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).

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 or the following authors:

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.

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:

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.

On April 9, 2020, the New York Empire State Development Corporation (“ESD”) further updated its guidance for determining whether businesses are “essential” and therefore exempt from the in-person workforce restrictions established in Governor Cuomo’s March 20, 2020 “New York State on PAUSE” Executive Order (EO 202.8). That March 20 order required all non-essential businesses keep 100 percent of their workforce at home. These updates, which we review in this alert, demonstrate that ESD is continuing to evolve the breadth and depth of its guidance on what constitutes an essential business. It is therefore critical that businesses continue to stay apprised of the latest developments.

The ESD’s April 9 version of the guidance contains four primary updates to its previous guidance, which was last updated on April 8.[1]

First, the new guidance adds two new essential business categories—“Recreation” and “Professional services with extensive restrictions”—which together set forth social distancing and workplace restrictions regarding parks and open public spaces, legal and real estate services, and houses of worship.
Second, the updated guidance provides further detail on what constitutes essential construction in the context of affordable housing and the energy industry, and clarifies that essential construction also includes construction necessary to protect the health and safety of occupants of a structure as well as construction for existing projects of an essential business.
Third, the updated guidance incorporates new examples of essential businesses in the preexisting healthcare, manufacturing, retail, and essential services industry categories.
Fourth, the updated guidance broadens the list of businesses deemed non-essential and therefore prohibited from requesting a designation as an essential business under the guidance.

These four primary updates to the guidance are reviewed below in further detail.

I. The Updated Guidance Incorporates Two New Essential Business Categories

The updated guidance now includes two additional essential business categories: “Recreation” and “Professional services with extensive restrictions.” According to the guidance, recreation includes parks and other open public spaces—except for golf courses, the use of boat launches and marinas for recreational vessels, and “playgrounds and other areas of congregation where social distancing cannot be abided.”

The new professional services category is largely directed to legal and real estate services, as well as houses of worship. With respect to legal services, the guidance clarifies that lawyers may provide in-person services, but only in support of essential businesses. Even so, the guidance recommends that such work be conducted “as remotely as possible,” while mandating that the remainder of all legal work shall be performed remotely. With respect to real estate services, the guidance permits services necessary to complete a transfer of real property to occur in person “only to the extent legally necessary and in accordance with appropriate social distancing and cleaning/disinfecting protocols.” Otherwise, all real estate transactions should be conducted remotely. Finally, with respect to houses of worship, the revised guidance allows individuals to enter them only where six feet of distance can be maintained between persons. That permission notwithstanding, the guidance cautions that individuals should not be gathering in houses of worship until the end of the COVID-19 public health emergency, and encourages religious leaders to hold virtual religious services.

II. The Updated Guidance Provides Further Detail Concerning What Constitutes Essential Construction

The ESD’s prior guidance on construction, which Gibson Dunn reviewed in a prior alert, provided that all non-essential construction must cease, except for emergency construction such as projects “necessary to protect health and safety of the occupants” or projects for which it would be unsafe to allow them to remain incomplete. The prior guidance also noted that essential construction included that of roads, bridges, transit facilities, utilities, hospitals or health care facilities, affordable housing, and homeless shelters. And it provided that essential and non-essential emergency construction must adhere to social distancing and safety best practices, to be enforced by state and local authorities, with up to $10,000 fines for a violation. All that remains in effect in the updated guidance.

The updated guidance, however, affords new detail on what constitutes “essential” construction with respect to affordable housing and the energy industry. Construction of affordable housing is now defined as construction work where: “either (i) a minimum 20% of the residential units are or will be deemed affordable and are or will be subject to a regulatory agreement and/or a declaration from a local, state, or federal government agency or (ii) where the project is being undertaken by, or on behalf of, a public housing authority.” And certain construction in the energy industry is now expressly included as “essential” construction which may continue, as set forth in greater detail in the response to Question 14 of the ESD’s FAQs.[2] The updated guidance also categorizes as essential construction that which is “necessary to protect the health and safety of occupants of a structure” and construction for “existing (i.e. currently underway) projects of an essential business.”

III. The Updated Guidance Incorporates New Examples into Several Other Essential Business Categories

The revised guidance sets forth additional examples of essential businesses among several of the original 12 categories of businesses provided in the prior guidance and narrows the scope of one example in the financial institutions category. These essential business categories and their new examples are set forth below.

Essential Health Care Operations: Emergency chiropractic services; physical therapy, prescribed by a medical professional; occupational therapy, prescribed by a medical professional.
Essential Manufacturing: Any parts or components necessary for essential products that are referenced within the guidance, such as sanitary and personal care products regulated by the Food and Drug Administration.
Essential Retail: Telecommunications to service existing customers and accounts; and delivery for orders placed remotely via phone or online at non-essential retail establishments—provided that only one employee is physically present at the business location to fulfill orders.
Essential Services: Marine vessel repair and marinas, but only to support government or essential commercial operations, and not for recreational purposes; landscaping, but only for maintenance or pest control and not cosmetic purposes; designing, printing, publishing and signage companies to the extent that they support essential businesses or services; remote instruction or streaming of classes from public or private schools or health/fitness centers—provided that no in-person congregate classes are permitted.
Financial Institutions: The prior example of “services related to financial markets” has been narrowed to exclude debt collection services.

IV. The Updated Guidance Provides Further Examples of Businesses Deemed Non-Essential

The ESD’s updated guidance broadens the types of businesses deemed non-essential and therefore ineligible to request a designation as an essential business. The prior guidance provided that non-essential businesses included those that were previously ordered to close due to prior restrictions on gatherings with 50 or more participants, such as bars, restaurants, gyms, movie theatres, casinos, auditoriums, concerts, conferences, worship services, sporting events, and any physical fitness centers.[3]

The revised guidance now also specifically enumerates certain additional businesses as “non-essential.” These include “[a]ny indoor common portions of retail shopping malls with 100,000 or more square feet of retail space available for lease,”; “[a]ll places of public amusement, whether indoors or outdoors,” such as amusement rides, aquariums, bowling alleys, and children’s play centers, among others; and barbershops, hair salons, tattoo or piercing parlors, and related personal care services like nail technicians, and laser hair removal services. The new restrictions further note that restaurant take-out or delivery for off-premise consumption do not fall within the scope of restaurants deemed non-essential, which are now more clearly specified as those offering dine-in restaurant or bar services.

* * *

In sum, as ESD continues to help businesses navigate the effects of Governor Cuomo’s “New York State on PAUSE” Executive Order, its guidance on what constitutes essential businesses continues evolving as to the breadth and depth of the types of business and activities covered. Gibson Dunn will continue to track these updates and will report on important developments.

Prior client alerts providing an overview of the Governor Cuomo’s “New York State on PAUSE” executive order’s in-person workforce restrictions and ESD’s guidance on essential businesses exempt from the order may be accessed here, here, and here. As noted in Gibson Dunn’s March 24, 2020 alert, New York Attorney General Letitia James has urged employees who believe their employers to be acting in violation of Governor Cuomo’s executive order to file a complaint with the New York State Office of the Attorney General’s Labor Bureau.

[1] The April 8 guidance removed the following sentence that was present in earlier versions: “Houses of worship are not ordered closed however it is strongly recommended not to hold congregate services. If held, social distance must be maintained and compliance with DOH guidance, which can be found at https://coronavirus.health.ny.gov/ information-providers.”

[2] The answer to Question 14 in the ESD’s FAQs explains (among other things) that utility operations and maintenance for existing power generation, fuel supply, and “[t]ransmission and distribution infrastructure,” are examples of essential construction “necessary to respond to the COVID-19 state emergency or to provide basic human services” like food, shelter, and safety.

[3] See Governor Andrew M. Cuomo, E.O. 202.3 (March 16, 2020).

Mylan Denerstein – New York (+1 212.351.3850, [email protected])

Lauren Elliot – New York (+1 212.351.3848, [email protected])

Stella Cernak – New York (+1 212.351.3898, [email protected])

Lee Crain – New York (+1 212.351.2454, [email protected])

Doran Satanove – New York (+1 212.351.4098, [email protected])

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

Many companies have retooled (or are considering retooling) their businesses to meet the rising demand for personal protective equipment (“PPE”), ventilators, and other products or services to address the COVID-19 pandemic. Moreover, on April 2, 2020, the President ordered the Department of Health and Human Services to use its authority under the Defense Production Act (“DPA”) of 1950, as amended, 50 U.S.C. §§ 4501 et seq., to facilitate the supply of materials for the production of ventilators by several companies operating in the United States.[1] This alert reviews the limited protection against potential patent infringement lawsuits and damages that the law provides for infringement that occurs during the production, use, or sale of products or services in response to these emergency declarations.

Under the Patent Act, “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” 35 U.S.C. § 271(a). The Act further provides for an award of damages “adequate to compensate for the infringement,” which may be trebled in certain instances, 35 U.S.C. § 284; injunctive relief is also available. 35 U.S.C. § 283.

The Patent Act creates no exceptions for patent infringement damages during public health crises or pandemics such as COVID-19, but several other statutes and doctrines may provide some protections for businesses responding to urgent demands for products or services. As discussed below, some protections may be available for manufacturers and providers of emergency equipment under a Declaration pursuant to the Public Readiness and Emergency Preparedness Act (“PREP Act”), 42 U.S.C. § 247d-6d; the DPA; and a statute relating to government use of patents, 28 U.S.C. § 1498(a). This alert also considers arguments that might be advanced to minimize damages for the infringement of patent claims that might cover certain emergency equipment. Although the principles discussed here are relevant to many emergency activities taken during the COVID-19 pandemic, the development and marketing of new pharmaceutical treatments for COVID-19 raises additional patent issues that this alert does not address.

I. Potential Protection from Patent Infringement Liability

A. The PREP Act and PREP Declaration

As described in a previous client alert, on March 17, 2020, Alex Azar, Secretary of the Department of Health and Human Services (HHS), issued a Declaration activating the PREP Act, 42 U.S.C. § 247d-6d. The Declaration extends immunity “from suit and liability under federal and state law with respect to all claims for loss caused by, arising out of, relating to, or resulting from” administration or use of qualifying products used to combat or reduce the spread of COVID-19 (the “PREP Declaration”).[2] Along with other recent FDA guidance relaxing regulatory oversight for certain COVID-19-fighting products, the PREP Declaration protects manufacturers, suppliers, distributors, and others helping to mitigate supply shortages during the current crisis.

There are several pertinent limitations on the applicability of the PREP Declaration to the circumstances described here. First, no court has yet determined that immunity under the PREP Act extends to immunity from liability for patent infringement. Although the PREP Act confers “immun[ity] from suit and liability under Federal and State law,” nothing in the Act or legislative history shows specific consideration of intellectual property laws. There is also no express exclusion of patent suits, however, and potential defendants would be expected to argue that in view of the broad language of the statute, combined with courts’ frequent treatment of patent law as a species of statutory tort law, PREP Act immunity from suit “under Federal . . . law” includes claims of patent infringement.[3]

Second, even if the PREP Act applies to patent infringement, not every product used in response to COVID-19 is a qualified product under the PREP Declaration. For example, a qualified product must be FDA approved, licensed for use under the Public Health Service Act, or cleared for use under a FDA emergency use authorization (EUA).[4]

Thus, activities directed towards masks and ventilators that are not approved by FDA or NIOSH (or otherwise authorized by FDA based on compliance with foreign agency standards), and that are not created pursuant to a federal contract or governmental response, are not likely to be afforded PREP Act immunity. In short, protections under the PREP Act are limited, and businesses should consider these limitations when evaluating whether the PREP Declaration protects their activities.[5]

B. The Defense Production Act and 28 U.S.C. § 1498(a)

Individuals or businesses that facilitate the production of COVID-19 response products through contracts with the federal government, including those arising from the President’s recent invocation of the DPA, are granted certain protections from patent infringement liability under 28 U.S.C. § 1498(a).

1. The DPA

The DPA authorizes the President to require businesses to prioritize any of their government contracts deemed “necessary or appropriate to promote the national defense” “over performance under any other contract,” and “to require” private businesses to “accept[] and perform[]” such government contracts where the President finds those businesses capable of performance. 50 U.S.C. § 4511(a)(1). The DPA also confers on the President the authority “to allocate materials, services, and facilities, to such extent as he shall deem necessary or appropriate.” 50 U.S.C. § 4511(a)(2). These powers can be used to control the distribution of materials in the United States market, but only where the President first finds that those materials are “a scarce and critical material essential to the national defense,” and that “the requirements of the national defense for such material cannot otherwise be met without creating a significant dislocation of the normal distribution of such material . . . .” 50 U.S.C. § 4511(b).

This is the case with personal protective equipment and ventilators used to combat the COVID-19 virus: the President’s March 18, 2020 Executive Order specifically found that “personal protective equipment and ventilators” met “the criteria specified in [§ 4511(b)],” and further delegated the Secretary of Health and Human Services to “identify additional specific health and medical resources” that met § 4511(b)’s criteria. The President then invoked the DPA on March 27, 2020, ordering “General Motors Company to accept, perform and prioritize contracts or orders for the number of ventilators that the Secretary determines to be appropriate.” And on April 2, 2020, as previously noted, the President again invoked the DPA, ordering the Secretary of Health and Human Services to use its DPA authority to facilitate the supply of materials for the production of ventilators by a handful of companies in addition to General Motors.

2. Section 28 U.S.C. 1498(a) Protects Certain Federal Contractors from Liability

Although the DPA does not itself create immunity from claims of patent infringement against those ordered to perform contracts under the DPA,[6] another federal statute effectively supplies an affirmative defense for federal government contractors who face patent infringement claims. That protection, codified at 28 U.S.C. § 1498(a), limits a patent owner’s remedy for infringement of inventions “used or manufactured by or for the United States”—i.e., inventions used or manufactured “with the authorization and consent of the Government”—to an “action against the United States in the United States Court of Federal Claims for the recovery of . . . reasonable and entire compensation for such use and manufacture.” 28 U.S.C. § 1498(a).[7] That section requires the United States government to defend such actions, waiving its sovereign immunity in the process. The U.S. government’s “consent and authorization” for a contractor to use and manufacture a patented invention can be expressly made in the applicable contract, pursuant to Federal Acquisition Regulation (“FAR”) 52.227-1.[8] Accordingly, federal contractors cannot be held directly liable for patent infringement claims arising from conduct undertaken for the benefit of the federal government, with that government’s authorization and consent.[9]

But the protections of § 1498(a) only go so far. A federal contractor nevertheless may be required to indemnify the government for any damages assessed in a suit that proceeds by virtue of § 1498(a). Indeed, FAR 27.201-1(d) authorizes the Government to require certain contractors to reimburse it for patent infringement “liability” and “costs” incurred in performing the contract by inserting an indemnity clause into the contract.[10] It would thus behoove federal contractors to try to exclude that clause from government contracts—if possible. Moreover, parties to federal contracts arising from the DPA might argue that such an indemnity clause is unenforceable under FAR-52.227-3(b)(1), which provides that the indemnity clause does not apply to infringement claims where, among other things, the infringement results from “the Contracting Officer . . . directing a manner of performance of the contract not normally used by the Contractor.” Although the scope of that exception does not appear to have been tested in the context of the DPA, it is expected that contractors ordered to facilitate the manufacture of products they do not normally produce would argue for its application in these circumstances.

In short, a federal contract for the manufacture, supply, and distribution of PPE and ventilators may help insulate manufacturers and others from direct claims of patent infringement for certain activities, but that protection may be of limited value if they are thereafter required to indemnify the government against such claims.

II. Businesses Meeting the Urgent Needs of the COVID-19 Pandemic May Be Expected to Argue That Any Patent Damages for Their Activities Should Be Minimal

The expected arguments for minimizing patent damages and other remedies for the production, sale, or use of infringing PPE and ventilators during the pandemic—even in the absence of a federal contract—find some support in existing Federal Circuit case law.

A. Injunctive Relief Would Be Unlikely

As an initial matter, it is unlikely that patent owners could obtain injunctive relief against infringers of patents on PPE and ventilators in the context of the COVID-19 crisis. To obtain a permanent injunction against an infringer, a patentee must satisfy the well-established four-factor test, by showing that: “(1) it has suffered an irreparable injury; (2) remedies available at law are inadequate to compensate for that injury; (3) considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) the public interest would not be “disserved” by a permanent injunction.”[11] Patentees would have tremendous difficulty meeting their burden for the seemingly obvious reason that enjoining the production of supplies that prevent the spread of COVID-19 and treat infected individuals would disserve the public interest. Indeed, the Federal Circuit has held that the public interest would be disserved by a reduction in availability of cancer and hepatitis test kits, and pacemakers—at times where no comparable global health pandemics were declared.[12] A patentee’s expected failure to meet the public interest prong would almost certainly be fatal to any claim for injunctive relief.[13]

B. Defendants’ Arguments for Reduced Damages Might Find Purchase with a Court

A patent owner who prevails in patent litigation is entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer,” 35 U.S.C. § 284. Moreover, “the court may increase the damages up to three times the amount found or assessed,” an enhancement that typically involves a finding of willful infringement. Id. The circumstances of the COVID-19 pandemic would render unlikely any award of lost profits damages or enhanced damages for willful infringement. Lost profits damages require the patentee to show (among other things) that it had the manufacturing and marketing capability to meet public demand for the product.[14] The extraordinary present need for PPE and ventilators, as two examples, would militate against such a showing.

An award of enhanced damages for willful infringement rests within the district court’s discretion for “egregious cases of misconduct beyond typical infringement.”[15] Even during a pandemic, the question of whether infringement directed toward preventing the spread of COVID-19 meets the “egregious” standard may depend on a variety of factors, among them whether the government directed production of the product or service—in which case a court may very well find the infringing conduct does not constitute the “malicious, bad-faith” conduct the egregious standard is intended to capture.[16] Likewise, the Patent Act provides that the “court in exceptional cases may award reasonable attorney fees to the prevailing party.” 35 U.S.C. § 285. We do not expect courts to find that cases arising out of the COVID-19 pandemic are “exceptional” such that prevailing plaintiffs are entitled to fees—but in circumstances where defendants prevail, courts might use a finding that the case was “exceptional” to deter meritless suits against companies attempting to address the COVID-19 pandemic.

The minimum damages to which prevailing patent-holders are entitled are a “reasonable royalty.” Manufacturers, distributors, and users of COVID-19 response products who are found liable for patent infringement would be expected to argue that any such reasonable royalty would be minimal under the circumstances.[17]

C. Commentators Have Suggested Other Ways to Permit Businesses to Respond to the Current Emergency Without the Risk of Infringement Suits and Liability

The urgency of the COVID-19 crisis has given rise to other suggestions for ways to permit businesses to provide urgently-needed supplies without the risk of defending against expensive patent infringement litigation and being assessed damages. One suggestion calls for the donation of intellectual property rights to the fight against COVID-19. For example, on March 31, 2020, a group of prominent scientists, lawyers, and entrepreneurs introduced the “Open COVID Pledge,” in an effort to promote the removal of obstacles involving intellectual property in the fight against COVID-19. The pledge, available on the group’s website, is intended for signature by “patent, copyright and other intellectual and industrial property rights (other than trademarks and trade secrets)” and would grant a non-exclusive, royalty-free, worldwide license to such intellectual property “for the sole purpose of ending” the COVID-19 pandemic. The license would be limited in time to the period of December 1, 2019 until one year after the World Health Organization declares the pandemic to have ended.

Companies such as Intel and Mozilla have reportedly joined the Open COVID-19 pledge. While it remains to be seen how many patent holders ultimately do so, the pledge itself reflects a sentiment that companies contribute to the fight against the pandemic by forgoing the enforcement of their intellectual property rights—in essence, by donating them. But that sentiment—which may dissuade intellectual property owners from bringing suit now—may ultimately be significantly less valuable than an enforceable pledge or right. Because even if a non-binding spirit of public contribution (and public pressure) prevents patent owners from asserting infringement claims during the current climate, businesses should bear in mind that the current emergency will (hopefully) abate, and that patent-holders may typically seek damages for six years of pre-suit damages—meaning that activities now may not be the subject of suits until 2026, when the climate may be different.

In sum, businesses or individuals facilitating the manufacture, supply, distribution, and use of COVID-19 response products should be mindful that many of these products are subject to patents. While the PREP Act and PREP Declaration may afford immunity from patent infringement claims in limited instances, and while federal contractors may rely on 28 U.S.C. § 1498 as an affirmative defense to such claims, other persons and entities that infringe patent claims on PPE and ventilator components could conceivably face reasonable royalty damages. Those considering aiding in the production or distribution of PPE and ventilators should consider doing so through federal government contracts, and by negotiating license agreements with patent holders upfront. Likewise, legislative and regulatory solutions (such as, for example, clear tax benefits for the donation of intellectual property for use by businesses trying to meet emergency needs), and business philanthropy, may help address the emergency, and businesses are advised to monitor any such developments. We will report on any advances of note. Government actions impacting intellectual property rights owners may also raise constitutional issues concerning property rights more broadly, as addressed in a prior client alert available here.

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[1] These companies include General Electric Company; Hill-Rom Holdings, Inc.; Medtronic Public Limited Company; ResMed Inc.; Royal Philips N.V.; and Vyaire Medical, Inc. The President previously invoked his powers under the DPA, on March 27, 2020, by requiring that General Motors Company “accept, perform and prioritize contracts or orders for the number of ventilators that the Secretary [of Health and Human Services] determines to be appropriate.”

[2] 85 Fed. Reg. 15198 (March 17, 2020).

[3] See Carbice Corp. of Am. v. Am. Patents Dev. Corp., 283 U.S. 27, 33 (1931); Akamai v. Limelight Networks Inc., 786 F.3d 899, 905 (Fed. Cir. 2015), rev’d on other grounds, 797 F.3d 1020 (Fed. Cir. 2015) (en banc) (per curiam); Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1365 (Fed. Cir. 2008); Orthokinetics Inc. v. Safety Travel Chairs Inc., 806 F.2d 1565, 1579 (Fed. Cir. 1986).

[4] 85 Fed. Reg. 15198 § VI (“Covered Countermeasures”) (“To be a Covered Countermeasure, qualified pandemic or epidemic products or security countermeasures also must be approved or cleared under the FD&C Act; licensed under the PHS Act, or authorized for emergency use under Sections 564, 564A, or 564B of the FD&C Act.”)

[5] 85 Fed. Reg. 15198 (March 17, 2020).

[6] The DPA states that “[n]o person shall be held liable for damages or penalties for any act or failure to act resulting directly or indirectly from compliance with a rule, regulation, or order issued pursuant to this chapter[.]” 50 U.S.C. § 4557. But that provision has been interpreted to apply only to third-party breach of contract claims against parties whose performances of their contracts were frustrated under a DPA order. See Hercules, Inc. v. United States, 24 F.3d 188, 203-04 (Fed. Cir. 1994), aff’d, 516 U.S. 417 (1996).

[7] The full text of 28 U.S.C. § 1498(a) provides: “Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture . . . For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States.”; see also Liberty Ammunition, Inc. v. United States, 835 F.3d 1388, 1394 n.3 (Fed. Cir. 2016) (noting that § 1498 effects a waiver of the government’s sovereign immunity).

[8] FAR 52.227-1 more specifically sets forth an express grant of “authorization and consent” for contractors and subcontractors for the use and manufacture of any patented invention (1) embodied in the structure or composition of any article delivered to and accepted by the government related to a government contract; or (2) used in machinery, tools, or methods necessary for a contractor to comply with the specifications of a contract, or if such use is directed by a contracting officer’s specific written instructions.

