Client Alert Archives

We are pleased to provide you with Gibson Dunn’s Accounting Firm Quarterly Update for Q1 2024. The Update is available in .pdf format at the below link, and addresses news on the following topics that we hope are of interest to you:

SEC Voluntarily Stays Climate-Disclosure Rules Pending Appellate Review
PCAOB Issues Proposed Rule on Firm Metric Reporting
SolarWinds Moves to Dismiss SEC Amended Complaint
Alabama Federal Court Declares Corporate Transparency Act Unconstitutional
SEC Adopts Final Rules Relating to SPACs
House Oversight Committee Examines PCAOB Treatment of China-Based Firms
PCAOB Proposes New Rule on False or Misleading Statements Concerning PCAOB Registration and Oversight
PCAOB Reopens Comment Period and Holds Roundtable on NOCLAR Proposal
NCLA Sues PCAOB Claiming Unconstitutional Disciplinary Proceedings
SEC Commissioner Speaks on Materiality and Engagement with the SEC
Illinois Appellate Court Issues Verein Ruling in Legal Malpractice Case
Southern District Rules That PCAOB Inspection Information Is Not “Property”
Other Recent SEC and PCAOB Enforcement and Regulatory Developments

Please let us know if there are topics that you would be interested in seeing covered in future editions of the Update.

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Warmest regards,
Jim Farrell
Monica Loseman
Michael Scanlon

Chairs, Accounting Firm Advisory and Defense Practice Group, Gibson, Dunn & Crutcher LLP

In addition to the practice group chairs, this update was prepared by David Ware, Timothy Zimmerman, Benjamin Belair, Adrienne Tarver, and Monica Limeng Woolley.

Accounting Firm Advisory and Defense Group:

James J. Farrell – Co-Chair, New York (+1 212-351-5326, [email protected])

Monica K. Loseman – Co-Chair, Denver (+1 303-298-5784, [email protected])

Michael Scanlon – Co-Chair, Washington, D.C.(+1 202-887-3668, [email protected])

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

On April 15, 2024, the U.S. Equal Employment Opportunity Commission (“EEOC”) issued regulations implementing the Pregnant Workers Fairness Act (“PWFA”). The final rule comes after considering extensive comments on the August 2023 draft rulemaking, and will go into effect on June 18, 2024.

The PWFA was signed into law on December 29, 2022. It was intended to fill gaps in the federal and state legal landscape regarding protections for employees affected by pregnancy, childbirth, or related medical conditions. Specifically, the PWFA requires most employers with 15 or more employees to provide reasonable accommodations for a qualified employee’s or applicant’s known limitations related to, affected by, or arising out of pregnancy, childbirth, or related medical conditions, unless the accommodation will cause an undue hardship on the operation of the employer’s business. The requirements apply even when the medical limitations giving rise to the need for an accommodation would not constitute a disability under the Americans with Disabilities Act (“ADA”). (For a detailed analysis of the PWFA’s requirements and differences between the PWFA and existing federal and state law with respect to the accommodation of pregnancy-related medical restrictions, please see our prior alert.)

The PWFA has been in effect since June 27, 2023, but the final rule and accompanying guidance clarify (and in some ways expand) the obligations that were explicit in the statute itself. Below are 10 key takeaways for employers.

10 Key Takeaways for Employers

Certain Identified Accommodations Are Assumed To Be Reasonable: The final rule specifies that the following four pregnancy accommodations are reasonable and should be granted in almost every circumstance without documentation: (1) additional restroom breaks, (2) food and drink breaks, (3) allowing water and other drinks to be kept nearby, and (4) allowing sitting or standing, as necessary. Other possible reasonable accommodations specified by the final rule, although not presumptively required, include job restructuring, modifying work schedules, use of paid leave, and reassignment to a vacant position.
Broad Scope of Covered Conditions: The EEOC’s “non-exhaustive list” of conditions that can give rise to a request for accommodation under the PWFA include: current pregnancy, past pregnancy, lactation (including breastfeeding and pumping), use of birth control, menstruation, postpartum depression, gestational diabetes, preeclampsia, infertility and fertility treatments, endometriosis, miscarriage, stillbirth, and having or choosing not to have an abortion, among other conditions. The breadth of this list has drawn criticism for exceeding the EEOC’s authority—including a public dissent from EEOC Commissioner Andrea Lucas—and the abortion-related aspect in particular has attracted strong attention (and is likely to be litigated).
Applicants/Employees May Need To Be Excused From Essential Functions For Extended Periods: Under the ADA, only a “qualified individual” is entitled to a reasonable accommodation, and a qualified individual is one who can perform the essential functions of the job with or without a reasonable accommodation. By contrast, under the PWFA, an individual is still qualified—and therefore entitled to a reasonable accommodation—even if they cannot perform an essential function of the job now, so long as the limitation is for “a temporary period” and the essential function can be performed in the “near future.”
Employers Cannot Seek Documentation For Certain Requests: The final rule generally prohibits employers from seeking documentation in many circumstances, including: (1) when the limitation and need for a reasonable accommodation is obvious; (2) when the employer already has sufficient information to support a known limitation related to pregnancy; (3) when the request is for one of the four identified reasonable accommodations listed above (i.e., additional restroom breaks; food/drink breaks; beverages near the work station; and sitting or standing as needed); (4) when the request is for a lactation accommodation; and (5) when the accommodation is available without documentation for other employees seeking the same accommodation for non-PWFA reasons.
Informal Requests Can Trigger Statutory Obligations: The guidance accompanying the final rule indicates that verbal conversations with direct supervisors can trigger accommodation obligations, and an employee’s failure to fill out paperwork or speak to the “right” supervisor or designated department is not grounds for either delaying or not providing the accommodation. In other words, the initial request (or statement of need for an accommodation) alone may be sufficient to place the employer on notice and trigger the interactive accommodation process.
Account For Accommodations In Reporting And Metrics: Where a reasonable accommodation is granted (e.g., extra bathroom or water breaks), employers should ensure that technologies are appropriately adjusted to integrate the accommodation. Given that employers are increasingly using technology in the workplace for purposes such as monitoring attendance or tracking productivity and performance, it is important that employers develop policies that contemplate how a reasonable accommodation might impact the accuracy of these tools. For example, the EEOC suggests that calculations on productivity for a given shift may need to be adjusted to account for the additional excused break periods.
Act With Expediency And Consider Interim Accommodations: Although the PWFA’s interactive process largely tracks that of the ADA, the final rule provides that employers must respond to requests under the PWFA with “expediency” and notes that granting an interim accommodation will decrease the likelihood that an unnecessary delay will be found.
Unpaid Leave As A Last Resort: As the PWFA itself makes clear, employers may only require an employee to take leave as a last resort if there are no other reasonable accommodations that can be provided absent undue hardship. The final rule and guidance continue this theme, underscoring that requiring an employee to take unpaid leave or to use their leave after they ask for an accommodation and are awaiting a response could also violate the PWFA if, for example, there is paid work that the employee could have been provided during the interactive process.
Overlap With The ADA: Overlap With The ADA: The final rule acknowledges that there may be circumstances in which a qualified individual may be entitled to an accommodation under either the PWFA or the ADA for a pregnancy-related limitation. The interpretive guidance emphasizes that employees are not required to identify the statute under which they are requesting a reasonable accommodation, so employers should train human resources and management professionals to identify and apply the applicable framework.
Don’t Forget About Applicants: The PWFA prohibits employers from refusing to hire a pregnant applicant because they assume that the applicant will soon need to leave to recover for childbirth. In addition, the interpretive guidance flags that the accommodation process is often more difficult to navigate for applicants than for existing employees. As such, employers should consider training recruiting and onboarding professionals on how to best ensure that an applicant understands the process for requesting a reasonable accommodation during the hiring process. The guidance notes that an applicant may not know enough about, for example, the equipment used by the employer or the application process itself to request an accommodation and the employer may likewise not have enough information to suggest an appropriate accommodation. Accordingly, employers might consider trying to anticipate potential hurdles to accessibility during the hiring process and either remedy the obstacles, if feasible, or provide advanced notice during the early stages of the process so that the applicant can identify any potential issues and request a reasonable accommodation.

The following Gibson Dunn lawyers prepared this update: Jason C. Schwartz, Katherine V.A. Smith, Molly Senger, David Schnitzer, and Emily M. Lamm.

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

Molly T. Senger – Partner, Labor & Employment
Washington, D.C. (+1 202.955.8571, [email protected])

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment
Washington, D.C. (+1 202.955.8242, [email protected])

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment
Los Angeles (+1 213.229.7107, [email protected])

Muldrow v. City of St. Louis, No. 22-193 – Decided April 17, 2024

Today, the Supreme Court held that a Title VII plaintiff challenging a forced job transfer as discriminatory must show some harm from the transfer, but need not show that the harm was “significant,” “material,” or “serious.”

“Although an employee must show some harm from a forced transfer to prevail in a Title VII suit, she need not show that the injury satisfies a significance test.”

Justice Kagan, writing for the Court

Background:

The Civil Rights Act of 1964 (“Title VII”) prohibits discrimination in the “terms, conditions, or privileges of employment” because of an individual’s race, religion, sex, or national origin. 42 U.S.C. § 2000e-2(a)(1). In 2017, following a change in leadership in the St. Louis Police Department, Sergeant Jatonya Muldrow was transferred from the Intelligence Division to another unit. The transfer did not affect Muldrow’s regular pay or rank, but she was allegedly “moved from a plainclothes job in a prestigious specialized division giving her substantial responsibility over priority investigations and frequent opportunity to work with police commanders . . . to a uniformed job supervising one district’s patrol officers, in which she was less involved in high-visibility matters and primarily performed administrative work. Her schedule became less regular, often requiring her to work weekends; and she lost her take-home car.” She alleged that no male sergeants were transferred out of the Intelligence Division and that she was replaced with a male sergeant.

Muldrow brought a Title VII claim against the Department, alleging that the transfer was discriminatory because of her sex. The district court and the Eighth Circuit held that the transfer was not an adverse employment action because it did not result in a “materially significant disadvantage” to Muldrow.

Issue:

Does Title VII prohibit discrimination in transfer decisions where the transfer does not result in a “materially significant disadvantage”?

Court’s Holding:

To prevail on a Title VII claim challenging a forced job transfer, a plaintiff must show some harm from the transfer, but need not show that the harm was “significant,” “material,” or “serious.”

What It Means:

The Court’s decision is a win for Title VII plaintiffs who challenge employers’ job-transfer decisions as discriminatory based on race, sex, or some other protected characteristic. According to the six Justices who joined the Court’s decision, “this decision changes the legal standard used in any circuit that has previously required ‘significant,’ ‘material’ or ‘serious’ injury. It lowers the bar Title VII plaintiffs must meet.” Majority op. 7 n.2.
At the same time, the Court noted that there is “reason to doubt that the floodgates will open” for new Title VII claims, and that lower courts “retain multiple ways to dispose of meritless Title VII claims challenging transfer decisions.” Majority op. 9, 10. Most significantly, Title VII plaintiffs must show “some harm respecting an identifiable term or condition of employment,” such as hiring, firing, or transferring employees. Id. at 6. Justice Alito, concurring in the Court’s judgment, predicted that this requirement will mean that “careful lower court judges will mind the words they use but will continue to do pretty much just what they have done for years.” Alito op. 2.
The Court also held that a Title VII plaintiff still must show that her employer acted with discriminatory intent and the internal transfer was made on the basis of a protected characteristic such as race, color, religion, sex, or national origin. Employers should document the business reasons for an internal transfer, which will assist in defeating allegations that a transfer was based on a protected characteristic.
The Court also noted that lower courts “may consider whether a less harmful act is, in a given context, less suggestive of intentional discrimination.” Majority op. 10. Thus, lower courts appear to retain latitude to consider whether the facts alleged in a Title VII complaint are more suggestive of lawful conduct than unlawful conduct, consistent with ordinary pleading standards.
The Court emphasized that its holding did not reach Title VII retaliation claims, for which the “materially adverse” standard still applies. Majority op. 9. Nor did the Court’s decision address hostile work environment claims, or the application of ordinary pleading standards at the motion to dismiss stage.
Finally, the Court did not address how its new standard might apply to corporate Diversity, Equity, and Inclusion (“DEI”) programs. Plaintiffs challenging DEI programs under Title VII must still show that such programs caused them some harm because of a protected characteristic and with respect to a term or condition of employment.

Gibson Dunn represented the Chamber of Commerce of the United States of America, National Federation of Independent Business Small Business Legal Center, Inc., Restaurant Law Center, Inc., and National Retail Federation as Amici Supporting Respondent.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

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

Related Practice: Labor and Employment

Jason C. Schwartz
+1 202.955.8242
[email protected]

Katherine V.A. Smith
+1 213.229.7107
[email protected]

Molly T. Senger
+1 202.955.8571
[email protected]

This alert was prepared by associates Cate McCaffrey and Salah Hawkins.

Under the final rule, domestic or foreign “resource extraction issuers” are required to annually disclose information about certain payments made to foreign governments or the U.S. federal government on Form SD.

As previously reported on our Securities Regulation and Corporate Governance Monitor on December 16, 2020 (available here), the Securities and Exchange Commission (the “SEC”) adopted the final rule (available here) requiring additional disclosures by public companies that engage in the commercial development of oil, natural gas or minerals. Under the final rule, domestic or foreign “resource extraction issuers” are required to annually disclose information about certain payments made to foreign governments or the U.S. federal government on Form SD.

The final rule became effective on March 16, 2021 allowing for a two-year transition period after the effective date, with initial Form SD filings due no later than 270 calendar days after the end of an issuer’s next completed fiscal year (e.g., September 26, 2024 for issuers with a December 31, 2023 fiscal year end). While the adopting release specifically referred to September 30, 2024 as the due date for a company with a fiscal year end of December 31, 2023 (274 days after year end), we recommend filing the Form SD by September 26, 2024 to ensure timely compliance with the rule’s deadline. We note that for 2025, 2026 and 2027, the form will be due by September 27 for companies with a December 31 fiscal year end (270 days after the fiscal year end in non-leap years), unless September 27 is a Saturday, Sunday or holiday, in which case the deadline is the next business day.

What kind of information is required to be disclosed?

The final rule implements Section 13(q) of the Securities Exchange Act of 1934, as amended, which requires disclosure of company-specific, project-level information on Form SD (available here and on page 212 of the adopting release), including the:

type and total amount of payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas or minerals;
type and total amount of such payments for all projects made to a government, as well as the country in which each such government is located;
currency used and the fiscal year in which the payments were made;
fiscal year in which the payments were made;
business segment of the issuer that made the payments;
specific projects to which such payments relate and the resources that are being developed;
method of extraction used in the project and the major subnational political jurisdiction of each project; and
payments made by a subsidiary or entity controlled by the issuer.

What kinds of activities does the rule apply to, and to whom does the rule apply?

The adopted rule applies to any resource extraction issuer. Resource extraction includes: the commercial development of oil, natural gas or minerals; the exploration, extraction, processing and export of oil, natural gas or minerals; or the acquisition of a license for any such activity.

For example, companies engaged in oil exploration and production operations and the mining industry will generally be subject to the rule.

For resource extraction joint ventures or arrangements where no one party has control, the operator of the venture or arrangement must report all of the payments. Non-operator members are only required to report payments that, as resource extraction issuers, they make directly to governments.

Who is exempt from the rule?

There are exemptions for:

issuers that are unable to comply with the final rule without violating the laws of the jurisdiction where the project is located;
issuers that are unable to comply with the final rule without violating the terms in a contract that became effective before the final rule was adopted;
smaller reporting companies, meaning issuers with a public float of less than $250 million and issuers with annual revenues of less than $100 million for previous year and public float of less than $700 million; and
emerging growth companies, meaning issuers with total annual gross revenues of less than $1,235,000,000 during their most recently completed fiscal year and that have not sold common equity securities under a registration statement.

We note that the final rule includes transitional relief for recently acquired companies that were not previously subject to the rule and for issuers that completed their initial public offering within their last full fiscal year.

What relief is afforded to acquisitions?

