Client Alert Archives

Quach v. California Commerce Club, Inc., S275121 – Decided July 25, 2024

The California Supreme Court held yesterday that, consistent with federal law, California courts should not consider prejudice to the party resisting arbitration when deciding whether a party has waived its right to compel arbitration.

“Because the state law arbitration-specific prejudice requirement finds no support in statutory language or legislative history, we now abrogate it.”

Justice Groban, writing for the Court

Background:

Parties can waive their right to compel arbitration by waiting too long to assert it or engaging in other conduct inconsistent with an intent to arbitrate. Under the test for waiver the California Supreme Court adopted in St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, the most “critical” (and often “determinative”) factor is prejudice to the party resisting arbitration. The St. Agnes rule is an arbitration-specific exception to general state-law principles governing waiver of contract rights, which focus entirely on the conduct of the party that assertedly waived the right. In Morgan v. Sundance (2022) 142 S.Ct. 1708, however, the U.S. Supreme Court rejected a similar rule under the Federal Arbitration Act. The Court held that the FAA does not authorize courts to apply an arbitration-only rule asking whether a party’s waiver resulted in prejudice for the other side.

Peter Quach sued his former employer, the California Commerce Club, after he was fired. Although the Club asserted in its answer that Mr. Quach had agreed to arbitrate any disputes, it initially demanded a jury trial and proposed a discovery plan. The Club didn’t move to compel arbitration until more than a year after the complaint had been filed, and after the parties had engaged in significant discovery. The trial court denied the Club’s motion to compel, ruling that it had waived its arbitration right. A divided panel of the California Court of Appeal reversed, holding that Mr. Quach had not sufficiently shown that he had been prejudiced by the delay under St. Agnes.

Issue Presented:

In deciding whether a party has waived its right to compel arbitration, should courts consider prejudice to the party resisting arbitration (as St. Agnes held), or instead focus only on the conduct of the waiving party (as Morgan held)?

Court’s Holdings:

Courts should not consider prejudice to the party resisting arbitration. The St. Agnes rule has been abrogated.

What It Means:

Parties seeking to enforce arbitration agreements should move to compel arbitration promptly and should avoid engaging in any conduct—including litigation of the merits and factual development through discovery—that suggests an inconsistent intent to proceed in court.
The Court’s decision brings California law in line with federal law, ensuring that courts will apply the same waiver principles regardless of whether a case is governed by the Federal Arbitration Act or the California Arbitration Act. Under those principles, courts should focus “exclusively … on the waiving party’s words or conduct.”
By eliminating the “stringent” prejudice requirement, the decision will make it easier for parties resisting arbitration to show that the party invoking an arbitration agreement had waived its rights under the agreement. Future courts will be especially on the lookout for signs of “undue delay and gamesmanship” in the invocation of an arbitration agreement.
The Court also cautioned that lower courts “should separately evaluate each generally applicable state contract law defense raised by [a] party opposing arbitration,” including waiver, forfeiture, estoppel, laches, and untimeliness, rather than “lump[ing] distinct legal defenses into a catch-all category called ‘waiver.’”

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

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Michael J. Holecek +1 213.229.7018 mholecek@gibsondunn.com

Related Practice: Labor and Employment

Jason C. Schwartz
+1 202.955.8242
jschwartz@gibsondunn.com

Katherine V.A. Smith
+1 213.229.7107
ksmith@gibsondunn.com

Jesse A. Cripps
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jcripps@gibsondunn.com

Related Practice: Litigation

Theodore J. Boutrous, Jr.
+1 213.229.7804
tboutrous@gibsondunn.com

Theane Evangelis
+1 213.229.7726
tevangelis@gibsondunn.com

This alert was prepared by associates Daniel R. Adler, Ryan Azad, and Matt Aidan Getz.

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.

The SEC’s action against SolarWinds related to a highly publicized compromise of the company in 2020 that was attributed to Russia’s Foreign Intelligence Service who had inserted malware into a routine SolarWinds software update.