[9] IRIS Corp. v. Japan Airlines Corp., 769 F.3d 1359 (Fed. Cir. 2014); Zoltek Corp. v. United States, 672 F.3d 1309, 1322-23 (Fed. Cir. 2012) (en banc); Advanced Software Design Corp. v. Federal Reserve Bank of St. Louis, 583 F.3d 1371, 1376-77 (Fed. Cir. 2009).

[10] The indemnity clause is set forth in FAR 52.227-3 (titled “Patent Indemnity”) and provides that “[t]he contractor shall indemnify the Government and its officers, agents, and employees against liability, including costs, for any infringement of any United States patent . . . arising out of the manufacture or delivery of supplies, the performance of services, or the construction, alteration, modification, or repair of real property . . . or out of the use or disposal by or for the account of the Government of such supplies or construction work.”

[11] i4i Ltd. Ptrp. v. Microsoft Corp., 598 F.3d 831, 861 (Fed. Cir. 2010) (citing eBay v. MercExchange L.L.C, 547 U.S. 388, 391 (2006)).

[12] Hybritech Inc. v. Abbott Laboratories, 849 F.2d 1446, 1458 (Fed. Cir. 1988); Cordis Corp. v. Medtronic, Inc., 835 F.2d 859, 864 (Fed. Cir. 1986).

[13] See Amgen Inc. v. Sanofi, 872 F.3d 1367, 1381 (Fed. Cir. 2017) (finding district court erred in granting permanent injunction where it found that the public interest would be disserved by one). The same is true with respect to obtaining preliminary injunctive relief, which similarly requires that the patentee establish that the balance of equities weighs in its favor, that the injunction serves the public interest, that it is likely to succeed on the merits, and that it will suffer irreparable harm in the absence of an injunction. Trebro Mfg., Inc. v. Firefly Equipment, LLC, 748 F.3d 1159, 1165 (Fed. Cir. 2014).

[14] Mentor Graphics Corp. v. EVE-USA, Inc., 851 F.3d 1275, 1285 (Fed. Cir. 2017) (citing Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978)). The patentee must also show demand for the patented product, an absence of acceptable non-infringing alternatives, and the amount of profit it would have made. See id.

[15] Halo Elecs., Inc. v. Pulse Elecs., Inc., 136 S. Ct. 1923, 1929 (2016).

[16] Id. at 1932.

[17] See 35 U.S.C. § 284 (providing that a court “shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer”). The reasonable royalty is commonly calculated by attempting “to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began.” Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009). In cases where only components of a product infringe a patent, the patentee must “apportion or separate the damages” between the patented and unpatented parts of the multicomponent product. Exmark Mfg. Co. v. Briggs & Stratton Power Prods. Grp., 879 F.3d 1332, 1349 (Fed. Cir. 2018).

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 contact any member of the firm’s Coronavirus (COVID-19) Response Team. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, or the authors:

Authors: Joe Evall ([email protected]), Richard Mark ([email protected]), and Doran Satanove ([email protected])

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

The COVID-19 pandemic is already reshaping federal and state regulatory enforcement actions in the United States and around the world. Although it is too early to know the path or impact of future enforcement, experience gleaned from previous post-disaster enforcement activity and an analysis of enforcement activity to date brings into focus a few areas likely to prominently figure in regulator’s activity. These changes will not be consistent. As in the past, the political environment, enforcement resources, and ways in which fraud emerges from the crisis will differ across domestic and international borders.

With this in mind, in this alert, the beginning of a series of on-going Gibson Dunn alerts, we provide an overview of early enforcement actions in the United States, the United Kingdom, the European Union, and Asia, as well as specific areas in which increased enforcement activity is likely in the future: namely, insider trading, state-level consumer protection, and False Claims Act enforcement.

Gibson Dunn will continue to monitor enforcement actions and trends in the United States and abroad and provide updated analysis to assist our clients as they navigate the changing tides.

COVID-19 Enforcement in the United States

On March 20, 2020, the U.S. Department of Justice issued a press release announcing that Attorney General William Barr “directed all U.S. attorneys to prioritize the investigation and prosecution of Coronavirus-related fraud schemes.”[1] According to the press release, Deputy Attorney General Jeffrey Rosen “further directed each U.S. Attorney to appoint a Coronavirus Fraud Coordinator to serve as the legal counsel for the federal judicial district on matters relating to the Coronavirus, direct the prosecution of Coronavirus-related crimes, and to conduct outreach and awareness.”[2] Attorney General Barr also “urg[ed] the public to report suspected fraud schemes related to COVID-19.”[3]

On March 22, 2020, the DOJ announced its first action in federal court to combat fraud related to COVID-19. The DOJ sought, and received, a temporary restraining order in the United States District Court for the Western District of Texas against a website offering access to a (non-existent) Coronavirus vaccine kit from the World Trade Organization.[4]

On March 24, 2020, the Department of Justice established the COVID-19 Hoarding and Price Gouging Task Force “to address COVID-19-related market manipulation, hoarding, and price gouging.”[5] On April 2, 2020, the Department of Justice, in partnership with the Department of Health and Human Services, announced “the distribution of hoarded personal protective equipment (PPE), including approximately 192,000 N95 respirator masks,” discovered by the Federal Bureau of Investigations during an enforcement operation.[6]

Similarly, the United States Securities and Exchange Commission (“SEC”) has announced that, in response to the Coronavirus pandemic, it remains focused on “continuity of Commission operations,” “monitoring market functions and system risks,” “providing prompt, targeted regulatory relief and guidance,” and “maintaining [its] enforcement and investor protection efforts.”[7] Recently, the SEC announced trading suspensions in connection with false COVID-19 information, including the suspension of trading for a company that made statements “about having, and being able to obtain, large quantities of N95 masks,”[8] the suspension of trading for a company with “purported international marketing rights to an approved coronavirus treatment,”[9] the suspension of trading for a company in which third-party promoters disseminated information about “the viability of the company’s product to treat the coronavirus,”[10] and the suspension of trading of an OTC company amidst “concerns about investors confusing this issuer with a similarly-named NASDAQ-listed issuer . . . which has seen a rise in share price during the on-going COVID-19 pandemic.”[11]

Further, the SEC’s Office of the Chief Accountant has identified areas of particular focus with respect to ensuring high-quality financial information reporting, including the importance of well-reasoned accounting judgment and estimates (such as, fair value and impairment considerations, revenue recognition, and going concern), audit issues (in particular auditor independence issues in partnership with the Public Company Accounting Oversight Board), the impact of international accounting and audit-related standards, and continued investor outreach.[12] Notably, in the post-2008 financial crisis period, the SEC brought enforcement actions in connection with, among other things, concealed risks, misleading disclosures, false statements with respect to a company’s financial position, and the failure by auditors to appropriately scrutinize management estimates.[13] For more information on potential SEC enforcement, please refer to Gibson Dunn’s recent alert “SEC Enforcement Focus on Fallout from COVID-19: Insights for Public Companies and Investment Advisers During a Crisis.”[14]

Past may be prologue in connection with post-crisis federal enforcement—particularly with respect to oversight of emergency government stimulus funds. On March 27, 2020, the President signed into law the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”), a $2 trillion emergency stimulus package.[15] During the 2008 financial crisis, Congress similarly established emergency government stimulus programs, including the Troubled Asset Relief Program (“TARP”) “to implement programs to stabilize the financial system.”[16] Regulatory oversight was included in the legislation establishing TARP, specifically, the Office of the Special Investigator General for the Troubled Asset Relief Program (“SIGTARP”). SIGTARP, which remains active today, “is a federal law enforcement agency and an independent audit watchdog that targets financial institution crime and other fraud, waste, and abuse related to TARP.”[17] Notably, the CARES Act also establishes a Special Inspector General for Pandemic Recovery (“SIGPR”) to “conduct, supervise, and coordinate audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments” made by the Department of Treasury pursuant to the CARES Act.[18] On April 4, 2020, the President nominated Brian D. Miller as the Special Inspector General.[19] Mr. Miller is currently a special assistant to the President and senior associate counsel in the Office of White House Counsel.[20] In addition to SIGPR, the CARES Act established a Pandemic Response Accountability Committee and a Congressional Oversight Commission.[21]

SIGTARP’s continued enforcement function over a decade after its enactment predicts that the even larger, suddenly-organized distribution of government funds through the CARES Act, and other legislative efforts that may follow it, will dominate much of the enforcement agenda for the next decade. That so much of it involves funds loaned through federally-insured banks will provide the government with the benefit of a ten-year statute of limitations to proceed.[22] For instance, we should expect that law enforcement will look to loan or other government funding applications as a regular component of financial fraud investigations involving domestic targets or subjects, scouring them for alleged misstatements.

COVID-19 Enforcement in The United Kingdom

In the UK, the Coronavirus Act 2020[23] and the Health Protection (Coronavirus) Regulations 2020[24] have mandated amongst other things a national “lockdown,” the closure of businesses except those deemed to be essential, and restrictions on traveling to work unless necessary. The Coronavirus Act contains various offences for those that flout the rules, and limited related enforcement action has been taken by authorities.

A number of agencies have reported a spike in scams, including in the financial services sector, and there were reports early on that some companies were exploiting the pandemic and engaging in price gouging. Recently, a senior UK civil servant told Parliament that he expects to see organized crime targeting the Government’s multibillion-pound employee furlough scheme.

The Crown Prosecution Service issued guidance to police forces and prosecutors directing them that “all COVID-19 related cases” must be fed into the criminal justice system “Immediately” (above “High Priority”), including, for example, assaults on emergency workers.[25]

Competition and Consumer Law: The Competition and Markets Authority (“CMA”) has established a COVID-19 Taskforce[26] and in March issued Guidance indicating that competitor coordination will be permitted (and no enforcement action will be taken) if it is undertaken solely to address market needs arising from the pandemic and lasts no longer than necessary,[27] and an open letter to drug makers and food and drink companies warning against capitalizing on COVID-19 by charging unjustifiably high prices for essential goods or by making misleading claims about their efficacy.[28] The CMA publicly stated that it “will not tolerate unscrupulous businesses exploiting the crisis as a ‘cover’ for non-essential collusion.”[29] This includes “exchanging [] information on future pricing or business strategies, where this is not necessary to meet the needs of the current situation.”[30]

Financial Services Sector: The Financial Conduct Authority, the UK’s financial services regulator and enforcement agency, has stated that during the COVID-19 pandemic, it is focusing its efforts on ensuring that consumers remain protected and that markets continue to function well. The FCA made several announcements in response to COVID-19, including alerting consumers to pension scams.[31] The FCA indicated that it will not change its enforcement policy and will continue to investigate and bring enforcement action. It has warned publicly that it will not “tolerate conduct that seeks to exploit the situation and harms consumers.”[32]

Firms must continue to monitor their compliance systems and adapt to new risks. The FCA has recognized that increased numbers of people working from home will pose unique challenges and called on firms to continue to monitor their systems and controls, for example in relation to the recording of sales and other calls. Anti-money laundering requirements (such as customer identification checks) must still be followed, although the FCA recognizes that firms may have to adapt their approach. The FCA is likely to give firms some latitude, but firms must continue to monitor risks and look at alternative options if routine compliance controls cannot operate.

Finally, the FCA wrote to companies during March imposing a two week moratorium to delay publication of preliminary results and thereby prevent investors relying on outdated market information. In the same statement announcing the moratorium, the FCA reminded companies that the Market Abuse Regulation, the EU-wide law dealing with market abuse, market manipulation, and insider dealing, remains in force.[33]

Criminal Enforcement Agencies: The National Crime Agency and National Economic Crime Center have published several announcements, including a warning of organized crime groups exploiting the COVID-19 pandemic by using coronavirus-themed malicious apps, websites, and email phishing attacks in order to obtain personal and financial information;[34] and alerting the public to fraud and online scams including where individuals intend to purchase medical supplies online, such as face masks and COVID-19 testing kits, which never arrive or are fake. We expect to see a spike in prosecutions of those who are engaged in COVID-19-related fraud and other scams.[35] The NCA has not published any guidance regarding implications of the pandemic for the filing of Suspicious Activity Reports.

The UK Serious Fraud Office has yet to make any announcements in response to COVID-19, but is continuing its investigative efforts where possible. The lockdown measures will undoubtedly result in delays in SFO investigations (for example the agency may not be able to conduct interviews), but the extent of those delays will depend on the length of the lock down. To date, at least one SFO trial has been adjourned and remains on hold until further notice, and there are likely to be significant delays to others as the Lord Chief Justice has ordered a halt to all new jury trials.

Information Commissioner’s Office: The ICO has issued guidance stating that it would not penalize companies that the ICO “know[s] need to prioritise other areas or adapt their usual approach during this extraordinary period.”^[36] For further details, please refer to the Gibson Dunn alert “Privacy and Cybersecurity Issues Related to COVID-19.”[37]

International Trade: The UK has prohibited the parallel export of certain critical medicines currently being tested for efficacy in treating COVID-19. On March 20, 2020, over 80 additional medicines used to treat patients in intensive care units were banned from parallel export from the UK in order to seek to ensure uninterrupted supply to NHS hospitals treating coronavirus patients. For further details, please refer to the Gibson Dunn alert “COVID-19 & International Trade – Nation-State Responses to a Global Pandemic.”[38]

COVID-19 Enforcement in The European Union

In the European Union, the primary authority to fight COVID-19 and its detrimental effects on health and security lies with each of the Member States. As such, the rules and the measures adopted by Member States differ in detail among the Member States (and, for example in Federations like Germany, among different regions within a Member State).

Most of the Member States have imposed severe measures, including travel restrictions, limitations to public life, and lockdowns as a response to the pandemic. Most notably, some Member States have imposed curfews on their citizens to varying degrees of severity. Failure to follow such measures—e.g. opening retail stores in spite of a prohibition or ignoring a curfew—may, depending on the Member State, constitute a regulatory or even a criminal offense.[39] The longer these restrictions remain, the more likely it becomes that enforcement actions will play a bigger role in the near future.

European security standards already are shifting focus as criminals try to benefit from the current state of affairs. Following the COVID-19 outbreak, EU law enforcement agencies, such as Europol, have observed a rise in crime in the following areas:^[40] Cybercrime, Fraud, Counterfeit and Substandard Goods, and Organized Property Crimes.

Cybercrime: Cybercrime appears to be on the rise because criminals are using the COVID-19 crisis to carry out social engineering attacks themed around the pandemic to distribute various malware packages. As a greater number of employers institute work from home policies and allow external connections to their organizations’ systems, cybercriminals are expected to increase attacks on networks. Most critically, there are signals that cybercriminals have already attacked critical infrastructure such as hospitals (which is believed to have already occurred in the Czech Republic). Prior to the pandemic, in an effort to prepare for major cross-border cyberattacks, a EU Law Enforcement Emergency Response Protocol (“EU LE ERP”) was adopted in December 2018. The EU LE ERP supports EU law enforcement authorities in providing immediate response to major cross-border cyber-attacks through rapid assessment, the secure and timely sharing of critical information, and effective coordination of the international aspects of their investigations.^[41]

Fraud: Fraud linked to the current pandemic often preys on the fear of EU citizens. In one recent case, for example, the transfer of €6.6 million by one company to another company in Singapore in order to purchase alcohol gels and FFP3/2 masks is under investigation because the goods were never received by the buyer. Similarly, criminals are also reported to have adapted investment scams to solicit speculative investments in stocks related to COVID-19 with promises of substantial profits.

As in the United States, we expect European investigations of fraud and subsidy fraud offenses will play a bigger role as the wave of applications to get access to state aid is now under way. Various governments are keen on making support funds^[42] for businesses available—“quickly and without red tape,” as governments like to emphasize—and the age-old dynamic of fraud following urgency is equally predictable in Europe. As far as European funds are affected by such fraudulent acts (see, e.g., the new EU program for temporary Support to mitigate Unemployment Risks in an Emergency, also known as SURE^[43]), EU agencies such as Europol and OLAF, the European Anti-Fraud Office, likely will get involved.

Counterfeit and Substandard Goods: The sale of counterfeit health care, sanitary/pharmaceutical products and personal healthcare equipment has become one of the main areas of criminal activity in the EU. These schemes often leverage people’s fear of infection. For example, the reported distribution of fake coronavirus home testing kits are particularly worrying from a public health perspective, because apart from being ineffective these kits may inflict bodily harm upon their users.

Organized Property Crime: Organized Property Crimes include the ‘nephew’ or ‘grandchild’ trick and the impersonation of representatives of public authorities. Criminals have adapted their modi operandi to the current situation. The number of attempts involving these types of thefts and scams is likely to increase across the EU. Multiple Member States have reported to Europol a similar modus operandi for theft. The perpetrators gain access to private homes by impersonating medical staff providing information material or hygiene products or conducting a “corona test.” The EU tries to handle the situation by working closely with all the Member States enforcement authorities on a 24/7 basis and informs the public about these scams regularly.[44]

That these forms of illicit activity occur now is no surprise. But the way European regulators redeploy resources will orient the direction companies and other market actors staff and pursue compliance initiatives and should be carefully followed.

COVID-19 Enforcement in Asia

Regulators in Asian countries, which have been combating COVID-19 since January, have ramped up enforcement efforts against market misconduct such as price gouging of medical supplies and false advertising.

In China, the State Administration for Market Regulation and its local branches have launched a series of enforcement actions targeting sales of substandard face masks and price gouging of face masks as well as raw materials that are essential for producing medical supplies. Regulators around the country have initiated approximately 14,800 investigations relating to pricing violations, half of which involved face masks.[45] As some cities in China are resuming normal business activities, local regulators are adopting a more comprehensive approach in combating market misconduct. The Shanghai Municipal Administration for Market Regulation, a key regulator for multinational companies that have operations in Shanghai, has announced an anti-unfair competition campaign that will last until the end of July of this year.[46] The campaign focuses on, among other things, false advertising and commercial bribery in medical device procurement, medical services, and education services. Notably, the Shanghai Municipal Administration for Market Regulation has called out potentially anti-competitive practices such as donating medical devices in exchange for the purchase of consumables.[47]

Regulators in Korea, including the Korean National Police Agency, the National Tax Services, the Ministry of Food and Drug Safety, and the Fair Trade Commission, have formed a joint task force to crack down on unfair market practices such as price gouging.[48] For example, the Korean National Tax Services has reportedly cracked down on 222 retailers and 41 mask manufacturers for hoarding and price gouging behavior.[49]

To contain the spread of COVID-19, government agencies and private enterprises in China are collecting personal data for contact tracing. Regulators have stepped up the protection of the personal information collected. In February 2019, the Cyberspace Administration of China (“CAC”) issued a circular regarding the collection and use of personal information in connection with COVID-19.[50] The CAC stressed in the circular that companies are only allowed to collect personal information from their employees as required by government entities for the purpose of containing COVID-19 or for purposes directly related to the performance of employment contracts, and should not use the personal information that they collected for any other purposes.[51] In particular, companies and government agencies are prohibited from disclosing names and family addresses of COVID-19 patients unless consent is given.[52] The Chinese government has already prosecuted several cases involving unauthorized disclosure of personal information of COVID-19 patients.[53] For instance, a local branch of the Commission for Discipline Inspection of the Communist Party of China is investigating a deputy at Hunan Yiyang County Health Bureau for disseminating a case study involving a COVID-19 patient that contains protected personal information of the patient and the patient’s eleven relatives.[54]

Enforcement Trends to Watch: Insider Trading

There has been widespread coverage—and condemnation—of potential insider trading by at least four senators in the early weeks of the Coronavirus pandemic. These senators allegedly received confidential briefings on how badly the U.S. economy might be hit by the pandemic, and thereafter sold substantial stock holdings before the recent Coronavirus-induced market drops, thus avoiding millions of dollars in losses.[55] The U.S. Department of Justice is now investigating,[56] the U.S. Securities and Exchange Commission issued a blanket warning against trading on material non-public information related to the coronavirus,[57] and private lawsuits are beginning to be filed.[58]

The last time allegations of pervasive congressional insider trading received this much attention, the federal government responded by passing the Stop Trading on Congressional Knowledge Act (the “STOCK Act”) in 2012. Designed to prevent members of Congress and other government employees from using nonpublic information derived from their official positions for personal benefit or other purposes, the STOCK Act prohibits members and employees of Congress and others from using “nonpublic information derived from such person’s position . . . or gained from the performance of such person’s official responsibilities as a means for making a private profit.”[59] However, certain portions of the STOCK Act that mandated greater transparency, reporting, and applicability were quietly rolled back in 2013.[60] Recent events have highlighted that potential insider trading by government officials continues to be a problem, and the public is again lamenting the country’s apparent inability to effect meaningful reform—both in Washington, D.C., and with respect to insider trading generally.[61] Indeed, some have suggested that it may be difficult to prosecute these senators for their alleged Coronavirus-related trading, given the many challenges built into our current insider trading jurisprudence.[62]

This renewed focus on insider trading arising from information asymmetries in COVID-19 related fact patterns may provide the public pressure necessary to enact real change in our country’s current insider trading laws. There are no laws specifically addressing insider trading in the U.S. Rather, insider trading law arises from a series of increasingly complex federal court decisions interpreting the anti-fraud provisions of the Securities Exchange Act of 1934. Over the years, there have been various initiatives to replace our current regime with explicit insider trading legislation—as other countries have done[63]—but they have all failed to gain traction to date.[64]

It is unclear whether the current public outcry hardens into the motivation necessary to systematically and comprehensively address this issue once and for all. When the dust of the current public health crisis settles, this may emerge as a top legislative issue—similar to the enactment of the Foreign Corrupt Practices Act (“FCPA”) in 1977 following concerns about widespread bribery of foreign officials by U.S. companies.[65]

Enforcement Trends to Watch: Enhanced State-Level Consumer Protection

State Attorneys General have announced their intentions to focus on fraud in connection with the pandemic—specifically identifying consumer protection and price gouging as areas already requiring enforcement.[66] To date, state Attorneys General have, among other things, sought temporary restraining orders and permanent injunctions to stop the sale of alleged COVID-19 treatments,[67] issued subpoenas against third-party sellers concerning allegations of price gouging,[68] and sent cease and desist letters to individuals and entities marketing products as COVID-19 treatments.[69] Numerous state Attorneys General have partnered with federal authorities to identify and prosecute COVID-19-related fraud.[70]

In addition to new federal regulatory enforcement initiatives, we can expect that preexisting anti-fraud initiatives may swiftly ripen into expanded investigative authority. The aforementioned progression of the FCPA in the aftermath of Watergate presages how enforcement initiatives facing uncertain enactment suddenly gather steam to implementation. Two state initiatives—in New York and California—may soon prove this point.[71] In response to perceived lax enforcement over the financial services industry at the federal level by the Consumer Financial Protection Bureau (“CFPB”), both New York and California have been pursuing significant expansions of the regulatory powers of state agencies.