Form SD reporting obligations for an acquired entity will depend on whether the acquired entity was subject to Section 13(q) for the fiscal year prior to the acquisition. If the acquired entity was not subject to Section 13(q) (or an alternative reporting regime) for the issuer’s last full fiscal year prior to the acquisition, then the issuer will be required to begin reporting payment information for that acquired entity starting with the Form SD submission for the first full fiscal year immediately following the effective date of the acquisition. The issuer will therefore not be required to provide the (excluded) payment disclosure for the year in which it acquired the entity.

However, this transition period does not apply to acquisitions of entities that were already subject to Section 13(q)’s disclosure requirements. In these instances, disclosure is required for the fiscal year of the acquisition.

By way of example, if an acquisition of an entity that was not subject to Section 13(q) closes in November 2024, assuming a December 31 fiscal year end, then the acquired entity’s payments will be first reported on the Form SD covering fiscal year 2025, which must be filed by September 28, 2026, given that September 27, 2026 is a Sunday. However, if the acquired entity was already subject to Section 13(q), then the acquired entity’s payments will be reported on the Form SD covering fiscal year 2024, which must be filed by September 29, 2025, given that September 27, 2025 is a Saturday.

What about interpretive questions raised by the rule and adopting release but left unanswered?

As resource extraction issuers analyze their disclosure obligations on Form SD, various interpretative questions have arisen. We recommend coordinating discussions on these questions with your peers and industry groups. In addition, Gibson Dunn lawyers are available to assist in addressing any questions that you may have regarding compliance with this new rule and related Form SD filing requirements, as we have been working through questions with our various clients that operate in the oil and gas and mining industries.

Read More

The following Gibson Dunn lawyers assisted in preparing this update: Hillary Holmes, James Moloney, Harrison Tucker, Malakeh Hijazi, and Meghan Sherley.

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

Hillary H. Holmes – Houston (+1 346.718.6602, [email protected])
James J. Moloney – Orange County (+1 949.451.4343, [email protected])
Harrison Tucker – Houston (+1 346.718.6643, [email protected])

Please also view Gibson Dunn’s Securities Regulation and Corporate Governance Monitor.

The Climate Change Cases are the first of their kind decided by the Court and constitute a significant legal development requiring considered analysis and reflection.

On 9 April 2024, the Grand Chamber of the European Court of Human Rights (“Court”) rendered its rulings in the “Climate Change Cases”: (i) Verein KlimaSeniorinnen Schweiz and Others v. Switzerland (“KlimaSeniorinnen”), (ii) Carême v. France (“Carême”), and (iii) Duarte Agostinho and Others v. Portugal and 32 Others (the “Portuguese Youth Climate Case”). The Climate Change Cases are the first of their kind decided by the Court. They constitute a significant legal development requiring considered analysis and reflection.

In KlimaSeniorinnen, the Court held that Switzerland had not implemented the measures necessary to fulfil its positive obligations to cut greenhouse gas (“GHG”) emissions in conformity with the requirements under Article 8 (the right to private and family life and the right to a home) of the European Convention on Human Rights (“Convention”). The Convention does not spell out an autonomous right to a clean and healthy environment. However, KlimaSeniorinnen creates what may be seen as a novel right accompanied by a new positive duty on the 46 member States of the Council of Europe (“Convention States”) in the field of climate change. As the Convention is incorporated into the national laws of all Convention States, this finding may directly affect domestic legislation within these jurisdictions.

By contrast, the applications in both Carême and the Portuguese Youth Climate Case were declared inadmissible. In the former, the Court held that the applicant did not have victim status as he no longer had a link to Grande-Synthe, the area of France allegedly affected by the climate crisis where he had served as mayor. In the latter case, the application was dismissed on both jurisdictional grounds and for non-exhaustion of domestic remedies. Below, these decisions are considered separately to KlimaSeniorinnen although it is important to view these rulings as a trilogy of climate cases decided by the Court on the same date.

Overall, the judgment in Klimaseniorinnen, which is the most significant of the three rulings, may have the potential to reverberate on a global level—including exerting a considerable influence on other pending climate change cases both nationally and internationally. Inversely, the findings in Carême and the Portuguese Youth Case are well in line with the existing case law of the Court.

This alert provides an overview of the Court’s findings in each of the three Climate Change Cases and offers our thoughts on some of the potential impacts.

1. KlimaSeniorinnen

(a) Background

The KlimaSeniorinnen proceedings against Switzerland began over nine years ago before the Swiss national courts. The claims were dismissed at all levels (including before the Swiss Federal Supreme Court) on jurisdictional grounds, including for lack of standing (the claims constituting an actio popularis), and were therefore not examined on the merits. Proceedings were then lodged before the Court in 2020.

The applicants (“Applicants”) in the case were: (i) “KlimaSeniorinnen”, a Swiss-registered association established to promote and implement effective climate protection on behalf of its 2,000 female members who all live in Switzerland, and who have an average age of 73 years (the “Association”), and (ii) four individual women who are members of the Association (“Individual Applicants”).

The Applicants argued that they were part of the most vulnerable group affected by climate change owing to their age and sex. They submitted testimony and medical evidence demonstrating, in their view, the negative effects of global warming on their health (including suffering from cardiovascular and respiratory diseases). According to the Applicants, there was no doubt that climate change-induced heatwaves in Switzerland had caused, were causing and would cause further deaths and illnesses to older people and particularly women, in Switzerland.

The Applicants further submitted that Switzerland’s actions to tackle climate change through domestic legislative measures were inadequate, despite being aware of the relevant risks and scientific evidence such as reports by the United Nations Intergovernmental Panel on Climate Change (“IPCC”).

Against this background, the Applicants contended that Switzerland had failed and continued to fail to protect them effectively in violation of Articles 2 (right to life) and 8 of the Convention. Specifically, they argued that the State had a positive duty to put in place the necessary regulatory framework to mitigate climate change, taking into account its particularities and the level of risk. Further, the Applicants complained of a lack of access to a court in violation of Article 6(1) of the Convention, and the lack of an effective remedy in violation of Article 13.

As an evidentiary matter, the Court began by accepting that “anthropogenic climate change exists” and that “the relevant risks are projected to be lower if the rise in temperature is limited to 1.5^oC above pre-industrial levels and if action is taken urgently, and that current global mitigation efforts are not sufficient to meet the latter target”. The Court attached importance to relevant international standards, the decisions of domestic courts and the conclusions of reports and studies by relevant international bodies, such the IPCC (the findings of which had not been called into doubt by Switzerland or intervening States (of which there were a number)). On this basis, the Court examined the admissibility and merits of the complaints.

(b) The Issue of Standing Before the Court

“Victim status”, which is the Court’s threshold standing requirement as set out in Article 34 of the Convention, was one of the salient issues in all three of the Climate Change Cases.

Under Article 34 to the Convention, the Court may receive applications from any person, NGO or group of individuals claiming to be the victim of a violation under the Convention. Therefore, the Court’s well-established case law requires an applicant to establish causation between the alleged violation and the harm allegedly suffered. A complaint to the Court must thus identify a concrete and particularised harm directly or indirectly suffered by the applicant. A so-called actio popularis, in which the applicant only asserts a general public interest in bringing proceedings, is in principle prohibited.

In KlimaSeniorinnen, the Court emphasised that, in accordance with its case law, victim status “cannot be applied in a rigid, mechanical and inflexible way” and that the concept of “victim” must be interpreted in an “evolutive” fashion. The Court considered that in the climate change context, a special approach to victim status was warranted, reasoning that there exists a causal link between State actions or omissions (causing or failing to address climate change) and the harm affecting individuals.

The Court then went on to establish novel tests to be applied to the victim status of applicants in the context of climate change. First, with respect to individual applicants, the Court established the following “Individual Victim Status Criteria”:

(a) the applicant must be subject to a high intensity of exposure to the adverse effects of climate change, that is, the level and severity of (the risk of) adverse consequences of governmental action or inaction affecting the applicant must be significant; and

(b) there must be a pressing need to ensure the applicant’s individual protection, owing to the absence or inadequacy of any reasonable measures to reduce harm.

The Court emphasised that the threshold for fulfilling the Individual Victim Status Criteria “is especially high” and will depend on circumstances such as the prevailing local conditions and individual specificities and vulnerabilities. The Individual Applicants in KlimaSeniorinnen did not, in the Court’s view, meet the high threshold, as it could not be said that they suffered from any critical medical condition whose possible aggravation linked to climate change could not be alleviated through adaptation measures available in Switzerland.

Second, with respect to associations, the Court took an inverse approach, setting out a new and accommodating test for determining their standing in the climate change context—the Court considering that associations play a particularly important function in this context since recourse to such bodies may be “the only mean[s] available” to certain groups of applicants (such as “future generations”, a consideration borrowed from environmental law). Namely, the association must fulfil the following “Associations Victim Status Criteria”:

(a) be lawfully established in the jurisdiction concerned or have standing to act there;

(b) be able to demonstrate that it pursues a dedicated purpose in accordance with its statutory objectives in the defence of the human rights of its members or other affected individuals within the jurisdiction concerned; and

(c) be able to demonstrate that it can be regarded as genuinely qualified and representative to act on behalf of members or other affected individuals within the jurisdiction who are subject to specific threats or adverse effects of climate change on their lives, health or well-being as protected under the Convention.

However, the Court then also went further, holding that the standing of an association to act on behalf of members or other affected individuals will not be subject to a separate requirement of showing that those on whose behalf the case has been brought would themselves have met the Individual Victim Status Criteria.

Applying this novel Criteria to the Association, the Court found that these were met, and noted that this represented “a vehicle of collective recourse aimed at defending the rights and interests of individuals against the threats of climate change in the respondent State”. Therefore, the Court proceeded with examining the merits of the application on this basis.

(c) The Merits: Articles 2 and 8

Assessing the Court’s margin of appreciation (i.e., the deference that it would accord to Convention States) in the climate change context, the Court made a distinction between (i) the State’s commitment to the necessity of combating climate change, and the setting of the requisite aims and objectives in this respect on the one hand, and, on the other, (ii) the choice of means designed to achieve those objectives. As regards (i), the Court explained that the nature and gravity of the threat of climate change, and the general international consensus around the need to reduce GHG emissions through targets, called “for a reduced margin of appreciation”. However, as regards (ii)—the choice of means (including operational choices and policies)—Convention States should be accorded a wide margin of appreciation.

The Court then set out the scope of the Article 2 and 8 Convention rights as considered in previous environmental harm cases before the Court but noted that given the special nature of climate change “the general parameters of the positive obligations must be adapted to th[is] specific context”.

As regards Article 2, the Court referred to the established test that there must be a “real and imminent” risk to life, which may extend to complaints of State action and/or inaction in the context of climate change. In the climate change context, it would be possible to assume this threshold had been met where victim status had been established. That said, the Court examined the Association’s complaint primarily on the basis of Article 8, noting that to a great extent the Court had in its case law applied the same principles to both articles in the context of environmental claims. As such, the Court found that it was unnecessary to examine the applicability of Article 2 in the present case.

Then, for the first time in its history, the Court prescribed the content of the States’ positive obligations under Article 8 in the context of climate change. Significantly, the Court held that Article 8 affords individuals a right to enjoy effective protection by State authorities from serious adverse effects on their life, health, well-being and quality of life arising from the harmful effects and risks caused by climate change. Accordingly, under Article 8, States must “do [their] part” to ensure such protection. As such, States’ primary duty is to adopt, and to effectively apply in practice, “general measures specifying a target timeline for achieving carbon neutrality and the overall remaining carbon budget for the same timeframe”. This includes setting out intermediate GHG emissions reduction targets and pathways (to be updated through due diligence), including by sector, and providing evidence that States have duly complied with the relevant GHG reduction targets. Importantly, States’ positive obligations include acting in “good time and in an appropriate and consistent manner when devising and implementing the relevant legislation and measures”. Unprecedently, the Court then held that States should have “a view to reaching net neutrality within, in principle, the next three decades”.

Furthermore, the Court explained that effective protection of the rights of individuals from serious adverse effects on their life, health, well-being and quality of life requires that the above-noted mitigation measures be supplemented by adaptation measures aimed at alleviating the most severe or imminent consequences of climate change, taking into account any relevant particular needs for protection.

Applied to the case, the Court concluded that Switzerland had failed to fulfil its positive obligation derived from Article 8 to devise a regulatory framework setting out the requisite objectives and goals. In particular, the Court pointed to the fact that the 2025 and 2030 period remains unregulated in Switzerland in terms of GHG emissions, pending the enactment of new legislation, and that Switzerland had not quantified national GHG emissions limitations through, for example, a carbon budget. Furthermore, Switzerland had previously failed to meet its past GHG emission reduction targets. As such, the Court found that there had been a violation of Article 8 of the Convention.

(d) Articles 6 and 13: Victim Status and the Merits

In addition to the substantive complaints made under Articles 2 and 8 of the Convention, the Applicants brought complaints under Articles 6 and 13 alleging a failure of the Swiss national courts to grant them access to court. In KlimaSeniorinnen, the Applicants complained that they had been denied being heard on the merits on jurisdictional grounds, including for lack of standing.

The Court examined the Applicants’ victim status with respect to Article 6 finding that the Association had victim status under this provision because the domestic litigation was “directly decisive” for its “rights” under the Convention. By contrast—and in line with its victim status findings pursuant to Articles 2 and 8—the Court found that the Individual Applicants lacked standing because the dispute they pursued was not directly decisive for their specific rights, and had a tenuous connection with the rights relied upon under national law.

Applied to the merits of the Association’s case, the Court found a violation of its Article 6 right of access to the national courts. The Court furthermore found it unnecessary to examine the Association’s Article 13 complaint, having found in its favour on Article 6.

(e) The Dissenting Opinion of Judge Eicke

Judge Eicke of the United Kingdom issued a strongly worded dissent in KlimaSeniorinnen, opining that the majority had gone “well beyond what I consider to be, as a matter of international law, the permissible limits of evolutive interpretation”. In particular, he questioned the Court’s unnecessary expansion of “victim status” and unjustifiable creation of (i) “a new right (under Article 8 and, possibly, Article 2)”; and (ii) a new “primary duty” on Convention States. He was of the view that neither of these “have any basis in Article 8 or any other provision of or Protocol to the Convention”.

He further expressed concern that, at a policy level, there is a significant risk that the new right / obligation created by the majority (alone or in combination with the much enlarged standing rules for associations) would prove an unwelcome and unnecessary distraction for the national and international authorities in that “it detracts attention from the on-going legislative and negotiating efforts being undertaken as we speak to address the – generally accepted – need for urgent action”. He specifically referred to the “significant risk” that national authorities “will now be tied up in litigation about whatever regulations and measures they have adopted (whether as a result or independently) or how those regulations and measures have been applied in practice…”.

As regards Article 6, although Judge Eicke agreed with the majority that there had been a violation of the right of access to court, his conclusion was on a different (and what he called “more orthodox”) approach. In Judge Eicke’s view, the Individual Applicants’ victim status as it related to Article 6 had been clearly established and not challenged by the Swiss Government. As such, it would “have been more obvious and more appropriate to address the complaint about the denial of access to court first; before then, if necessary, moving on to consider the complaint(s) under Articles 2 and 8 of the Convention”. In his view, such an approach could have vitiated the need for developing a “novel approach” to the issue of the Applicants’ victim status under Articles 2 and 8.

(f) Key Takeaways

As stated at the outset, the Climate Change Cases are the first of their kind decided by the Court. They constitute a significant legal development. At this stage, there are a number of observations which can be highlighted.

First, due to the fact that the Convention is incorporated into the national laws of all 46 Convention States, the findings of the Court in KlimaSeniorinnen may require such States to consider amending national laws to take account of the expansion of victim status. In other words, some Convention States may have to amend their standing laws to reflect the Association Victim Status Criteria in cases leveraging Convention rights in the context of climate change cases.

