available, the CDC recommends consumers use an alcohol-based hand sanitizer that contains at least 60 percent alcohol. To improve the availability of hand sanitizer products, FDA issued guidance, updated March 27, 2020, regarding three temporary policies for alcohol-based hand sanitizer products that are compounded by pharmacists, produced by over-the-counter (OTC) drug manufacturers, or produced by firms that are not currently regulated as drug manufacturers, e.g., manufacturers of alcohol for human consumption.[50]

Generally, FDA expects that hand sanitizers are manufactured consistent with WHO recommendations, unless produced by an alcohol manufacturer, and formulated with either (1) alcohol that is not less than 94.9% ethanol by volume, or (2) isopropyl alcohol, glycerin USP or food grade, hydrogen peroxide, and sterile water. Firms should not add other active in inactive ingredients and should prepare the products under sanitary conditions with appropriate equipment. For alcohol manufacturers, the guidance directs such firms to register their facility in the FDA Drug Registration and Listing System, at which point they may commence manufacturing and distribution of the alcohol product without needing to await further correspondence from FDA. The guidances also set forth the labeling that should accompany the hand sanitizers. Additional manufacturing, quality, registration, and record-keeping expectations may apply, depending on whether the producer is a pharmacist, OTC drug manufacturer, or alcohol manufacturer.

B. EUA for Blood Purification System

On April 9, 2020, FDA issued the first EUA for the use of a blood purification system to address the “cytokine storm” occurring in some COVID-19 patients. The EUA was issued to Terumo BCT Inc. and Marker Therapeutics AG for their Spectra Optia Apheresis System and Depuro D2000 Adsorption Cartridge devices. Under the EUA, these devices may be used to treat patients 18 years of age and older with confirmed COVID-19, who are admitted to the ICU with confirmed or imminent respiratory failure. The product works by filtering cytokines and other inflammatory mediators out of the patient’s blood. These inflammatory mediators are typically elevated during infections and can be associated with a “cytokine storm” that occurs in some patients with COVID-19, leading to severe inflammation, progressive shock, respiratory failure, organ failure, and death. The following day, April 10, 2020, FDA issued a second EUA to CytoSorbents, Inc. for its CytoSorb blood purification system.

C. Enforcement Policy for Extracorporeal Membrane Oxygenation and Cardiopulmonary Bypass Devices

On April 6, 2020, FDA released guidance on Extracorporeal Membrane Oxygenation (ECMO) and Cardiopulmonary Bypass (CPB) devices for the purpose of expanding the availability of devices that can be used for ECMO therapy.[51] The guidance is limited to ECMO devices and CPB devices that are intended to pump or oxygenate blood by: (1) moving the blood to a component that pumps/oxygenates blood; (2) controlling pump speed; (3) controlling or monitoring gas flow for the circuit; or (4) controlling the temperature of the blood. It does not apply to devices intended only for extracorporeal carbon dioxide removal; however, FDA noted that manufacturers of such devices may request an EUA.

The guidance recognizes that FDA-cleared or FDA-approved CPB devices, listed in Table 2 of the guidance, are technologically capable of being used for ECMO therapy—specifically, of providing extracorporeal oxygenation for longer than 6 hours—and allows these devices to make modifications to their indications and design to that effect without 510(k) premarket notification or a Premarket Approval Application (PMA) Supplement under Section 515 of the FDCA. In particular, the CPB devices in Table 2 of the guidance may change their indications to include use of the device in an ECMO circuit to treat patients who are experiencing acute respiratory failure and/or acute cardiopulmonary failure, as well as to include use of the device for longer than 6 hours in an ECMO circuit. Additionally, the ECMO devices in Table 1 of the guidance and the CPB devices in Table 2 of the guidance may make changes to the dimension(s) of cannulae, tubing, filters, connectors, or other accessories to support use in an ECMO circuit that do not affect the flow rate of blood throughout the circuit.

The modifications cannot create “an undue risk,” and are only allowed for the “duration of the public health emergency related to COVID-19.” FDA states that changes to the coating of the device and changes that might negatively impact the gas transfer/exchange properties are likely to create “undue risk.” FDA also recommends that labeling for modified devices include five elements that provide users with additional data and information on use, including a “prominent and exhaustive list of clinical signs . . . that suggest device change-out is necessary,” and “clear distinction delineating FDA-cleared or FDA-approved indications from those that are not FDA-cleared or FDA-approved.” Finally, FDA recommends that, when available, devices cleared by FDA for ECMO therapy, as listed under Table 1, are used in ECMO circuits; the CPB devices whose indications have been modified should be used when needed “for patients in need of ECMO in the United States for the duration of the public health emergency.”