In New York, Governor Andrew Cuomo’s January 2020 proposed budget sought to expand the enforcement authority of the New York State Department of Financial Services (“DFS”), the state’s banking and insurance regulator.[72] The proposed budget expanded the definition of “financial product or service” to include “the sale or provision to a consumer or small business of any security, investment advice, or money management device,” which could have turned the DFS into another state securities regulator (in addition to the New York State Attorney General)—with implications far beyond simply banks and insurance companies operating in New York.[73] The pre-pandemic proposed budget further expanded the power of DFS to levy (increased) civil penalties by removing requirements to prove intentionality and by including oversight of unfair, deceptive, or abusive acts or practices.[74] If passed, the DFS’ authority could have mirrored the authority of the state Attorney General under the Martin Act—the New York State law aggressively utilized by the state Attorney General to conduct investigations and bring civil and criminal actions for securities fraud.[75] The enacted budget, signed by Governor Cuomo on April 3, 2020, however, removed the proposal from the final budget.[76] New York’s effort to enhance its state financial services regulator have fallen to the wayside in response to the expected COVID-19 budget crunch.[77]

In California, Governor Gavin Newsom’s proposed 2020-2021 budget, which must be voted on by June 15, 2020, expands and restructures the California Department of Business Oversight (“DBO”). At present, the DBO oversees the operations of state-licensed financial institutions, such as banks, and licenses and regulates a variety of financial businesses, such as securities brokers and dealers.[78]

The proposed budget includes the California Consumer Financial Protection Law which “seeks to cement California’s consumer protection leadership amidst a retreat on that front by federal agencies.”[79] Under this proposal, the DBO would be rebranded as the Department of Financial Protection and Innovation. Its budget would increase by $19.3 million over the course of 2-3 years, and its staffing would increase by 90 positions over the same period.[80]

Explaining that “[t]he federal government’s rollback of the CFPB leaves Californians vulnerable to predatory businesses,” the California Consumer Financial Protection Law will expand the DBO’s authority to oversee and regulate unlicensed financial services providers not currently subject to regulatory oversight, including debt collectors, credit reporting agencies, and financial technology companies.[81]

Initially, funding is proposed to be covered by available settlement proceeds, with future costs covered by fees generated from newly covered industries and increased fees on existing licenses.[82] However, this proposal was issued prior to the Coronavirus pandemic, and the impact of the Coronavirus on the proposed budget, similar to New York’s recent experience, is unknown.

But when the greatest urgency from the COVID-19 pandemic passes, either or both of these bold initiatives, or some variants of them, may find ready support in New York and California. This is particularly so if they are viewed as holding promise not only to enhance enforcement, but to generate revenue derived from enforcement fines and penalties.

Enforcement Trends to Watch: False Claims Act

In a March 31, 2020 alert, Gibson Dunn detailed measures that companies can take now to decrease the risk that DOJ and/or qui tam whistleblowers will, down the line, successfully second-guess companies’ responses to the COVID-19 pandemic (through False Claims Act suits).

Public crises prompt government spending (for example, the CARES Act), and such spending inevitably leads to post-crisis DOJ and/or whistleblower suits targeting corporations that directly received or indirectly benefited from public funds. Given this historical precedent, turning square corners with the government, documenting communications with (and decisions by) government contractors, and responding thoroughly to internal whistleblower reports can meaningfully decrease False Claims Act exposure in the wake of the COVID-19 crisis.

For more detailed information, please refer to the Gibson Dunn alert, “Implications of COVID-19 Crisis for False Claims Act Compliance.”[83]

_________________________

[1] Press Release, U.S. Dep’t of Justice, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (Mar. 20, 2020), available at www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud.

[2] Id.

[3] Id. Attorney General Barr urged the public to report suspected fraud to the National Center for Disaster Fraud (“NCDF”). The NCDF was established in 2005, in the wake of Hurricane Katrina, and is the national coordinating agency for man-made and natural disasters. In the wake of Hurricane Katrina, federal prosecutors charged over 1,300 disaster fraud cases. See National Center for Disaster Fraud, U.S. Dep’t of Justice, www.justice.gov/disaster-fraud (last visited Apr. 8, 2020). It can be expected that federal prosecutors will be similarly aggressive in addressing Coronavirus-related fraud reported to the NCDF.

[4] Press Release, U.S. Dep’t of Justice, Justice Department Files its First Enforcement Action Against COVID-19 Fraud (Mar. 22, 2020), available at www.justice.gov/opa/pr/justice-department-files-its-first-enforcement-action-against-covid-19-fraud.

[5] Memorandum from the Attorney General, U.S. Dep’t of Justice, Department of Justice COVID-19 Hoarding and Price Gouging Task Force (Mar. 24, 2020), available at www.justice.gov/file/1262776/download.

[6] Press Release, U.S. Dep’t of Justice, Department of Justice and Department of Health and Human Services Partner to Distribute More Than Half a Million Medical Supplies Confiscated from Price Gougers (Apr. 2, 2020), available at www.justice.gov/opa/pr/department-justice-and-department-health-and-human-services-partner-distribute-more-half.

[7] SEC Coronavirus (COVID-19) Response, U.S. Secs. & Exch. Comm’n, www.sec.gov/sec-coronavirus-covid-19-response (last visited Apr. 8, 2020).

[8] In the Matter of Praxsyn Corp., 2020 WL 1611114 (Mar. 25, 2020), available at www.sec.gov/litigation/suspensions/2020/34-88479-o.pdf.

[9] Exchange Act Release No. 88265, 2020 WL 916766 (Feb. 24, 2020), available at www.sec.gov/litigation/suspensions/2020/34-88265.pdf.

[10] Exchange Act Release No. 88142, 2020 WL 870115 (Feb. 7, 2020), available at www.sec.gov/litigation/suspensions/2020/34-88142.pdf.

[11] Exchange Act Release No. 88477, 2020 WL 1610845 (Mar. 25, 2020), available at www.sec.gov/litigation/suspensions/2020/34-88477.pdf.

[12] Public Statement, Sagar Teotia, Chief Accountant, Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19 (Apr. 3, 2020), available at www.sec.gov/news/public-statement/statement-teotia-financial-reporting-covid-19-2020-04-03.

[13] SEC Enforcement Actions Addressing Misconduct that Led to or Arose from the Financial Crisis, U.S. Secs. & Exch. Comm’n (last modified July 15, 2019), www.sec.gov/spotlight/enf-actions-fc.shtml.

[14] See SEC Enforcement Focus on Fallout from COVID-19: Insights for Public Companies and Investment Advisers During a Crisis, Gibson Dunn & Crutcher LLP (Mar. 26, 2020), available at www.gibsondunn.com/sec-enforcement-focus-on-fallout-from-covid-19-insights-for-public-companies-and-investment-advisers-during-a-crisis/#_edn1.

[15] See Erica Werner et al., Trump signs $2 trillion coronavirus bill into law as companies and households brace for more economic pain, Wash. Post (Mar. 27, 2020), available at www.washingtonpost.com/us-policy/2020/03/27/congress-coronavirus-house-vote/.

[16] About TARP, U.S. Dep’t of Treasury (last modified Nov. 20, 2019), www.treasury.gov/initiatives/financial-stability/about-tarp/Pages/default.aspx.

[17] Office of the Special Inspector Gen. for the Trouble Asset Relief Program, www.sigtarp.gov (last visited Apr. 8, 2020).

[18] CARES Act, H.R. 748 § 4018(c)(1) (2020).

[19] Alex Leary, Trump Nominates White House Layer to Oversee Coronavirus Business Loans, Wall St. J. (Apr. 4, 2020), available at www.wsj.com/articles/trump-nominates-white-house-lawyer-to-oversee-coronavirus-business-loans-11585965870?ns=prod/accounts-wsj.

[20] Id.

[21] CARES Act, H.R. 748 §§ 4020, 15010 (2020). CARES Act §§ 4020, 15010. It is of note that, in a signing statement, the President took issue with aspects of both the Pandemic Response Accountability Committee and SIGPR. As to the Pandemic Response Accountability Committee, the President announced his intention to treat as hortatory, not mandatory, the requirement that the Chairperson of the Council of the Inspectors General on Integrity and Efficiency consult with members of Congress regarding the selection of the Executive Director and Deputy Executive Director of the Committee. As to the SIGPR, the President took issue with the requirement that SIGPR report to Congress “without delay” any unreasonable refusal by a government agency to produce information requested by SIGPR. The President stated that the administration would not treat this provision as permitting SIGPR to issue reports to Congress without presidential supervision. See Statement by the President, The White House (Mar. 27, 2020), available at www.whitehouse.gov/briefings-statements/statement-by-the-president-38/.

[22] See 18 U.S.C. § 3293 (2020) (“No person shall be prosecuted, tried, or punished for a violation of, or a conspiracy to violate . . . (2) section 1341 or 1343, if the offense affects a financial institution . . . unless the indictment is returned or the information is filed within 10 years after the commission of the offense.”).

[23] Coronavirus Act 2020, c. 7 (Eng.), available at www.legislation.gov.uk/ukpga/2020/7/contents/enacted.

[24] The Health Protection (Coronavirus) Regulations 2020, SI 2020/129, (Eng.), available at www.legislation.gov.uk/uksi/2020/129/contents/made.

[25] Interim CPS Charging Protocol – Covid-19 crisis response, CPS (Apr. 1, 2020), available at www.cps.gov.uk/sites/default/files/documents/legal_guidance/Interim-CPS-Charging-Protocol-Covid-19-crisis-response.pdf.

[26] CMA COVID-19 taskforce, U.K. Ministry of Justice (Mar. 20, 2020), www.gov.uk/government/publications/covid-19-cma-taskforce/cma-covid-19-taskforce.

[27] CMA approach to business cooperation in response to COVID-19, Competition and Mkts. Auth. 7 (Mar. 25, 2020), available at assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/875468/COVID-19_guidance_-.pdf.

[28] An Open Letter to the Pharmaceutical and Food and Drink Industries, Competition and Mkts. Auth. (Mar. 20, 2020), available at assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/874240/COVID_19_Open_letter_to_pharmaceutical_and_food_and_drink_industries2.pdf.

[29] CMA approach to business cooperation in response to COVID-19, Competition and Mkts. Auth. 6 (Mar. 25, 2020), available at assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/875468/COVID-19_guidance_-.pdf.

[30] Id.

[31] Covid-19: savers stay calm and don’t rush financial decisions, Fin. Conduct Auth. (last modified Apr. 3, 2020), www.fca.org.uk/news/press-releases/covid-19-savers-stay-calm-dont-rush-financial-decisions.

[32] FCA and PSR respond to the CMA’s guidance on business cooperation under competition law, Fin. Conduct Auth. (last modified Mar. 27, 2020), www.fca.org.uk/news/statements/fca-and-psr-respond-cmas-guidance-business-cooperation-under-competition-law.

[33] FCA requests a delay to the forthcoming announcement of preliminary financial accounts, Fin. Conduct Auth. (last modified Mar. 22, 2020), www.fca.org.uk/news/statements/fca-requests-delay-forthcoming-announcement-preliminary-financial-accounts.

[34] National Crime Agency warn that organised crime groups may try to exploit the coronavirus outbreak to target the UK, Nat’l Crime Agency (Mar. 22, 2020), www.nationalcrimeagency.gov.uk/news/national-crime-agency-warn-that-organised-crime-groups-may-try-to-exploit-the-coronavirus-outbreak-to-target-the-uk.

[35] Beware fraud and scams during Covid-19 pandemic fraud, Nat’l Crime Agency (Mar. 26, 2020), www.nationalcrimeagency.gov.uk/news/fraud-scams-covid19.

[36] Data protection and coronavirus: what you need to know, Info. Comm’rs Office, ico.org.uk/for-organisations/data-protection-and-coronavirus/ (last visited Apr. 8, 2020).

[37] Privacy and Cybersecurity Issues Related to COVID-19, Gibson Dunn & Crutcher LLP (Mar. 20, 2020), available at www.gibsondunn.com/privacy-and-cybersecurity-issues-related-to-covid-19/.

[38] COVID-19 & International Trade – Nation-State Responses to a Global Pandemic, Gibson Dunn & Crutcher LLP (Apr. 1, 2020), available at www.gibsondunn.com/covid-19-international-trade-nation-state-responses-to-a-global-pandemic/.

[39] For further details on the German Infectious Diseases Protection Act, see COVID-19: The German Infectious Diseases Protection Act – What Makes You Stay At Home, Gibson Dunn & Crutcher LLP (Mar. 20, 2020), available at www.gibsondunn.com/covid-19-german-infectious-diseases-protection-act-what-makes-you-stay-at-home/.

[40] Press Release, Europol, How Criminals Profit from the Covid-19 Pandemic (Mar. 27, 2020), available at www.europol.europa.eu/newsroom/news/how-criminals-profit-covid-19-pandemic.

[41] Pandemic Profiteering: How Criminals Exploit the Covid-19 Crisis, Europol (Mar. 27, 2020), available at www.europol.europa.eu/publications-documents/pandemic-profiteering-how-criminals-exploit-covid-19-crisis.

[42] For more details see European and German Programs Counteracting Liquidity Shortfalls and Relaxations in German Insolvency Law, Gibson Dunn & Crutcher LLP (Mar. 25, 2020), available at www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/.

[43] Questions and Answers: Commission Proposes SURE, A New Temporary Instrument Worth up to €100 Billion to Help Protect Jobs and People in Work, European Comm’n (Apr. 2, 2020), available at ec.europa.eu/commission/presscorner/detail/en/qanda_20_572.

[44] For updates see Staying Safe During Covid-19: What You Need to Know, Europol (last modified Apr. 1, 2020), www.europol.europa.eu/staying-safe-during-covid-19-what-you-need-to-know.

[45] Li Ang, “Zero Tolerance” Towards Illegal Acts During COVID-19, Sina Finance (Mar. 26, 2020), available at finance.sina.com.cn/chanjing/cyxw/2020-03-26/doc-iimxyqwa3197497.shtml.

[46] Notice by the Shanghai Municipal Administration for Market Regulation Regarding Further Enhancing Anti-Competition Enforcement Work (Feb. 25, 2020), available at scjgj.sh.gov.cn/shaic/html/govpub/2020-03-03-0000009a202002200011.html.

[47] Id.

[48] Han-na Park, Seoul Gets Tough on Profiteering on Masks, Sanitizers, The Korea Herald (Feb. 6, 2020), available at www.koreaherald.com/view.php?ud=20200206000709.

[49] Yeon-joo Kim et al., S. Korea tightens mask exports to relieve local shortage, Pulse (Feb. 26, 2020), available at pulsenews.co.kr/view.php?year=2020&no=198103.

[50] Notice Regarding Protecting Personal Information and Utilizing Big Data to Support the Combat Against COVID-19, Cyberspace Admin. of China (Feb. 9, 2020), www.cac.gov.cn/2020-02/09/c_1582791585580220.htm.

[51] Id.

[52] Id.

[53] Xue Li, Dozens Prosecuted for Disclosing Private Information Regarding COVID-19 Patients, Tencent News (Feb. 24, 2020), available at xw.qq.com/cmsid/20200224A0Q39T00.

[54] Mengyao Wang, A Health Bureau Deputy Being Investigated for Disclosing Personal Information of a COVID-19 Patient, Caixin (Jan. 30, 2020), available at china.caixin.com/2020-01-30/101509610.html.

[55] See, e.g., Robert Faturechi and Derek Willis, Senator Dumped Up to $1.7 Million of Stock After Reassuring Public About Coronavirus Preparedness, ProPublica (Mar. 19, 2020), available at www.propublica.org/article/senator-dumped-up-to-1-7-million-of-stock-after-reassuring-public-about-coronavirus-preparedness; Richard Cowan et al., U.S. senators defend selling shares before coronavirus crash, Reuters (Mar. 20, 2020), available at www.reuters.com/article/us-health-coronavirus-usa-congress/reports-that-republican-u-s-senators-dumped-stock-before-coronavirus-market-crash-spark-calls-to-resign-idUSKBN2171AL.

[56] See David Shortell et al., Exclusive: Justice Department reviews stock trades by lawmakers after coronavirus briefings, CNN (Mar. 30, 2020), available at www.cnn.com/2020/03/29/politics/justice-stock-trades-lawmakers-coronavirus/index.html.

[57] Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC’s Division of Enforcement, Regarding Market Integrity U.S. Secs. & Exch. Comm’n (Mar. 23, 2020), available at www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity.

[58] See, e.g., Complaint, Jacobson v. Burr, 1:20-cv-00799 (D.D.C. Mar. 23, 2020).

[59] Stop Trading on Congressional Knowledge Act of 2012 § 3, 5 U.S.C. app. 1010 note prec. (2012).

[60] See Tamara Keith, How Congress Quietly Overhauled Its Insider-Trading Law, NPR (Apr. 16, 2013), available at www.npr.org/sections/itsallpolitics/2013/04/16/177496734/how-congress-quietly-overhauled-its-insider-trading-law.

[61] E.g., Matt Taibbi, After Richard Burr’s Coronavirus Scandal, Will the Government Finally Crack Down on Congressional Insider Trading?, Rolling Stone (Mar. 24, 2020), available at www.rollingstone.com/politics/politics-features/richard-burr-coronavirus-insider-trading-972101/ (“Members of congress trading against a pandemic is as low as it gets. On the long and winding history of elected officials eluding rules against political profiteering.”); John Crudele, Insider trading is business as usual for our politicians, N.Y. Post (Mar. 23, 2020), available at nypost.com/2020/03/23/insider-trading-is-business-as-usual-for-our-politicians/.

[62] See, e.g., Eric M. Creizman, COVID-19 and Congressional Trading on Nonpublic Information, N.Y. Law J. (Mar. 26, 2020), available at www.law.com/newyorklawjournal/2020/03/26/covid-19-and-congressional-trading-on-nonpublic-information/; Al Barbarino, Probes Of Senators’ Trading May Reach Uncharted Waters, Law360 (Mar. 25, 2020), available at www.law360.com/whitecollar/articles/1257242/probes-of-senators-trading-may-reach-uncharted-waters.

[63] See, e.g., Parliament and Council Regulation 596/2014 of April 14, 2014, On Market Abuse (Market Abuse Regulation) and Repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC and 2004/72/EC, 2014 O.J. (L 173) (EU); Act No. 108/2007 on Securities Transactions (Ice.).

[64] For example, several bills were introduced in Congress in the wake of the Second Circuit’s decision in United States v. Newman, 773 F. 3d 438 (2d. Cir. 2014), but they ultimately went nowhere. And more recently, the House passed the Insider Trading Prohibition Act in December 2019, but to date, this bill has not advanced in the Senate. The Bharara Task Force on Insider Trading likewise issued a report in January 2020 calling on Congress to pass clear and concise insider trading legislation (providing a model statute that could form the basis for a new law with clear parameters), and other legal scholars and jurists have also advocated for change and put forth proposals that, to date, have failed to take hold. See, e.g., Kenneth R. Davis, Insider Trading Flaw: Toward a Fraud-on-the-Market Theory and Beyond, 66 Am. U. L. Rev. 51 (2017); Carmen Germaine, Rakoff Urges Securities Bar to Write Insider Trading Law, Law360 (Mar. 1, 2017), available at www.law360.com/articles/897188/rakoff-urges-securities-bar-to-write-insider-trading-law.

[65] See, e.g., A Resource Guide to the U.S. Foreign Corrupt Practices Act, U.S. Dep’t of Justice & U.S. Secs. & Exch. Comm’n (2012), available at www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf; Joe Palazzolo, From Watergate to Today, How FCPA Became So Feared, Wall St. J. (Oct. 2, 2012), available at www.wsj.com/articles/SB10000872396390444752504578024791676151154?ns=prod/accounts-wsj.

[66] Attorney Generals Are Taking Action to Protect Consumers During Coronavirus Pandemic, Nat’l Attorneys Gen. Training and Research Inst., www.consumerresources.org/covid-19-consumer-updates (last visited Apr. 8, 2020).

[67] Press Release, Eric Schmitt, Missouri Attorney General, AG Schmitt Files Suit Against Jim Bakker for Selling Fake “Coronavirus Cure” (Mar. 10. 2020), available at ago.mo.gov/home/news/2020/03/10/ag-schmitt-files-suit-against-jim-bakker-for-selling-fake-coronavirus-cure.

[68] Press Release, Florida Office of the Attorney General, Attorney General Moody Issues More Than 40 Subpoenas Over Allegations of Price Gouging by Third-Party Sellers on Amazon (Mar. 24 2020), available at www.myfloridalegal.com/newsrel.nsf/newsreleases/9D854B0F3345DC9085258535006C3BEC?Open&.

[69] Press Release, New York Attorney General, Attorney General James Order Alex Jones to Stop Selling Fake Coronavirus Treatments (Mar. 12, 2020), available at ag.ny.gov/press-release/2020/attorney-general-james-orders-alex-jones-stop-selling-fake-coronavirus-treatments.

[70] See, e.g., Press Release, Oklahoma Attorney General, Attorney General Hunter, U.S. Attorney Downing Coordinate Efforts to Combat Coronavirus Fraud (Mar. 27, 2020), available at www.oag.ok.gov/attorney-general-hunter-us-attorney-downing-coordinate-efforts-to-combat-coronavirus-fraud; Press Release, United States Attorney for the District of Columbia Timothy J. Shea Announces Launch of Metropolitan Area COVID-19 Anti-Fraud Task Force, U.S. Attorney Carpenito, AG Grewal, Acting Comptroller Walsh, Announce Federal-State COVID-19 Fraud Task Force (Mar. 30, 2020), available at www.justice.gov/usao-nj/pr/us-attorney-carpenito-ag-grewal-acting-comptroller-walsh-announce-federal-state-covid-19; Press Release, U.S. Dep’t of Justice, United States Attorney for the District of Columbia Timothy J. Shea Announces Launch of Metropolitan Area COVID-19 Anti-Fraud Task Force (Apr. 2, 2020), available at www.justice.gov/usao-dc/pr/united-states-attorney-district-columbia-timothy-j-shea-announces-launch-metropolitan.

[71] Corinne Ramey, New York, California Want More Power Over the Financial Sector, Wall St. J. (Mar. 16, 2020), available at www.wsj.com/articles/new-york-california-want-more-power-over-the-financial-sector-11584351002.

[72] See FY 2021 New York State Executive Budget, Transportation, Economic Development and Environmental Conservation, Article VII Legislation, Part NN (Jan. 21, 2020), available at www.budget.ny.gov/pubs/archive/fy21/exec/artvii/ted-bill.pdf.

[73] See id. at 288:25-26.

[74] See id. at 292:19-24.

[75] See 2019 Year-End Securities Litigation Update, Gibson Dunn & Crutcher LLP (Feb. 18, 2020), available at www.gibsondunn.com/2019-year-end-securities-litigation-update (discussing the Martin Act).

[76] See S. B. S7508-B, 2019-2020 Leg. Sess., Part NN (N.Y. 2020); see also A.B. 9508-B, 2019-2020 Leg. Sess., Part NN (N.Y. 2020).

[77] See Evan Weinberger, N.Y. Plan to Beef Up Financial Regulator Abandoned in Budget, Bloomberg Law (Apr. 2, 2020), available at news.bloomberglaw.com/banking-law/n-y-plan-to-beef-up-financial-regulator-abandoned-in-budget.

[78] About, Cal. Dep’t of Bus. Oversight, dbo.ca.gov/about (last visited Apr. 8, 2020).

[79] California Consumer Financial Protection Law, Cal. Dep’t of Bus. Oversight, dbo.ca.gov/California-consumer-financial-protection-law (last visited Apr. 8, 2020).

[80] Governor’s Budget Summary 2020-21, 174 (Jan. 10, 2020), available at www.ebudget.ca.gov/2020-21/pdf/BudgetSummary/FullBudgetSummary.pdf.

[81] Id. at 173-74.