Second, the Court in KlimaSeniorinnen found, for the first time, an independent actionable right to effective protection by the State for climate change-related harms under Article 8 (leaving the scope and content of any such right under Article 2 undetermined for the time being). This right includes the imposition of positive obligations on Convention States. While these positive obligations remain general on their face, they may be interpreted to require that climate change mitigation measures are “incorporated into a binding regulatory framework”, and, the Court expressly referred to the aim of reaching net neutrality “within, in principle, the next three decades”. This finding may prompt Convention States to enact more rigorous national legislation relating to GHG reductions. This could, in turn, have a significant impact on the private sector operating within those States.

Third, such regulatory changes could also prompt new investor State claims, if such legislative changes (for example, the phase out of production of electricity from certain fossil fuels) were implemented in such a manner that could be considered a breach of the States’ investment treaty obligations. In that context, Convention States may attempt to use the positive obligations imposed by the Court in KlimaSeniorinnen as a defence to such claims. However, we note that the Court’s judgment seems to leave States flexibility in how they seek to accomplish their climate targets.

Lastly, this ruling may influence other pending climate change litigation—especially where claimants are advancing human rights-based arguments. This includes cases pending before the Court which have been adjourned awaiting the rulings in the Climate Change Cases, including Greenpeace Nordic and Others v. Norway (no. 34068/21) (which relates to the issuance of new licenses for oil and gas exploration in the Barents Sea), amongst others—but also proceedings against State parties currently pending before national European courts. In addition, whilst the judgment in KlimaSeniorinnen is limited in application to Convention States as a jurisdictional matter, NGOs and other claimants may seek to leverage the judgment to support new and existing climate lawsuits against private parties. This could, in turn, have an effect on domestic standing laws related to climate change actions. Notably, there have already been examples of claims against private actors in the climate change context in Convention State courts where Convention-based arguments have been put forward.

In jurisdictions outside of the Council of Europe, Klima Seniorinnen may also prove influential where human rights arguments have been raised by the claimant(s). Further, on the international plane, KlimaSeniorinnen may have a persuasive effect on the International Court of Justice’s (“ICJ”) pending decision in connection with UN General Assembly’s request for an advisory opinion relating to States’ international law obligations to ensure protection from climate change for present and future generations. The ICJ is expected to deliver its opinion in this judgment in early 2025.

2. Carême and The Portuguese Youth Climate Case

(a) The Court’s Findings

Carême concerned an action by an individual, Mr Carême, acting on his own behalf and in his capacity as mayor of Grande-Synthe, and in the name and on behalf of the latter municipality. In proceedings before the French courts, the Conseil d’État declared admissible the action brought by the municipality and inadmissible the action brought by Mr Carême. The Conseil d’État found that the measures taken by the French authorities to tackle climate change had been insufficient and ordered the authorities to take additional measures by 31 March 2022 to meet the GHG emissions reduction targets set out in the domestic legislation and Annex I of Regulation (EU) 2018/842.

The Grand Chamber concluded that the complaint in Carême was inadmissible on the basis that Mr Carême lacked “victim status” as required by Article 34 of the Convention. This was because Mr Carême had moved away from Grande-Synthe, the area in France that he alleged was affected by climate change, to Brussels, and otherwise had no other links to Grande-Synthe for the purposes of Articles 2 and 8 of the Convention (which were the articles upon which Mr Carême relied).

Meanwhile, the Portuguese Youth Climate Case was brought by six young persons (who all resided in Portugal) against Portugal and 32 other Convention States, alleging that the respondents had violated human rights by failing to take sufficient action on climate change in violation of Articles 2 and 8, with particular reference to forest fires and heatwaves in Portugal in 2017 and 2018. The applicants sought an order from the Court requiring the respondent States to take more ambitious climate change action.

The Court concluded that although Portugal had territorial jurisdiction for the purposes of Article 1 of the Convention, extra-territorial jurisdiction could not be established in respect of the other 32 respondent States. The Court thus confirmed its existing jurisprudence on extra-territorial jurisdiction and refused to expand that jurisprudence in the climate change context. The claims against the 32 other respondent Convention States were declared inadmissible on that basis. Additionally, the Court declared the claim inadmissible on a second ground: that the applicants had not exhausted domestic remedies available in Portugal.

(b) Key Takeaways

First, and importantly, the Court’s refusal to extend its case law on extraterritorial jurisdiction in the Portuguese Youth Climate Case on the basis of specific arguments grounded on climate change considerations means that climate change related claims brought under the Convention will, in principle, have to be directed at and first resolved in the State in which the individual persons alleging harms are situated.

Second, the Court’s emphasis that domestic remedies must be exhausted in the context of climate change confirms that climate change litigation is, first and foremost, a matter for the national courts in the respective Convention State.

The Gibson Dunn team would be very happy to discuss the wide-ranging ramifications of the Climate Change Cases in more detail with clients.

The following Gibson Dunn lawyers prepared this update: Robert Spano, Stephanie Collins, and Alexa Romanelli.

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

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

We are pleased to provide you with Gibson Dunn’s ESG monthly updates for March 2024. This month our update covers the following key developments. Please click on the links below for further details.

I. GLOBAL

France and Brazil launch EUR 1.1 billion program to protect Amazon rainforest

On March 26 in Belém, Brazil, the Brazilian and French presidents launched a joint investment program to protect the Brazilian and Guyanese Amazon rainforest “with the aim of leveraging EUR 1 billion in public and private investments in the bioeconomy over the next four years.” The investment plan will involve Brazilian state-run banks, such as the National Bank for Economic and Social Development (BNDES) and Banco da Amazonia (BASA), as well as the French investment agency.

According to the signed declaration the presidents “consider it urgent to focus our efforts on establishing, by COP30, a bioeconomy model that considers the three dimensions of sustainable development — social, economic, and environmental — and allows us to reverse biodiversity loss and tackle climate change.” This pledge to stop deforestation in the Amazon by 2030 comes two years before Brazil hosts the COP30 climate negotiations talks in Belém.

Net Zero Banking Alliance tightens guidelines for banks’ climate targets

On March 13, members of the bank-led, UN-convened Net-Zero Banking Alliance (“NZBA”) voted to adopt a new version of the Guidelines for Climate Target Setting for Banks. One key change is the expanded scope, which now includes not only lending and investment activities but also capital markets arranging and underwriting activities. This extension aims to provide a more comprehensive approach to climate target setting, acknowledging the significant role these activities play in banking portfolios as well as the scientific, regulatory, and methodological changes that have occurred since the original April 2021 Guidelines.

According to the UNEP FI website, the guidelines are a product of an NZBA member bank-led review informed by their own experience of applying the original guidelines, setting and implementing climate targets, and financing transitions in different sectors. The new version “reinforces the guidelines, further outlining key principles to underpin the setting of credible and ambitious targets in line with achieving the objectives of the Paris Agreement”. The updated version of the guidelines will apply to all new targets and any new iterations of existing targets set by NZBA member banks after April 22, 2024.

Saudi Arabia introduces Green Financing Framework to drive sustainability

On March 28, Saudi Arabia announced its Green Financing Framework, which seeks to attract funding for a range of sustainable investment opportunities. The Framework identifies eight types of projects eligible for funding from so-called “green” debt sales, ranging from support for cleaner transportation and renewable energy to projects that may help the desert kingdom adapt to climate change.

The Ministry of Finance stated the structure will allow the government to sell green bonds and sukuk (Sharia compliant bonds) for projects that meet the criteria. Any sale of such debt would be a first for the central government as it aims to cut its greenhouse gas emissions by 278 million tonnes per year by 2030 and have net zero emissions by 2060.

This announcement follows a number of recent initiatives which include the Saudi Green Initiative (“SGI”) to combat the adverse effects of climate change over the past few years. On March 27, the Kingdom celebrated its first Saudi Green Initiative Day organised under the theme “For Our Today and Their Tomorrow: KSA Together for a Greener Future” which aimed to highlight the collaboration of the more than 80 public and private sector projects that are part of the SGI.

II. UNITED KINGDOM

HM Treasury announces consultation on new regulatory regime for ESG ratings

The UK Government confirmed on 6 March, as part of the Spring Budget, that it will regulate providers of ESG ratings to users within the UK. ESG ratings providers will fall within the regulatory perimeter of the Financial Conduct Authority.

This follows the UK Government’s publication in March 2023 of a consultation on the future regulatory regime for ESG ratings providers alongside an updated Green Finance Strategy. Both publications were part of a wider set of ESG-related publications such as the Powering Up Britain – Net Zero Growth Plan and Energy Security Plan and the more recent consultation on addressing carbon leakage risk to support decarbonisation.

UK to enforce tougher emission reduction rules on the oil and gas industry

On March 27, the North Sea Transition Authority (“NSTA”), the UK government’s oil and gas regulator, published new guidelines for emissions reduction in the North Sea. These stricter guidelines for oil and gas producers follows from the 2021 NSTA (then “OGA”) strategy which placed an obligation on the industry to assist “in meeting the net zero carbon by 2050 target”.

The NSTA’s new guidelines set out “four clear contributing factors to decarbonising the industry” — including asset electrification, investment and efficiency and action on flaring and venting. It will also look at “inventory as a whole”, ramping up scrutiny on assets with high emissions intensity. New developments with “a first oil or gas after 1 January 2030 must be either fully electrified or run on alternative low carbon power with near equivalent emission reductions”, the NSTA said. New developments with a first oil or gas date before 2030 should be electrification-ready at minimum.

III. EUROPE

European Council approves Corporate Sustainability Due Diligence Directive

On March 15, the EU Council approved a revised version of the Corporate Sustainability Due Diligence Directive (“CS3D”). The CS3D imposed obligations on companies to conduct thorough due diligence encompassing identification, assessment, prevention, and mitigation of negative environmental and human rights impacts. To mitigate these, the CS3D stipulates that a broad range of elements must be addressed, including child and forced labour, greenhouse gas emissions and deforestation. Importantly, companies are required to examine and document findings beyond their immediate operations, encompassing both indirect business partners and subsidiaries.

The CS3D has two key objectives: (i) to require companies to carry out due diligence to avoid adverse environmental and human rights impacts and (ii) to ensure accountability in case of actual adverse impacts being caused. The key obligations endorsed by the council in relation to due diligence are set out below:

“Chain of activities”: This definition of a company’s downstream and upstream activities in respect of due diligence obligations has now been further narrowed, by excluding downstream activities performed by indirect business; and downstream activities at the product disposal stage (such as dismantling, recycling, composting and landfilling).

Financial institutions: The provisional agreement was stated to cover only the upstream but not the downstream activities of financial institutions (thus excluding the investment and lending activities of such institutions). The review clause of the compromise text nonetheless continues to provide that the Commission shall prepare, within two years of the directive’s adoption, a report on the need for additional due diligence requirements tailored to the financial sector.

Groups of companies: As per the provisional agreement, ultimate parent companies are responsible for meeting the due diligence obligations of the directive, save where the parent company’s main activity is holding shares in operational subsidiaries—and now, pursuant to an additional exemption introduced in the concession text, where the parent company does not engage in taking “management, operational or financial decisions” affecting the group or its subsidiaries. The parent company must also now apply to the competent supervisory authority for any such exemption.

Civil liability: The civil liability regime has been further adjusted by making it clear that Member States are free to decide the conditions under which trade unions, non-governmental organizations or national human rights institutions can initiate collective redress mechanisms on behalf of victims. In particular, language referring to the ability of such a body to bring a claim “in its own capacity” has been deleted and the possibility for third-party intervention in support of victims in lieu of direct representation explicitly provided for.

Corporate Sustainability Reporting directive and disclosure of climate risk information

Another of the key obligations endorsed by the European Council under CS3D is the requirement to “adopt and put into effect a transition plan for climate change mitigation” (“Climate Plan”), which must have specific features. Paragraph 50 of the Directive states that Climate Plan must aim “to ensure, through best efforts, that the business model and strategy of the company are compatible with” (i) the transition to a sustainable economy; (ii) limiting global warming to 1.5 °C in line with the Paris Agreement; (iii) the objective of achieving climate neutrality as established in the EU Climate Law, including its intermediate and 2050 targets; and (iv) where relevant, the exposure of the undertaking to coal, oil and gas-related activities.

It must include the following company-specific targets and reporting standards: (i) climate targets including specifically in terms of Scopes 1-3; (ii) identification of decarbonisation levers; (iii) an explanation of transition funding for the Climate Plan; and (iv) description of leadership accountability which must be defined specifically with regard to the Climate Plan.

IV. NORTH AMERICA

U.S. Securities and Exchange Commission adopts final Climate Change Rules

On March 6, the U.S. Securities and Exchange Commission (“SEC”) approved final climate change rules. More information on these rules is available in our client alert available here. The rules were immediately challenged in court by various parties, including several states and the Sierra Club. On March 15, the Fifth Circuit Court of Appeals granted an emergency administrative stay of the SEC’s rules. On March 21, the Judicial Panel on Multidistrict Litigation selected the Eighth Circuit as the court that will consider the petitions for review challenging the SEC’s rule, and on March 22, the administrative stay was dissolved when the Fifth Circuit cases were transferred to the Eighth Circuit. (Subsequently, on April 4, the SEC issued an Order a stay of its final rule “pending the completion of judicial review” of the consolidated Eighth Circuit petitions.)

U.S. introduces bill to exclude ESG factors from Retirement Investment Plans

On March 21, Congressman Greg Murphy introduced the Safeguarding Investment Options for Retirement Act, legislation to prohibit tax-advantaged retirement plan trustees from considering factors other than financial risk and return when making investment decisions on behalf of workers, retirees, and their beneficiaries. In his official press release, the Congressman explained the background to his decision. He stated that in recent years some retirement plans prioritising ESG factors had “performed more poorly compared to traditional investments, raising questions about trustees’ priorities for investment.” Under this legislation, if plans are found to be using non-financial risk and return factors, they risk losing their tax-advantaged status.

The bill proposes to counteract “the left’s environmental and equity agendas”. Specifically, the Department of Labor’s (“DOL”) reversal under the Biden administration of the restrictions imposed under predecessor Donald Trump on retirement plans considering ESG factors when selecting investments. In November 2022, the DOL finalised rules under ERISA that permit fiduciaries of retirement plans governed by ERISA to consider ESG in the selection process for investments of such retirement plans. Congressman Murphy’s bill is indicative of much of the wider Republican response to the DOL’s 2022 rule and follows the January 2023 lawsuit filed in the Northern District of Texas by attorney generals from 25 states which challenges the 2022 rule.

U.S. Government commits $750 million for growth of hydrogen industry in U.S.

On March 14, the Department of Energy (“DOE”) announced that it will allocate $750 million to a series of projects aimed at dramatically reducing the cost of clean hydrogen. Focused on advancing electrolysis technologies, manufacturing and recycling capabilities for clean hydrogen systems, this commitment is indicative of the Biden Administration’s approach to hydrogen as crucial in reducing fossil fuels and emissions from hard to decarbonize industries such as aluminium and cement.

The announcement follows the Biden administration’s release in June 2023 of the U.S. National Clean Hydrogen Strategy and Roadmap, aimed at significantly increasing the production, use, and distribution of low carbon hydrogen in energy intensive industries. It outlines the commitment to scale U.S. clean hydrogen production and use to 10 million metric tonnes by 2030, and as much as 50 million tonnes by 2050.

The new allocations by the DOE will be funded by the Bipartisan Infrastructure Law, which was passed in November 2021 and allocates $9.5 billion to clean hydrogen. The law gives authority to the DOE to allocate the funding, which includes up to $1 billion for research and development of reducing the cost of clean hydrogen produced via electrolysis; as well as $500 million to research and development of improved processes and technologies for manufacturing and recycling clean hydrogen systems and materials.

V. APAC

South Korea unveils $313 billion green financing plan to combat climate change

South Korea has vowed to provide loans worth $313.4 billion to finance carbon-cutting projects, in a joint statement by the government and major banks on 19 March. By 2030, five state financial institutions including Korea Development Bank (“KDB”) will provide those loans to encourage companies to switch to low carbon production, the announcement said. By 2030, these measures are anticipated to achieve a reduction of 85.97 million metric tonnes of greenhouse gases, fulfilling nearly 30% of the government’s ambitious target.