On July 18, 2024, the U.S. District Court for the Southern District of New York largely granted SolarWinds’ motion to dismiss and dismissed most of the SEC’s claims against the company and its former Chief Information Security Officer (CISO).[1] The SEC’s action against SolarWinds related to a highly publicized compromise of the company in 2020 that was attributed to Russia’s Foreign Intelligence Service (SVR) who had inserted malware into a routine SolarWinds software update. Although thousands of SolarWinds customers received the software update, the SVR used the compromise to access the environments of certain SolarWinds customers in the government and private sector (the “SUNBURST” incident).

The court dismissed most of the claims advanced by the SEC relating to its disclosures, including SolarWinds’ Form 8-K filings, but did sustain claims against SolarWinds and its CISO alleging that a “Security Statement” posted on its website in 2017 may have been false or misleading.

The decision is noteworthy for several reasons:

The court dismissed the SEC’s claim that cybersecurity-related deficiencies were actionable under its rules relating to internal accounting and disclosure controls. The court concluded that the claim was “ill-pled” because “cybersecurity controls are not—and could not have been expected to be—part of the apparatus necessary to the production of accurate” financial reports, noting that “[a]s a matter of statutory construction, [the SEC’s] reading is not tenable.”[2] This is noteworthy because the SEC just last month entered into a settlement in cybersecurity-related case under the theory that internal accounting controls-related regulations could encompass traditional IT assets that were unrelated to financial systems or financial/accounting data.[3] The Solar Winds decision will likely impact how the SEC thinks about its broad use of accounting controls as a basis to charge a violation related to a cyber incident.
The court’s decision makes clear that more than isolated disclosure failures are required to put the adequacy of a company’s disclosure controls and procedures in issue. The decision also leaves open the question of whether, in a close case where the SEC may be inclined to allege fraud, the SEC will continue to be willing to enter into a settlement on the basis of a disclosure controls and procedures violation if the company was willing to do so in order to avoid a fraud charge, as has been their practice to date.
While the decision is an encouraging sign that the SEC’s aggressive attempts to hold CISOs individually liable for company conduct will be evaluated on the factual record and the law, the decision did not dismiss all claims against the CISO (allowing the claims based on allegations of contemporaneous knowledge of falsity of public statements to go forward), and companies and CISOs should remain vigilant in responding to cybersecurity incidents and ensuring the accuracy of all public statements that are made about cybersecurity.

Background

On October 30, 2023, the SEC filed a complaint against SolarWinds and its former CISO alleging that they made materially false and misleading statements and omissions on the company website, blog posts, press releases, Form S-1, and quarterly and annual SEC reports prior to the incident and did the same in two reports on Form 8-K in which the company disclosed the incident.[4] The SEC also conducted an investigation regarding the SUNBURST incident and issued a letter to certain companies because the SEC staff believed those entities were impacted by the SolarWinds compromise and requested that they provide information to the staff on a voluntary basis.[5] In February 2024, the SEC filed an amended complaint including factual details to support its allegations that SolarWinds and its CISO were aware of the company’s weak security practices yet made contrary statements about its strength in SolarWinds’ Security Statement.[6] The Defendants filed a motion to dismiss in March 22, 2024,[7] and the court issued its order on July 18, 2024.