[82] Id.

[83] Implications of COVID-19 Crisis for False Claims Act Compliance, Gibson, Dunn & Crutcher LLP (Mar. 31, 2020), available at www.gibsondunn.com/implications-of-covid-19-crisis-for-false-claims-act-compliance.

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The following Gibson Dunn lawyers assisted in preparing this client alert: Joel M. Cohen, F. Joseph Warin, Charles J. Stevens, Debra Wong Yang, Mylan Denerstein, Kelly Austin, Zainab Ahmad, Stephanie Brooker, John Partridge, Benno Schwarz, Patrick Doris, Darcy Harris, Amanda Aycock, David Crowley-Buck, Steve Melrose, Ning Ning, Carla Baum, and Andreas Dürr.

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. Please feel free to contact the Gibson Dunn lawyer with whom you work, any member of the firm’s White Collar Defense and Investigations Group (F. Joseph Warin, Charles J. Stevens, and Joel M. Cohen, Co-Chairs), or any of the authors:

New York
Zainab Ahmad
Joel M. Cohen
Mylan Denerstein

Washington, D.C.
Stephanie L. Brooker
F. Joseph Warin

Los Angeles
Debra Wong Yang

San Francisco
Charles J. Stevens

Denver
John D.W. Partridge

London
Patrick Doris

Munich
Benno Schwarz

Hong Kong
Kelly Austin

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

The COVID-19 crisis is in full progress. Most companies are extremely burdened by the crisis and looking for easements. This newsletter shall give you an overview of various possibilities to reduce personnel costs in the short term under German law.

Next to a hiring freeze, which many companies have already implemented by now, using accrued overtime and vacation entitlement is the easiest and least intrusive option to respond to the situation. However, these measures do not directly reduce personnel costs.

Therefore, the following further measures should be considered:

A. Cut bonuses

Most bonus schemes have a clause, which allows the employer to reduce or entirely cut the bonus due to exceptional circumstances and/or financial distress. The COVID-19 crisis with its tremendous economic implications and government-induced shop closures[1] can be regarded as such an exceptional circumstance. Therefore, reducing or cutting bonuses should be the first measure, which can protect employer liquidity.

B. Short-time work (“Kurzarbeit“)

Another useful tool to counteract the initial drop in orders and labor surpluses is government-subsidized, short-time work, which already proved helpful during the 2008/2009 financial crisis. In a nutshell, short-time work means that the employer may reduce work time (even down to zero) and that, in the ultimate result, the state pays 60 %[2] of the net[3] income lost by the affected employees. After a limited period of short-time work (up to twelve months[4]), the original schedule is taken up again, thereby retaining a skilled workforce.

In response to the COVID-19 crisis, the German Federal government has introduced facilitated conditions with regard to short-time work with retroactive effect from March 1, 2020. For at least the rest of the year, short-time money will be granted under the following requirements:

At least 10% of employees[5] suffer a loss of more than 10% of their remuneration due to an inevitable event (such as a state prohibition to temporarily operate one’s business) or due to economic causes (e.g., reduced demand or limited supply of goods as a result of the crisis);
The loss of work must be of a temporary nature and inevitable. The company must adopt measures to counteract the reduction of work (e.g., assigning other remaining tasks to employees, cutting accrued overtime, using remaining vacation days for 2019 and before);
The loss of work must be notified to the employment agency and shown in a convincing fashion (glaubhaft machen); and
The option of short-time work must be provided for either in individual agreements with the respective employees or collective agreement (Tarifvertrag) or company agreement (Betriebsvereinbarung).

Short-time work might become the predominant tool to tackle the economic impacts of the crisis throughout Europe. The European Union has recently set up a program to support short-time working schemes across Europe. This new instrument for temporary Support to mitigate Unemployment Risks in an Emergency (“SURE”) provides financial assistance in the form of loans of up to €100 billion to EU Member States.

C. Voluntary salary reduction

In addition to the measures named above, a voluntary reduction of the salary or parts of it can be considered to protect the company’s liquidity regarding personnel costs. Absent any collective agreements to that effect, such a step generally requires the consent of each affected employee. While such consent is usually very difficult to obtain under normal circumstances, we have seen cases in which companies used crises of different natures to create a common conviction among their workforce to facilitate such intrusive measures.

D. Reducing the workforce

Some companies will also consider reducing their workforce.

As a principle, German labor law is extremely strict with regard to dismissals. There are only limited acknowledged reasons for dismissals, and the employer has the burden of proof as to their existence, if the employee challenges the dismissal, which happens quite often. In particular, a mere reference to the “corona crisis” does not justify a dismissal.

A termination for operational reasons (betriebsbedingte Kündigung) requires a permanent loss of the possibility to employ further. The burden of proof lies with the employer. As the COVID-19 crisis is—hopefully—of a temporary nature, this requirement would be hard to be upheld in court. The burden of proof with regard to the final loss of the job is even increased if the employee to be dismissed is working on a short-work scheme which is, by its nature, an instrument for covering a temporary loss of work. Thus, while an ordinary dismissal during short-time work is generally conceivable, the reasons for a termination due to operational reasons must necessarily go beyond the reasons that were originally given to justify an application for (temporary) short-time work.[6]

Yet, the strict dismissal protection provisions in general do not apply to (i) small shops with less than ten employees and (ii) to employees in their first six months of employment.

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[1] See also, https://www.gibsondunn.com/covid-19-german-infectious-diseases-protection-act-what-makes-you-stay-at-home/ (last visited April 7, 2020).

[2] Sixty-seven percent, if the employee has at least one child. According to media reports, the coalition parties forming the German Federal government are allegedly considering to increase the short-time money. While one suggestion put forward by the Social Democrats contains a general increase of the percent share to 80% and 87% respectively, the Christian Democrats are said to favor a sort of minimum amount of short-time money targeted at low-income beneficiaries. For further details, see Frankfurter Allgemeine Zeitung, dated April 4, 2020.

[3] Social security contributions are compensated by the employment agency.

[4] The Federal Ministry of Labor may, by way of regulation, extend the maximum period to 24 months.

[5] To be able to file a motion for short-time money, it is sufficient that a company retains a single employee. Thus, also small businesses may profit from a short-time work scheme.

[6] See Federal Labor Court, Judgment of February 23, 2012, 2 AZR 548/10, para. 21 = NZA 2012, 852, 854 et seq.

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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, or the following authors in Germany.

Authors: Mark Zimmer and Andreas Dürr

Key Governance Action Items in Response to COVID-19

As public companies wrestle with the continuing and evolving impact of COVID-19, there are several key corporate governance matters that public companies and their boards of directors should consider in the short term.

Ensure board continuity: Boards should consider whether to take action now to adopt emergency bylaws and/or appoint executive committees in order to ensure the continued ability of the board to operate in the months ahead.

- Emergency Bylaws. The corporate laws of many states include provisions that apply in the event of an emergency to ensure that the board can continue to function. Some of these provisions require board action while others are self-executing. For example:
  - Section 110(a) of the General Corporation Law of the State of Delaware (the “DGCL”) authorizes boards of companies incorporated in Delaware to adopt emergency bylaws that apply in the event that specific types of emergencies[1] prevent a quorum of the board or a standing committee. The emergency bylaws can provide flexibility regarding who can call board or committee meetings, permit a lower quorum and allow officers to serve as directors for certain meetings.
  - In addition, other parts of DGCL Section 110 apply regardless of whether the board has acted. For example, DGCL Section 110(f) states that, unless otherwise provided in emergency bylaws, notice of any board meeting during an emergency may only be given to the directors that it is feasible to reach and by means that are feasible at the time. DGCL Section 110(g) also provides that to the extent necessary to achieve a quorum at any board meeting during an emergency, the company’s officers who are present shall (unless otherwise set forth in the emergency bylaws) be deemed directors for the meeting.
  - Importantly, DGCL Section 110(d) states, “No officer, director or employee acting in accordance with any emergency bylaws shall be liable except for wilful misconduct.”
- Executive Committees. Another method to provide for board continuity is to create (or reconsider if previously created) an executive committee of the board comprised of a few members of the board with the remaining directors designated as alternates. This increases the likelihood that the executive committee will be able to continue to function even if several directors are unreachable and unable to participate. While it is important for the board in creating or reconsidering an executive committee to give the committee all of the powers and authority of the board that it is permitted to delegate, there are limits. For example, DGCL Section 141(c) places certain limits on board committees depending on the applicable DGCL provision and, in some instances, whether such rights were expressly delegated to the executive committee. Moreover, Delaware corporations should confirm whether the bylaws authorize committees to appoint alternate members, which provides added flexibility. Section 141(c) of the DGCL authorizes the board to appoint alternate committee members, but committees may appoint alternates only if expressly permitted in the bylaws.
- Practical Considerations: As an initial matter, companies should determine whether their bylaws already include emergency bylaws and authorize committees to appoint alternates as well as review the resolutions used to create any existing executive committee to determine whether alternates are designated and the extent of the committee’s authority. Boards also should consider which approach is preferable, considering (among other things) that there may be limits on the authority of an executive committee and that emergency bylaws create flexibility to adjust the quorums for the board and its committees, allow officers to fill board seats and, as discussed above, provide individuals acting pursuant to emergency bylaws greater protection from liability. While reviewing the bylaws in light of these issues, companies should also review the notice requirements for board and committee meetings and assess whether any changes are appropriate (consistent with state law) to enhance the board’s flexibility. As a matter of good corporate governance, even if a company has adopted one or both of these measures, it often will remain appropriate to invite all directors or committee members to any meetings so that directors remain informed and ready to act as needed.

Reinforce emergency executive succession plan: A key duty of the board is to engage in succession planning for the CEO and management team, both for the long term and in the case of an emergency. Given COVID-19, it is important for boards to act now to review and confirm their emergency succession plan.[2] Specifically, boards should:

- Confirm expected successors in an emergency. Discuss who should step in as CEO if needed and who is their replacement and understand, with input from the CEO, who are the replacements for each member of the executive team, preferably identifying at least two potential successors for each.
- Communicate with the emergency CEO successors. Inform the potential emergency CEO successors of their expected role in the event of the unexpected loss or incapacity of the CEO so that the relevant person can act until the board can formally appoint them as the new or interim CEO.
- Discuss the factors that would trigger implementation. Consider and discuss the various scenarios that may require implementation of the emergency succession plan (g., CEO hospitalization). Companies should review their bylaws to confirm whether they address officer succession events and impose any formalities on the process.
- Reinforce the role of the board’s independent leadership. Discuss designating the independent director in a leadership role (g., lead independent director or board chair) as point person for discussing if and when to trigger the CEO emergency succession plan in consultation with the board. Boards should also consider and document the role of the CEO and other executives in implementing emergency succession actions below the CEO level.
- Consider SEC disclosure of COVID-19 illnesses. In this context, boards may need to discuss whether and when to disclose a COVID-19-related illness of an executive officer. Although not necessarily a reportable event under Form 8-K, if an executive takes a leave of absence due to the illness, or can no longer perform his or her duties, disclosure under Item 5.02 of Form 8-K may be warranted. However, disclosure may be prudent, even without a leave of absence, if, under the circumstances, the company considers the illness of the executive to be a significant development in the company’s business requiring public disclosure. Companies should carefully review Form 8-K disclosure requirements in the event that an interim or replacement officer (even if temporary) has been appointed.[3]

Consider if updates are needed to delegations of authority: Companies typically use delegations of authority to establish the specific authority given by the board to management in various areas, such as acquisitions, financing arrangements, variances from previously approved operating plans and budgets, and employee compensation matters. Given the evolving and often dramatic economic and business impacts related to COVID-19, companies should review these delegations of authority and consider whether the nature and scope of these delegations remain appropriate so that management has the flexibility to pivot as needed and the board can continue to play an appropriate oversight role.
Evaluate how best to fulfill the board’s oversight role and directors’ fiduciary duties: Boards need to carefully balance performance of their oversight responsibilities with not unnecessarily burdening management teams that are already fully engaged. Boards should be shifting gears and spending more time overseeing issues and risks in response to the current situation, including emergency succession (discussed above), enhanced cybersecurity protections, liquidity concerns (g., if customers are delayed in paying bills), and staffing and the operation of workplace safety and work-from-home policies. This may mean delaying nonessential presentations, and moving from full- or multiple-day board and committee meetings to more frequent, shorter meetings. Other practices may also be useful in helping to keep the board informed in light of the rapidly occurring developments related to COVID-19, such as more frequent between-meeting communications with the board and having the board chairman check in individually with directors. The goal should be to ensure that the board is receiving regular reports on, and devoting appropriate time and attention to, the most critical challenges and risks facing the company, including those posed by COVID-19, and that the board’s efforts are appropriately documented. This will enable the board to fulfill its “Caremark” duties (so named for the seminal Caremark[4] case in which the Delaware Chancery Court articulated the oversight and monitoring responsibilities of a corporation’s boards of directors under Delaware law). A more recent application of this case—the Delaware Supreme Court’s 2019 decision in Marchand v. Barnhill[5]—underscores the importance of diligent monitoring when a company faces events or risks that are intrinsically critical to its business operations. Finally, directors should be mindful that in times of true crisis, a director’s fiduciary duties permit—and indeed, may even compel – the board to prioritize the interests of a range of stakeholders, because a company’s survival may depend on it. In this regard, Former Chief Justice of the Delaware Supreme Court Leo Strine recently wrote that during a national crisis, “the corporation’s obligations to its workers, its regular contractors, service providers, and lenders, and others with a legal and ethical claim to being paid comes above its duty to stockholders. Corporate leaders have the discretion to use their business judgment to best enable the corporation to weather this unprecedented storm, to honor its duties to those who have made the deepest commitment to the company’s success (that is, its employees), and to secure the solvency and long-term health of the business.”[6]
Evaluate impacts on internal controls and internal audit function: Companies should consider the impacts of COVID-19 on their internal controls and internal audit function. In a recent statement, SEC Chairman Jay Clayton reminded companies that how they plan and respond to unfolding COVID-19 developments can be material to investment decisions and therefore may require disclosures about companies’ assessment of material risks related to COVID-19 and plans for addressing these risks. In light of this, Chairman Clayton “urge[d] companies to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.”[7] Changes to internal controls, and the implementation of new controls, may be warranted, and changes must be disclosed in Forms 10-Q and Form 10-K to the extent those changes have materially affected, or are reasonably likely to materially affect, the company’s internal controls. Companies also should consider the possibility that personnel or information critical to the effective operation of certain controls may be unavailable and that the development of alternative controls may be necessary. With respect to the internal audit function, companies may wish to revisit the internal audit plan and determine whether it is appropriate to shift priorities reflected in the plan and whether it is feasible to conduct planned audits without in-person access to certain locations. As companies continue to respond to COVID-19, internal audit can also play an important role in evaluating and making recommendations on issues such as emerging risks and business continuity plans.
Consider how to proceed with the annual shareholders meeting: A significant number of companies expected to hold annual meetings of shareholders in the coming months now will hold virtual meetings in order to comply with government orders limiting the size of gatherings and to protect the health and safety of those who attend. While the SEC has provided relief for companies with respect to the proxy rules, companies also must consider the laws of the states in which they are incorporated.

- Restrictions on Virtual Meetings. Some jurisdictions continue to prohibit or restrict the ability to hold virtual meetings, and some companies may not be in a position to rely upon emergency relief granted to facilitate virtual meetings.[8] As a result, some companies will need to choose between convening (or adjourning) in-person meetings with limited attendance in order to facilitate votes on key matters, and postponing the meeting for what could be a significant period of time due to COVID-19 and thus potentially incurring the costs of redistributing proxy materials.
- Holding Virtual Meetings. Companies that determine to hold a virtual meeting should carefully evaluate, among other things, the experience and workload of key virtual meeting providers and how to balance structuring the meeting agenda to complete the formal portion of the meeting quickly in case there are technological challenges with providing a forum for shareholders to engage with the company. Companies in this situation should address contingency plans for various scenarios, such as arranging in advance appropriate delegations or substitutions if the meeting chair or the designated proxyholders are unavailable. Finally, directors should strive to “attend” the virtual shareholder meeting to the extent feasible.
- Pivoting to Virtual Meetings. Companies that distributed proxy materials discussing the possibility of virtual meetings will need to decide whether to pivot to a virtual meeting several weeks in advance of the meeting in order to notify the virtual meeting provider, address state law notice requirements for record holders informing them of the change in location (if necessary—for example, if the website address for the meeting was not included in the initial materials) and issue a press release.[9] While not addressing or resolving state law concerns, the SEC’s recent guidance[10] for conducting annual meetings in light of COVID-19 addresses securities law issues for a company changing the meeting location from a physical location to a virtual one. The guidance provides that under the federal securities laws, a company that determines to change the date, time or location of its annual meeting after having mailed its definitive proxy materials may do so without needing to mail additional soliciting materials or amend its proxy materials if it issues a press release announcing such change, files the announcement as additional soliciting material on EDGAR, and takes all reasonable steps necessary to inform other intermediaries in the proxy process and relevant market participants of such change. With respect to companies opting to pivot to a virtual meeting, the SEC staff noted that it expects companies to timely notify shareholders and market participants of any plans to conduct a virtual meeting and to clearly disclose logistical details of the virtual meeting, including how shareholders can remotely access, participate in and vote at such meeting.

(Re)examine incentive arrangements: Boards should bear in mind existing compensatory programs for senior management and employees and consider whether they provide the proper incentives in light of COVID-19. For example, establishing long-term goals based on total shareholder return (TSR) at a time of extreme stock price volatility may not create adequate incentives, and some executive compensation decisions may be better delayed until situations improve or at least stabilize. Moreover, companies should consider whether to disclose decisions by executive teams to reduce their compensation. Some boards have also considered whether to reduce their cash compensation to set the appropriate “tone at the top.”

[1] DGCL Section 110 states that emergency bylaws can be operative “during any emergency resulting from an attack on the United States or on a locality in which the corporation conducts its business or customarily holds meetings of its board of directors or its stockholders, or during any nuclear or atomic disaster, or during the existence of any catastrophe, or other similar emergency condition.”

[2] Under DGCL Section 110(b), either before or during an emergency, the board of directors may provide and modify lines of succession “in the event that during such emergency any or all officers or agents of the corporation shall for any reason be rendered incapable of discharging their duties.”

[3] See SEC Compliance and Disclosure Interpretation 217.02, stating, “When a principal financial officer temporarily turns his or her duties over to another person, a company must file a Form 8-K under Item 5.02(b) to report that the original principal financial officer has temporarily stepped down and under Item 5.02(c) to report that the replacement principal financial officer has been appointed. If the original principal financial officer returns to the position, then the company must file a Form 8-K under Item 5.02(b) to report the departure of the temporary principal financial officer and under Item 5.02(c) to report the ‘re-appointment’ of the original principal financial officer.” See also SEC Compliance and Disclosure Interpretation 217.04, providing that Item 5.02(b) of Form 8-K does not require a registrant to report the death of a director or listed officer.

[4] In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).

[5] Marchand v. Barnhill, 2019 WL 2509617 (Del. June 18, 2019).

[6] Leo Strine, Remembering What Comes First is More Important Than Ever, Financial Times (Mar. 27, 2020).

[7] Available at https://www.sec.gov/news/press-release/2020-53.

[8] Although California law requires all shareholders to consent to the holding of virtual meetings, the governor issued an executive order suspending those requirements, dated March 30, 2020, available at https://www.gov.ca.gov/wp-content/uploads/2020/03/3.30.20-N-40-20.pdf. Other states that allow only hybrid meetings (physical and electronic) have acted to permit virtual-only meetings during the COVID-19 crisis. For example, several governors have issued executive orders to temporarily permit virtual-only meetings: Connecticut, dated March 21, 2020 (available at https://portal.ct.gov/-/media/Office-of-the-Governor/Executive-Orders/Lamont-Executive-Orders/Executive-Order-No-7I.pdf?la=en), Georgia, dated March 20, 2020 (available at https://gov.georgia.gov/document/2020-executive-order/03202002/download), Massachusetts, dated March 30, 2020 (available at https://www.mass.gov/doc/virtual-shareholder-meeting-order/download), New York, dated March 20, 2020 (available at https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/EO_202.8.pdf) and North Carolina, dated April 1, 2020 (available at https://files.nc.gov/governor/documents/files/EO125-Authorizing-Encouraging-Remote-Shareholder-Meetings.pdf). See also the legislation enacted in New Jersey (available at https://www.njleg.state.nj.us/2020/Bills/A4000/3861_I1.HTM).

[9] An emergency order signed by the Delaware governor on April 6, 2020, states that a public company can provide notice of a change from a physical to a virtual meeting by filing a notice with the SEC and issuing a press release that is posted on the company’s website provided that the change was due to the public health threat caused by COVID-19 and that the company distributed proxy materials in advance of the Order notifying shareholders of the physical meeting. See Tenth Modification of the Declaration of A State of Emergency for the State of Delaware Due to a Public Health Threat, available at https://governor.delaware.gov/health-soe/tenth-state-of-emergency/.

[10] See Staff Guidance for Conducting Annual Meetings in Light of COVID-19 Concerns, available at https://www.sec.gov/ocr/staff-guidance-conducting-annual-meetings-light-covid-19-concerns?auHash=zrsDVFen7QmUL6Xou7EIHYov4Y6IfrRTjW3KPSVukQs.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance practice group, or the authors:

Authors: Elizabeth Ising, Ronald O. Mueller, Lori Zyskowski, Courtney C. Haseley and Gillian McPhee.

NOTE: This Client Alert, which focuses on Delaware law, does not purport to provide an exhaustive guide to the issues directors should consider in times of financial stress.

The rapid spread of COVID-19, increasingly stringent government orders in response, and the profound effects on the global economy have raised concerns among corporate directors about how to adequately discharge their fiduciary duties.

First and foremost, directors can rest assured that the flexibility and protections afforded to them by the business judgment rule remain as vital today as they did before the COVID-19 pandemic. The COVID-19 pandemic does not alter the business judgment deference afforded to decisions made by a well-informed and non-conflicted board that acts in good faith towards what is best for the corporation and its stockholders.

However, directors do need to recognize that as a result of the COVID-19 pandemic, economic, regulatory, and public health related events are unfolding faster than ever. Directors must make decisions on tight timetables and with limited resources. This note is a tool for directors to help them identify some of the issues they should consider to ensure that their decisions are protected by the business judgment rule as they guide their companies during these challenging times.

Ensure Information and Reporting Systems Are Adequate. Directors generally must attempt to assure a reasonable information and reporting system exists as part of their oversight obligations. This is an area that had already become the focus of boards and their advisors over the last 18 months, as recent Delaware cases have criticized boards for failing to properly discharge their oversight obligations.[1]

Most companies already have in place systems for typically encountered business issues, including regularly scheduled management updates. Those systems should be adapted as needed to respond to the current pandemic and its impact on your business. At a minimum, evaluate whether your system involves:

Regular Management Updates. To satisfy their duties, directors are expected to require management to deliver updates about the business to the board on a consistent basis—and to document those requirements where possible. Management is likely gathering information related to COVID-19 and tracking the effects of the pandemic on the organization. Directors should ensure they receive updates with the benefit of that information.
Board Review and Adoption of Relevant Policies. Directors are often expected to play a role in reviewing policies that a company develops in response to applicable regulations and should oversee policies, among other things, relating to the regulatory response to COVID-19, when appropriate.
Written Materials. It is not always possible to prepare written materials ahead of a board meeting; however, it is a good practice to provide written materials whenever practicable. While the addition of written materials to update the directors places an additional burden on management, should a board decision later be subjected to judicial review, courts may consider whether directors reviewed written materials in making significant corporate decisions. Note that written materials that reflect legal advice should be marked “privileged and confidential.”