The plan to step up the fight against climate change was unveiled in a meeting between government officials and heads of South Korea’s five major banks. The KDB and other big banks including Woori Bank and Kookmin Bank, will also create a new fund worth KRW 9 trillion for building new green energy facilities, the government added.

Chinese stock exchanges consult on mandatory sustainability reporting requirements for listed companies

China’s three major stock exchanges, the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the Beijing Stock Exchange, have announced new sustainability reporting guidelines for listed companies to begin mandatory disclosure on ESG related topics in 2026.

The reporting requirements will cover four core topics, including governance, strategy, impact and risk and opportunity management, along with indicators and goals. The exchanges are taking a “double materiality” approach, which includes reporting on both the risks and impacts of sustainability issues, along with the companies’ impacts on the environment and society.

The mandatory reporting requirements will capture more than 450 companies listed across the three exchanges, with the reporting set to begin in 2026 for the 2025 reporting period.

Warmest regards,
Susy Bullock
Elizabeth Ising
Perlette M. Jura
Ronald Kirk
Michael K. Murphy
Selina S. Sagayam

Chairs, Environmental, Social and Governance Practice Group, Gibson Dunn & Crutcher LLP

For further information about any of the topics discussed herein, please contact the ESG Practice Group Chairs or contributors, or the Gibson Dunn attorney with whom you regularly work.

The following Gibson Dunn lawyers prepared this update: Lauren Assaf-Holmes, Grace Chong, Elizabeth Ising, Cynthia Mabry, Patricia Tan Openshaw, Charlie Osborne, Selina S. Sagayam, and Helena Silewicz*.

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

Environmental, Social and Governance (ESG):
Susy Bullock – London (+44 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213.229.7121, [email protected])
Ronald Kirk – Dallas (+1 214.698.3295, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, [email protected])
Patricia Tan Openshaw – Hong Kong (+852 2214-3868, [email protected])
Selina S. Sagayam – London (+44 20 7071 4263, [email protected])

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

Macquarie Infrastructure Corp. v. Moab Partners, L.P., No. 22-1165 – Decided April 12, 2024

On April 12, the Supreme Court unanimously held that a company’s failure to disclose information required under SEC regulations—such as Item 303 of Regulation S-K—cannot support a private securities-fraud claim unless the omission makes the company’s affirmative statements misleading.

“Pure omissions are not actionable under Rule 10b-5(b).”

Justice Sotomayor, writing for the Court

Background:

Regulation S-K requires public companies to provide disclosure on certain prescribed topics. Item 303 of the regulation, the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” (MD&A), specifically requires companies to disclose “known trends or uncertainties that have had or that are reasonably likely to have” a material impact on net sales, revenue, or income. 17 C.F.R. § 229.303(b)(2)(ii). And Rule 10b-5(b) makes it unlawful for companies “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” Id. § 240.10b-5(b). Both the SEC and private parties can sue companies for violations of Rule 10b-5(b).

Several circuits had held that failure to make a disclosure under Item 303 cannot support a securities fraud claim under Rule 10b-5(b) without an affirmative statement that is made misleading by the omission. But the Second Circuit disagreed, holding that an Item 303 violation alone can give rise to a securities-fraud claim. The Supreme Court granted review to resolve the conflict.

Issue:

Whether a failure to make a disclosure required under Item 303 of Regulation S-K can support a private claim under Rule 10b-5(b) even in the absence of an otherwise misleading statement.

Court’s Holding:

No. Rule 10b-5(b) does not prohibit pure omissions, so a failure to disclose information required under Item 303 does not support a private securities-fraud claim under Rule 10b-5(b) without an affirmative statement made misleading by the omission.

What It Means:

The Court’s holding clarifies that Rule 10b-5(b) does not allow private lawsuits based on pure omissions, including omitted information required to be disclosed under SEC regulations like Item 303. Instead, Rule 10b-5(b) permits lawsuits based only on affirmative misrepresentations and “half-truths” that are misleading because they omit critical qualifying information.
The Court rejected the plaintiff’s and government’s argument that the omission of any information required by Item 303 is necessarily misleading because investors expect companies to disclose all known trends or uncertainties. The Court clarified, however, that “private parties remain free to bring claims based on Item 303 violations that create misleading half-truths.” The Court also contrasted Rule 10b-5(b)’s language with Section 11(a) of the Securities Act of 1933, under which the Court observed that Congress expressly imposed liability for pure omissions.
The Court’s decision represents an important check on claims under Rule 10b-5(b), reaffirming that the private right of action the Court recognized many decades ago should not be further extended.
Although the Court framed the question presented in terms of “private” rights of action, the Court’s interpretation of Rule 10b-5(b) does not appear to be limited to that context. Accordingly, the Court’s decision likely means that the SEC itself also will not be able to bring enforcement actions alleging fraud under Rule 10b-5(b) based on a pure omission theory. The Court did make clear, however, that the SEC retains authority to prosecute violations of Item 303 and the SEC’s other regulations that mandate what disclosures must be made in public filings.
The Court did not opine on any issue other than whether a pure omission is actionable under Rule 10b-5(b). It did not address what would qualify as a statement made misleading by an omission, or whether the other parts of Rule 10b-5—the “scheme liability” provisions of Rules 10b-5(a) and 10b-5(c)—support liability for pure omissions. Those issues will likely be the subject of further litigation.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

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

Related Practice: Securities Litigation

Monica K. Loseman +1 303.298.5784 [email protected]	Brian M. Lutz +1 415.393.8379 [email protected]	Craig Varnen +1 213.229.7922 [email protected]
Jason J. Mendro +1 202.887.3726 [email protected]	Michael D. Celio +1 650.849.5326 [email protected]

Related Practice: Securities Regulation and Corporate Governance

Elizabeth Ising +1 202.955.8287 [email protected]	James J. Moloney +1 949.451.4343 [email protected]	Lori Zyskowski +1 212.351.2309 [email protected]
Thomas J. Kim +1 202.887.3550 [email protected]	Brian J. Lane +1 202.887.3646 [email protected]	Ronald O. Mueller +1 202.955.8671 [email protected]

This alert was prepared by associates Patrick Fuster, Matt Aidan Getz, and Robert Batista.

Bissonnette v. LePage Bakeries Park St., LLC, No. 23-51 – Decided April 12, 2024

Today, the Supreme Court unanimously held that the applicability of the Federal Arbitration Act’s exemption for transportation workers in interstate commerce turns on whether a worker is a transportation worker, not whether they work in the transportation industry.

“A transportation worker need not work in the transportation industry to fall within the exemption from the FAA provided by §1 of the Act.”

Chief Justice Roberts, writing for the Court

Background:

The Federal Arbitration Act (“FAA”) broadly requires courts to enforce arbitration agreements but exempts from its application arbitration “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1. The Supreme Court in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), held that this exemption applies only to transportation workers.

Neal Bissonnette and Tyler Wojnarowski worked as distributors for Flower Foods, Inc., a baked-goods producer and marketer. After they sued Flowers for allegedly violating state and federal wage laws, Flowers moved to compel arbitration under the FAA pursuant to the arbitration clauses in their distribution agreements.

Bissonnette and Wojnarowski resisted arbitration, arguing that they were exempt under Section 1 of the FAA because they were “workers engaged in foreign or interstate commerce.”

The district court compelled arbitration on the ground that the distributors were not transportation workers but had much broader responsibilities. The Second Circuit affirmed, but on different reasoning: it held that the distributors worked in the bakery industry, not the transportation industry, and therefore did not qualify for the Section 1 exemption.

Issue:

Whether a transportation worker must work for a company in the transportation industry to qualify for the arbitration exemption in Section 1 of the FAA.

Court’s Holding:

No. To qualify as a transportation worker under Section 1 of the FAA, a worker does not have to work for a company in the transportation industry, and can qualify for the exemption if they play “a direct and ‘necessary role in the free flow of goods’ across borders.”

What It Means:

The Court’s decision is narrow. The Court rejected a “transportation industry” test for Section 1 of the FAA. The Court’s decision largely follows from Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022), which held that Section 1 “focuses on the performance of work, rather than the industry of the employer.”
The Court’s decision did not address whether the workers at issue were transportation workers or whether they were engaged in interstate commerce.
This ruling does not meaningfully alter the FAA Section 1 landscape, given that Saxon had already held that the Section 1 inquiry focuses on whether the workers’ job duties render them “transportation workers.” Regardless of industry, employers who use arbitration agreements should consider workers’ job duties when assessing whether the Section 1 exemption might apply.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 [email protected]	Allyson N. Ho +1 214.698.3233 [email protected]	Julian W. Poon +1 213.229.7758 [email protected]
Lucas C. Townsend +1 202.887.3731 [email protected]	Theane Evangelis +1 213.229.7726 [email protected]	Bradley J. Hamburger +1 213.229.7658 [email protected]
Brad G. Hubbard +1 214.698.3326 [email protected]

Related Practice: Labor and Employment

Jason C. Schwartz
+1 202.955.8242
[email protected]

Katherine V.A. Smith
+1 213.229.7107
[email protected]

Theane Evangelis
+1 213.229.7726
[email protected]

Related Practice: Class Actions

Christopher Chorba
+1 213.229.7396
[email protected]

Kahn A. Scolnick
+1 213.229.7656
[email protected]

This alert was prepared by associates Elizabeth Strassner and Salah Hawkins.

Sheetz v. County of El Dorado, No. 22-1074 – Decided April 12, 2024

Today, the Supreme Court held unanimously that land-development permit exactions subject to the Takings Clause must bear an essential nexus and rough proportionality to the expected impacts of the development, even if the exaction is imposed pursuant to legislation.

“The Takings Clause … prohibits legislatures and agencies alike from imposing unconstitutional conditions on land-use permits.”

Justice Barrett, writing for the Court

Background:

The Supreme Court’s prior decisions in Nollan v. California Coastal Commission and Dolan v. City of Tigard held that certain land-development exactions violate the Fifth Amendment’s Takings Clause unless the government can show that the exaction bears (1) an “essential nexus” and (2) a “rough proportionality” to the expected impacts from the development.

George Sheetz applied for a permit from the County of El Dorado, California to build a house on his property. County legislation required Mr. Sheetz to pay a traffic impact mitigation fee as a condition of obtaining a permit, which was set according to a legislatively determined fee schedule that did not account for an individual project’s actual impact on roads. Mr. Sheetz challenged the exaction as an unconstitutional taking under Nollan and Dolan. The California Court of Appeal held that the exaction was immune from constitutional scrutiny because it was authorized by generally applicable legislation, as opposed to an administratively imposed exaction.

Issue:

Is a building permit exaction authorized by legislation exempt from constitutional scrutiny under the test set forth in Nollan and Dolan?

Court’s Holding:

No. The Takings Clause does not distinguish between legislative and administrative land-use permit conditions, and therefore legislatively mandated exactions are not exempt from the “essential nexus” and “rough proportionality” standards established by Nollan and Dolan.

What It Means:

The Court’s decision means that land-development exactions do not evade review under Nollan and Dolan merely because they are authorized pursuant to legislation.
The Court’s ruling gives property developers more opportunities to challenge legislative exactions as unconstitutional takings. The decision could lead to greater predictability in legislative exactions and a reduction in the types and amounts of impact fees and other exactions imposed, as local governments will need to assess whether legislation imposing exaction fees on private property development, if subject to the Takings Clause, comply with Nollan and Dolan’s mandates.
The Court’s decision unanimously declares that “[t]he Constitution’s text does not limit the Takings Clause to a particular branch of government,” which is consistent with the conclusion of Justice Scalia’s 2010 plurality opinion in Stop the Beach Renourishment, Inc. v. Florida Department of Environmental Protection that judicial actions are subject to the Takings Clause.
Justice Kavanaugh’s concurring opinion, joined by Justices Kagan and Jackson, emphasized that the Court today expressly left open the question whether a permit condition imposed on a class of properties is subject to the same standard as a permit condition that targets a particular development. Justice Gorsuch, in another concurrence, offered his answer: Nollan and Dolan should not operate differently when an alleged taking affects a class of properties rather than a specific development, as neither of those precedents involved the targeting of a particular development.
Justice Sotomayor’s concurring opinion, joined by Justice Jackson, expressed the view that the Court had not decided the threshold question whether the traffic impact fee in this case would be a compensable taking if imposed outside of the permitting context.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

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

Related Practice: Real Estate

Eric M. Feuerstein
+1 212.351.2323
[email protected]

Alan Samson
+44 20 7071 4222
[email protected]

Jesse Sharf
+1 310.552.8512
[email protected]

Related Practice: Land Use and Development

Mary G. Murphy
+1 415.393.8257
[email protected]

Benjamin Saltsman
+1 213.229.7480
[email protected]

This alert was prepared by associates Connie Lee and Robert Batista.

From the Derivatives Practice Group: The CFTC has appointed a new Inspector General, Christopher Skinner. The Office of the Inspector General is an independent organizational unit of the CFTC, with the mission to detect waste, fraud, and abuse and to promote integrity, economy, efficiency, and effectiveness in the CFTC’s programs and operations.

New Developments

CFTC Appoints Christopher Skinner as Inspector General. On April 10, the Commodity Futures Trading Commission announced that Christopher L. Skinner has been appointed CFTC’s Inspector General (IG). The CFTC stated that Mr. Skinner brings 15 years of IG experience, including leading and managing Offices of Inspector’s General (OIG), and conducting investigations, inspections, and audits. Mr. Skinner comes to the CFTC from the Federal Election Commission (FEC) where he served as IG since 2019. [NEW]
SEC Adopts Reforms Relating to Investment Advisers Operating Exclusively Through the Internet. On March 27, the SEC adopted amendments to the rule permitting certain internet investment advisers to register with the Commission (the “internet adviser exemption”). The amendments will require an investment adviser relying on the internet adviser exemption to have at all times an operational interactive website through which the adviser provides digital investment advisory services on an ongoing basis to more than one client. The amendments will also eliminate the current rule’s de minimis exception by requiring an internet investment adviser to provide advice to all of its clients exclusively through an operational interactive website and to make certain corresponding changes to Form ADV.

New Developments Outside the U.S.