D. Enforcement Policy for Remote Ophthalmic Assessment and Monitoring Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

FDA also has published guidance regarding remote ophthalmic assessment and measuring devices. The guidance covers a wide range of commonly used products, from standard visual acuity charts, to tonometers (devices that measure the eye’s pressure through a known force, such as a small puff of air, to check for ocular pathologies).[52] FDA’s goal in issuing the guidance is to “reduc[e] the need for in-person treatment during the COVID-19 public health emergency” and, in so doing, to “help reduce the risk of exposure for patients and health care providers” to the novel coronavirus. To facilitate the use of such devices for eye care outside of traditional settings, the guidance makes clear that FDA will not object to alterations such as:

Allowing devices previously cleared for use in health care facilities to change their indications such that they can be used in home settings;
Modifying previously non-portable (though FDA-approved) ophthalmic devices for portable or handheld use; or
Allowing “virtual reality or mobile technology” to be used to modify such devices to allow for remote assessment and monitoring by off-site HCPs.

The guidance permits a host of modifications to visual acuity charts, general-use ophthalmic cameras, and tonometers without complying with the full set of usual regulatory requirements. However, FDA does not intend to relax requirements with respect to devices “intended to determine when patients need immediate clinical intervention,” or for devices “intended . . . solely or primarily [to be] relied upon by the eye care provider or patient to make a clinical diagnosis or treatment decision.” The guidance provides resources for validating and evaluating modifications made pursuant to its terms, and includes recommendations on the labeling of such modified devices to ensure patients and providers can evaluate the modifications to determine if they are appropriate.

E. Enforcement Policy for Non-Invasive Remote Monitoring Devices Used to Support Patient Monitoring During the Coronavirus Disease-2019 (COVID-19) Public Health Emergency

During the COVID-19 pandemic, HCPs are using noninvasive remote monitoring data for a range of purposes, from predicting spread of the virus to caring for patients who are sheltering in place.[53] On March 20, 2020, FDA issued a guidance document intended to facilitate the use of noninvasive remote monitoring devices to enable and expand patient monitoring while limiting direct contact between patients and HCPs.[54] The guidance applies to devices such as electronic thermometers, cardiac monitors, and pulse oximeters, and specifies that FDA will not object to certain modifications to the indications, claims, or functionality of such devices during the duration of the COVID-19 public health emergency, as declared by HHS.

By removing the specter of potential FDCA enforcement, FDA has encouraged device manufacturers to explore innovative solutions to facilitate patient care while minimizing direct patient-HCP interactions. Given the extent to which COVID-19 symptoms can be measured by the types of devices included in this guidance, this guidance is particularly important.

The guidance applies to a wide variety of devices that may transmit physiological measurements directly to HCPs or a monitoring entity via a wireless or cellular connection, in the following categories: (1) clinical electronic thermometers, (2) electrocardiograph devices (ECGs), (3) cardiac monitors, (4) electrocardiograph software for OTC use, (5) pulse oximetry, (6) noninvasive blood pressure measurement devices, (7) respiratory rate and breathing frequency, and (8) electronic stethoscopes.[55]

In light of the demand on HCPs and the risk of exposure associated with in-person visits, “FDA does not intend to object to limited modifications to the indications, claims, functionality or hardware or software of FDA-cleared non-invasive remote monitoring devices” during the public health emergency. By obviating 510(k) premarket notification requirements, FDA intends to enable device companies to refer to monitoring for COVID-19 or associated conditions, allow devices cleared for use in health care facilities to be used at home, and update hardware or software to enhance remote monitoring capabilities.[56]

In balancing safety with the demands of the COVID-19 crisis, FDA articulated that “modifications do[] not create . . . undue risk” where subject devices provide physiological parameter data to HCPs or patients, and those individuals can independently review the basis for any diagnostic or treatment recommendations. By contrast, a modification would trigger undue risk—and thus potential enforcement activity—if, for example, the device is intended to alert patients to a need for “immediate clinical intervention” or to be relied upon by HCPs or patients “to make a clinical diagnosis or treatment decision pertaining to COVID-19 or co-existing conditions.”[57]