Maintain Complete and Accurate Board Minutes. Contemporaneously recorded board minutes are generally entitled to a presumption that they accurately reflect the substance of the board’s discussions. Whenever practicable, clients should continue to record board minutes contemporaneously with any meeting to ensure that if needed, the board has a written record of its actions. And boards should evaluate how much detail is required under the circumstances: for example, merely referring to a discussion of COVID-19 as an “operational update” is unlikely to provide a sufficient basis to determine whether the directors adequately discharged their fiduciary duties, unless the record reflects that additional written materials were provided to directors that reflect in a more fulsome manner the relevant “operational update.”

Be Aware of Privilege Issues. Directors should be especially vigilant about protecting privilege given the range of third-party non-legal advisors that may be assisting clients in responding to the COVID-19 pandemic. While board communications with in-house and outside counsel are generally privileged, the mere presence of an attorney at a board meeting will not cloak a communication in privilege because privilege only attaches to legal advice, including requests for legal advice, and attorney-client communications. Additionally, the presence of third parties at board meetings where legal advice is being provided likely will constitute a waiver of privilege if the third parties (including observers and financial advisors) are not necessary for legal advice discussed. Therefore, directors should evaluate regularly whether third parties should be excused from any portion of a meeting. Directors should also exercise caution when forwarding or disseminating company materials to third parties, because doing so could constitute a waiver of privilege. In addition, communications among the directors that do not involve communications with lawyers are likely not privileged.

Regularly Evaluate Solvency. Businesses that were previously on strong financial ground are now facing financial challenges of a size and speed that was not contemplated prior to the COVID-19 pandemic. Businesses already facing financial stress will likely face even greater financial stress, potentially pushing them closer to insolvency at a faster rate. Directors should evaluate how often they need to receive reports on the financial condition of their business.

Fiduciary Duties Expand to Cover Creditors. The board of directors owes fiduciary duties to the corporation. Generally, when a corporation is solvent, the beneficiaries of those fiduciary duties are the stockholders; creditors do not benefit from fiduciary duties and instead are instead afforded protection through contracts and other sources of creditor rights. But when a corporation becomes insolvent, under Delaware law, creditors become the primary beneficiaries of those fiduciary duties, and this shift will require that boards take into account the interests of creditors as well as stockholders when making strategic decisions. Even when fiduciary remedies extend to creditors, they are still be subject to the default business judgment rule if the underlying actions were taken by non-conflicted directors. Note that under Delaware law, LLC operating agreements can include broad waivers of fiduciary duties, so boards of those entities may want to confirm whether applicable waivers are in such operating agreements.
Insolvency May Prohibit Scheduled Actions. Certain board decisions made before the COVID-19 pandemic may require re-evaluation to account for the company’s post-COVID-19 financial status. For example, the board may have approved an extraordinary capital expenditure prior before to the COVID-19 pandemic (g., opening a new factory), which it is prudent to revisit given the current climate. Or the board may have declared a dividend prior to the pandemic, but before paying a dividend, certain state statutes require that the corporation have sufficient assets such that the payment would not leave the corporation insolvent. Should the board determine the company is sufficiently stressed that it cannot issue a dividend, that may create legal peril if the dividend was previously declared. The prior declaration of a dividend may have created an irrevocable debtor-creditor relationship between the corporation and its stockholders, and the only lawful option might be to postpone the record date (if it has not yet passed) and payment date until a future date when adequate funds become lawfully available for distribution to stockholders. This is just one of the many previously approved board actions that boards may need to reassess after being fully informed about the company’s financial condition.

Check Your D&O Insurance. Evaluate whether you have sufficient coverage. Confirm whether your insurance policy has, or whether you need, Side A coverage (direct coverage for directors and officers who the company is unable or unwilling to indemnify) or Side B coverage (reimbursement to the company for indemnity payments made on behalf of directors and officers). Evaluate whether your policy has exclusions that would vitiate coverage in the event the company files for bankruptcy.

Key Employee Retention Plan. Evaluate whether steps should be taken to retain key management. Particularly in cases where the company is in distress, typical equity grants may be insufficient as a retention tool. Further, key employees may consider a future promise of retention payments to be too speculative or risky in light of the company’s financial stress. One strategy that may mitigate the risk is to make an upfront cash retention payment to key employees, with a written agreement that the employee will keep the payment if by a designated milestone the employee has not been fired for cause or did not resign without cause.

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[1] See Gibson, Dunn & Crutcher LLP, Delaware Supreme Court Revisits Oversight Liability (July 29, 2019), https://www.gibsondunn.com/delaware-supreme-court-revisits-oversight-liability/.

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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 any member of the firm’s Coronavirus (COVID-19) Response Team, the Gibson Dunn lawyer with whom you usually work, or the authors:

Authors: Shireen Barday, Mary Beth Maloney, Dennis Friedman, Eduardo Gallardo, Robert Klyman, Jonathan Fortney and Patrick Hayden

The UK Government has announced a series of measures to support public services, people and businesses through this period of severe – but temporary – disruption caused by COVID-19. The Government’s measures are a mixture of tax relief, financing and support towards the cost of employees. Further clarity on the Government’s plans and practical processes for taking advantage of the support is expected to be provided as the days progress.

In this client alert we give a brief overview of the financial packages that have been made available to UK businesses. This is a very fluid situation where UK Government policy announcements are being made on an almost daily basis. The brief overview provided below presents the measures available as at 3 April 2020.

See also the Gibson Dunn Coronavirus (COVID-19) Resource Centre for more details on these UK Government schemes, including our prior client alerts on:

The Covid Corporate Finance Facility and Coronavirus Business Interruption Loans: https://www.gibsondunn.com/covid-19-uk-financial-support-for-businesses-through-purchases-of-commercial-paper-and-lending-to-smes/
The Coronavirus Job Retention Scheme and other UK employment related-matters: https://www.gibsondunn.com/uk-employment-law-considerations-for-companies-responding-to-covid-19-update/ ; https://www.gibsondunn.com/uk-employment-law-updated-considerations-for-companies-responding-to-covid-19/ ; https://www.gibsondunn.com/uk-employment-law-considerations-for-companies-responding-to-covid-19/

Scheme	Details
*Financial Support Measures*
1. COVID-19 Corporate Financing Facility (CCFF)	Under the CCFF scheme, the Bank of England (BoE) will buy commercial paper from larger companies. The CCFF scheme will support companies that are fundamentally strong but which have been affected by a short-term funding squeeze. Small and medium-sized enterprises are unlikely to be able to access the CCFF scheme. The scheme will operate for at least 12 months and will purchase sterling-denominated commercial paper, with the following characteristics: Maturity of one week to twelve months. Where available, a credit rating of A-3 / P-3 / F-3 / R3 from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as at 1 March 2020. Issued directly into Euroclear and/or Clearstream. The CCFF scheme is available to companies, and their finance subsidiaries, that “make a material contribution to the UK economy.” The BoE states that, in practice, firms that meet this requirement would typically be: UK incorporated companies (including those with foreign-incorporated parents and with a genuine business in the UK); companies with significant employment in the UK; firms with their headquarters in the UK. The BoE notes that it will also consider whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK. The CCFF is open to firms that can demonstrate that they were in “sound financial health” prior to the impact of COVID-19. This means companies that had a short or long-term rating of investment grade, as at 1 March 2020, or equivalent. If firms have different ratings from different agencies, and one of those is below investment grade then the commercial paper will not be eligible. The CCFF is open to all firms and sectors, providing that the eligibility criteria as set out above are satisfied. If a firm does not have a credit rating it should speak to its existing lenders and if the firm was considered to be in “sound financial health” at 1 March 2020, a submission can be made to the BoE on that basis. Alternatively, the BoE notes that companies can contact one of the major credit rating agencies to seek an assessment of credit quality in a form that can be shared with the BoE and HM Treasury. More information on eligibility and application documents can be found on the Bank of England Website.
2. Coronavirus Business Interruption Loan Scheme	This temporary scheme supports small and medium-sized businesses with an annual turnover of up to £45 million with access to £5 million of finance in the form of term loans, overdrafts, invoice finance and asset finance facilities for up to six years. The Scheme has also been extended to enable banks to make loans of up to £25 million to firms with an annual turnover of between £45 million and £500 million. The scheme will be delivered through commercial lenders (including all major banks), backed by the UK Government-owned British Business Bank. As part of the scheme, the UK Government will provide lenders with a guarantee of 80% on each loan (subject to a per-lender cap on claims). The UK Government will also make a business interruption payment to cover the first 12 months of interest payments and any lender-levied fees. However, clients should note that the borrower remains 100% liable for the debt. Clients should also note that there is no obligation on a lender to offer a loan within the Scheme. If a lender can offer finance on normal commercial terms without making use of the Scheme, it will do so. Security is not required to secure lending below £250,000. For any borrowing above £250,000, it is open to lenders to ask for security including personal guarantees from directors and security over their assets in support of such guarantees, however, there is a prohibition on taking security over a director’s primary residential property. Taking into consideration the UK Government’s guarantee, any personal guarantees for borrowing in excess of £250,000 are capped at 20% of the outstanding value of the loan. To be eligible to participate in the Scheme the business must meet the following key tests: the applicant must be UK-based in its business activity; the applicant must have an annual turnover of no more than £500 million the applicant must have a borrowing proposal which the lender would consider viable, were it not for the current pandemic; and the applicant must self-certify that it has been adversely impacted by the coronavirus (COVID-19). The full rules of the Scheme (including further eligibility criteria and the application process) is available on the British Business Bank website.
3. Insurance Claims for Notifiable Diseases	Most commercial insurance policies are unlikely to cover pandemics or unspecified notifiable diseases, such as COVID-19. However, those businesses which have an insurance policy that covers government ordered closure and pandemics or government ordered closure and unspecified notifiable disease should be able to make a claim (subject to the terms and conditions of their policy). Businesses are encouraged to check the terms and conditions of their specific policy and contact their providers. Notifiable diseases are certain infectious diseases that registered medical practitioners have a statutory duty to notify the ‘proper officer’ at their local council or local health protection team about when they come across a suspected case. The Government keeps an updated list of notifiable diseases. On 5 March 2020, the government added COVID-19 to its list of notifiable diseases. Many insurers use diseases on notifiable diseases list as triggers for the activation or exclusion of insurance cover. For example, insurers’ policies that cover notifiable diseases will typically only cover a specific subset of notifiable diseases (such as Cholera or Anthrax) that the insurer will reference in the policy documentation. These policies will exclude any notifiable disease not on the insurers list, as well as future/unknown diseases (such as COVID-19). The price that the insurer charges for the policy is modelled against the risk posed by this set list of diseases. Some businesses will have purchased add-ons for their insurance that cover for ‘unspecified notifiable diseases’. These policies effectively cover any disease listed as a notifiable disease, enabling the business to claim for losses for all notifiable diseases as well as from diseases that are unknown at the point the policy is written. The effect of the Government adding COVID-19 to its list of notifiable diseases is to ensure that businesses with unspecified notifiable disease cover are able to make a claim – subject to the terms and conditions in their policy. For example, someone infected with COVID-19 may need to have been on the premises. The Government also asked a number of different businesses and venues to remain closed from 21 March 2020 onwards. Insurers have agreed that this advice is sufficient for businesses covered for COVID-19 losses to make a claim (if the only barrier to them making a claim was a lack of clarity on whether the government had ordered businesses to close). As such, intervention by the police or any other statutory body is no longer required to trigger cover in the current circumstances. However, most businesses’ commercial insurance policies (including for denial of access) are unlikely to offer cover for COVID-19. Insurance policies differ significantly, so businesses are encouraged to check the terms and conditions of their specific policy and contact their providers.
4. State Aid	EU State aid rules apply in the UK during the Brexit transition period which expires on 31 December 2020. On 19 March 2020, the European Commission (Commission) adopted a Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak. Under the Temporary Framework, the Commission can authorize member states and the UK to adopt aid schemes in the form of tax advantages or direct grants, State guarantees or loans on an expedited basis (within 24-48 hours). On 25 March, the Commission approved two UK aid schemes. The guarantees scheme covers 80% of loan facilities for SMEs with a turnover of up to GBP 45 million to cover their working and investment capital needs and will be implemented through the British Business Bank. Under the direct grants scheme, SMEs are eligible for an up to GBP 734,000 support in the form of a direct grant. The schemes will be in place until 30 September 2020, and can be extended by the UK until 31 December 2020. In addition to the Temporary Framework, which provides for the possibility of adopting aid schemes, the UK can grant State aid under the existing (non-COVID-19) State aid rules, which permit member states and the UK, under certain conditions, to: (i) provide rescue aid without first notifying the Commission; and (ii) provide State aid to make good the damage caused by natural disasters or exceptional occurrences. On 12 March, the EC declared that Covid-19 is an exceptional occurrence. Whether larger companies that cannot benefit from the COVID-19 aid schemes, both because of their size and their funding needs, can receive UK Government support will need to be assessed on a case-by-case basis.
*Employment Support Measures*
5. Coronavirus Job Retention Scheme	All UK employers with a PAYE (“pay as you earn”) scheme in operation on 28 February 2020 will be able to access support to continue paying part of their employees’ salary for those that would otherwise have been laid off during this crisis. The scheme applies to all employees that have been asked to stop working, but who are being kept on the pay roll (described as “furloughed workers”). To claim, employees must be designated as furloughed workers and notified of this change. The UK tax authority (HMRC) will reimburse 80% of furloughed workers’ wages, up to £2,500 per month, plus the associated Employer’s National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage. Employers can choose to “top up” the pay of a furloughed employee to 100% of their contractual pay, but are not obliged to under the scheme. The scheme will cover the cost of wages backdated to 1 March 2020. It is initially open for three months, but “will be extended if necessary”. HMRC expects the first grants to be paid by the end of April. In the meantime, if a business needs short term cash flow support, it may be eligible for a Coronavirus Business Interruption Loan (see below). More information here.
6. Self-employment income support scheme	The UK government has outlined details of new Self-Employment Income Support Scheme. The scheme will provide a taxable grant to self-employed individuals (including members of partnerships) worth 80% of average monthly income taken over the last three tax years, capped at £2,500 per month. The scheme is only open to anyone with trading profits less than £50,000 and to those who earn the majority of their income from self-employment. The scheme is unlikely to be up and running before the start of June 2020, so it will not help self-employed individuals with immediate cash flow issues. Unlike the Coronavirus Job Retention Scheme, an eligible self-employed person can continue to work while claiming the grant.
7. Statutory Sick Pay Rebate	Small-and medium-sized enterprises (SME) and employers will be able reclaim Statutory Sick Pay (SSP) paid for sickness absence due to COVID-19. A company is considered an SME if it meets two out of three of the following criteria: (i) Turnover of less than £25 million; (ii) Fewer than 250 employees, and/or (iii) Gross assets of less than £12.5 million. The eligibility criteria for the scheme will be as follows: (i) 2 weeks’ SSP per eligible employee who has been off work because of COVID-19; (ii) SMEs only; (iii) employers can reclaim expenditure for any employee who has claimed SSP (according to the new eligibility criteria) as a result of COVID-19; (iv) employers should maintain records of staff absences and payments of SSP, but employees will not need to provide a GP fit note. If evidence is required by an employer, those with symptoms of coronavirus can get an isolation note from NHS 111 online and those who live with someone that has symptoms can get a note from the NHS website; and (v) the eligible period for the scheme will commence the day after the regulations on the extension of SSP to those staying at home comes into force. The process for claiming a rebate has not yet been developed and further detail is expected in due course. More information here.
*Tax Support Measures*
8. Time to Pay	All businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service. The service previously did not cover corporation tax, PAYE and Valued Added Tax (VAT), however, the UK Government’s measures have now extended to apply to VAT and HMRC will consider deferral of PAYE and corporation taxes on a case by case basis. All arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities. More information here.
9. VAT Deferral	The UK Government has deferred Valued Added Tax (VAT) payments for three months (from 20 March 2020 until 30 June 2020). All VAT-registered UK businesses are automatically eligible without application required. However, quarterly returns should still be filed as normal and HMRC will pay VAT refunds and reclaims as normal (providing cash flow for some businesses). The payment of VAT that has been deferred under the scheme should be paid at the end of the next tax year, in April 2021. More information here.
10. Deferral of Self-Assessment payment	The Self- Assessment payment on account, that is ordinarily due to be paid to HMRC by 31 July 2020 may now be deferred until January 2021. The deferment is automatic but optional. No penalties or interest for late payment will be charged if the July 2020 payment on account is deferred until January 2021. More information here.
11. Business Rates Holiday for Retail, Hospitality and Leisure	Businesses in the retail, hospitality and leisure sectors in England[1] will not have to pay business rates (municipality taxes) for the 2020-21 tax year. There is no action to take. Local authorities will automatically apply the business rates holiday to business rates bills for the 2020/2021 tax year. More information here.
12. Cash Grant for Retail, Hospitality and Leisure	Businesses in England in the retail, hospitality or leisure sector with a rateable value between £15,001 and £51,000 will receive a cash grant of up to £25,000 per property. There is no action to take. Local authorities will write to businesses that are eligible for this grant. More information here.
13. Small Business Grant Funding	This scheme supports small businesses in England that already pay little or no business rates because of small business rate relief, rural rate relief and tapered relief. The scheme will provide a one-off grant of £10,000 to businesses with a rateable value of up to £15,000 to help meet their ongoing business costs. Local Authorities will write to all eligible businesses with information on how to claim this grant. More information here.
14. Business Rates Holiday for Nurseries	Nurseries in England that provide Early Years Foundation Stage do not have to pay business rates for the 2020-21 tax year. Local authorities will automatically apply the business rate holiday to relevant business rates bills for the 2020-21 tax year. More information here.

[1] Some aspects of business support are devolved. Separate schemes may apply in Scotland, Wales and Northern Ireland.

This client update was prepared by Michelle Kirschner, Mark Sperotto, Attila Borsos, Anne MacPherson, Amar Madhani, and Martin Coombes.

The Authors:

Michelle M. Kirschner – London, Financial Institutions (+44 (0)20 7071 4212, [email protected])
Mark Sperotto – London, Private Equity (+44 (0)20 7071 4291, [email protected])
Attila Borsos – Brussels, Antitrust (+32 2 554 72 11, [email protected])
Anne MacPherson – London, Senior Transactional PSL (+44 (0)20 7071 4134, [email protected])
Martin Coombes – London, Financial Institutions (+44 (0)20 7071 4258, [email protected])
Amar Madhani – London, Private Equity and Real Estate (+44 (0)20 7071 4229, [email protected])

London Key Contacts:

Sandy Bhogal – London, Tax (+44 (0)20 7071 4266, [email protected])
Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, [email protected])
Gregory A. Campbell – London, Restructuring and Finance (+44 (0)20 7071 4236, [email protected])
James A. Cox – London, Employment (+44 (0)20 7071 4250, [email protected])
Patrick Doris – London, Litigation & Data Protection (+44 (0)20 7071 4276, [email protected])
Christopher Haynes – London, Corporate (+44 (0)20 7071 4238, [email protected])
James R. Howe – London, Private Equity (+44 (0)20 7071 4214, [email protected])
Anna Howell – London, Energy, Oil & Gas (+44 (0)20 7070 4241, [email protected])
Charles Falconer, QC – London, Litigation (+44 (0)20 7071 4270, [email protected])
Jeremy Kenley – London, M&A, Private Equity & Real Estate (+44 (0)20 7071 4255, [email protected])
Penny Madden, QC – London, Arbitration (+44 (0)20 7071 4226, [email protected])
Ali Nikpay – London, Antitrust (+44 (0)20 7071 4273, [email protected])
Philip Rocher – London, Litigation (+44 (0)20 7071 4202, [email protected])
Selina S. Sagayam – London, Corporate (+44 (0)20 7071 4264, [email protected])
Alan A. Samson – London, Real Estate & Real Estate Finance (+44 (0)20 7071 4222, [email protected])
Jeffrey M. Trinklein – London, Tax (+44 (0)20 7071 4264, [email protected])

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

On 3 April 2020, the UK Financial Conduct Authority (“FCA”) published a statement setting out its expectations of FCA solo-regulated firms under the Senior Managers and Certification Regime (“SMCR”) during the COVID-19 outbreak. This client alert provides FCA solo-regulated firms with an overview of the FCA’s SMCR-related expectations.

What are the responsibilities of senior management during the current outbreak?

The FCA has previously stated that it does not require firms to have a single senior manager responsible for their coronavirus response. Rather, firms should allocate these responsibilities in the way which best enables them to manage the risks they face. The FCA’s latest statement notes that senior managers are responsible for risks in their areas of responsibility and should be considering:

where the current situation might lead to emerging risks, and
how it affects existing risks, along with the controls used to manage them.

Does my firm need to make changes to statements of responsibilities?

The FCA recognises that some firms may need to make temporary arrangements to cover absences or change senior manager responsibilities in light of the COVID-19 outbreak. However, the FCA has stated that it wants to minimise the burden to firms at this time and does not intend to enforce the requirement on firms to submit updated statements of responsibilities provided that the change is:

is made to cover multiple sicknesses, or other temporary changes in responsibilities in direct response to the pandemic, and
is temporary and expected to revert to the firm’s previous arrangements.

However, the FCA does expect allocations (even if temporary) to be clearly documented internally to ensure that those within the firm understand who is responsible for what. This must be made available to the FCA on request. Furthermore, firms’ internal records should aim to keep a “running commentary” of their senior manager population and their responsibilities during this period. The FCA has stated that this includes keeping statements of responsibilities, role profiles and, if applicable, responsibilities maps up-to-date. The FCA does not expect firms to notify it of such temporary arrangements using Form D.

Firms that are classified as “fixed portfolio” firms should supply the FCA with timely detail of the changes they would normally include in updated statements of responsibilities. Firms should also update their FCA supervisors of any furloughing of one or more senior managers.

What if my firm needs to make temporary arrangements for senior management functions?

The FCA intends to issue a Modification by Consent to the “12 week rule” to support firms using temporary arrangements during the crisis. The 12 week rule permits an individual to cover for a senior manager without FCA approval where the absence is temporary or reasonably unforeseen and the appointment is for less than 12 consecutive weeks. If temporary arrangements last longer than 12 weeks as a result of the COVID-19 outbreak, firms can notify the FCA that they consent to a modification of the 12 week rule. In these cases, temporary arrangements can be extended up to 36 weeks.

Under the modification, firms will also be able to allocate the prescribed responsibilities of the absent senior manager to the individual who is standing in for the absent Senior Manager. Usually, prescribed responsibilities can only be allocated to another FCA approved senior manager under this rule. However, if possible, the FCA still expects firms to do this. Firms should still allocate to the most senior person responsible for that activity or area, who has sufficient authority and an appropriate level of knowledge and competence to carry out the responsibility properly. The “temporary” manager will require access to the governance forums they need to exercise their responsibilities.

The FCA expects firms to clearly document these responsibilities, however temporary, including on relevant statements of responsibilities and, if applicable, responsibilities maps.

What notifications does my firm need to make?