New Report Sheds Light on Quality and Use of Regulatory Data Across EU. On April 11, ESMA published the fourth edition of its Report on the Quality and Use of Data aiming to provide transparency on how the data collected under different regulations is used systematically by authorities in the EU, and clarifying the actions taken to ensure data quality. The report provides details on how National Competent Authorities, the European Central Bank, the European Systemic Risk Board and ESMA use the data that is collected through the year from different legislation requirements, including datasets from European Market Infrastructure Regulation, Securities Financing Transactions Regulation, Markets in Financial Instruments Directive, Securitization Regulation, Alternative Investment Fund Managers Directive and Money Market Funds Regulation. [NEW]
UK’s Accelerated Settlement Taskforce Publishes Report on the Path to T+1. On March 28, the UK’s Accelerated Settlement Taskforce published its report on the path to a T+1 settlement cycle. The report finds there is a clear consensus on the need for the UK to move to a T+1 settlement cycle and this shift will require substantial investment in greater automation and standardization. In addition, the report emphasizes a need for ongoing engagement with stakeholders during the transition period and the opportunity to learn from the U.S. move to T+1 in May 2024. The report recommends the immediate creation of a technical group to identify the challenges of transition and formulate solutions and suggests a two-step transition to T+1 before the end of 2027, with the exact date to be determined by the technical group.
ESMA Clarifies Application of Certain MIFIR Provisions, Including Volume Cap. On March 27, the European Securities and Markets Authority (ESMA) published a statement, including practical guidance supporting the transition and the consistent application of the revised Markets in Financial Instruments Regulation (MiFIR).The statement covers guidance on equity transparency and non-equity transparency; the systematic internaliser (SIs) regime; designated publishing entities (DPEs); and reporting. Regarding the volume cap, following the publication by the European Commission, ESMA confirmed that DVC data will continue to be published, with the next publication scheduled for early April.
ESMA Provides Market Participants with Guidance on the Clearing Obligation for Trading with 3rd Country Pension Schemes. On March 27, ESMA issued a public statement on deprioritizing supervisory actions linked to the clearing obligation for third-country pension scheme arrangements (TC PSA), pending the finalization of the review of EMIR. ESMA expects National Competent Authorities (NCAs) not to prioritize supervisory actions in relation to the clearing obligation for derivative transactions conducted with TC PSAs exempted from the clearing obligation under their third-country’s national law. Additionally, ESMA recommends that NCAs apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner. The Council and the European Parliament reached a provisional agreement on February 7. The political agreement on the EMIR 3 text provides for an exemption regime from the EMIR clearing obligation when the TC PSA is exempted from the clearing obligation under that third country’s national law.
ESMA Finalizes First Rules on Crypto-Asset Service Providers. On March 25, ESMA published the first Final Report under the Markets in Crypto-Assets Regulation (MiCA). ESMA stated that Tthe report, which aims to foster clarity and predictability, promote fair competition between crypto-asset service providers (CASPs) and a safer environment for investors across the Union, includes proposals on: (1) information required for the authorization of CASPs; (2) the information required where financial entities notify their intent to provide crypto-asset services; (3) information required for the assessment of intended acquisition of a qualifying holding in a CASP, and (4) how CASPs should address complaints.
ESMA Launches the Third Consultation Under MiCA. On March 25, ESMA published its third consultation package under the MiCA. In the consultation package, ESMA is seeking input on four sets of proposed rules and guidelines, covering: (1) detection and reporting of suspected market abuse in crypto-assets; (2) policies and procedures, including the rights of clients, for crypto-asset transfer services; (3) suitability requirements for certain crypto-asset services and format of the periodic statement for portfolio management; and (4) ICT operational resilience for certain entities under MiCA.
SGX Issues Consultation on Revised Limit on Clearing Members’ Liability for Multiple Defaults. On March 22, Singapore Exchange (SGX) issued a consultation paper proposing to refine the existing cap on a clearing member’s liability to meet default losses arising from multiple events of default. The cap is imposed on clearing members of Singapore Exchange Derivatives Clearing Limited (SGX-DC) and The Central Depository (Pte) Limited (CDP). The proposal purports to limit a non-defaulting clearing member’s liability to meet multiple default losses arising within a 30-day period to three times the aggregate of its funded and unfunded clearing fund contributions (prescribed contribution) as determined at the start of the 30-day period. The revised limit is intended to be independent of the clearing member’s resignation. SGX has also proposed changes to the SGX-DC clearing rules set out in Appendix B of the consultation. SGX is seeking views and comments on: (1) capping the limit for multiple defaults at three times a clearing member’s clearing fund contribution amount for all defaults occurring within a 30-day period; (2) the methodology for calculating the amount of a non-defaulting clearing member’s clearing fund contributions available to meet losses suffered by the SGX central counterparty arising from or in connection with an event of default (as set out in SGX-DC Clearing Rule 7A.06.9.2); and (3) the rule amendments to effect the proposed change. The consultation closes on April 24, 2024.
SFC and HKMA Further Consult on Enhancements to Hong Kong’s OTC Derivatives Reporting Regime. On March 22, 2024, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) launched a joint-further consultation on enhancements to the over-the-counter (OTC) derivatives reporting regime in Hong Kong. This further consultation follows an earlier joint-consultation in April 2019, in which the SFC and HKMA proposed a requirement to identify transactions submitted to the Hong Kong Trade Repository (HKTR) for the reporting obligation by a Unique Transaction Identifier. The current joint-further consultation consults on the implementation of the Unique Transaction Identifier, together with the mandatory use of Unique Product Identifier and Critical Data Elements for submission of transactions to the HKTR. The Interested parties are encouraged to submit responses to the SFC or HKMA on the consultation by May 17, 2024.

New Industry-Led Developments

ISDA, AIMA, GFXD Publish Paper on Transition to UPI. On April 9, ISDA, the Alternative Investment Management Association (AIMA) and the Global Foreign Exchange Division (GFXD) of the Global Financial Markets Association published a paper on the transition to unique product identifiers (UPI) as the basis for over-the-counter (OTC) derivatives identification across the Markets in Financial Instruments Regulation (MIFIR) regimes. The paper has been sent to the European Commission, which is working on legislation to address appropriate identification of OTC derivatives under MiFIR. [NEW]
IOSCO Seeks Feedback on the Evolution of Market Structures and Proposed Good Practices. On April 4, the International Organization of Securities Commissions (IOSCO) published a consultation report on Evolution in the Operation, Governance and Business Models of Exchanges: Regulatory Implications and Good Practices. The consultation report analyzes the structural and organizational changes within exchanges, focusing on business models and ownership structures. It highlights a shift towards more competitive, cross-border, and diversified operations as exchanges integrate into larger corporate groups. The consultation report discusses regulatory considerations, particularly in the organization of individual exchanges and exchange groups and the supervision of multinational exchange groups. It addresses potential conflicts of interest arising from matrix structures and the challenges of overseeing individual exchanges within exchange groups. Additionally, it outlines a set of six proposed good practices for regulators to consider in the supervision of exchanges, particularly when they provide multiple services and/or are part of an exchange group. The good practices are also complemented by a non-exclusive list of supervisory tools used by IOSCO jurisdictions to address the issues under discussion, in the form of “toolkits”. While the Consultation Report focuses on equities listing trading venues, the findings are also relevant to other trading venues, including non-listing trading venues and derivatives trading venues. IOSCO is seeking input from market participants on the major trends and risks observed, and the proposed good practices on or before July 3, 2024.
ISDA Submits Response to CFTC Proposed Operational Resilience Rules. On April 1, ISDA submitted comments on the CFTC’s notice of proposed rulemaking on requirements to establish an Operational Resilience Framework for Futures Commission Merchants, Swap Dealers and Major Swap Participants, which was published in the Federal Register on January 24, 2024. ISDA recommended that the CFTC adjust adjust portions of the proposed rules relating to governance, third-party relationships, incident notification and implementation period.
ISDA Submits Response to IOSCO Consultation on Post-Trade Risk Reduction. On March 29, ISDA submitted a response to IOSCO consultation on post-trade risk reduction (PTRR) services. According to ISDA, PTRR services are intended to optimize bilateral and cleared derivatives portfolios to minimize the build-up of notional amounts and trade count, counterparty risk, and basis risk respectively, which in turn reduces systemic risk. ISDA stated that it is broadly supportive of IOSCO’s proposed sound practices.
ISDA Submits Joint Response to PRA on Approach to Policy. On March 28, ISDA and the Association for Financial Markets in Europe (AFME) submitted a joint response to the Prudential Regulation Authority (PRA) consultation on its approach to policy. The associations highlighted the importance of considering UK market specificities in meeting the secondary competitiveness and growth objective, and in the implementation of international standards. The associations expressed support for the continuation of structured policy development in dialogue with the industry, while also advocating for the enhancement of the PRA’s stakeholder engagement by re-establishing standing groups and horizon risk scanning groups, and greater industry cooperation during the initiation phase of the policy cycle. ISDA highlighted certain other points in the response, including recommendations on clustering regulatory principles and suggested improvements to the cost-benefit analysis and data collection processes to achieve greater transparency.
ISDA Submits Joint Response to BCBS Crypto Standard Amendments Consultation. On March 28, ISDA, with the Global Financial Markets Association, the Futures Industry Association, the Institute of International Finance and the Financial Services Forum, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on proposed crypto asset standard amendments. ISDA and the other trade associations stated that they welcome the BCBS’s continued focus on designing and improving the prudential framework for crypto assets. The key topics in the consultation response include public permissionless blockchains, classification condition 2 and settlement finality and Group 1b eligibility.

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

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

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

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

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

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

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

Adam Lapidus – New York (+1 212.351.3869, [email protected])

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

Roscoe Jones Jr., Washington, D.C. (202.887.3530, [email protected])

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

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

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

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

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

On April 4, 2024, the Department of Justice (DOJ) announced[1] that five additional cabinet-level federal agencies have joined a pledge to investigate unfair or discriminatory conduct involving artificial intelligence (AI). The joint statement—which was initially released in April 2023 by DOJ’s Civil Rights Division, the Consumer Financial Protection Bureau, the Equal Employment Opportunity Commission, and the Federal Trade Commission—now includes the Department of Education, the Department of Health and Human Services, the Department of Homeland Security, the Department of Housing and Urban Development, and the Department of Labor. DOJ’s Consumer Protection Branch also joined the pledge.

The announcement follows an April 3, 2024 meeting of senior government officials to enhance coordination on AI-related issues. This was the second such meeting following President Biden’s Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence, which directs federal agencies to use their authorities to prevent and address harms that may result from AI.

These actions highlight federal agency efforts to coordinate and pursue actions using existing legal authorities. The addition of DOJ’s Consumer Protection Branch to the pledge particularly signals the likelihood of new criminal investigations into AI-related conduct affecting consumers. Companies involved in the development and use of AI should be thoughtful about planning and avoidance of issues of concern identified in the pledge, including biased inputs, design opacity, and unintended uses.

The Pledge

The joint statement emphasizes the agencies’ focus on their responsibility to ensure that automated systems are “developed and used in a manner consistent with existing federal laws.” Signing agencies also pledge to “monitor the development and use of automated systems,” promote responsible innovation, and “vigorously” protect individuals’ rights. This pledge stems from Section 8 of the President’s Executive Order, which directed federal agencies “to consider using their full range of authorities to protect American consumers from fraud, discrimination, and threats to privacy and to address other risks that may arise from the use of AI.”[2]

Agency Highlights

Existing Federal Laws Apply to AI. The joint statement reiterates the view expressed in the initial April 2023 statement that the federal government believes that regulation of AI falls squarely within the ambit of existing federal laws and the agencies’ collective authority to enforce civil rights, non-discrimination, fair competition, and consumer protection. Indeed, the statement declares that “existing legal authorities apply to the use of automated systems and innovative new technologies just as they apply to other practices.”

Emphasis on Unfair or Discriminatory Conduct. As noted by DOJ in announcing the pledge:

“Federal agencies are sending a clear message: we will use our collective authority and power to protect individual rights in the wake of increased reliance on artificial intelligence in various aspects of American life. As social media platforms, banks, landlords, employers and other businesses choose to rely on artificial intelligence, algorithms, and automated systems to conduct business, we stand ready to hold accountable those entities that fail to address the unfair and discriminatory outcomes that may result.”[3]

This joint statement identifies the following particular issues of governmental concern with AI systems:

Data and Datasets—The agency signers of the pledge note that automated system outcomes can be skewed by unrepresentative or imbalanced datasets, datasets that incorporate historical bias, or datasets that contain other types of errors. Making it clear that avoiding the use of protected characteristics as inputs is not enough, they also express concern that automated systems may correlate data with protected classes, which could lead to discriminatory outcomes.
Model Opacity and Access—The agencies also worry that many automated systems are “black boxes” whose internal workings may not be clear even to the developer of the system. This lack of transparency, the agencies assert, could makes it more difficult for developers, businesses, and individuals to know whether an automated system is fair.
Design and Use—Developers do not always understand or account for the contexts in which private or public entities will use their automated systems, the agencies state. Developers, they explain, may design a system on the basis of flawed assumptions about its users, relevant context, or the underlying practices or procedures it may replace.

Business Implications

The number of federal agencies that have joined the pledge and the scope of regulatory and enforcement priorities outlined in the joint statement are the strongest signals yet from the federal government that it intends to proactively monitor and regulate use cases of AI. Other recent actions of note include the FTC’s blanket authorization—which “will be in effect for 10 years”—of compulsory process in investigations of any products or services “that use or claim to be produced using artificial intelligence or claim to detect its use.”[4] The Department of Justice also has established an Emerging Technology Board[5] and Chief AI Officer[6] to spearhead AI investigations and initiatives.

Companies that develop or use AI (whether directly or indirectly) should take steps to ensure that they are compliant with federal law to the extent applicable to AI-related conduct in the absence of AI-specific requirements. In practice, this includes ensuring that AI systems and business processes that rely on AI are designed with compliance in mind and in accordance with an AI governance framework. Such framework should include, to the extent applicable, processes to stay aligned with current regulatory developments and priorities, including those identified in the pledge and accompanying joint statement.

Gibson Dunn’s leading AI, Privacy and Cybersecurity, and White Collar Investigations and Defense Practice Groups stand ready to help clients design and implement dynamic compliance programs and respond to agency actions.

__________

[1] U.S. Department of Justice Office of Public Affairs, Five New Federal Agencies Join Justice Department in Pledge to Enforce Civil Rights Laws in Artificial Intelligence, April 4, 2024, available here.

[2] Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence, Sec. 8 (October 8, 2023), available at https://www.whitehouse.gov/briefing-room/presidential-actions/2023/10/30/executive-order-on-the-safe-secure-and-trustworthy-development-and-use-of-artificial-intelligence/.

[3] Id.

[4] FTC, FTC Authorizes Compulsory Process for AI-related Products and Services, November 21, 2023, available at https://www.ftc.gov/news-events/news/press-releases/2023/11/ftc-authorizes-compulsory-process-ai-related-products-services.

[5] See U.S. Department of Justice, Deputy Attorney General Lisa Monaco Announcement, November 9, 2023, available at https://www.justice.gov/opa/pr/readout-deputy-attorney-general-lisa-monacos-trip-new-york-and-connecticut

[6] See U.S. Department of Justice, Attorney General Garland Designates Jonathan Mayer to Serve as Chief AI Officer, February 22, 2024, available at https://www.justice.gov/opa/pr/attorney-general-merrick-b-garland-designates-jonathan-mayer-serve-justice-departments-first.

The following Gibson Dunn attorneys assisted in preparing this update: Gustav W. Eyler, Svetlana S. Gans, Vivek Mohan, Rosemarie Ring, Alexander Southwell, and Jay Mitchell.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Artificial Intelligence, Privacy, Cybersecurity & Data Innovation, or White Collar Defense & Investigations practice groups, or the authors:

Gustav W. Eyler – Washington, D.C. (+1 202.955.8610, [email protected])
Svetlana S. Gans – Washington, D.C. (+1 202.955.8657, [email protected])
Vivek Mohan – Palo Alto (+1 650.849.5345, [email protected])
Rosemarie T. Ring – San Francisco (+1 415.393.8247, [email protected])
Alexander H. Southwell – New York (+1 212.351.3981, [email protected])
Jay Mitchell – Palo Alto (+1 650.849.5214, [email protected])

Artificial Intelligence:
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650.849.5203, [email protected])
Vivek Mohan – Palo Alto (+1 650.849.5345, [email protected])
Robert Spano – Paris/London (+33 1 56 43 14 07, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213.229.7186, [email protected])

Privacy, Cybersecurity and Data Innovation:
Ahmed Baladi – Paris (+33 1 56 43 13 00, [email protected])
S. Ashlie Beringer – Palo Alto (+1 650.849.5327, [email protected])
Joel Harrison – London (+44 20 7071 4289, [email protected])
Jane C. Horvath – Washington, D.C. (+1 202.955.8505, [email protected])
Rosemarie T. Ring – San Francisco (+1 415.393.8247, [email protected])

White Collar Defense and Investigations:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, [email protected])
Winston Y. Chan – San Francisco (+1 415.393.8362, [email protected])
Nicola T. Hanna – Los Angeles (+1 213.229.7269, [email protected])
F. Joseph Warin – Washington, D.C. (+1 202.887.3609, [email protected])

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

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

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

Disputes caused by the rapid evolution of underlying technologies

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

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

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

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

Complex interplay of project and finance structures

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

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

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

Increased vulnerability to climate change

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

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

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

Heightened regulatory risks

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

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

Supply chain issues

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

Proactive engagement and careful allocation of risks

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

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

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

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

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

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

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

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

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

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A quarterly update of high-quality education opportunities for Boards of Directors of public and pre-IPO companies and members of private boards.

Gibson Dunn’s summary of director education opportunities has been updated as of April 2024. A copy is available at this link. Boards of Directors of public and pre-IPO companies find this a useful resource as they look for high quality education opportunities.