FDA recommended that the labeling for modified devices:

Clearly describe the device’s new indications, claims, or functions relating to COVID-19 or related conditions, including “[p]otential risks” and “use conditions” (e.g., periodic testing or continuous monitoring);
Admonish patients and HCPs that the device’s recommendations are intended to support clinical decision-making rather than serve as the sole or primary driver of decisions;
Differentiate the device’s FDA-cleared indications and claims from the new ones; and
Instruct patients adequately on in-home use of devices previously cleared for use in health care facilities.[58]

Subject to the risk balancing and labeling guidance described above, FDA also does not intend to object to efforts to modify hardware or software to enable or enhance remote monitoring, so long as the alterations do not impact the physiological parameter measurement algorithms. FDA emphasized that modifications should reflect “appropriate cybersecurity controls” and recommended that changes accord with specified FDA-recognized technical standards.[59]

The guidance document underscores that mobile apps can facilitate monitoring of patients with COVID-19 or coexisting conditions. A provision of the CURES Act excluded certain software functions from the FDCA’s definition of device, such as software for an HCP that pairs a patient’s diagnosis with treatment guidelines for COVID-19 patients (along with the guidelines’ source) or software that compares patient physiological signs, symptoms, or results against guidelines and recommendations for condition-specific diagnostic tests, therapies, or triage strategies.[60]

F. Enforcement Policy for Infusion Pumps and Accessories During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

On April 5, 2020, FDA published guidance regarding FDA’s enforcement policy toward infusion pumps and accessories during the COVID-19 emergency.[61] This guidance is aimed at increasing the “availability and remote capabilities of infusion pumps,” as well as related accessories, for the duration in which the “declaration of public health emergency related to COVID-19,” as declared by HHS, remains in effect.

Infusion pumps represent a broad category of medical devices that are designed to “deliver[] fluids, such as nutrients and medications, into a patient’s body in controlled amounts.”[62] The guidance does not purport to cover all infusion devices. For instance, it expressly does not apply to the implementation of “closed loop control systems” (i.e., a setup combining infusion pumps with other technologies, such as electronic medical records, barcode medical administration, and drug libraries to create a semiautonomous, integrated drug distribution system). Nor does it extend to modifications that impact infusion pump usage within a magnetic resonance environment. However, the guidance does relax regulations on a host of other infusion pumps and related accessories, including the pumps themselves (21 C.F.R. § 880.5725); infusion line filters (21 C.F.R. § 880.5440); and electronic intravascular infusion controllers (21 C.F.R. § 880.5725).

Although whenever possible “health care facilities should use FDA-cleared infusion pumps” during the public health emergency, FDA “does not intend to object” to various modifications to FDA-cleared pumps and accessories that implemented without compliance with the premarket notification requirements (21 C.F.R. § 807.81). Such permissible modifications include, among others:

Changes to an infusion pump’s motor to allow for an alternate power supply;
Allowing or activating remote monitoring capabilities of infusion pumps so that a patient’s care can be managed without needing to enter her or his room (thus mitigating the risk of infection);
The transfer of electronic drug library information—which is used to automatically program infusion pumps—over a wireless network;
The use of infusion pumps that are otherwise FDA-certified for use while a patient is being transported, even if the device has not specifically been approved for use while in transit; and
The use of otherwise-approved pumps for populations “not explicitly referenced in the device labeling” (i.e., using a pump for children even if not labeled for pediatric use).

Additionally, the guidance makes clear that FDA will not object to hardware or software modifications aimed at increasing a pump’s battery capacity, to allow for the monitoring of multiple pumps from one location, or to better allow for remote, off-site monitoring.

Reflecting the strain on the medical supply chain caused by COVID-19, the guidance makes clear that FDA will not object to the use of infusion pump accessory devices beyond their design life. The guidance further clarifies that it will not view such extended uses as a legally actionable “undue risk” if, for instance, the devices are used according to a health care institution’s protocols, or if the device is taken out of use once it is visibly soiled or malfunctioning.

In light of these changes, the guidance also recommends that any devices modified as permitted above be clearly labeled to reflect these changes. And finally, to build a more robust pipeline for infusion pumps, FDA is interested in working with manufacturers, both foreign and domestic, to authorize the use of currently unauthorized infusion pumps under the EUA process.