The FCA does not expect firms to submit the updated statement of responsibilities of the absent senior manager or of senior managers who take on the responsibilities of the absent manager. However, the FCA does expect allocations to be clearly documented internally. Although, the FCA has stated that, if applicable, the firm’s responsibilities map should reflect the responsibilities of those non-senior managers with temporary responsibilities taken on under the 12 week rule.

What is the position regarding furloughed senior managers?

The FCA has previously noted that senior managers may be considered key workers. However, there may be circumstances where a senior manager has been furloughed. Unless such a senior manager is permanently leaving their position, the senior manager will retain their FCA approval and will not be required to re-apply for approval on their return to work.

To the extent that a firm is subject to the “Overall Responsibility” rule, the responsibilities of the furloughed senior manager must be allocated to another senior manager. If the firm is relying on the 12 week rule, the replacement does not need not be a senior manager.

Does my firm need to re-allocate prescribed responsibilities?

If a firm has furloughed a senior manager, that senior manager’s prescribed responsibilities should be re-allocated to another senior manager. However, if a temporary replacement has been appointed under the 12 week rule, the proposed modification by consent allows the firm to re-allocate prescribed responsibilities to the temporary replacement, even if the replacement is not a senior manager.

The FCA has stated that individual performing “required function” (for example, Compliance Oversight and MLRO) should only be furloughed as a last resort. Where an individual holding a required function is furloughed, the firm should replace that individual until their return. If the replacement is temporary, firms can use the 12 week rule to arrange cover. The FCA’s rules regarding who can hold certain functions still apply. For example, executives should not be allocated an oversight role.

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Authors: Michelle Kirschner and Martin Coombes

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

Yesterday, the U.S. Small Business Administration (“SBA”) published an interim final rule on affiliation (the “Affiliation IFR”) (available here), a summary of affiliation tests (available here) (the “Summary”), a lender application form and agreement (available here and here, respectively), and FAQs (available here), with respect to, the Paycheck Protection Program (the “Program” or “PPP” and such rule, the “Rule”). As described in greater detail in our previous client alerts, 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, and Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program, the Program provides $349 billion to help small businesses impacted by COVID-19 keep their employees on the payroll and their businesses solvent.

The Affiliation IFR is effective immediately and confirms the general principle that a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP. The only waivers to this general rule for purposes of the Program are a new exemption for faith-based organizations established by the Affiliation IFR and the three affiliation rule waivers established by the CARES Act for any business concern: (1) with not more than 500 employees and that is assigned a North American Industry Classification System code beginning with 72; (2) operating as a franchise that is assigned a franchise identifier code by the SBA; and (3) that receive financial assistance from a small business investment company (i.e., a company licensed under section 301 of the Small Business Investment Act of 1958). The CARES Act also makes eligible a business concern that “employs not more than 500 employees per physical location of the business concern and that is assigned a North American Industry Classification System code beginning with 72 at the time of disbursal.”

The Affiliation IFR also clarifies that the 500 employee eligibility standard applies to only “employees whose principal place of residence is in the United States.” The CARES Act itself does not state a clear rule as to the locus of employees for purposes of determining whether a business concern meets the eligibility standard; it simply sets the eligibility standard at “500 employees.” The SBA size standards regulations at 13 CFR 121.106 clearly state that the employee eligibility calculation includes domestic and foreign employees. The Affiliation IFR, on the other hand, states the different standard noted above. Our view is that clients should know what the Affiliation IFR states and that this interpretation is neither compelled by nor inconsistent with the CARES Act. If a business concern chooses to apply for a PPP loan, we recommend that it state clearly in an addendum to the application form how it is interpreting the employee eligibility requirements and note its foreign employees. We recommend further that the applicant state in an addendum that it would use the portion of the funds allocated to payroll costs exclusively to benefit its employees in the U.S., and not its non-U.S. employees.

The Summary is almost identical to the language of the first four bases for affiliation described in the existing SBA affiliation rules.[1] The Summary provides that affiliation under four different circumstances is sufficient to establish affiliation under the Program:

Ownership. Affiliation exists as a result of ownership or the power to control more than 50% of voting equity.

If no individual, concern, or entity owns or controls more than 50% of a concern’s voting equity, the Board of Directors or President or CEO (or other officers, managing members, or partners who control the concern’s management) are deemed to control the concern.
A minority shareholder is deemed to control the concern if the shareholder has the right under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board or shareholders.

Stock options, convertible securities, and merger agreements. The rights granted under stock options, convertible securities, and agreements to merge (including agreements in principle, but not agreements to negotiate) are deemed to have been exercised. For example, if a 20% stockholder has an option to acquire another 30% of the concern’s voting stock, that stockholder is deemed an affiliate of the concern.

SBA will not deem exercise of the following to have occurred: options, convertible securities, and agreements that are subject to conditions precedent which are incapable of fulfillment, speculative, conjectural, or unenforceable, or where the probability of the transaction (or exercise of the rights) occurring is extremely remote.
A shareholder that agrees to divest its ownership interest in a concern is still deemed to own such interest.

Management. If the CEO, President, other officers, managing members, or partners who control the management of a concern also control the management of another concern, the concerns are affiliates. If a single individual, concern, or entity that controls the Board of Directors or management of a concern also control the Board of Directors or management of another concern, the concerns are affiliates.

Affiliation also arises where a single individual, concern or entity controls the management of a concern through a management agreement.

Identity of interest. If an individual and his or her spouse, parent, child, sibling or spouse of such any such person have identical or substantially identical business or economic interests (such as where they operate concerns in the same or similar industry in the same geographic area), they are affiliates.

Affiliation based on identity of interest may be rebutted with evidence showing that the interests deemed to be one are in fact separate.

Unlike the SBA’s existing rules (available here), the Summary does not provide that affiliation may arise between individuals or firms with common investments, or firms that are economically dependent through contractual or other relationships). Also unlike the existing SBA rules, the Summary does not establish affiliation based on: the “newly organized concern rule” applicable to concerns actively operating for two years or less; the totality of the circumstances; or franchise agreements.

While the Affiliation Rule is effective immediately, the SBA will solicit public comments and consider the need to make revisions in light of such comments.

The FAQ states that the SBA, in consultation with the Department of Treasury, intends to provide timely additional guidance to address borrower and lender questions concerning the Program. Such guidance may be relied upon as the SBA’s interpretation of the CARES Act and the Paycheck Protection Program Interim Final Rule. The FAQ states it will be updated on a regular basis. The initial FAQ provided clarifies that Program lenders are not required to replicate every borrower calculation. Instead, “lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost.” The SBA also issued a separate set of FAQs for faith-based organizations.

____________________

[1] The Affiliation Rule states that the detailed affiliation standards contained in 13 CFR 121.103 do not apply to PPP borrowers. This is consistent with SBA regulations in effect prior to the enactment of the CARES Act. Applicants for Section 7(a) loans, including PPP loans, are subject to the affiliation rule contained in 13 CFR 121.301 pursuant to 13 CFR 103(a)(8) and 13 CFR 301(f).

____________________

Authors: Michael D. Bopp, Roscoe Jones, Jr.*, Alisa Babitz, Courtney Brown, Alexander Orr, William Lawrence and Samantha Ostrom

* 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.

On 31 March 2020, the European Securities and Markets Authority (“ESMA”) issued a public statement[1] to clarify issues regarding the publication by execution venues and firms of best execution reports required by RTS 27 and RTS 28 of MiFID II. This client alert provides an overview of ESMA’s public statement and its consequences for execution venues and firms.

What are the best execution reporting requirements?

Execution venues are required to periodically published information in accordance with RTS 27. This information is intended to provide the public and firms with relevant data to measure the quality of execution on execution venues. Firms are also required to periodically publish information under RTS 28 to enable the public and investors to evaluate the quality of a firm’s execution practices by requiring publication of information about how and where the firm has executed client orders.

Why is ESMA suggesting regulatory forbearance in relating to best execution reporting obligations?

ESMA has stated it recognises that the exceptional circumstances created by the COVID-19 outbreak means that execution venues and firms may need to deprioritise efforts for the publication of RTS 27 and RTS 28 reports concerning 2019.

ESMA has decided to issue the public statement to promote co-ordinated action by national competent authorities (“NCAs”) and to provide clarity to execution venues and firms subject to the disclosure requirements. ESMA recommends that NCAs take into account the current climate by considering the possibility execution venues and firms can report in line with an amended reporting timetable.

What changes has ESMA suggested to best execution reporting deadlines?

Having regard to the coronavirus outbreak, ESMA’s public statement encourages NCAs not to prioritise supervisory action against execution venues and firms in relation to the latest best execution reporting deadlines. ESMA also encourages NCAs to adopt a risk-based approach in the exercise of their supervisory powers in enforcement of RTS 27 and RTS 28 concerning these deadlines.

Requirement	Original disclosure date	New suggested disclosure date
RTS 27 disclosure	For execution venues, 31 March 2020 in respect of RTS 27 reports on the quarterly information regarding the reporting period from 1 October to 31 December 2019.	Execution venues unable to publish RTS 27 reports due by 31 March 2020 may only be able to publish them as soon as reasonably practicable after that date and no later than by the following reporting deadline (i.e. 30 June 2020).
RTS 28 disclosure	For firms, 30 April 2020 in respect of RTS 28 reports on the annual information regarding the reporting period of 2019.	Firms may only be able to publish the RTS 28 reports due by 30 April 2020 on or before 30 June 2020.

What steps should execution venues and firms take now?

ESMA has recommended that execution venues and firms should keep records of any decision made in relation to any delay to the publication of RTS 27 or RTS 28 disclosures. ESMA’s public statement also reminds firms of their core obligations to achieve best execution for clients and to ensure fair order handling and allocations during current market volatility. Execution firms and firms should also take note of any further publications by their respective NCAs in relation to the best execution reporting obligations.

[1] https://www.esma.europa.eu/sites/default/files/library/esma35-36-1919_esma_statement_on_covid-19_and_best_execution_reports.pdf

Authors: Michelle Kirschner and Martin Coombes

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

The UK Financial Conduct Authority (“FCA”) has made clarifications to its previous announcement on 16 March regarding the European Securities and Markets Authority’s (“ESMA’s”) decision concerning temporary amendments to short selling notification thresholds under the Short Selling Regulation (“SSR”). The FCA will now be ready to receive notifications at the lower threshold from 6 April 2020.

This client alert provides firms holding net short positions with an overview of the FCA’s new notification thresholds in light of the coronavirus outbreak.

What did the ESMA decision say?

The SSR requires holders of net short positions in shares trades on a European Union (“EU”) regulated market to notify notifying national competent authorities of their position.

ESMA published a decision on 16 March 2020 that it was temporarily amending the threshold of net short positions under the SSR from 0.2% of issued share capital to 0.1%. The decision applies until 16 June 2020.

ESMA stated that lowering the reporting threshold was a precautionary action that was essential for authorities to monitor developments in markets during the ongoing coronavirus outbreak.

What did the FCA’s statement on 17 March 2020 say?

The FCA confirmed that it would apply ESMA’s decision in the UK. However, the FCA noted that this would require changes to its technology to receive the data at the new threshold. The FCA stated that firms should continue to reporting in compliance with the existing thresholds until further notice.

When do the new notification thresholds apply?

On 31 March 2020, the FCA confirmed that it has made the required changes to its systems and will be ready to receive notifications at the lower threshold.

Firms must comply with the new thresholds from Monday 6 April 2020. However, firms are not required to amend and resubmit notifications submitted to the FCA between 16 March 2020 and 3 April 2020.

In line with the SSR, the new reporting obligation will apply to shares for which the FCA is the relevant competent authority and not to exempted shares where the principal venue for the trading of the shares is located outside of the EU.

What if a firm’s systems are unable to report at the new threshold?

The FCA states that firms should make best efforts to report at the lower threshold from 6 April 2020. However, the FCA appreciates that it may not be possible for some firms to amend their systems by this date. If a firm is unable to report at the new thresholds by 6 April 2020, they must contact [email protected] to discuss the matter further.

Authors: Michelle Kirschner and Martin Coombes

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

We have received many questions about aid to small businesses and non-profit organizations in the New York tri-state area. Below please find a compilation of Federal and state-specific resources that are available to assist eligible small businesses and non-profit organizations in the New York tri-state area related to the COVID-19 pandemic. For your convenience, where applicable, we have included links to the relevant third party’s website so you can easily access more information about the resources being offered by that third party. This document provides you with a general outline of certain available resources, but please note that (i) this document does not purport to contain information on all Federal, state, and local resources available to small businesses and non-profits and (ii) there may be additional resources not listed below that are available to assist your small business or non-profit organization.

I. Financial Assistance – Resources and Information

A. Federal[1]

1. 1. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
    - Small Business Administration (“SBA”) Emergency Small Business Loans: Provides funding for special emergency loans (“Emergency 7(a) Loans”) for eligible nonprofits and small businesses, permitting them to cover costs of payroll, operations, and debt service, and provides that the loans be forgiven in whole or in part under certain circumstances. Other aspects of these loans include:
    - General Eligibility: Available to business concerns that existed on March 1, 2020 that employ not more than the greater of (i) 500 employees or (ii) if applicable, the size standard in number of employee established by the SBA for the industry in which the business concern operates.
    - Loan Use: Loan proceeds may be used to make payroll and associated costs, including health insurance premiums, facilities costs, and debt service.
    - Loan Forgiveness: Employers that maintain employment between February 15 and June 30 would be eligible to have their loans forgiven, essentially turning the loan into a grant. The loan forgiveness amount is excluded from taxable income.
    - Loan Limitation: The amount of an Emergency 7(a) Loan will typically equal the lesser of (i) $10 million and (ii) 5x the average monthly payroll costs[2].
    - Affiliation Rules: The CARES Act allows certain business concerns that previously did not qualify for an SBA loan because its affiliations caused the business concern to exceed the applicable employee thresholds to qualify for a covered loan.
    - Application Process: To apply for Emergency 7(a) Loans, please use the following resources to contact a participating SBA lender:
      - SBA Resources:
        
        SBA Lender Match Program: https://www.sba.gov/funding-programs/loans/lender-match
        
        List of 100 most active SBA 7(a) lenders: https://www.sba.gov/article/2020/mar/02/100-most-active-sba-7a-lenders
      - Wells Fargo SBA Program: https://www.wellsfargo.com/biz/sba/
      - JPMorgan Chase SBA Program: https://www.chase.com/business/loans/sba-loans
      - TD Bank SBA Program: https://www.td.com/us/en/small-business/sba-loan-programs/
    - Economic Injury Disaster Loans (“EIDL”): Eliminates creditworthiness requirements and appropriates an additional $10 billion to the EIDL program so that eligible nonprofits and other applicants with 500 or fewer employees can get checks for $10,000 within three days.
      - Please see Section I.A.2 below for more information on the application process for the EIDL program.
    - Self-Funded Nonprofits and Unemployment: Only reimburses self-funded nonprofits for half of the costs of benefits provided to their laid-off employees.[3]
    - Charitable Giving Incentive: Includes a new above-the-line deduction (universal or non-itemized deduction that applies to all taxpayers) for total charitable contributions of up to $300. The incentive applies to contributions made in 2020 and would be claimed on tax forms next year. The bill also lifts the existing cap on annual contributions for those who itemize, raising it from 60% of adjusted gross income to 100%. For corporations, the bill raises the annual limit from 10% to 25%. The deduction for donations of food from corporations would be available to 25%, up from the current 15% cap.
    - Employee Retention Payroll Tax Credit: Creates a refundable payroll tax credit of up to $5,000 for each employee on the payroll when certain conditions are met. The entity had to be an ongoing concern at the beginning of 2020 and had seen a drop in revenue of at least 50% in the first quarter compared to the first quarter of 2019. The availability of the credit would continue each quarter until the organization’s revenue exceeds 80% of the same quarter in 2019. For tax-exempt organizations, the entity’s whole operations must be taken into account when determining the decline in revenues. Notably, employers receiving emergency SBA 7(a) loans would not be eligible for these credits.
    - Industry Stabilization Fund: Creates a loan and loan guarantee program for industries like airlines to keep them solvent through the crisis. It sets aside $425 billion for “eligible business” which is defined as “a United States business that has not otherwise received economic relief in the form of loans or loan guarantees provided under” the legislation. It is expected that charitable nonprofits qualify under that definition for industry stabilization loans. Mid-sized businesses, including nonprofits, that have between 500 and 10,000 employees are expressly eligible for these loans. Although there is no loan forgiveness provision in this section, the mid-size business loans would be charged an interest rate of no higher than 2% and would not accrue interest or require repayments for the first six months. Nonprofits accepting the mid-size business loans must retain at least 90% of their staff at full compensation.
1. 1. SBA Economic Injury Disaster Loan Program

- - - SBA is providing targeted, low-interest working capital loans of up to $2 million to small businesses and non-profits affected by COVID-19. These loans carry an interest rate of 3.75% for small businesses and 75% for non-profits. Loan repayment terms vary by applicant, up to a maximum of 30 years.
    - Apply online at: https://www.sba.gov/page/disaster-loan-applications
      - Please use the following link for more information on the application process for the EIDL program: https://www.sba.gov/disaster/apply-for-disaster-loan/index.html. Alternatively, please call the SBA Disaster Assistance Customer Service Center at 1-800-659-2955 for additional information.
    - See:
      - https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
      - https://www.forbes.com/sites/advisor/2020/03/20/list-of-coronavirus-covid-19-small-business-relief-programs/#dbf7a71e89dd

1. 1. SBA Consultants:

- - - Please note that there are consultants who are willing to assist in the SBA filing/application process for a fee. We would be happy to connect you with a SBA loan consultant if so desired.

1. 1. Other Options to Consider:

- - - Develop a list of potential donors (grant-making organizations, family foundations, or major donors) that are known to support the same cause, and request a grant or donation. Consider requesting the donation as an interest-free loan.
    - Review force majeure clauses in the non-profit’s major contracts to see if those clauses exempt the non-profit from performing its obligations on the grounds of a government order not to operate or the occurrence of a disease or pandemic.
    - Even if there are no force majeure clauses in those contracts, ask the counterparties for a one or two month reprieve from making any obligated payments, or negotiate a payment plan that will result in the full amount being paid over time, after the pandemic.

B. New Jersey Specific

1. 1. New Jersey Government resources

- - - Small Business Fund (https://www.njeda.com/financing_incentives/programs/small_business_fund)
      - Amount: Up to $500,000 with 1.0x historical debt service coverage.
      - Uses: Fixed assets or working capital.
      - Eligibility: Small businesses must have been in operation for at least one full year, and non-profits for at least three full years.
    - Bond Financing (https://www.njeda.com/financing_incentives/programs/bond_financing)
      - Amount:
        
        $500,000 to $10 million in tax-exempt bonds for for-profit companies.
        
        $500,000 with no dollar limit in tax-exempt bonds for qualified non-profit organizations.
      - Uses: Capital improvements/expansions, working capital, debt refinancing, etc.
      - Eligibility: Borrowers must meet the eligibility requirements outlined in the Internal Revenue Code in order to qualify for tax-exempt bond financing.

1. 1. Emergency relief funds providing support for eligible non-profits

- - - New Jersey Pandemic Relief Fund (https://njprf.org/)
      - As of March 28, 2020, the New Jersey Pandemic Relief Fund has not provided any information regarding grant requirements, eligibility, etc. This fund expects to post application information to its website in the near future.
    - South Jersey COVID-19 Response Fund (https://www.communityfoundationsj.org/)
      - Amount: One-time support grants of at least $3,000.
      - Eligibility: Non-profit organizations aimed at assisting South Jersey residents that otherwise meet one of the following three criteria:
        
        Triage: Community-based non-profits that have increased demand for services from South Jersey residents due to COVID-19, including organizations that focus on providing economic security and related services to South Jersey residents.
        
        Treatment: Human service non-profits that are modifying their delivery modes due to COVID-19.
        
        Recovery: Non-profits facing extreme difficulty because of lost revenue due to closures and cancellations, as well as other business model challenges resulting from the pandemic.
      - COVID-19 Rapid Response Fund (https://www.nnjcf.org/2020/03/covid-19-rapid-response-fund/)
        
        As of March 28, 2020, the COVID-19 Rapid Response Fund has not provided any information regarding grant requirements, eligibility, etc. This fund expects to post application information to its website in the near future.
      - Princeton Area Community Foundation COVID-19 Relief & Recovery Fund (https://pacf.org/the-princeton-area-community-foundation-covid-19-relief-recovery-fund/)
        
        Amount: This fund is accepting requests for unrestricted support, although the fund also states on its website that non-profits should be “realistic in the amount of [its] request. While fundraising efforts are continuous, [the fund has] limited resources, and [it is] trying to meet as many needs as possible.”
        
        Eligibility: No specific criteria is listed, but information located on the fund’s website suggests that this fund is aimed at assisting non-profits servicing the local community (i.e., Princeton, NJ and surrounding areas).
      - OceanFirst Foundation Rapid Response Grants and Good Neighbor Grants (http://www.oceanfirstfdn.org/covid-19-information-updates/)
        
        Amount: Up to $5,000.
        
        Eligibility: Non-profits are only eligible for these grants.
      - PHL COVID-19 Fund (https://www.phlcovid19fund.org/covid-19/)
        
        Amount: Grant amounts will be calculated based on an organization’s operating budget.
        
        Eligibility: Non-profits operating in Bucks, Chester, Delaware, Montgomery and Philadelphia counties in Pennsylvania and Atlantic, Burlington, Camden, Cape May, Cumberland counties in New Jersey.

C. New York Specific

1. 1. New York Government resources

- - - NYC Employee Retention Grant Program (https://www1.nyc.gov/site/sbs/businesses/covid19-business-outreach.page)
      - Amount: Grant amounts will cover 40% of payroll costs for two months.
      - Uses: Retention of employees.
      - Eligibility:
        
        Be located within the five boroughs of New York City.
        
        Demonstrate that the COVID-19 outbreak caused at least a 25% decrease in revenue.
        
        Employ 1-4 employees in total across all locations.
        
        Have been in operation for at least 6 months.
        
        Have no outstanding tax liens or legal judgements.
      - NYC Small Business Continuity Loan Fund (https://www1.nyc.gov/site/sbs/businesses/covid19-business-outreach.page)
        
        Amount: Interest-free loan in an amount up to $75,000.
        
        Eligibility:
        
        Be located within the five boroughs of New York City.
        
        Demonstrate that the COVID-19 outbreak caused at least a 25% decrease in revenue.
        
        Employ 99 employees or fewer in total across all locations.
        
        Demonstrate ability to repay the loan.
        
        Have no outstanding tax liens or legal judgements.
        
        New York State Nonprofit Security Grant Program (http://www.dhses.ny.gov/grants/nonprofit/nsgp.cfm)
        
        Amount: Up to $100,000.
        
        Eligibility: Non-profit organizations who are prequalified in the NYS Grants Management system.

1. 1. Emergency relief funds providing support for eligible non-profits

- - - NYC COVID-19 Response & Impact Fund – Grants (https://www.nycommunitytrust.org/covid19/)
      - Amount: No specific amounts are specified on the fund’s website.
      - Eligibility: Non-profits that generally meet the governance and financial standards of the Better Business Bureau, including a board of directors with at least five members, and no more than one paid board member.
    - Nonprofit Finance Fund (NFF) – NYC COVID-19 Response & Impact Fund – Loans (https://nff.org/nyc-covid-19-recovery-fund)
      - Amount: Unsecured loans ranging from $100,000 to $3 million.
      - Eligibility:
        
        501(c)(3) nonprofit organization.
        