This quarter’s update includes a number of new opportunities as well as updates to the programs offered by organizations that have been included in our prior updates. Some of the new opportunities include unique events for members of private boards.

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The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Lori Zyskowski, Elizabeth Ising, and Ronald Mueller, with assistance from Caroline Bakewell, Ben Blefeld, Mason Gauch, To Nhu Huynh, and Mariana Lozano.

Hillary H. Holmes – Houston (+1 346.718.6602, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, [email protected])
Lori Zyskowski – New York (+1 212.351.2309, [email protected])

Please also view Gibson Dunn’s Securities Regulation and Corporate Governance Monitor.

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

Key Developments:

America First Legal (AFL), the conservative organization founded and run by former Trump policy advisor Stephen Miller, announced two new actions targeting DEI policies. On March 27, the organization sent a letter to The Walt Disney Company’s CEO Bob Iger, Board of Directors, and management, alleging breaches of fiduciary duty and violations of federal securities laws. AFL claims that Disney’s internal DEI policies and certain diversity-related content in Disney’s children’s streaming programming have contributed to a nearly 40% decline in the company’s market capitalization. AFL has asked Disney to immediately cease and desist from all employment and contracting practices that may discriminate on the basis of race, color, sex, or national origin; disclose the risks associated with its DEI practices and policies in its Form 10-K and proxy statements; and retain an independent counsel for a full investigation of the company’s hiring, promotion, recruitment, and purchasing practices. Two days later, on March 29, AFL released internal research alleging that the Bill and Melinda Gates Foundation is funding DEI programs, highlighting donations made by the Gates Foundation to the Inland Empire Community Foundation’s Black Equity Fund, the Indian American Impact Project, and the Equity in Education Coalition, among others. Miller said in a statement that “these foundation gifts appear to be funding extreme activists and programs that promote illegal racial discrimination against whites and other groups, radically undermine public safety, and foment dangerous anti-cop extremism.” AFL demanded an “explanation and accounting” from the Foundation.

On March 25, the Equal Protection Project of the Legal Insurrection Foundation (EPP), a conservative non-profit organization, filed a complaint with the Department of Education’s Office for Civil Rights (DOE) alleging that the George Floyd Memorial Scholarship at Minnesota’s North Central University violates Title VI of the Civil Rights Act. The scholarship, a four-year, full-tuition award, is granted to one undergraduate Black student based on community recommendations and a written essay. EPP contends that the scholarship discriminates against non-Black students by excluding them from consideration. This complaint follows EPP’s January 22nd complaint against the University of Wisconsin-Madison regarding its Creando Comunidad: Community Engaged BIPOC Fellows program. That scholarship program requires applicants to be a “member of a historically underrepresented racial or ethnic group or community.” EPP alleges that UW’s active promotion of the program violates the Equal Protection Clause of the Fourteenth Amendment and Title VI of the Civil Rights Act. The same day that EPP filed its complaint against North Central University, DOE confirmed it is investigating UW’s program.

On March 21, Idaho Governor Brad Little (R) signed into law Senate Bill 1274, which restricts the use of diversity statements by colleges and universities. The law prohibits public postsecondary institutions from requiring candidates for employment or admission to submit or ascribe to any “diversity statement,” defined broadly to include written or oral statements relating to “race, sex, color, ethnicity, or sexual orientation,” views on DEI and social justice, or experiences working with others of diverse backgrounds. The law also prohibits institutions from requiring or soliciting diversity statements in any contract renewal or promotion process “or as a condition of participation in any administrative or decision-making function of the institution.” The law does not bar students from voluntarily submitting information that would fall under the definition of a diversity statement. Because the law states that it is responsive to an “emergency,” it takes effect on July 1, 2024.

On March 6, the Congressional Black Caucus, chaired by Representative Steven Horsford (D-Nev.), issued a letter to Attorney General Merrick Garland, calling for the Department of Justice to “examine the lawfulness of states acting to dismantle the Diversity, Equity, and Inclusion (DEI) programs at American institutions of higher learning.” The letter emphasizes the historical importance of civil rights laws in promoting the growth of diversity on college campuses, and notes that diverse college students continue to face ongoing challenges in obtaining equal access to higher education. The letter—which follows the recent moves by the University of Florida to eliminate all of its DEI-related spending, Alabama Senate Bill 129 which limits DEI programs and teaching, and Texas Senate Bill 17 that eliminates DEI programs in state colleges—stresses that “Anti-DEI bills have been introduced in more than 30 states as of February 29, 2024.” The letter contends that because these university systems are recipients of federal funding, their anti-DEI actions constitute potential violations of federal anti discrimination laws codified in Title VI and Title IX of the Civil Rights Act of 1964.

Media Coverage and Commentary:

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

Axios, “‘The backlash is real’: Behind DEI’s rise and fall” (April 2): Emily Peck of Axios reports on the recent decline of corporate DEI programs over the past two years in the wake of widespread attacks from lawmakers and conservative activists. Peck suggests that some companies, which may have been less invested in DEI or more concerned about potential lawsuits, are using this moment to back away. Peck reports that these businesses are cutting back funding, trimming DEI staff, and considering limits to initiatives like employee resource groups based on workers’ races, ethnicities or interests. Conversely, according to Peck, companies that are continuing their DEI efforts are doing so quietly and altering their approach.
Bloomberg Law, “States Clash With First Amendment on DEI, Captive Audience Laws” (April 1): Bloomberg Law’s Chris Marr reports on the impact of recent state legislation on private companies’ approach to communications with their employees regarding diversity-related topics. Roughly a half-dozen states, including California and New York, have enacted statutes requiring diversity training, while courts in other states such as Michigan have found diversity training to be an implied part of employers’ obligations under state anti-discrimination laws. However, Marr opines that the First Amendment may be in tension with these diversity statutes, which may be construed as impermissibly requiring content-based communication. Marr also discusses instances where the courts have struck down conservative state legislation aimed at limiting diversity-related discussion in the workplace as a violation of employees’ free-speech rights, such as the Eleventh Circuit’s recent decision in Honeyfund.com, Inc. v. DeSantis, — F.4th —, 2024 WL 909379 (11th Cir. Mar. 4, 2024). Marr notes that states are poised to continue testing the bounds of when and how they can regulate workplace speech, setting up future courtroom clashes over the extent of employers’ First Amendment rights in protecting their communications with employees.
Law.com, “What’s in a Name? Group Urges Full 2nd Circuit to Scrap Rule Against Pseudonymity” (March 29): Avalon Zoppo of Law.com reports on the efforts of conservative nonprofit group Do No Harm to petition the U.S. Court of Appeals for the Second Circuit to scrap its new standing test requiring organizations to provide members’ names when seeking preliminary injunctions. In its petition for en banc review of the court’s recent decision in Do No Harm v. Pfizer, Inc., — F.4th —, 2024 WL 949506 (2d Cir. Mar. 6, 2024), Do No Harm argues that the rule will deter organizations from bringing lawsuits on behalf of individuals who may wish to remain anonymous due to fears of retaliation. Gibson Dunn partner and co-head of the firm’s Labor and Employment practice group Jason Schwartz said the case could affect a recent influx of lawsuits against corporate diversity initiatives, where conservative groups have sued on behalf of anonymous members: “This is a super important threshold question for a lot of this new wave of lawsuits . . . If the court says you have to come forward with real live human beings, that’s going to change the wave of these cases in a material way.”
The Hill, “Texas AG Paxton probes Boeing supplier, takes aim at DEI practices” (March 29): The Hill’s Saul Elbein reports on Texas Attorney General Ken Paxton’s investigation of a major supplier to aerospace company Boeing, whose flagship 737 MAX aircraft has been linked to a series of deadly accidents since 2018. Paxton ordered the supplier, Spirit AeroSystems, to provide documents related to manufacturing defects that resulted in the grounding of numerous Boeing planes. Elbein reports that, as part of his request for information, Paxton also asked for information related to the company’s DEI policy and demanded the company substantiate its claim that a diverse workplace improves product quality, enhances performance, and/or helps Spirit make better decisions. Paxton reportedly also asked the company to explain how company-wide demographics for race, national origin, sexual orientation, and age have changed since 2022, when Spirit first adopted its DEI policy.
CNN, “University of Texas at Austin students say cultural programs are struggling to stay afloat in wake of anti-DEI law” (March 28): CNN’s Nicquel Terry Ellis reports on the impact of Texas SB17 on students at the University of Texas at Austin. Signed into law in 2023 by Texas Governor Greg Abbott, SB17 prohibits public colleges and universities in Texas from maintaining diversity, equity, and inclusion offices; hiring or assigning anyone to perform DEI office duties; giving preference to any job applicants or employees based on race, sex, color, ethnicity or national origin; or requiring anyone to complete DEI training. Ellis reports that, at UT Austin, the implementation of the law has caused cultural and identity groups on campus to struggle to find funding for events, meetings, and conferences previously sponsored by the school. According to Aaliyah Barlow, president of the University’s Black Student Alliance, the anti-DEI law makes marginalized communities feel unwanted on campus. However, UT Austin President Jay Hartzell emphasized that although the University will comply with the new law, it will not change the institution’s “commitment to attracting, supporting, and retaining exceptional talent across diverse backgrounds and perspectives.”
Wall Street Journal, “Government Changes How It Asks About Race and Ethnicity, Adds Middle Eastern” (March 28): The Wall Street Journal’s Paul Overberg and Michelle Hackman report on how, for the first time in 27 years, the U.S. government is changing the racial and ethnic categories used in the federal census and on other government forms. Under the new standard, respondents can now identify with more than one race, including American Indian or Alaska Native; Asian; Black or African-American; Hispanic or Latino; Middle Eastern or North African; Native Hawaiian or Pacific Islander; and white. Overberg and Hackman note that the change marks the first time that “Middle Eastern or North African” is included as its own category. Under the previous standard, individuals from these backgrounds were categorized as white.
CNN, “US House Office of Diversity and Inclusion to be disbanded as part of government spending bill” (March 25): Reporting for CNN, Nicquel Terry Ellis, Chandelis Duster, and Eva McKend cover the dissolution of the U.S. House of Representatives’ Office of Diversity and Inclusion as part of the spending bill that passed on March 22. The office, established in March 2020 with a mission to foster a congressional workforce reflective of the nation’s demographics, will be replaced by a newly-formed entity, the Office of Talent Management.

Case Updates:

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

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

Roberts & Freedom Truck Dispatch v. Progressive Preferred Ins. Co., et al., No. 23-cv-1597 (N.D. Oh. 2023): On August 16, 2023, plaintiffs represented by AFL sued defendants Progressive Insurance, Hello Alice, and Circular Board, Inc., alleging that the defendants’ grant program that awarded funding specifically to Black entrepreneurs to support their small businesses violated Section 1981.
- Latest update: On March 22, the plaintiffs filed a response to the defendants’ combined motion to dismiss, motion to stay and compel arbitration, and motion to transfer. On March 28, the Equal Protection Project of the Legal Insurrection Foundation (EPP) filed an amicus brief in support of the plaintiffs. EPP argued that the grant of the defendants’ motion would prevent civil rights groups from enforcing laws against civil rights violations by “carving out a massive loophole to characterize discriminatory conduct as protected speech.”
Am. Alliance for Equal Rights v. Zamanillo, No. 1:24-cv-509-JMC (D.D.C. 2024): On February 22, 2024, AAER filed a complaint and motion for a preliminary injunction against Jorge Zamanillo in his official capacity as the Director of the National Museum of the American Latino, part of the Smithsonian Institution. The complaint targets the Museum’s internship program, which aims to provide Latino, Latina, and Latinx undergraduates with training in non-curatorial art museum careers. AAER claimed that the program constitutes race discrimination in violation of the Fifth Amendment because the Museum allegedly considers the race of applicants in choosing interns and purportedly refuses to hire non-Latino applicants. AAER had asked for an injunction to prevent the Museum from closing the application window on April 1, or selecting interns for the program (currently scheduled to begin in late April).
- Latest update: On March 26, AAER filed a notice of settlement and stipulation of dismissal. In the settlement agreement, the Smithsonian agreed to add the following statement to the text of the scoring rubric before the application window for the undergraduate internship closes: “The Undergraduate Internship is equally open to students of all races and ethnicities. Reviewers should not give preference or restrict selection based on race or ethnicity.”
Bradley, et al. v. Gannett Co. Inc., 1:23-cv-01100 (E.D.V.A. 2023): On August 18, 2023, white plaintiffs sued Gannett over its alleged “Reverse Race Discrimination Policy,” claiming that Gannett’s expressed commitment to having its staff demographics reflect the communities it covers violates Section 1981. On November 24, 2023 Gannett moved to dismiss and to strike the plaintiffs’ class action allegations. On February 8, 2024, the plaintiffs moved for a preliminary injunction and for class certification. Gannett filed a motion to stay briefing on the plaintiffs’ motions pending a ruling on Gannett’s motion to dismiss, arguing that it may moot any need for class certification or a preliminary injunction.
- Latest update: On March 20, Gannett filed a notice of supplemental authority in support of its motion to dismiss, bringing the court’s attention to the recent Fourth Circuit opinion in Duvall v. Novant Health, Inc., No. 22-2142 (4th Cir. Mar. 12, 2024), which Gannett contends stands for the proposition that DEI programs are not per se unlawful, as long as they do not entail “a system wide decision making process” for employment based on DEI metrics.
Alexandre v. Amazon, Inc., No. 3:22-cv-1459 (S.D. Cal. 2022): White, Asian, and Native Hawaiian entrepreneur plaintiffs, on behalf of a putative class of past and future Amazon “delivery service partner” (DSP) program applicants, challenged a DEI program that provides $10,000 grants to qualifying delivery service providers who are “Black, Latinx, and Native American entrepreneurs.” The plaintiffs allege violations of California state civil rights laws prohibiting discrimination. On December 6, 2023, Amazon moved to dismiss, and the plaintiffs opposed the motion on February 16, 2024.
- Latest update: On March 20, Amazon filed a reply in support of its motion to dismiss, arguing that the plaintiffs lack standing because only a person who was already an Amazon DSP could suffer the injury of being denied a DSP diversity grant, and the plaintiffs are neither current DSPs nor applicants to become DSPs. Amazon further argued that the plaintiffs waived their claims under Section 1981 (because they did not respond to Amazon’s argument to dismiss that claim) and Section 51.5 of the Unruh Act (because they had already conceded that Section 51 does not apply). On March 26, 2024, the court announced that it would not hold oral argument on the motion.
Do No Harm v. Pfizer, No. 1:22-cv-07908 (S.D.N.Y. 2022), aff’d, No. 23-15 (2d Cir. 2023): On September 15, 2022, conservative medical advocacy organization Do No Harm filed suit against Pfizer, alleging that Pfizer discriminated against white and Asian students by excluding them from its Breakthrough Fellowship Program. To be eligible for the program, applicants must “[m]eet the program’s goals of increasing the pipeline for Black/African American, Latino/Hispanic and Native Americans.” Do No Harm alleged that the criteria violate Section 1981, Title VI of the Affordable Care Act, and multiple New York state laws banning racially discriminatory internships, training programs, and employment. In December 2022, the Southern District of New York dismissed the case for lack of subject matter jurisdiction, finding that Do No Harm did not have standing because it did not identify at least one member by name. On March 6, 2024, the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal, holding that an organization must name at least one affected member to establish Article III standing under the “clear language” of Supreme Court precedent.
- Latest update: On March 20, Do No Harm petitioned the court for a rehearing en banc, arguing that the panel’s opinion splits with at least two circuits and creates “an irreconcilable line of intracircuit precedent,” and predicting that the panel’s opinion would “deter associations from representing vulnerable members in court.” Do No Harm also moved to supplement the record on appeal with three additional anonymous declarations from potential applicants to the Pfizer Breakthrough Fellowship Program.