G. Enforcement Policy for Clinical Electronic Thermometers

On April 4, 2020, FDA released guidance on clinical electronic thermometers, which are generally required to submit a premarket notification under Section 510(k) of the FDCA.[63] Recognizing the importance of maintaining an adequate supply of these “important screening and diagnostic tool[s] to assist in the identification of those individuals who may be infected with COVID-19,” FDA states that it does not intend to object to the distribution of clinical electronic thermometers that are not currently 510(k)-cleared.

As with other guidance released by FDA for the COVID-19 pandemic, this guidance is valid for the duration of the pandemic and as long as the devices do not create “undue risk.” For the purposes of this guidance, FDA explains that a device does not create undue risk where: (1) The device is manufactured consistent with 21 C.F.R. Part 820, ISO 13485:2016, or equivalent system approach; (2) the device has a marketing authorization in another regulatory jurisdiction (Europe, Australia, Canada, Japan) or device confirms to certain thermometer, electrical, software, and biocompatibility standards; (3) the device labeling includes a clear description of available data on device’s indications or functions, including performance, method of determining temperature, potential risks, and cleaning and reprocessing instructions; and (4) the device labeling includes clear identification that the device is not FDA approved or cleared.

H. Enforcement Policy for Sterilizers, Disinfectant Devices, and Air Purifiers

In its Enforcement Policy for Sterilizers, Disinfectant Devices, and Air Purifiers During the COVID-19 Public Health Emergency, FDA states that it will not enforce its premarketing requirements in certain circumstances to help “expand the availability and capability of sterilizers, disinfectants devices, and air purifiers” during the public health emergency.[64]

Because the coronavirus is a type of virus that is the least resistant to germicidal chemicals, the application of sterilization, disinfection, and air purifiers should minimize the viability of the coronavirus, and thereby “facilitate rapid turnaround of sterilized or disinfected medical equipment and reduce the risk of viral exposure for patients and health care providers.” But sterilizers, disinfectants, and air purifiers are generally categorized as class II devices and, as such, typically must comply with FDA’s 510(k) or PMA requirements—requirements that could hamper availability of new devices, or modifications or labeling changes to existing devices.

Accordingly, the guidance provides that FDA will not pursue enforcement of the 510(k) and PMA requirements as to “limited modifications to the indications or functionality” of already-cleared or approved devices, and as to devices that are “intended to be effective” at killing the novel coronavirus but do not yet have marketing authorization, provided certain performance and labeling elements are met for each category of device. FDA also made clear, however, that the guidance does not apply to items that are “intended to prevent or reduce the risks of hospital acquired infections or COVID-19.”

The guidance enumerates a number of performance elements that should be met for a device to fall within the FDA enforcement discretion. First, the guidance states that sterilizers (or modifications to sterilizers) should be designed, evaluated and validated in accordance with certain listed FDA-recognized standards, such as relevant AAMI and ANSI standards, and device changes should be documented consistent with quality system regulation requirements. Second, disinfectants similarly should meet certain listed AAMI or AOAC standards and changes to devices should be documented under the QSR, and the guidance recommends the use of certain specific performance levels for evaluating whether the product meets low-, intermediate-, or high-level disinfection, consistent with its labeling. Third, the guidance recommends manufacturers of air purifiers evaluate or perform certain specific measures such as particulate reduction or effectiveness against a representative virus of the coronavirus.

Finally, in the guidance FDA also recommends that these devices include certain labeling to aide users, such as: a clear description of the data on the device’s coronavirus-related indications or functions; a clear distinction of which indications are not FDA-cleared or -approved; for disinfectant devices, a clear statement about the level of disinfection; and various cautions pertaining to the limits and hazards of UV disinfectants.

I. Policy for the Temporary Use of Portable Cryogenic Containers Not in Compliance With 21 C.F.R. § 211.94(e)(1) For Oxygen and Nitrogen

During the COVID-19 pandemic, there has been an increased demand for oxygen and nitrogen, which are used for resuscitation, inhalation therapy, and in drug development settings, as well as the low supply of portable cryogenic medical gas containers for these gases. On April 9, 2020, FDA released a guidance on the use of gas containers for these gases.[65] Medical gases and medical gas containers are generally subject to cGMP requirements. One of the cGMP requirements sets out that portable cryogenic medical gas containers that are not manufactured with permanent gas-use outlet connections (e.g., those that have been silver-brazed) have tamper-resistant outlet connections; the outlet connections cannot be readily removed or replaced without making the valve inoperable (“211.94(e)(1)-compliant containers”). Industrial gas containers, which are not compliant with 211.94(e)(1), have tamper-evident connections; they indicate that removal was attempted or accomplished.