        Based in New York City.
        
        Annual non-governmental revenue of $20 million or less.
        
        Receive New York City or New York State government funding.
        
        History of delivering effective programs and services equitably for New York City residents.
      - North Star Fund (https://northstarfund.org/apply/)
        
        Amount: Grants typically range from $5,000 to $10,000.
        
        Eligibility: Non-profits that are:
        
        Located in at least one of the five boroughs of New York City, or in Westchester, Rockland, Putnam, Orange, Dutchess, Ulster, Sullivan, Columbia, Greene, Delaware, Rensselaer, Albany and Schoharie counties.
        
        Operating with a budget of less than $800,000.
        
        Northern New York Community Foundation: Community Support Fund for COVID-19 (http://www.nnycf.org/recent-news/community-support-fund/)
        
        Amount: The fund’s website does not specify the amount that will be awarded for each grant, but the amount of the entire fund is $50,000.
        
        Eligibility: Non-profits that are located in Jefferson, Lewis and St. Lawrence counties and that work to support essential needs the local community.
        
        Robin Hood Relief Fund (https://www.robinhood.org/relief-fund-application/)
        
        Amount: The average grant will equal $45,000.
        
        Eligibility: Non-profits that provide services to low-income communities in New York City.
        
        Adirondack Foundation: COVID-19 Special and Urgent Needs Fund (https://www.adirondackfoundation.org/press/special-and-urgent-needs-fund-activated-help-adirondack-communities-respond-covid-19)
        
        Amount: Up to $10,000, but the fund reserves the right to provide grants in excess of $10,000.
        
        Eligibility: Non-profits that are located in the Adirondack region, which includes all of Clinton, Essex, Franklin and Hamilton counties as well as the parts of Herkimer, St. Lawrence, Warren, and Washington counties within the Adirondack Park boundary and the Saint Regis Mohawk Reservation.
        
        Central New York Community Foundation: COVID-19 Community Support Fund (https://cnycf.org/covid19#.XnKELahKg2w)
        
        Amount: Up to $50,000.
        
        Eligibility: Non-profits that are located in Central New York and that are working with communities who are disproportionately impacted by COVID-19 and the economic consequences of this outbreak.

D. Connecticut Specific

1. 1. Connecticut Government resources

- - - Connecticut Recovery Bridge Loan Program (https://portal.ct.gov/DECD/Content/Coronavirus-Business-Recovery/CT-Recovery-Bridge-Loan-Program)
      - Amount: The lesser of (i) $75,000 and (ii) three months of operating expenses.
      - Uses: Working capital.
      - Eligibility:
        
        Have no more than 100 employees.
        
        Be in good standing with the Department of Revenue Services & Department of Economic and Community Development.
        
        Have been profitable prior to March 10, 2020— with no adverse personal credit reports 60 days past due the past six months.
        
        Not be involved in real estate, multi-level marketing, adult entertainment, cannabis or firearms; nor be a state elected public official or state employee.

1. 1. Emergency relief funds providing support for eligible non-profits

- - William Caspar Graustein Memorial Fund (http://www.wcgmf.org/home)
    - Amount: The fund website does not specify the typical amount of each grant.
    - Eligibility: Non-profits located in Connecticut.
  - Community Foundation of Eastern Connecticut: Neighbors for Neighbors Fund (https://www.cfect.org/Our-Initiatives/Response-to-COVID-19)
    - Amount: The fund website does not specify the typical amount of each grant.
    - Eligibility: Non-profits that serve communities in Eastern Connecticut.
  - Hartford Foundation for Public Giving: COVID-19 Response Fund (https://www.hfpg.org/nonprofits)
    - Amount: The fund website does not specify the typical amount of each grant.
    - Eligibility: Non-profits that serve communities in the Hartford, Connecticut region.

II. Other Guidance

A. New Jersey Specific

1. 1. Center for Non-Profits – COVID-19 Resource Center (https://www.njnonprofits.org/COVID-19.html)

- - - Free webinars addressing non-profit governance, operations, and fundraising during the COVID-19 pandemic.
    - Links to emergency relief funds for eligible non-profits and others.
    - Access to other resources, including information related to: insurance, fundraisers, payroll/employee matters, telecommuting, etc.

1. 1. Invest Newark – COVID-19 Resource Center (https://investnewark.org/covid-19/)

- - - Free webinar and other resources devoted to helping small businesses and non-profits address the current pandemic.
    - Access to local, state, and national resources designed to assist small businesses during the COVID-19 outbreak.

B. New York Specific

1. 1. New York Council of Nonprofits – COVID-19 Resources (https://www.nycon.org/resources/covid-19-resources-for-nonprofits)

- - - Registrations to participate in weekly webinars to discuss pertinent topics.
    - Access to other state and national resources designed to assist non-profits during the COVID-19 outbreak.

C. Connecticut Specific

1. 1. Connecticut Non-Profit Alliance – COVID-19 Response Resource Center (http://ctnonprofitalliance.org/)

- - - Links to federal and state resources that have been established in connection with the COVID-19 outbreak.

D. General

1. 1. Navigating Non-Profit Leadership During COVID-19 Webinar (https://www.youtube.com/watch?v=8fiRE6nutr0)

- - - Webinar designed to provide insights for non-profit leaders leading their organizations during the COVID-19 pandemic.
    - Topics include:
      - Donor Engagement
      - Remote Staffing
      - Financial Strategy & Planning
      - Technology Tools
      - Virtual Events & Fundraising
      - Program Impact
      - Communications Strategy
      - Self-Care
    - Webinar (short-hand) notes available at: https://theideationinc.app.box.com

1. 1. Miller Center for Social Entrepreneurship – Crisis Management Resources (https://www.millersocent.org/covid19/)

- - - Navigating the Crisis – A Survival Checklist for Your Enterprise.
    - COVID-19 Webinars.
    - Links to relief funds for eligible non-profits and others.

1. 1. To assist with staff working remotely, Zoom Discount Program at TechSoup provides discounted video and web conferencing as well as webinar software to eligible non-profits. (https://www.techsoup.org/zoom)

[1] The SBA is expected to issue additional regulations on some of the topics discussed below. Once available, please review those materials as they will provide further guidance on the implementation of the provisions referenced in this section.

[2] Payroll costs are defined to include payments for salary, wage, commission, or similar compensation; payments for cash tips or equivalent; payments for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits; payment of any retirement benefit; payment of state or local tax assessed on the compensation of employees; payments of any compensation or income of a sole proprietor or independent contractor that is an amount not more than $100,000 in one year, as prorated for the covered period. “Payroll costs” do not include the compensation of an individual employee in excess of an annual salary of $100,000, as pro-rated for the covered period; taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code; compensation of an employee whose principal place of residence is outside of the United States; and qualified sick leave wages or qualified family leave wages for which a credit is already allowed under the Families First Coronavirus Response Act.

[3] For more information on Self-Funded Nonprofits and Unemployment, please refer to the following article: https://www.councilofnonprofits.org/thought-leadership/self-insured-nonprofits-and-unemployment-insurance.

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. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Public Policy Group, or the authors:

Richard J. Birns – New York (+1 212-351-4032, [email protected])
Eric B. Sloan – New York, Washington, D.C. (+1 212-351-2340, [email protected])
Stefan G. dePozsgay – New York (+1 212-351-2368, [email protected])
Sean McFarlane – New York (+1 212-351-3878, [email protected])

Attorney Advertising: The enclosed materials have

This application of the CARES Act to real estate specific issues was prepared as of March 30, 2020.

On March 29, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“ CARES ACT”), a $2.2 trillion stimulus package designed to mitigate the effects of the novel coronavirus (“COVID-19”). The ACT provides, among other things, unprecedented economic assistance to millions of Americans and small and distressed businesses.

Most significantly for our real estate clients, the legislation (a) establishes certain forbearance, foreclosure and eviction limitations upon owners/lenders of certain properties secured by government-backed loans; (b) establishes a $349 billion loan guarantee program to help small businesses keep employees on the payroll and cover necessities (the “SBA Paycheck Protection Program”); and (c) extends $454 billion to businesses, states and cities especially impacted by the coronavirus and not receiving loans through any other provision in the Act (“Title IV Funding”).

This analysis is designed to educate real estate stakeholders in order to maximize their ability, and that of their tenants, to access available stimulus funds, in particular, to identify and explain the provisions of the SBA Paycheck Protection Program and Title IV Funding; enable real estate stakeholders to determine their own eligibility for relief under the Act and that of their tenants; and to highlight issues requiring further clarity in the real-estate applied space, which the industry can and should consider in formulating any collective response/comment to implementing regulations.

The authors note that the Act addresses several additional topics relevant to real estate clients, including, among them, compensation and benefit, labor and employment and tax matters, which are not included in this analysis. The author refers the reader to the CARES Act Client Alert available at www.gibsondunn.com/category/publications for such broader analysis, and to the list of Gibson Dunn practice group leaders contained therein, who may be contacted at any time with questions.

What eviction and/or foreclosure relief for borrowers and tenants are included in the Act?

Forbearance, Not Foreclosure Moratorium, for Multi Family Borrowers of Federally Backed Mortgage Loans. Section 4023 of the CARES Act provides that, during the “covered period” a “multi-family borrower” with a “federally backed multifamily mortgage loan” that was current on its payments as of February 1, 2020, may submit an oral or written request for forbearance under Section 4023(a) to the borrower’s servicer affirming that the multifamily borrower is experiencing a financial hardship during the COVID-19 emergency. For this purpose, the Act defines (1) the “covered period” as the period beginning on the date of enactment and ending upon the sooner of (A) the termination date of the national emergency concerning COVID-19 declared by President Trump under the National Emergencies Act or (B) December 31, 2020, (2) “multi-family borrower” as a borrower of a residential mortgage loan that is secured by a lien against a property comprising 5 or more dwelling units (this would include traditional multifamily, student housing and senior housing), and (3) a “federally backed mortgage loan” as any loan, other than temporary financing (such as a construction loan) that is secured by a first or subordinate lien on a multi-family property and is made, in whole or in part, or insured, guaranteed, supplemented or assisted in any way by any officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by any other such officer or agency, or is purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.

Upon receipt of an oral or written request from a multi-family borrower, a servicer shall (A) document the financial hardship and (B) provide the forbearance for up to 30 days; and (C) extend the forbearance for up to 2 additional 30 day periods upon the request of borrower, provided that the borrower’s request for an extension is made during the covered period and, at least 15 days prior to the end of the initial forbearance period.

Eviction Restriction on Multi-Family Landlords/Borrowers of Federally Backed Mortgage Loans. Section 4024 imposes a temporary moratorium on eviction filings for a 120 day period beginning on the date of the enactment of the Act. 4024(b) provides, in pertinent part, that “the lessor of a covered dwelling may not: (1) make or cause to be made, any filing with the court of jurisdiction to initiate a legal action to recover possession of the covered dwelling from the tenant for nonpayment of rent or other fees or charges; (2) charge any late fees, penalties or other charges to a tenant described at clause (1) for late payment of rent; (3) require a tenant to vacate a dwelling unit located in or on the applicable property before the date that is 30 days after the date on which the borrower provides the tenant with a notice to vacate; and (4) may not issue a notice to vacate until after the expiration of the forbearance (Section 4023(d) and (e)). In addition, Section 4023 prohibits any multi-family landlord/borrower who is receiving mortgage forbearance relief from taking any of the foregoing actions for the duration of the forbearance.

As compared to borrowers owning residential real property designed principally for the occupancy of 1-4 families (who are the beneficiaries of greater relief), the Act does not impose a blanket moratorium on foreclosures by lenders upon multi-family or other commercial borrowers, or impose any restrictions on the eviction by commercial landlords of commercial tenants; these measures are generally being implemented on state and local levels. As of the date of this writing, the authors note various statewide and/or local initiatives to this effect which may apply outside of the Act to any particular property and to a broader range of financing and leasing transactions (i.e., not just federally backed). This includes, among others in California, Governor Newsom’s (i) most recent executive order (E.O. 37-20) suspending statewide evictions of residential tenants until May 31, and (ii) request that any financial institution holding residential or commercial mortgages, equity loans, lines of credit or business loans, implement a process to work with the mortgagors or loan holders to avoid foreclosure or default arising out of financial hardship caused by the COVID-19 pandemic, or by any local, state or federal government response to COVID.[1]

What is the SBA Paycheck Protection Program? Who is Eligible?

The SBA Paycheck Protection Program (the “PPP”) is a $349 billion loan guarantee program to help small businesses keep employees on the payroll and cover necessities such as rent and utilities, and is found in Title I of the Act. If certain conditions are met, the loans are forgivable. Prior to the Act’s passage, in order to qualify as an eligible recipient for a loan from the Small Business Administration (the “SBA”), the size of a “business concern” was determined by both employee count – no more than 500 employees – and revenue – no more than $35 million.

Due to the COVID-19 pandemic, the Act removes the revenue restriction, and provides that any business concern is eligible to receive an SBA loan if the business concern employs not more than the greater of (I) 500 employees or (II) if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern operates. The size standard established by the SBA can be found here.[2] It appears that this alternative was designed to give particular sectors of the economy (transportation, supply chain security, etc.) the benefit of a higher employee count, but for most F&B, general retail and lodging uses, there appears to be either no size standard in number of employees, (i.e., only size standards in millions of dollars, which is no longer relevant where the revenue restriction has been removed under the Act) or size standards in number of employees that are less than 500. As a result, for most real estate owners/tenants, 500 will be the relevant number for this purpose.

The Act does not change the SBA definition of “business concern,” which is defined broadly to include any business entity organized for profit, with a place of business located in the U.S., which operates primarily in the U.S. or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor. Thus, most real estate asset classes, and most real estate owners, landlords, tenants and borrowers based or operating primarily in the U.S. will constitute “business concerns” for purposes of this prong of SBA loan eligibility. The authors note that the spotlight focused on hotel owners and landlords to tenants who operate in the lodging and F&B sectors is a function of certain affiliate restriction waivers that apply, in particular, to these industries, making such assets the most likely beneficiaries of funding under the SBA PPA. Owners and lessees of other real estate asset classes, such as traditional multifamily, general retail and office properties are not categorically barred from accessing these funds, however meeting the employee test for eligibility may be more difficult, as more particularly described below.

Note that under existing federal regulations, a business concern specifically states that “where the form is a joint venture, there can be no more than 49% participation by foreign business entities in the joint venture” (13 CFR 121.105). Entities utilizing foreign capital and looking to take advantage of an SBA loan should carefully review structure with counsel to determine at what level of the org chart the “joint venture” sits, and whether “participation” has been triggered (guidance around how “participation” might compare to a traditional “control” definition remains to be seen).

How is the Employee Count Determined? What is the relevance of the “affiliate waiver”?

Prior to the passage of the Act, the SBA would ordinarily count the employees of a business concern’s affiliates when determining whether the business concern qualifies as a small business. This would typically include affiliates or other parties with the ability to directly or indirectly control. Thus, prior to the Act’s passage, a hotel owned by a single member LLC and employing 400 employees, may not have qualified by employee size standard if ultimate beneficial ownership rolled up to a private equity fund that owned a portfolio of hotels through similar SPE structures – i.e., each SPE hotel owner/potential SBA loan recipient would have to aggregate both the subject hotel’s employees with the employees of all other hotels owned by the parent. Similarly, an owner of an retail strip mall or office building using the same structure would be aggregated with its affiliates for purposes of the employee count. (The SBA, prior to the Act, would have treated each of these assets and their respective owners in the same way; the practical difference is that the hotel owner would have been much less likely to qualify on an aggregated basis under the prior rules given the number of employees any given hotel employs relative to a retail mall or office building.)

The Act removes the affiliate aggregation for purposes of determining employee count in certain circumstances. It is worthwhile to pause here to ask two basic questions – (1) who is the employer and (2) how is affiliate defined?

With respect to (1), for tenants applying for an SBA loan, the answer is fairly straightforward – most commercial tenants will be operating businesses of some kind – restaurants and other food and beverage tenants, retailers, professional services companies, etc. – employing their employees directly in one form or fashion.

For real estate owners looking to apply for SBA loans, the answer may be more complicated. In most real estate transactions, for liability and other reasons, the single purpose borrower/owner is decidedly not the employer, and is frequently prohibited from acting in such a capacity. An office building owner, owner of a retail strip mall or shopping center, residential or student housing complex, would typically engage a property management company, which property management company, in turn, constitutes the employer for all legal, and all other intents and purposes. The property manager receives a fee and, perhaps, some additional compensation for overhead, but for all purposes, all payroll, benefits, etc. associated with employment stays with the property manager and is not directly passed through to the real estate owner. Does this mean that particular real estate owner actually has zero employees? Does that analysis change depending on whether the asset is more operationally based, such as a hotel or a senior housing asset, where management agreements typically transfer all payroll, benefits and other employment costs to the owner, stopping short only of calling the owner the “employer” for labor and employment liability more broadly? Assigning a hotel SPE owner an employee count of zero (on account of the way real estate deals are typically structured for employment liability purposes) would seem to destroy the average hotel owner’s eligibility under the program with no employees to support, where the purpose of the Act is to specifically enable the hospitality industry to keep employees on the payroll. However, the answers to these questions are not yet clear. This is not surprising given the types of businesses that were typically receiving SBA loans prior to the passage of the Act.

The Act defines employees as “employees that are employed on a full time, part-time, or other basis”. It is not yet clear whether this is intended to cover independent contractors, such as the employees of, say, a parking or other vendor, or subs or employees under a general contractor, each of whom the property contracts with as an independent contractor. The language includes a reference to “other basis” but independent contractors are not typically described as employees. It is also unclear, if hotel owners are being charged with the employees of their hotel managers, whether this includes the entirety of that hotel management company’s employees, or only those dedicated to, or proportionally allocated to the specific business concern. It would seem logical that the former would apply if the hotel manager is the SBA loan recipient, and the latter if the hotel owner is the SBA loan recipient, directly or indirectly, but this will need to be fleshed out in further guidance.

With respect to (2), the Act does not define “affiliates.” We anticipate that the implementing regulations will address this question specifically, but it is not clear whether the regulations will defer to existing law and SBA’s present application of this definition, or whether the implementing regulations will apply a different, broader or narrower definition.

For the balance of this analysis, then, the authors assume that real estate owners will be charged for purposes of employee count with the employees who are employed directly or indirectly by the subject property, irrespective of legal designation as the “employer” and that, as a result, the relaxation of the affiliate waiver will be most relevant to hotel assets, casino assets, skilled nursing/memory care (as opposed to independent living senior housing) and other real estate assets with heavy labor/operations components. The authors further assume that affiliates will be defined by a generic common control standard, where narrowing the definition of affiliate would only serve to limit the relief Congress seems intent upon directing to particular industries through Title I, namely, hospitality and food and beverage. Gibson Dunn is continuing to monitor developments in this area and will update this memo accordingly.

The Act provides that the affiliate aggregation rule is waived with respect to eligibility for an SBA loan for: (1) any business concern with not more than 500 employees that is assigned a NAICS Code beginning with 72; (2) any business concern operating as a franchise that is assigned a franchise identifier code by the SBA or (3) any business concern that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958.

The NAICS Code 72 industries are as follows: Hotels and Motels; Casino Hotels; Bed-and-Breakfast Inns; All Other Traveler Accommodation; RV Parks and Campgrounds; Recreational and Vacation Camps; Rooming and Boarding Houses, Dormitories, and Workers’ Camps; Food Service Contractors; Caterers; Mobile Food Services; Drinking Places (Alcoholic Beverages); Full-Service Restaurants; Limited-Service Restaurants; Cafeterias, Grill Buffets, and Buffets; Snack and Non-Alcoholic Beverage Bars.

In addition to owners of hospitality/lodging and restaurant/F&B assets, it seems this might cover student housing and/or possibly, senior housing assets. For shopping mall/retail owner/landlords, this would cover many of tenants operating in these sectors as well, but purely retail tenants, or landlords of purely retail or residential properties would not appear be covered. Query as to whether temporary housing, such as WeLive and similar flex/temporary living space arrangements would qualify under rooming and boarding houses. It also appears that the 72-code industries stop short of industries supporting food and beverage, such as warehousing, logistics, cold storage facilities, etc.

The business concerns with franchise identifier codes appear to relate to specific businesses that have already applied and received franchises through the SBA, as opposed to what might otherwise be commonly understood. The franchise identified code table as of March 2020 can be found here[3]. This list includes some household names (Applebee’s, Baskin Robbins), a range of hotel/motel chains that operate on a franchise basis (e.g. AC hotels by Marriott) and various other business (primarily, although not exclusively F&B or lodging). This would not appear to categorically include e.g., national retailers or so-called “chains” unless specifically listed. The authors note there does not appear to be any particular strategic value in getting licensed as a franchise for the purpose of qualifying, where the licensing agency is the same agency that will be inundated with SBA loan applications and is unlikely to act quicker on franchise applications; however, this could theoretically be a potential strategy to be analyzed on a case by case basis.

This analysis, for the time being, assumes that clause (3) will not apply to most commercial real estate owners, who are not receiving venture capital from investment firms formed exclusively for the purpose of supporting “small business” and licensed specifically as such, as the meaning was given to such term prior to the Act’s relaxation of SBA eligibility requirements (i.e., both the employee and the revenue restriction). However, this may apply to certain tenants, and landlords could consider informing tenants of this exception, who may be at risk for exceeding the 500 maximum employee count due to aggregation with affiliates.

What does it mean if my property, or my tenant’s business, does not have an NAICS code beginning with 72 or does not qualify as a franchise? To be sure, this does not mean the owner or the tenant does not qualify for SBA loan eligibility. It simply means that for purposes of determining whether the 500 or less employee test is met, that particular owner or tenant will not be exempted from the affiliate rule, and employees will be aggregated across that owner or tenant’s affiliates. This seems consistent with Congress’ desire to push maximum relief towards the hotel and food/beverage sectors as the most distressed (and which are not independently receiving relief under Title IV, such as airlines and transport).

How much is the PPP Loan Amount and how can such loan proceeds be used?

Each eligible recipient can receive one covered loan. Generally, the maximum loan amount is the lesser of (1) 2.5x the average total monthly payments by the applicant for payroll costs incurred during the one year period before the date the loan is made[4] and (2) $10 million.

In the case of a portfolio hotel company owning 20 hotels, if each individual LLC is an eligible recipient, meeting the employee threshold either because it has no employees or because it is free from any aggregation with affiliates, this could mean that a single parent company has access to potentially $200M in SBA loan funds. Nor, would it appear, that a mezzanine borrower and a mortgage borrower, or an opco/propco or operating lease structure frequently seen in hotel transactions, on the same hotel are prohibited from obtaining the maximum amount of SBA loans available, where each is, legally, an independent business concern, owning and operating legally distinct assets. It stands to reason that neither outcome represents congressional intent, however the text of the Act on its face would not appear to prohibit this.

The Act provides that proceeds of such loans may be used for: payroll costs; continuation of group healthcare benefits during periods of paid sick, medical or family leave or insurance premiums, salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities and interest on other outstanding debt.

This language appears intentionally broad, and would cover employee costs such as payroll even if paid indirectly through the manager, traditional rent and ground lease rent (where many hotels, including Hawaii, are held as ground leasehold interests), and interest on traditional mortgage, as well as mezzanine and “other” debt (the Act does not specify that the interest must be paid on any particular basis, i.e. current vs. deferred). Notably, the text of the Act does not state whether these expenses are paid directly or indirectly. This may impact the structure of the SBA Loan, and in particular, where in the capital stack is most appropriate for injection of these funds, as more particularly described below.