2. Employment discrimination and related claims:

Kascsak v. Expedia Inc., 1:23-cv-01373-DII (W.D. Tex. 2023): On November 9, 2023, a white man sued Expedia and a top executive for reverse discrimination in relation to the hiring process for a leadership role. The plaintiff claimed he was passed over in favor of a “diverse” candidate, a Black woman. The plaintiff claimed he was the victim of discrimination on the bases of race and sex in violation of Title VII, Section 1981, and the Texas Labor Code. On January 22, 2024, the defendants moved to dismiss, arguing that (1) the plaintiff lacked personal jurisdiction over the Expedia executive, and (2) the plaintiff failed to sufficiently plead a Section 1981 claim because race was not the sole but-for cause of the adverse hiring decision. The plaintiff opposed the motion on January 29, 2024, and the defendants replied on February 5.
- Latest update: On March 25, the court dismissed all claims against the individual executive defendant for lack of personal jurisdiction. The court denied the motion to dismiss as to Expedia, holding that Section 1981 permits claims where race is not the single but-for cause of an adverse contracting action.
Haltigan v. Drake, No. 5:23-cv-02437-EJD (N.D. Cal. 2023): A white male psychologist sued the University of California Santa Cruz, arguing that a requirement that prospective faculty candidates submit and be evaluated in part on the basis of statements explaining their views and understanding of DEI principles functioned as a loyalty oath that violated his First Amendment rights. The plaintiff claimed that because he is “committed to colorblindness and viewpoint diversity”––which he alleged was contrary to UC Santa Cruz’s position on DEI––he would be compelled to alter his political views to be a viable candidate for the position. The plaintiff sought a declaration that the University’s DEI statement requirement violated the First Amendment and a permanent injunction against the enforcement of the requirement. On January 12, 2024, the district court granted UC Santa Cruz’s motion to dismiss with leave to amend.
- Latest update: On March 1, the defendant moved to dismiss the plaintiff’s second amended complaint, arguing that the plaintiff lacks standing and failed to state claims of First Amendment viewpoint discrimination or compelled speech. On March 29, the plaintiff filed an opposition, arguing that he has standing because he was “as ready and able to apply [for the faculty position] as anyone could be.” The plaintiff also argued that the DEI statement is viewpoint discrimination because it is a “political litmus test,” and an unconstitutional condition rather than speech subject to Pickering balancing.

3. Challenges to agency rules, laws, and regulatory decisions:

American Alliance for Equal Rights v. Ivey, No. 2:24-cv-00104-RAH-JTA (M.D. Ala. 2024): On February 13, 2024, AAER filed a complaint against Alabama Governor Kay Ivey, challenging a state law that requires Governor Ivey to ensure there are no fewer than two individuals “of a minority race” on the Alabama Real Estate Appraisers Board (AREAB). The AREAB consists of nine seats, including one for a member of the public with no real estate background (the at-large seat), which has been unfilled for years. Because there was only one minority member among the Board at the time of filing, AAER asserts that state law will require that the open seat go to a minority. AAER states that one of its members applied for this final seat, but was denied purely on the basis of race, in violation of the Equal Protection Clause of the Fourteenth Amendment.
- Latest update: On March 19, the district court denied AAER’s motion for a temporary restraining order/preliminary injunction. The court ordered AAER to confidentially disclose of the identity of Member A, the anonymous member of AAER who asserted an injury. It also ordered the parties to submit briefing, due in early April, on why Member A should be allowed to proceed anonymously in the case.

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

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

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

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

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

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

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

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

The government successfully argued that trading in the securities of one company based upon material nonpublic information about a separate company (in whose securities the defendant does not trade) can nevertheless violate the federal securities laws.

On April 5, 2024, a civil jury found a former biopharmaceutical executive liable for insider trading under a novel theory with potentially far-reaching implications for the government’s enforcement of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as potential criminal insider trading prosecutions. In a first-of-its-kind trial, in SEC v. Panuwat, the government successfully argued that trading in the securities of one company based upon material nonpublic information about a separate company (in whose securities the defendant does not trade) can nevertheless violate the federal securities laws. This is called “shadow trading.” Although the SEC has been at pains to claim that there is “nothing novel” about the “pure and simple” insider trading theory it advanced in Panuwat,[1] the ruling heralds a significant new application of the federal government’s insider trading authority to prevent such “shadow trading” in which corporate insiders allegedly exploit information about their own companies to profit by trading in the securities of “economically-linked firms.”[2]

Factual Background

Matthew Panuwat served as Senior Director of Business Development at Medivation Inc., a publicly traded biopharmaceutical company specializing in oncology drugs. At the outset of his employment, Mr. Panuwat signed the company’s insider trading policy. That policy provided that he would not “gain personal benefit” by using Medivation’s information to “profit financially by buying or selling” either Medivation’s securities “or the securities of another publicly traded company.”[3] Not all public companies prohibit their personnel (including members of the Board of Directors) from trading in the securities of other public companies or competitors. Medivation did.

As alleged by the government, on August 18, 2016, Mr. Panuwat and other senior employees received an email from David Hung, Medivation’s chief executive officer, suggesting that a deal was imminent in which Medivation would be purchased by Pfizer. Although market participants already knew that Medivation had been fielding offers for several months, the SEC alleged that Hung’s email contained several pieces of non-public information. Mr. Panuwat, who had been part of the Medivation deal team, knew that the bids from potential acquirers including Pfizer represented a substantial premium over the then-existing market price for Medivation shares. Seven minutes after receiving Mr. Hung’s email, Mr. Panuwat began purchasing call options for Incyte Corporation, one of a handful of similar publicly traded biopharmaceutical companies focused on late-stage oncology treatments. When Pfizer’s acquisition of Medivation was publicly announced a few days later, Incyte’s stock increased 7.7% and Mr. Panuwat made approximately $110,000 from his call options.

On August 17, 2021, the SEC brought an action against Mr. Panuwat for insider trading under Section 10(b) of the Exchange Act, alleging a single violation of Rule 10b-5.

The District Court Denied Mr. Panuwat’s Motion to Dismiss

Mr. Panuwat moved to dismiss the SEC’s complaint on multiple grounds, including that the SEC’s unprecedented “shadow trading” theory sought to hold him liable for trading in Incyte’s securities as a result of his knowledge of the Pfizer-Medivation acquisition violated his constitutional right to Due Process. Mr. Panuwat argued that such a theory had never before been advanced in litigation. According to this line of argument, market participants had not previously understood that “confidential information regarding an acquisition involving Company A should also be considered material to Company B (and presumably companies C, D, E, etc.) that operate within the same general industry.”[4] Although the Court agreed that there “appear to be no other cases” supporting that proposition, and the SEC “conceded this at oral argument,” the Court nevertheless rejected this Due Process argument. The Court held that the SEC’s theory fell “within the general framework of insider trading, and the expansive language” of federal securities laws.[5]

The lengthiest portion of the Court’s decision, as well as the parties’ briefing, concerned whether information regarding the Pfizer-Medivation acquisition was material to Incyte. Mr. Panuwat argued that the information he received was not “about” Incyte, a non-party to the imminent transaction.[6] But the Court concluded that “given the limited number of mid-cap, oncology-focused biopharmaceutical companies with commercial-stage drugs in 2016, the acquisition of one such company (Medivation) would make the others (i.e., Incyte) more attractive, which could then drive up their stock price.” The Court stated that it was “reasonable to infer” that other companies that had unsuccessfully attempted to acquire Medivation “would turn their attention to Incyte” after losing out to Pfizer.[7] And, more broadly, in dicta the Court endorsed the SEC’s “common-sense” argument that “information regarding business decisions by a supplier, a purchaser, or a peer can have an impact on a company” and therefore be material—a potentially far-reaching endorsement of the SEC’s novel “shadow trading” theory.[8]

In addition, the parties agreed that Mr. Panuwat owed a duty to Medivation in light of his role as a senior executive of the company. That supported the SEC’s theory that he could be liable for misappropriating Medivation’s material non-public information concerning its impending acquisition. Although Mr. Panuwat argued that trading Incyte securities did not violate his duties to Medivation, the Court disagreed. At the pleading stage, the Court relied on “the plain language” of Medivation’s insider trading policy prohibiting trading “‘the securities of another publicly traded company, including . . . competitors” of Medivation, which could be read to include Incyte.[9] The Court further found that scienter could be reasonably inferred given that Mr. Punawat allegedly traded the Incyte call options “within minutes” of receiving Mr. Hung’s email but had “never traded Incyte stock before.”[10]

A Jury Agrees Mr. Panuwat’s Trading Falls Within the SEC’s “Shadow Trading” Theory

In November 2023, the Court denied Mr. Panuwat’s motion for summary judgment. The Court found that a key question for the jury was whether the SEC could prove “a connection between Medivation and Incyte” such that “a reasonable investor would view the information in the Hung Email as altering the ‘total mix’ of information available about Incyte.”[11] In particular, the Court recognized at least three ways in which the SEC might be able to prevail on this question of fact. First, it recognized that the SEC had introduced several “analyst reports and financial news articles” that “repeatedly linked Medivation’s acquisition to Incyte’s future.”[12] Mr. Panuwat tried to sever this link by arguing that Medivation and Incyte did not consider themselves competitors because they offered somewhat different products. The Court, however, rejected this argument because “no legal authority suggest[ed] that a reasonable investor would conclude that Medivation’s acquisition would only affect the stock price of companies that directly competed” with it.[13] Second, the SEC introduced evidence that “Medivation’s investment bankers considered Incyte a ‘comparable peer’” for valuation purposes because both were mid-cap biopharmaceutical companies with cancer-related drugs.[14] Third, the Court found that Incyte’s stock price increased by 7.7% after announcement of the Pfizer-Medivation acquisition, which the Court inferred was itself “strong evidence” investors understood “the significance of that information” as being material to Incyte.[15]

SEC v. Panuwat proceeded to an eight-day jury trial that began on March 25, 2024. After only about two hours of deliberation, on April 5, the jury returned a verdict finding that Mr. Panuwat’s purchase of Incyte call options constituted insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. That same day the SEC issued a press release noting that the brevity of the jury’s deliberations supported the SEC’s position since the outset of the litigation, quoting Division of Enforcement Director Gurbir S. Grewal as saying that, “As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple” because Mr. Panuwat “used highly confidential information about an impending announcement” of Medivation’s acquisition “to trade ahead of the news for his own enrichment” by using “his employer’s confidential information to acquire a large stake in call options” of Incyte, which “increased materially on the important news.”[16]

Depending on the Appellate Court, “Shadow Trading” Liability May Be Here to Stay

Pending the results of the anticipated appeal, the successful prosecution of Mr. Panuwat has armed the federal government with a powerful new precedent. Academic studies have claimed to find “robust evidence” that “shadow trading” is a frequent real-world phenomena in which “employees circumvent insider trading regulations” by “trading in their firm’s business partners and competitors” rather than trading in their own employers’ securities.[17] The district court’s detailed rulings in SEC v. Panuwat provide a clear blueprint for the government’s approach moving forward. Further, the jury’s findings against Mr. Panuwat after deliberating for only a few hours provides anecdotal evidence that litigating “shadow trading” cases is a viable option for government regulators and prosecutors.

Depending on whether Mr. Panuwat appeals the decision (as expected), legal and compliance professionals would be well-advised to continue to keep “shadow trading” issues in mind when designing, revising and implementing their firms’ trading policies and training programs. Indeed, anyone who trades in securities while in possession of material non-public information—including corporate insiders and directors, bankers, accountants, and lawyers, among others—could find themselves within the zone of a “shadow trading” theory. In addition, commencing with annual reports on Forms 10-K for fiscal years beginning on or after April 1, 2023, public companies will need to file as an exhibit to their Form 10-Ks any “insider trading policies and procedures governing the purchase, sale, and/or other dispositions of the registrant’s securities” that “are reasonably designed to promote compliance with insider trading laws, rules and regulations.”[18] While this requirement does not literally apply to policies addressing the trading of other companies’ securities, some companies have policies (as with Medivation) that address such trading.[19] Companies should carefully consider all factors in deciding whether to prohibit trading in other securities, and conduct training of insiders and board members as to the SEC’s expansive views on the scope of the law against insider trading.

Moreover, the securities laws impose obligations on SEC-registered firms, namely investment advisers and broker-dealers, to adopt and implement policies and procedures reasonably designed to prevent the misuse of material nonpublic information. Such firms can often be confronted with questions as to the scope of a restriction imposed by the receipt of material nonpublic information subject to a duty of confidentiality, while simultaneously fulfilling fiduciary duties to manage assets in the interests of clients. Such questions can arise at the inception of a trading restriction as well as at later points during the period of restriction. Judgments about the materiality of information about one company to the price of securities of another company are particularly nuanced and complicated. For example, it can be difficult to determine whether favorable news about one company will have a positive or negative impact on a competitor. Hanging over all of this is the ever-present risk that the SEC views the facts with the benefit of hindsight. Legal and compliance functions at investment advisers and broker-dealers may wish to revisit their policies and procedures in light of the shadow trading risk, as well as train their investment professionals to be sensitized to the risks the case highlights.

As always, Gibson Dunn remains available to help its clients in addressing these issues.

[1] SEC, Statement on Jury’s Verdict in Trial of Matthew Panuwat, Apr. 5, 2024 https://www.sec.gov/news/statement/grewal-statement-040524.

[2] Mihir Mehta, David Reeb, & Wanli Zhao, Shadow Trading 1, Accounting Review (July 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3689154.

[3] Complaint ¶ 20, SEC v. Panuwat, No. 21-cv-06322 (N.D. Cal. Aug. 17, 2021)

[4] SEC v. Panuwat, 2022 WL 633306, at *8 (N.D. Cal. Jan. 14, 2022).

[5] Id.

[6] Id. at *4.

[7] Id. at *5.

[8] Id. at *4.

[9] Id. at *6.

[10] Id. at *7.

[11] SEC v. Panuwat, 2023 WL 9375861, at *5 (N.D. Cal. Nov. 20, 2023).

[12] Id. at *6.

[13] Id.

[14] Id.

[15] Id.

[16] SEC, Statement on Jury’s Verdict in Trial of Matthew Panuwat, Apr. 5, 2024 https://www.sec.gov/news/statement/grewal-statement-040524.

[17] Mihir Mehta, David Reeb, & Wanli Zhao, Shadow Trading 1, 4, Accounting Review (July 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3689154.

[18] Item 408(b) of Regulation S-K (emphasis added). Smaller reporting companies have to comply with the requirements beginning with their Form 10-K for fiscal years beginning on or after October 1, 2023.

[19] Under Section 21A(b)(1) of the Exchange Act, public companies are not subject to controlling person liability for insider trading by executives, directors, or employees unless they disregarded the fact that a controlled person was likely to engage in the act or acts constituting the violation and failed to take appropriate steps to prevent such act or acts before they occurred.

The following Gibson Dunn lawyers assisted in preparing this update: Reed Brodsky, Benjamin Wagner, Mark Schonfeld, David Woodcock, Ronald Mueller, Lori Zyskowski, Thomas Kim, Julia Lapitskaya, Michael Nadler, Edmund Bannister, and Peter Jacobs*.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Securities Enforcement or Securities Regulation and Corporate Governance practice groups:

Securities Enforcement:
Reed Brodsky – New York (+1 212.351.5334, [email protected])
Mark K. Schonfeld – New York (+1 212.351.2433, [email protected])
Benjamin Wagner – Palo Alto (+1 650.849.5395, [email protected])
David Woodcock – Dallas/Washington, D.C. (+1 214.698.3211, [email protected])
Michael Nadler – New York (+1 212.351.2306, [email protected])

Securities Regulation and Corporate Governance:
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202.887.3550, [email protected])
Julia Lapitskaya – New York (+1 212.351.2354, [email protected])
James J. Moloney – Orange County (+1 1149.451.4343, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, [email protected])
Lori Zyskowski – New York (+1 212.351.2309, [email protected])

*Peter Jacobs is an associate working in the firm’s New York office who is not yet admitted to practice law.

Lennar Homes of Tex. Inc. v. Rafiei, No. 22-0830 – Decided April 5, 2024

In a unanimous per curiam opinion, the Texas Supreme Court held on Friday that when an arbitration agreement contains a clause delegating questions of arbitrability to the arbitrator, an unconscionability challenge must be supported with specific evidence showing that the cost of arbitrating any arbitrability issues is itself excessive. Because the plaintiff’s evidence went only to the overall costs of arbitration, the Court found no basis to conclude that the delegation clause was itself unconscionable.