Effective immediately and for the duration of the pandemic, FDA “does not intend to take enforcement action against firms that fill and distribute oxygen and nitrogen intended for medical use in portable cryogenic medical gas containers that are not in compliance with [21 C.F.R. §] 211.94(e)(1)” provided certain circumstances are met. The circumstances include, among other things: (1) 211.94(e)(1)-compliant containers are not available; (2) the manufacturing and labeling of the gas itself is in compliance with all other requirements, including cGMP; (3) the valve has a prominent tag on or near the valve directing users not to tamper with or remove the connection; and (4) manufacturers remove the containers that are not 211.94(e)(1)-compliant “as soon as practicable, during or at the end of the public health emergency.”

J. 3D Printing

On March 26, 2020, FDA entered into a Memorandum of Understanding (MOU) with the Department of Veterans Affairs (VHA) and NIAID to facilitate connections between patients and health care providers, local manufacturers with capabilities, and designs for needed medical products.[66] The MOU provides a “framework for collaboration intended to facilitate regulatory and basic science innovation with 3D printing technologies to respond to COVID-19.”

The MOU, which remains in effect for two years, does not specify what types of 3D printing projects it covers; it is not limited only to particular items, such as masks or ventilator parts. Instead, the MOU states that the goal generally is to “help the Parties proactively work to promote treatment and prevent the spread of the virus known as SARS-CoV-2.” Each of the Parties has particular responsibilities set out in the MOU, including that FDA will provide a point of contact for the public to address questions about 3D printable medical devices and products such as PPE; NIAID will provide digital files for fabrication of products such as PPE through 3D printing and provide infectious disease expertise in evaluating printable designs; and VHA will host an external-facing website for individuals and health care entities to support 3D printed medical supplies or those with 3D printing capabilities wishing to provide those services. All Parties are expected to provide consultation on models, testing, and practices related to 3D printing and to help connect health care organizations seeking 3D printed supplies with manufacturers willing to print 3D parts.

VIII. Conclusion

Rapid changes to the legal landscape for drug and device companies are far from over. As Congress, FDA, and other federal agencies continue to respond to the COVID-19 crisis, there will no doubt be additional, important changes and clarifications. We will continue to update you and, as always, are available to answer any questions you may have.

[1] For a full overview of the CARES Act, please see our prior Client Alert: Gibson Dunn, Senate Advances the CARES Act, the Largest Stimulus Package in History, to Stabilize the Economic Sector During the Coronavirus Pandemic (Mar. 26, 2020), https://www.gibsondunn.com/senate-advances-the-cares-act-to-stabilize-economic-sector-during-coronavirus-pandemic/.

[2] U.S. Dep’t of Health & Hum. Servs, CARES Act Relief Fund, https://www.hhs.gov/provider-relief/index.html.

[3] 21 U.S.C. § 356c(a).

[4] CARES Act, Section 3112.

[5] 21 U.S.C. § 356c(g).

[6] 42 U.S.C. § 247d-6d. Please see our recent Client Alert for additional details about Secretary Azar’s PREP Act Declaration for COVID-19: Gibson Dunn, The PREP Act Provides Limited Liability Protection for Certain Coronavirus Countermeasures (Apr. 6, 2020), https://www.gibsondunn.com/the-prep-act-provides-limited-liability-protection-for-certain-coronavirus-countermeasures/

[7] Process for Making Available Guidance Documents Related to Coronavirus Disease 2019, 85 Fed. Reg. 16949-16950 (Mar. 25, 2020).

[8] Gibson Dunn, The PREP Act Provides Limited Liability Protection for Certain Coronavirus Countermeasures (Apr. 6, 2020), https://www.gibsondunn.com/wp-content/uploads/2020/04/the-prep-act-provides-limited-liability-protection-for-certain-coronavirus-countermeasures.pdf.

[9] U.S. Food & Drug Administration, Policy for Diagnostic Tests for Coronavirus Disease-2019 during the Public Health Emergency (Mar. 16, 2020), https://www.fda.gov/media/135659/download.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] U.S. Food & Drug Administration, Enforcement Policy for Face Masks and Respirators During the Coronavirus Disease (COVID-19) Public Health Emergency (Revised) (Apr. 2020), https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-face-masks-and-respirators-during-coronavirus-disease-covid-19-public-health.