Is the SBA Loan secured and Under What Circumstances can the SBA Loan be Forgiven?

No collateral or personal guarantee is required for an SBA loan.

The Act allows for covered loan forgiveness under certain conditions. The loan forgiveness amount, which is excluded from taxable income, is equal to the payroll costs, mortgage interest payments, rent, and utility payments incurred or paid by a recipient during the period from February 15, 2020 to June 30, 2020 (the “covered period”).

The loan forgiveness amount is reduced if the recipient: (1) reduces the average number of full-time equivalent employees per month during the covered period below the lesser of (a) the average number of full-time equivalent employees per month from February 15, 2019 to June 20, 2019 or (b) the average number of full-time equivalent employees per month from January 1, 2020 to February 29, 2020, or (2) reduces the salary or wages of any employee in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. Many hotel assets have furloughed significant portions of their workforce on account of social distancing measures, travel restrictions and other impacts of the COVID-19 crisis. This will impact the portion of the loan forgiveness for which any given SBA loan recipient is eligible. Furthermore, it is not yet clear whether the numbers of employees is tested at the time loan forgiveness is applied for, or tested as of June 30, 2020, by which time the industry hopes to have independently recovered enough to return to normal workforce levels. The authors note that this requirement speaks to eligibility for loan forgiveness as distinct from eligibility for loan funds.

If an SBA loan has a remaining balance after the forgiveness described above, it will have a maximum maturity of 10 years and an interest rate not exceeding 4 percent. Lenders must defer payments under the loan for at least six (6) months and up to one (1) year.

If my business, or my tenant’s business, does not qualify for an SBA loan through the PPP, is other relief available through Title IV?

If a potential applicant employs more than 500 employees and therefore, cannot access relief under Title I, (e.g., either because the operation itself is sufficiently large, or because it does not qualify for an exemption from the affiliate aggregation requirements, perhaps a retail asset not included in the 72-code sectors), there may be relief available pursuant to Title IV. As it stands, the act establishes $500 billion for federal loans for sectors particularly distressed by COVID-19. $46 billion has been specifically appropriated to passenger air carriers, cargo air carriers and the like. The remaining $454 billion is generally reserved to support the Federal Reserve’s lending facilities to “eligible” businesses, states and municipalities. The Act does not define this term, and intentionally leaves this broad, leaving further definition to the Secretary of the Treasury in furtherance of directing these economic stabilization funds (“ESF”) to particularly distressed sectors of the economy. Therefore, specific requirements for eligibility for receipt of funds under Title IV will remain uncertain until such date.

Still, the Act does enumerate certain requirements for borrowers of ESF funds. Among them, these borrowers have to be based in the U.S. with employees primarily in the U.S., credit is not “otherwise reasonably available” (which may or may not be a disqualifying event for many entities that are ineligible for Title I funds due to the size and scale of their operations to begin with). In addition, such businesses may not be receiving relief elsewhere under the Act. In other words, a business concern cannot obtain relief under the SBA PPP and Title IV. What constitutes a business concern for this purpose remains to be seen in further guidance. If a hotel portfolio companies owns one hotel that employs 250 employees and another that employs 800, will they be treated independently in the same way that they are for purposes of aggregating employees, such that the larger hotel can benefit from Title IV and the smaller hotel can benefit from Title I? Or will they be aggregated for purposes of determining whether they are double dipping for purposes of relief under the Act? Are multifamily assets backed by Fannie/Freddie mortgage loans obtaining forbearance relief under Sections 4022-4024 of the Act prevented from accessing ESF?

Further, Title IV imposes significant restrictions, obligations and regulatory oversight of businesses that borrow these funds. These include restrictions, among others, on reducing employment levels, increasing compensation of highly compensated employees, and stock buy backs, and impose a variety of additional reporting obligations to facilitate greater oversight by Treasury of ESF funds, as compared to SBA PPP funds.

The authors note a third pool of economic disaster relief funds under the Act, if business concerns are able to demonstrate substantial economic injury on account of COVID-19. Such loans may not exceed $2,000,000, but come with the pleasant bonus of a $10,000 check within three days upon mere application for same. These funds may supplement either of Title IV or Title I (but not both, where relief under both is prohibited), however, the loan amount under the larger sections will be reduced dollar for dollar by such additional disaster relief. Pending further guidance around qualifications, this could constitute supplemental assistance to many real estate stakeholders struggling with eligibility for, or collecting upon, business interruption insurance for the gap period prior to accessing Title I or Title IV funds.

What potential tax relief exists under the Act?

Advance Tax and Employee Retention Credits for Employers. Facing difficult decisions about closures, employers should be aware that, under Section 2301, they may be eligible for a refundable payroll tax credit for 50 percent of “qualified wages” paid by employers to employees during the COVID-19 crisis. This credit is available to employers whose (1) operations were fully or partially suspended because of a COVID-19-related shut-down order, or (2) gross receipts have declined by more than 50 percent when compared to the same quarter in 2019, until the business recovers to 80 percent of gross receipts relative to the same quarter. Like the tax credits created in Families First Coronavirus Response Act, signed into law on March 18, 2020, excess credits are refundable. The calculation of “qualified wages” depends on the number of employees (determined by taking the average number of employees in 2019), and is subject to an aggregate $10,000 cap per employee for all calendar quarters, including health benefits, paid to an eligible employee. Under the prior Families First Coronavirus Response Act, certain employers are entitled to tax credits for Paid Sick and Paid Family and Medical Leave. Section 2301 will amend these provisions to allow the refundable portion of these credits to be advanced, subject to regulation and guidance. Certain employer payroll taxes for the period of the date of enactment until the end of the year would be deferred by the CARES Act. 50% of those taxes could be deferred until December 31, 2020 and the remaining 50% could be deferred until December 30, 2022. Owners of hotels should seek employment counsel to the extent they are seeking to benefit from such credits, including implications of an employer characterization in other contexts.

Modifications for Net Operating Losses The Act temporarily suspends a number of the business loss limitations established by the tax reform law commonly known as the Tax Cuts and Jobs Act (“TCJA”). Under current law, net operating losses (“NOLs”) are subject to limitations based on taxable income and cannot be carried back to prior tax years. The Act would modify current law to allow a taxpayer to carry back NOLs from tax years beginning in 2018, 2019, or 2020 up to five years. The NOLs cannot be carried back to offset the untaxed foreign earnings transition tax added to the Code in 2017; however, taxpayers can elect to exclude any tax years in which the foreign earnings are included into gross income from the calculation of the five-year carryback period. In addition, for taxable years beginning before January 1, 2021, the CARES Act removes a limitation on NOLs that prevents taxpayers from offsetting in excess of 80 percent of taxable income with NOLs. Notably Real estate investment trusts (“REITs”) will not be able to carry back losses, and losses may not be carried back to any REIT year (regardless of whether the taxpayer incurring the loss is currently a REIT).

Refundable AMT Credit Modification. The corporate alternative minimum tax (“AMT”) was repealed by the TCJA. However, corporate AMT credits were made available as refundable credits over several years, ending in 2021. Section 2305 of the Act accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.

Are there other specific forms of relief for particular types of real estate businesses and/or tenants?

Under Title II of the Act, a federal excise holiday would apply to alcohol and distilled spirits in the production of hand sanitizer. This could be meaningful for owners and tenants of restaurants, bar space and other food and beverage operations.

Title III of the Act provides an extensive program to support the health care system in its immediate response to COVID-19. This will be particularly relevant for any hospital tenants, medical office or other tenants in the health care space.

The Act provides key emergency appropriations of interest to government contractors as well as businesses that supply, or may begin supplying, products and services that support the national defense in response to the COVID-19 pandemic. In particular, the Act provides $1 billion for purchases under the Defense Production Act. This may be relevant for any number of industries including industrial logistics, warehousing, cold food storage and similar assets involved in maintaining supply chain security. This may also involve contractual arrangements with government agencies for purposes of converting unoccupied hotels, universities, student dormitories, conference centers, or even large swaths of vacant land, for purposes of setting up triage tents and spillover hospital space in hotspots where cases have overwhelmed current resources.

Who are the lenders making SBA and Title IV Loans?

The SBA’s website has a list of designated qualifying lenders, but it is outdated. It is also expected that, compared to its historical role, the SBA will need to quickly build a significant network of lenders, and with capacity for a much greater volume of loans, to administer this program effectively than the banking institutions that historically implemented the SBA loan program in its form prior to the Act. There does not appear to be any particularly lengthy or rigorous qualification process, and if there were, the SBA is likely to expedite (or waive) where the demand will nearly immediately outpace the agency’s resources. There is no stated date by which the SBA will formally release a form of application and begin to open the program for application. Many banks, whether on the list or not, are already launching their own SBA loan platforms.

The authors have received multiple requests for referrals to expediters or consultants to assist potential recipients as part of this process. The authors are unaware of any specific cottage industry of experts in this area, although it stands to reason this may develop. However, this may be an avoidable expense for would be borrowers, as the process itself is not particularly complicated (and where the basic infrastructure already exists). The issue is less likely to be one of need for advisory services and more about getting to the front of the line, which borrowers may just as easily do themselves by leveraging banking relationships early. As such borrowers are actively encouraged to reach out to their lenders IMMEDIATELY to begin this process.

When will additional guidance/regulation pertaining to the Act be released.

The Act directs the Secretary of the Treasury to publish implementing regulations within fifteen (15) days of the Act’s enactment. The government may publish draft regulations and solicit comment from stakeholders in preparing revisions. Alternatively, the government may issue guidance and defer the implementing regulations to a later date, which may or may not involve stakeholder calls for “Q&A”, or other opportunities to present the government with specific hypotheticals for evaluation. The government may also adopt a hybrid of the two, circulating draft regulations for the implementation of particularly critical/time sensitive sections, and issuing guidance as to others, with regulations to follow. What is certain is that the government is under tremendous pressure to act quickly given the circumstances. It is worthwhile to note that, unlike the Act itself, which required bipartisan, bicameral support, the regulations will be promulgated by the Trump Administration. To that end, they may ultimately reflect – and this may be an opportunity for industry to voice – a more commercially favorable tone, closer to the Republican favored version of the Act which did not include many of the individual/consumer focused protections that ultimately made their way into the Act upon Democratic insistence.

How do I apply for an SBA loan?

As noted above, borrowers are encouraged to reach out through their banking relationships immediately. The application process for the loan itself ought to be relatively straightforward, and will presumably be modeled on the existing application for the program that existing prior to the Act. Gibson Dunn has prepared an application checklist for purposes of enabling potential recipients of SBA loans to gather the necessary information early. However, the author notes that, inevitably, the application process/forms will need to be modified for the unprecedented breadth of borrowers and business concerns now having access to SBA loans, and the issues that come with their application to larger transactions and much more sophisticated structures. Among these questions are some of the most basic, such as, who should apply for the SBA loan? Should this be the manager, the owner, and indirect constituent of the owner? Applicants should consult with counsel in making these determinations to ensure that applications are made in accordance with restrictions on permitted debt under existing loan documents (which may be triggered by the mere application for same) and characterize ownership of employees in a manner that is sufficient to demonstrate eligibility without having inadvertent consequences for employer characterization in other contexts.

What are steps that borrowers/landlords should be taking to ensure they can quickly access SBA funds during this limbo period?

There will be a period of inevitable uncertainty until further guidance or draft regulations are provided. As of the date of this writng the authors believe that guidance from both Treasure and SBA may be distributed as early as Friday, April 3, 2020. It is impossible to know the contours of such guidance, but given the sheer scale of topics this will need to address in the short time period provided, stakeholders should be prepared for such guidance to address some issues, to leave many practical questions unanswered and to perhaps, introduce a new set of questions. Stakeholders will likely have to make decisions based on imperfect information, and to be prepared to weigh in as industry stakeholders over the course of a more formalized notice and comment process, ultimately leading to the publishing of final implementing rules at a future point in time once there is greater stabilization.

In the meantime, borrowers/landlords can and should do the following:

Engage with counsel on an interdisciplinary basis to analyze organizational/corporate structure, perform various employee count analyses, determine eligibility for funds, assess tax and labor/employment impacts and determine where in the organizational chart the SBA loan should sit.
Review loan documents to analyze permitted indebtedness and transfer requirements/restrictions as well as cash management provisions to ensure the SBA loan is made at a level unencumbered by same, or that conversations with lenders happening in parallel around forbearance and/or loan modifications are taking these issues into account.
Start discussing SBA loans with all lenders.
Work with counsel to establish user friendly information materials, form notices and property management protocol to educate and provide maximum value-add to your tenants while protecting the landlord from liability.
Leverage existing banking relationships with potential SBA qualifying lenders.
Consult with counsel familiar with SBA procedures to complete as much of the application as possible in advance, including gathering all supporting data for eligibility.
Consult with industry and public policy counsel to develop a list of industry “must haves” for any notice/comment period following the circulation of draft regulations.
Subscribe to GDC Cares Act Related Client Alerts

[1] Gibson Dunn is independently tracking such foreclosure/eviction laws (and what alternative remedies may or may not be permissible in residential and/or commercial contexts), along with other key guidance and directives around essential services and lockdown requirements. We will continue to share with and update our clients and friends as we monitor ongoing developments.

[2] https://www.ecfr.gov/cgi-bin/text-idx?SID=b919ec8f32159d9edaaa36a7eaf6b695&mc=true&node=pt13.1.121&rgn=div5#se13.1.121_1201

[3] https://www.sba.gov/sites/default/files/2020-03/FrnchsTbl_03232020_UPLOAD.pdf

[4] This period may vary depending upon whether the employer is a seasonal employer, and is shortened/adjusted pursuant to the Act if the business concern was not operating for particular periods throughout early/mid 2019. This would not appear to implicate hotels that were shut down in the very recent wake of the COVID-19 pandemic.

As always, 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 Real Estate or Public Policy Group, or the following authors:

Danielle Katzir – Los Angeles (+1213-229-7630, [email protected]) (Real Estate)
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected]) (Public Policy/SBA)
Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, [email protected]) (Public Policy)

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

IRS Notice 2020-18 and IRS FAQs

Internal Revenue Service (“IRS”) Notice 2020-18, issued March 20, 2020 (the “Notice”),[1] provides updated guidance on the extension of the April 15, 2020 U.S. federal income tax return filing and payment deadlines for individuals and corporations to July 15, 2020 as a result of the Coronavirus pandemic.[2] The extension does not require that the taxpayer be impacted by the Coronavirus pandemic. Additionally, on March 24, 2020, the IRS issued FAQs[3] to answer various questions relating to the Notice.

The Notice and FAQs provide the following relief and guidance:

Tax year 2019 income tax return filing and payment deadlines for all taxpayers that otherwise would be required to file income tax returns and pay income taxes on April 15, 2020 are extended to July 15, 2020 (the “Extension”).[4]
The Extension applies to both payments of tax on self-employment income and estimated income tax payments for the first quarter of tax year 2020 that are due on April 15, 2020. However, estimated income tax payments for the second quarter of tax year 2020 are still due on June 15, 2020.
No dollar limit applies to the Extension.
No interest, penalties, or additions to tax will accrue as a result of a failure to either file income tax returns or pay income (or self-employment) taxes otherwise due on April 15, 2020 during the period from April 15, 2020 to July 15, 2020.
The new July 15, 2020 deadline also applies to installment payments due on April 15, 2020 under section 965(h),[5] as well as to estimated payments for a corporation required to make Basis Erosion and Anti-Abuse Tax payments under section 59A.
The Notice extends to July 15, 2020 the deadline for making contributions to an Individual Retirement Account or Health Savings Account.
Notably, the Notice and FAQs provide that the following relief is not available:
No extension is available for information return filings as the Extension only applies to income (or self-employment) tax returns due on April 15. It is unclear how or whether information returns that ordinarily would be attached to U.S. federal income tax returns, such as Form 8621 (related to ownership of interests in a “passive foreign investment company”), Form 8865 (related to ownership of interests in a foreign partnership), and Form 5471 (related to ownership of interests in a foreign corporation), are affected by the Notice.
Taxpayers whose income tax return filing deadlines have already passed (e.g., returns due on March 16, 2020, such as Form 1065, Form 1065-B, Form 1066, and Form 1120-S for calendar year taxpayers) are not granted relief by the Extension.
The Notice does not provide relief for estimated income tax payments required to be paid in (or for any related estimated tax penalty assessed for) tax year 2019.
Taxpayers with income tax filing or payment due dates on any date other than April 15 are not granted relief with respect to those deadlines.
The Notice does not apply to payroll, excise, estate, or gift taxes. Additional legislation is expected to apply to payroll and other excise taxes, continue to follow Gibson Dunn’s updates and client alerts for additional information.
The Extension does not extend any applicable U.S. state tax filing or payment deadlines. However, a number of states conform to federal filing deadlines. See below for state extensions applicable to payment and filing deadlines.

U.S. State-Level Action

Income Taxes

A number of states have already extended their respective income tax filing and payment deadlines for the 2019 tax year, either automatically through linkage to the IRS’s extended deadlines or through separate action. Below is a list of states that assess income tax and have extended (or, where indicated with an asterisk, announced their intention to extend) their income tax filing and payment deadlines. States that have extended their deadlines for the payment of estimated taxes are explicitly noted with parentheticals below. The date listed in front of the state is the extended due date. State guidance is evolving, and we intend to supplement the below with additional updates as appropriate.

May 15:

Mississippi (deferred Q1 estimated tax payments).

June 1:

Virginia (extended payment due date only, filing deadline remains unchanged and is currently still April 15 for corporations and May 1 for individuals).

June 15:

Connecticut (business returns only, see July 15 for individual returns) and
Idaho.

July 15:

Alabama,
Arizona,
California (deferred Q1 & Q2 estimated tax payments for individuals, Q1 estimated tax payments for corporations),
Colorado (payments due July 15, but filing deadline now October 15) (deferred Q1 & Q2 estimated tax payments),
Connecticut* (individuals only) (deferred Q1 & Q2 estimated tax payments),
Delaware (deferred Q1 estimated tax payments),
District of Columbia,*
Georgia (deferred Q1 estimated tax payments),
Indiana* (deferred Q1 estimated tax payments),
Kansas,
Kentucky* (interest still accrues on deferred payments),
Louisiana,
Maryland (deferred Q1 estimated tax payments),
Minnesota,
Missouri (deferred Q1 estimated tax payments),
Montana (individuals only) (deferred Q1 estimated tax payments),
New Mexico (interest still accrues on deferred payments),
North Carolina (interest still accrues on deferred payments),
North Dakota,
Oklahoma (deferred Q1 estimated tax payments),
Pennsylvania (individuals only) (deferred Q1 & Q2 estimated tax payments),
Rhode Island,*
South Carolina (deferred Q1 estimated tax payments),
Utah,*
Vermont,* and
Wisconsin (deferred Q1 estimated tax payments).

July 20:

Hawaii.

July 31:

Iowa.

New Jersey has passed legislation that would match U.S. federal income tax extensions, but this legislation has not yet been signed into law. The New York State Assembly has announced that New York State tax filing deadlines will be extended to July 15, but this is not yet reflected in legislation or formal guidance issued by the New York State Department of Taxation and Finance.
At the local level, New York City has waived penalties for business taxes (including the unincorporated business tax, or “UBT”) due between March 16, 2020 and April 25, 2020, but as of now interest will still be assessed on all applicable tax payments received after the original due date.

Sales and Use Tax

Several states have also either deferred the payment deadline for sales and use taxes or waived penalties for late payments, though a number of these provisions are either limited to small businesses or to businesses in certain sectors. States that have taken action on sales and use taxes so far include: Alabama (waiving penalties for small businesses), California (deferred payment by 60 days), Colorado (governor directed D.O.R. to choose an extended deadline), District of Columbia (waiving penalties and interest), Illinois (waiving penalties and interest limited to certain businesses), Louisiana (deferred payment until May 20), Maryland (deferred payment until June 1), Massachusetts (deferred payment for certain taxpayers), Minnesota (deferred payment for certain businesses), Michigan (deferred payment for small businesses), New York (waiving penalties and interest limited to certain taxpayers), Pennsylvania (waiving some penalties), and South Carolina (deferred payment until June 1). For specific state sales and use tax questions, please consult your state and local tax advisor.

[1]	The Notice is available on the IRS website at https://www.irs.gov/pub/irs-drop/n-20-18.pdf.
[2]	The Notice expressly supersedes in its entirety recently released IRS Notice 2020-17, which also provided certain guidance related to extensions of income tax return filing and payment deadlines for individuals and corporations.
[3]	The FAQs are available on the IRS website at https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers.
[4]	The Extension applies to the following tax year 2019 returns that otherwise were due on April 15, 2020: Form 1040, 1040-SR, 1040-NR, 1040-NR-EZ, 1040-PR, 1040-SS; Form 1041, 1041-N, 1041-QFT; Form 1120, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-SF; Form 8960; Form 8991; and Form 990-T (but only if that form otherwise was due on April 15 and not May 15).
[5]	Unless indicated otherwise, all “section” references are to the Internal Revenue Code of 1986, as amended.

The Gibson, Dunn & Crutcher Tax Practice Group is able to assist with all U.S. federal return questions and many of these state and local tax matters. Clients should also continue to consult their specific state and local tax advisor with questions pertaining to such state and local tax matters. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the Tax Practice Group, or the following authors:

Benjamin Rippeon – Washington, D.C. (+1 202-955-8265, [email protected])
Evan M. Gusler – New York (+1 212-351-2445, [email protected])
Jennifer Fitzgerald – New York (+1 212-351-5262, [email protected])

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), [email protected])
David Sinak – Co-Chair, Dallas (+1 214-698-3107, [email protected])
James Chenoweth – Houston (+1 346-718-6718, [email protected])
Brian W. Kniesly – New York (+1 212-351-2379, [email protected])
Eric B. Sloan – New York (+1 212-351-2340, [email protected])
Edward S. Wei – New York (+1 212-351-3925, [email protected])
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])
Dora Arash – Los Angeles (+1 213-229-7134, [email protected])
Paul S. Issler – Los Angeles (+1 213-229-7763, [email protected])
Lorna Wilson – Los Angeles (+1 213-229-7547, [email protected])
Scott Knutson – Orange County (+1 949-451-3961, [email protected])

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

I. The Updated Guidance Incorporates Two New Essential Business Categories

II. The Updated Guidance Provides Further Detail Concerning What Constitutes Essential Construction

III. The Updated Guidance Incorporates New Examples into Several Other Essential Business Categories

IV. The Updated Guidance Provides Further Examples of Businesses Deemed Non-Essential

I. Potential Protection from Patent Infringement Liability

A. The PREP Act and PREP Declaration

B. The Defense Production Act and 28 U.S.C. § 1498(a)

1. The DPA

2. Section 28 U.S.C. 1498(a) Protects Certain Federal Contractors from Liability

II. Businesses Meeting the Urgent Needs of the COVID-19 Pandemic May Be Expected to Argue That Any Patent Damages for Their Activities Should Be Minimal

A. Injunctive Relief Would Be Unlikely

B. Defendants’ Arguments for Reduced Damages Might Find Purchase with a Court

C. Commentators Have Suggested Other Ways to Permit Businesses to Respond to the Current Emergency Without the Risk of Infringement Suits and Liability