“[T]he record fails to support a finding that the parties’ delegation clause is itself unconscionable due to prohibitive costs to adjudicate this threshold issue in arbitration.”

Per curiam

Background:

Rafiei bought a house from Lennar Homes. The purchase contract required the parties to submit their disputes to arbitration and delegated decisions about the arbitrability of disputes to the arbitrator. Rafiei later sued for personal injuries that he attributed to improper installation of a garbage disposal. Lennar moved to compel arbitration, and Rafiei opposed the motion, arguing that the agreement was unconscionable because arbitration was prohibitively expensive. In support of his unconscionability challenge, Rafiei submitted the AAA fee schedules and affidavits from himself and his attorney. The trial court denied Lennar’s motion, and the Fourteenth Court of Appeals affirmed.

Issue:

When an arbitration agreement delegates arbitrability issues to an arbitrator, may a court deny a motion to compel arbitration on unconscionability grounds absent evidence that the delegation provision is itself excessively costly?

Court’s Holdings:

No. “When an agreement delegates arbitrability issues to an arbitrator,” the only question for the court in an unconscionability challenge is whether the cost of arbitrating the “delegated threshold issue of unconscionability is excessive, standing alone.” Rafiei failed to “show that the delegation provision itself is unconscionable” as the supporting affidavits discussed only “the cost to arbitrate the overall dispute”—not “the cost to arbitrate the arbitrability question.” Nor did he present evidence of how the AAA fee schedule “would be applied to resolve the unconscionability challenge” itself. He also failed to establish that he could “afford litigation but not arbitration.” So the Court found no basis to set aside the delegation clause on unconscionability grounds. It refrained from deciding, however, whether the arbitration agreement as a whole was unconscionable because that issue was “reserved for the arbitrator.”

What It Means:

The Court continues to uphold the enforceability of arbitration agreements. When an agreement contains a delegation clause, a court’s inquiry on a motion to compel arbitration is “narrow.” Courts will order arbitration absent proof that the “delegation clause is itself unconscionable.”

Plaintiffs challenging arbitration agreements on unconscionability grounds face an uphill climb in Texas. They must adduce “specific evidence” showing (1) “the relevant costs between litigating in court and in arbitration”; and (2) their lack of “ability to pay the difference in such costs.” And if the agreement contains a delegation clause, plaintiffs must “estimate the actual costs associated with arbitrating the arbitrability question”—not the costs of the overall arbitration.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Texas Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

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

Related Practice: Texas General Litigation

Trey Cox +1 214.698.3256 [email protected]	Collin Cox +1 346.718.6604 [email protected]	Gregg Costa +1 346.718.6649 [email protected]
Andrew LeGrand +1 214.698.3405 [email protected]	Russ Falconer +1 346.718.3170 [email protected]

This alert was prepared by Texas associates Elizabeth Kiernan, Stephen Hammer, and Joseph Barakat.

From the Derivatives Practice Group: ISDA submitted responses to proposals from various bodies this week, both domestically and abroad.

New Developments

CFTC’s Energy and Environmental Markets Advisory Committee to Meet. The CFTC’s Energy and Environmental Markets Advisory (EEMAC) will hold a public meeting from 9:00 a.m. to 12:00 p.m. (CDT) on Wednesday, April 10 at the University of Missouri – Kansas City in Kansas City, Missouri. At this meeting, the EEMAC will continue its discussion on the federal prudential financial regulators’ proposed rules implementing Basel III and the implications for and impact on the derivatives market. There will also be presentations and discussions on the state of crude oil markets and the future of power markets. Finally, the two EEMAC subcommittees will offer updates on their continued work related to traditional energy infrastructure and metals markets.
CFTC’s Agricultural Advisory Committee to Meet. The CFTC’s Agricultural Advisory Committee (AAC) will hold a public meeting on April 11 from 9:30 a.m. to 11:00 a.m. (CDT) at the Sheraton Overland Park Hotel in Overland Park, Kansas. At this meeting, the AAC will discuss topics related to the agricultural economy and recent developments in the agricultural derivatives markets.
SEC Adopts Reforms Relating to Investment Advisers Operating Exclusively Through the Internet. On March 27, the SEC adopted amendments to the rule permitting certain internet investment advisers to register with the Commission (the “internet adviser exemption”). The amendments will require an investment adviser relying on the internet adviser exemption to have at all times an operational interactive website through which the adviser provides digital investment advisory services on an ongoing basis to more than one client. The amendments will also eliminate the current rule’s de minimis exception by requiring an internet investment adviser to provide advice to all of its clients exclusively through an operational interactive website and to make certain corresponding changes to Form ADV.
CFTC’s Market Risk Advisory Committee to Meet. The CFTC’s Market Risk Advisory Committee (MRAC) will meet on April 9 at 9:30 am ET. The MRAC will introduce recommendations, reports and presentations on current topics and developments, including an approach to manage the resilience, recovery or wind down of central counterparties, the implications of concentration risk in intermediation, the U.S. treasury cash-futures basis trade and risk-management considerations, a work plan for the integration of artificial intelligence in the markets; possible recommendations regarding efforts to manage climate-related market risks; and updates on the work of several workstreams on block implementation rules, post-trade risk reduction services, and margin transparency, margin procyclicality and margin calls.

New Developments Outside the U.S.

UK’s Accelerated Settlement Taskforce Publishes Report on the Path to T+1. On March 28, the UK’s Accelerated Settlement Taskforce published its report on the path to a T+1 settlement cycle. The report finds there is a clear consensus on the need for the UK to move to a T+1 settlement cycle and this shift will require substantial investment in greater automation and standardization. In addition, the report emphasizes a need for ongoing engagement with stakeholders during the transition period and the opportunity to learn from the U.S. move to T+1 in May 2024. The report recommends the immediate creation of a technical group to identify the challenges of transition and formulate solutions and suggests a two-step transition to T+1 before the end of 2027, with the exact date to be determined by the technical group. [NEW]
ESMA Clarifies Application of Certain MIFIR Provisions, Including Volume Cap. On March 27, the European Securities and Markets Authority (ESMA) published a statement, including practical guidance supporting the transition and the consistent application of the revised Markets in Financial Instruments Regulation (MiFIR).The statement covers guidance on equity transparency and non-equity transparency; the systematic internaliser (SIs) regime; designated publishing entities (DPEs); and reporting. Regarding the volume cap, following the publication by the European Commission, ESMA confirmsed that DVC data will continue to be published, with the next publication scheduled for early April.
ESMA Provides Market Participants with Guidance on the Clearing Obligation for Trading with 3rd Country Pension Schemes. On March 27, ESMA issued a public statement on deprioritizing supervisory actions linked to the clearing obligation for third-country pension scheme arrangements (TC PSA), pending the finalization of the review of EMIR. ESMA expects National Competent Authorities (NCAs) not to prioritize supervisory actions in relation to the clearing obligation for derivative transactions conducted with TC PSAs exempted from the clearing obligation under their third-country’s national law. Additionally, ESMA recommends that NCAs apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner. The Council and the European Parliament reached a provisional agreement on February 7. The political agreement on the EMIR 3 text provides for an exemption regime from the EMIR clearing obligation when the TC PSA is exempted from the clearing obligation under that third country’s national law.
ESMA Finalizes First Rules on Crypto-Asset Service Providers. On March 25, ESMA published the first Final Report under the Markets in Crypto-Assets Regulation (MiCA). ESMA stated that Tthe report, which aims to foster clarity and predictability, promote fair competition between crypto-asset service providers (CASPs) and a safer environment for investors across the Union, includes proposals on: (1) information required for the authorization of CASPs; (2) the information required where financial entities notify their intent to provide crypto-asset services; (3) information required for the assessment of intended acquisition of a qualifying holding in a CASP, and (4) how CASPs should address complaints.
ESMA Launches the Third Consultation Under MiCA. On March 25, ESMA published its third consultation package under the MiCA. In the consultation package, ESMA is seeking input on four sets of proposed rules and guidelines, covering: (1) detection and reporting of suspected market abuse in crypto-assets; (2) policies and procedures, including the rights of clients, for crypto-asset transfer services; (3) suitability requirements for certain crypto-asset services and format of the periodic statement for portfolio management; and (4) ICT operational resilience for certain entities under MiCA.
SGX Issues Consultation on Revised Limit on Clearing Members’ Liability for Multiple Defaults. On March 22, Singapore Exchange (SGX) issued a consultation paper proposing to refine the existing cap on a clearing member’s liability to meet default losses arising from multiple events of default. The cap is imposed on clearing members of Singapore Exchange Derivatives Clearing Limited (SGX-DC) and The Central Depository (Pte) Limited (CDP). The proposal purports to limit a non-defaulting clearing member’s liability to meet multiple default losses arising within a 30-day period to three times the aggregate of its funded and unfunded clearing fund contributions (prescribed contribution) as determined at the start of the 30-day period. The revised limit is intended to be independent of the clearing member’s resignation. SGX has also proposed changes to the SGX-DC clearing rules set out in Appendix B of the consultation. SGX is seeking views and comments on: (1) capping the limit for multiple defaults at three times a clearing member’s clearing fund contribution amount for all defaults occurring within a 30-day period; (2) the methodology for calculating the amount of a non-defaulting clearing member’s clearing fund contributions available to meet losses suffered by the SGX central counterparty arising from or in connection with an event of default (as set out in SGX-DC Clearing Rule 7A.06.9.2); and (3) the rule amendments to effect the proposed change. The consultation closes on April 24, 2024. [NEW]
SFC and HKMA Further Consult on Enhancements to Hong Kong’s OTC Derivatives Reporting Regime. On March 22, 2024, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) launched a joint-further consultation on enhancements to the over-the-counter (OTC) derivatives reporting regime in Hong Kong. This further consultation follows an earlier joint-consultation in April 2019, in which the SFC and HKMA proposed a requirement to identify transactions submitted to the Hong Kong Trade Repository (HKTR) for the reporting obligation by a Unique Transaction Identifier. The current joint-further consultation consults on the implementation of the Unique Transaction Identifier, together with the mandatory use of Unique Product Identifier and Critical Data Elements for submission of transactions to the HKTR. The Interested parties are encouraged to submit responses to the SFC or HKMA on the consultation by May 17, 2024.
ESMA Publishes Feedback on Shortening Settlement Cycle. On March 21, the ESMA published feedback received to its Call for Evidence on shortening the settlement cycle in the EU. According to ESMA’s report on the feedback, respondents focused on four areas: (1) many operational impacts, beyond adaptations of post-trade processes, were identified as the result of a reduction of the securities settlement cycle in the EU; (2) respondents identified a wide range of both potential costs and benefits of a shortened cycle, with some responses supporting a thorough impact assessment; (3) respondents provided suggestions around how and when a shorter settlement cycle could be achieved, with a strong demand for a clear signal from the regulatory front at the start of the work and clear coordination between regulators and the industry; and (4) stakeholders made clear the need for a proactive approach to adapt their own processes to the transition to T+1 in other jurisdictions. Additionally, according to ESMA, some responses warned about potential infringements due to the misalignment of the EU and North America settlement cycles.

New Industry-Led Developments

IOSCO Seeks Feedback on the Evolution of Market Structures and Proposed Good Practices. On April 4, the International Organization of Securities Commissions (IOSCO) published a consultation report on Evolution in the Operation, Governance and Business Models of Exchanges: Regulatory Implications and Good Practices. The consultation report analyzes the structural and organizational changes within exchanges, focusing on business models and ownership structures. It highlights a shift towards more competitive, cross-border, and diversified operations as exchanges integrate into larger corporate groups. The consultation report discusses regulatory considerations, particularly in the organization of individual exchanges and exchange groups and the supervision of multinational exchange groups. It addresses potential conflicts of interest arising from matrix structures and the challenges of overseeing individual exchanges within exchange groups. Additionally, it outlines a set of six proposed good practices for regulators to consider in the supervision of exchanges, particularly when they provide multiple services and/or are part of an exchange group. The good practices are also complemented by a non-exclusive list of supervisory tools used by IOSCO jurisdictions to address the issues under discussion, in the form of “toolkits”. While the Consultation Report focuses on equities listing trading venues, the findings are also relevant to other trading venues, including non-listing trading venues and derivatives trading venues. IOSCO is seeking input from market participants on the major trends and risks observed, and the proposed good practices on or before July 3, 2024. [NEW]
ISDA Submits Response to CFTC Proposed Operational Resilience Rules. On April 1, ISDA submitted comments on the CFTC’s notice of proposed rulemaking on requirements to establish an Operational Resilience Framework for Futures Commission Merchants, Swap Dealers and Major Swap Participants, which was published in the Federal Register on January 24, 2024. ISDA recommended that the CFTC adjust adjust portions of the proposed rules relating to governance, third-party relationships, incident notification and implementation period. [NEW]
ISDA Submits Response to IOSCO Consultation on Post-Trade Risk Reduction. On March 29, ISDA submitted a response to IOSCO consultation on post-trade risk reduction (PTRR) services. According to ISDA, PTRR services are intended to optimize bilateral and cleared derivatives portfolios to minimize the build-up of notional amounts and trade count, counterparty risk, and basis risk respectively, which in turn reduces systemic risk. ISDA stated that it is broadly supportive of IOSCO’s proposed sound practices. [NEW]
ISDA Submits Joint Response to PRA on Approach to Policy. On March 28, ISDA and the Association for Financial Markets in Europe (AFME) submitted a joint response to the Prudential Regulation Authority (PRA) consultation on its approach to policy. The associations highlighted the importance of considering UK market specificities in meeting the secondary competitiveness and growth objective, and in the implementation of international standards. The associations expressed support for the continuation of structured policy development in dialogue with the industry, while also advocating for the enhancement of the PRA’s stakeholder engagement by re-establishing standing groups and horizon risk scanning groups, and greater industry cooperation during the initiation phase of the policy cycle. ISDA highlighted certain other points in the response, including recommendations on clustering regulatory principles and suggested improvements to the cost-benefit analysis and data collection processes to achieve greater transparency. [NEW]
ISDA Submits Joint Response to BCBS Crypto Standard Amendments Consultation. On March 28, ISDA, with the Global Financial Markets Association, the Futures Industry Association, the Institute of International Finance and the Financial Services Forum, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on proposed crypto asset standard amendments. ISDA and the other trade associations stated that they welcome the BCBS’s continued focus on designing and improving the prudential framework for crypto assets. The key topics in the consultation response include public permissionless blockchains, classification condition 2 and settlement finality and Group 1b eligibility.
ISDA Responds to CFTC on Clearing Member Funds Protection. On March 18, ISDA responded to the CFTC’s consultation on proposed rules for the protection of clearing member funds held by derivatives clearing organizations (DCOs), including the assets of futures commission merchants (FCMs). According to ISDA, it proposed that the CFTC should finalize the enhanced protection for clearing member assets in connection with an intermediated DCO only, which includes multiple FCMs, unaffiliated with the DCO, as its members. Regarding a DCO providing direct clearing without multiple FCMs unaffiliated with the DCO, ISDA suggested the CFTC should wait to propose enhanced protection for clearing members’ assets, once a full assessment of the risks and complications associated with a DCO providing direct clearing has been completed. At which point, in ISDA’s opinion, it would be appropriate for the CFTC to propose a comprehensive framework to address these risks holistically. Otherwise, ISDA said, the current notice of proposed rulemaking would create a sense of safety for the disintermediated model, which is superficial due to the rule not creating a comprehensive safety regime for disintermediated central counterparties (CCPs), with many risks arising from such models being left unaddressed.
ISDA Responds to FASB on Induced Conversion of Convertible Debt. On March 18, ISDA submitted a response to the Financial Accounting Standards Board’s (FASB) exposure draft on File Reference No. 2023-ED600, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. ISDA indicated that it supports FASB’s proposals in the exposure draft and believes it achieves the objective of improving the application and relevance of the induced conversion guidance to cash convertible debt instruments.