[18] U.S. Food & Drug Administration, Enforcement Policy for Gowns, Other Apparel, and Gloves During the Coronavirus Disease (COVID-19) Public Health Emergency (Mar. 2020), https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-gowns-other-apparel-and-gloves-during-coronavirus-disease-covid-19-public-health.

[19] Examples of nonsurgical gowns include gowns that are intended to protect the wearer from the transfer of microorganisms and bodily fluids in low- or minimal-risk patient isolation situations and that are not intended for use during surgical procedures, invasive procedures, or when there is a medium or high risk of contamination. Id. at 6.

[20] Minimal-to-low barrier protection surgical apparel includes shoe covers, caps, and surgical suits. Id. at 6.

[21] A non-powdered patient examination glove is a disposable device intended for a medical purpose that is worn on the examiner’s hand or finger to prevent contamination between patient and examiner. Id. at 10.

[22] A non-powdered surgeon’s glove is a device intended to be worn on the hands of operating room personnel to protect a surgical wound from contamination. Id. at 11.

[23] U.S. Food & Drug Admin., NIOSH-Approved Air Purifying Respirators for Use in Health Care Settings During Response to the COVID-19 Public Health Emergency (Mar. 28, 2020). https://www.fda.gov/media/135763/download. FDA issued this EUA on March 2, 2020 and reissued it on March 27 and March 28, 2020.

[24] U.S. Food & Drug Admin., Imported, Non-NIOSH-Approved Disposable Filtering Facepiece Respirators (Mar. 28, 2020), https://www.fda.gov/media/136403/download. FDA issued this EUA on March 24, 2020 and reissued it on March 28, 2020.

[25] An “authorized decontamination system” means any decontamination system that has been issued an EUA. Id. Authorized decontamination systems can be found on FDA’s Emergency Use Authorization webpage, https://www.fda.gov/emergency-preparedness-and-response/mcm-legal-regulatory-and-policy-framework/emergency-use-authorization.

[26] U.S. Food & Drug Admin., Non-NIOSH-Approved Disposable Filtering Facepiece Respirators Manufactured in China (Apr. 3, 2020), https://www.fda.gov/media/136664/download.

[27] U.S. Food & Drug Admin., Face Shields Emergency Use Authorization (Apr. 9, 2020), https://www.fda.gov/media/136842/download.

[28] U.S. Food & Drug Admin., Battelle Decontamination System (Mar. 29, 2020), https://www.fda.gov/media/136529/download; U.S. Food & Drug Admin., STERIS Sterilization Systems for Decontamination of N95 Respirators (Apr. 9, 2020), https://www.fda.gov/media/136843/download; U.S. Food & Drug Administration, Coronavirus (COVID-19) Update: FDA Issues Emergency Use Authorization to Decontaminate Millions of N95 Respirators (Apr. 12, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-issues-emergency-use-authorization-decontaminate-millions-n95.

[29] U.S. Food & Drug Admin., Coronavirus (COVID-19) Update: FDA Issues Second Emergency Use Authorization to Decontaminate N95 Respirators (Apr. 10, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-issues-second-emergency-use-authorization-decontaminate-n95.

[30] U.S. Food & Drug Admin., Coronavirus (COVID-19) Update: FDA Issues Emergency Use Authorization to Decontaminate Millions of N95 Respirators (Apr. 12, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-issues-emergency-use-authorization-decontaminate-millions-n95.

[31] U.S. Food & Drug Admin., Enforcement Policy for Face Masks and Respirators During the Coronavirus Disease (COVID-19) Public Health Emergency (Revised) (Apr. 2020); https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-face-masks-and-respirators-during-coronavirus-disease-covid-19-public-health.

[32] See 21 C.F.R. §§ 868.5895, 868.5925, 868.5160, 868.5905, 868.5454.

[33] U.S. Food & Drug Admin., Enforcement Policy for Ventilators and Accessories and Other Respiratory Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency (Mar. 22, 2020), https://www.fda.gov/media/136318/download.

[34] Id.

[35] Id.

[36] Id.

[37] U.S. Food & Drug Admin, Coronavirus (COVID-19) Update: FDA takes action to help increase U.S. supply of ventilators and respirators for protection of health care workers, patients (Mar. 27, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-takes-action-help-increase-us-supply-ventilators-and-respirators.

[38] Id.

[39] Id.

[40] U.S. Food & Drug Admin., Appendix B: Authorized Ventilators, Ventilator Tubing Connectors, and Ventilator Accessories (Apr. 9, 2020), https://www.fda.gov/media/136528/download.

[41] U.S. Food & Drug Administration, Coronavirus Treatment Acceleration Program (CTAP) (Mar. 31, 2020), https://www.fda.gov/drugs/coronavirus-COVID-19-drugs/coronavirus-treatment-acceleration-program-ctap.

[42] U.S. Food & Drug Administration, Investigational COVID-19 Convalescent Plasma (Apr. 2020), https://www.fda.gov/media/136798/download.

[43] U.S. Food & Drug Admin., Frequently Asked Questions on the Emergency Use Authorization (EUA) for Chloroquine Phosphate and Hydroxychloroquine Sulfate for Certain Hospitalized COVID-19 Patients, https://www.fda.gov/media/136784/download.

[44] U.S. Food & Drug Admin., Letter to Stakeholders: Do Not Use Chloroquine Phosphate Intended for Fish as Treatment for COVID-19 in Humans (March 27, 2020), https://www.fda.gov/animal-veterinary/product-safety-information/fda-letter-stakeholders-do-not-use-chloroquine-phosphate-intended-fish-treatment-covid-19-humans.

[45] U.S. Food & Drug Admin., Product-Specific Guidances for Chloroquine Phosphate and Hydroxychloroquine Sulfate (Apr. 2020).

[46] World Health Organization, Draft Landscape of COVID-19 Candidate Vaccines (April 11, 2020), https://www.who.int/blueprint/priority-diseases/key-action/Novel_Coronavirus_Landscape_nCoV_11April2020.PDF

[47] FDA News Release, “Coronavirus (COVID-19) Update: FDA Continues to Facilitate Development of Treatments” (Mar. 19, 2020).

[48] U.S. Food & Drug Admin., Coronavirus (COVID-19) Update: FDA Continues to Facilitate Development of Treatments (Mar. 19, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-continues-facilitate-development-treatments.

[49] Scott Gottlieb, “Bet Big on Treatments for Coronavirus,” The Wall Street Journal (Apr. 5, 2020).

[50] U.S. Food & Drug Admin., Temporary Policy for Manufacture of Alcohol for Incorporation Into Alcohol-Based Hand Sanitizer Products During the Public Health Emergency (Mar. 2020), https://www.fda.gov/media/136390/download; U.S. Food & Drug Admin., Temporary Policy for Preparation of Certain Alcohol-Based Hand Sanitizer Products During the Public Health Emergency (Mar. 2020), https://www.fda.gov/media/136289/download; U.S. Food & Drug Admin., Policy for Temporary Compounding of Certain Alcohol-Based Hand Sanitizer Products During the Public Health Emergency (Mar. 2020), https://www.fda.gov/media/136118/download.

[51] U.S. Food & Drug Admin., Enforcement Policy for Extracorporeal Membrane Oxygenation and Cardiopulmonary Bypass Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency (Apr. 2020), https://www.fda.gov/media/136734/download.

[52] U.S. Food & Drug Admin., Enforcement Policy for Remote Ophthalmic Assessment and Monitoring Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency (Apr. 6, 2020), https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-remote-ophthalmic-assessment-and-monitoring-devices-during-coronavirus-disease.

[53] C. Hale, Companies roll out remote COVID-19 monitoring tools to free up hospital space, FierceBiotech, Apr. 3, 2020, https://www.fiercebiotech.com/medtech/companies-roll-out-remote-covid-19-monitoring-tools-to-free-up-hospital-space.

[54] U.S. Food & Drug Admin., Enforcement Policy for Non-Invasive Remote Monitoring Devices Used to Support Patient Monitoring During the Coronavirus Disease-2019 (COVID-19) Public Health Emergency (Mar. 20, 2020), https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-non-invasive-remote-monitoring-devices-used-support-patient-monitoring-during.

[55] Id. at 5–6.

[56] Id. at 6.

[57] Id. at 7.

[58] Id. at 7–8.

[59] Id. at 8.

[60] Id. at 9–10.

[61] U.S. Food & Drug Admin., Enforcement Policy for Infusion Pumps and Accessories During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency, (Apr. 5, 2020), https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-infusion-pumps-and-accessories-during-coronavirus-disease-2019-covid-19-public.

[62] U.S. Food & Drug Admin., Infusion Pumps (Aug. 22, 2018), https://www.fda.gov/medical-devices/general-hospital-devices-and-supplies/infusion-pumps.

[63] U.S. Food & Drug Admin., Enforcement Policy for Clinical Electronic Thermometers During the Coronavirus Disease 2019 (COVID19) Public Health Emergency (Apr. 2020), https://www.fda.gov/media/136698/download.

[64] U.S. Food & Drug Admin., Enforcement Policy for Sterilizers, Disinfectant Devices, and Air Purifiers During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency (Mar. 29, 2020) https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-sterilizers-disinfectant-devices-and-air-purifiers-during-coronavirus-disease.

[65] U.S. Food & Drug Admin., Policy for the Temporary Use of Portable Cryogenic Containers Not in Compliance With 21 CFR 211.94(e)(1) For Oxygen and Nitrogen During the COVID-19 Public Health Emergency (Apr. 2020), https://www.fda.gov/media/136830/download.

[66] Mem. of Understanding: Rapid Response to COVID-19 Using 3D Printing Between Nat’l Institutes of Health within U.S. Dep’t of Health and Human Servs. and U.S. Food & Drug Admin., U.S. Dep’t of Health and Human Servs., and Veterans Health Admin. within the U.S. Dep’t of Veterans Affairs, MOU 225-20-008, available at https://www.fda.gov/about-fda/domestic-mous/mou-225-20-008.

Authors: Marian J. Lee, John D.W. Partridge, Jonathan M. Phillips, Sarah Erickson-Muschko, Reid Rector, Yamini Grema, Maya Nuland, and Daniel Rauch

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

1. Sources of liability and exposure

2. Attributing criminal responsibility to management for business decisions in situations of crisis

3. Holding the business responsible for offences of its business leaders

4. Creating civil liability exposure

5. Special Recommendations by Public Authorities in re COVID-19

1.1 Corporate Law “Light” in the Context of State Measures under the WStFG

1.2 Other Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act

2. Dealing with the Corona Crisis in the Annual Financial Statements for the Business Years 2019 and 2020

3. Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes

4. Anti-Trust and Merger Control in Times of COVID-19

I. The Supreme Court’s Actions in Response to the COVID-19 Pandemic

II. The Cases That Will Be Carried Over to Next Term

III. Conclusion

Table of Contents

I. CARES Act Provisions for Medical Product Development and Deployment

A. Bolstering Supply and Promoting Development of Medical Products

B. Anticipating and Preventing Critical Drug and Device Shortages

C. Expedited Review of COVID-19 Product Applications

D. Liability Protection Extended to Respiratory Protective Devices

E. Proposed Supplemental Legislation

II. Overview of FDA’s Approach to the COVID-19 Crisis

III. Diagnostic Devices

IV. Personal Protective Equipment (PPE)

A. Enforcement Policies for PPE

B. Emergency Use Authorizations (EUAs) for PPE

V. Ventilators and Other Respiratory Devices

A. Enforcement Policy for Ventilators and Accessories and Other Respiratory Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

B. Emergency Use Authorizations (EUAs) for Ventilators and Other Respiratory Devices

VI. COVID-19 Drugs and Vaccines

VII. Other Medical Products to Prevent or Treat COVID-19

A. Alcohol Sanitizers

B. EUA for Blood Purification System

C. Enforcement Policy for Extracorporeal Membrane Oxygenation and Cardiopulmonary Bypass Devices

D. Enforcement Policy for Remote Ophthalmic Assessment and Monitoring Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

E. Enforcement Policy for Non-Invasive Remote Monitoring Devices Used to Support Patient Monitoring During the Coronavirus Disease-2019 (COVID-19) Public Health Emergency

F. Enforcement Policy for Infusion Pumps and Accessories During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

G. Enforcement Policy for Clinical Electronic Thermometers

H. Enforcement Policy for Sterilizers, Disinfectant Devices, and Air Purifiers

I. Policy for the Temporary Use of Portable Cryogenic Containers Not in Compliance With 21 C.F.R. § 211.94(e)(1) For Oxygen and Nitrogen

J. 3D Printing

VIII. Conclusion