July 18, 2024 Order

The court largely granted Defendants’ motion to dismiss, sustaining only the SEC’s claims alleging securities fraud based on allegations that the company made false or misleading representations in a “Security Statement” posted to SolarWinds’ website. Specifically:

Fraud and False and Misleading Statements

The court dismissed most of the SEC’s securities fraud claims regarding SolarWinds’ statements about its strong security that it made in press releases, blog posts, podcasts and securities filings. However, the court allowed the SEC’s claims based on the Securities Statement on SolarWinds’ website to proceed.[8]

The “Security Statement”

The court found that the SEC adequately pled that the Security Statement posted on SolarWinds’ website contained materially misleading and false representations as to at least two of SolarWinds’ cybersecurity practices: access controls and password protection policies. The court’s holding was based on the allegations in the complaint that SolarWinds had made statements touting that it had strong access controls and password policies when its internal practices and discourse instead “portrayed a diametrically opposite representation for public consumption.”[9] Specifically, the court found that the complaint alleged that the company’s access controls had “deficiencies” that “were not only glaring—they were long-standing, well-recognized within the company, and unrectified over time,” and its password policies were generally not enforced.[10] The court also found that the amended complaint “amply” alleged scienter, including that the former CISO knew of the substantial body of data that impeached the security statement’s content as false and misleading.[11]

The court importantly explained that false statements on public websites can sustain securities fraud liability, as the security statement at issue appeared on SolarWinds’ public website, accessible to all, including investors, and therefore was, according to the court, unavoidably part of the “total mix of information” that SolarWinds furnished to the investing public.[12] The court emphasized that for purposes of evaluating materiality, each representation should be considered collectively, rather than in isolation, as investors evaluate the whole picture.

Press Releases, Blog Posts, and Podcasts

The court dismissed the SEC’s claims that SolarWinds made false and misleading statements related to the 2020 incident in press releases, blog posts, and podcasts explaining that each qualifies as non-actionable corporate puffery, “too general to cause a reasonable investor to rely upon them.”[13] As the court noted, while public statements, such as the website security statement, can serve as the basis for a material misstatement when they contain a degree of specificity, general statements by an issuer about the strength of their cybersecurity program were not sufficient to support a fraud violation.

Pre-Incident Public Filings

The court dismissed each of the SEC’s claims that SolarWinds’ cybersecurity risk disclosures in its SEC filings did not accurately reflect the risks that the company faced. The court found that, viewed in totality, the risk disclosures sufficiently alerted the investing public of the types and nature of the cybersecurity risks SolarWinds faced and the consequences these could present for the company’s financial health and future.[14] The court also held that, on the facts pled, SolarWinds was not required to amend its cybersecurity risk disclosures for certain cyber incidents as the company’s cybersecurity risk disclosures already warned investors of the risks “in sobering terms.”[15]

In the court’s view, issuers are not required to disclose cybersecurity risks with “maximum specificity,” as, according to the court, spelling out a cybersecurity risk may backfire in various ways, such as by arming malevolent actors with information to exploit or by misleading investors as other disclosures might be disclosed with relatively less specificity.[16]

Post-incident Form 8-K

The court found that the SEC did not adequately plead that the post-incident Form 8-K was materially false or misleading, as the disclosure fairly captured the known facts and disclosed what was required for reasonable investors. The court also acknowledged that the impact on stock prices indicated that the market “got the message” (noting SolarWinds’ share prices dropped more than 16% the day of the announcement, and another 8% the next day),[17] and emphasized that SolarWinds published the disclosure just two days after discovering the compromise, when it was still in the early phases of its investigation and had a limited understanding of the attack.

Internal Accounting Controls

The court found that the SEC’s attempt to bring a claim under Section 13(b)(2)(B) of the Exchange Act (relating to internal accounting controls) was unsupported by legislative intent, as the surrounding terms that Congress used when drafting Section 13(b)(2)(B), which refer to “transactions,” “preparation of financial statements,” “generally accepted accounting principles,” and “books and records,” are uniformly consistent with financial accounting. [18] The court’s deep skepticism of the claim that Congress intended to confer the SEC with such authority is reflected in the analogy that doing so would be tantamount to “hid[ing] elephants in mouseholes.”[19]The court also found that the few courts that interpreted the term “internal accounting controls” as used in this section “have consistently construed it to address financial accounting.”[20] In this respect, the court’s conclusion is consistent with the views expressed in several dissents by Commissioners in other settled enforcement actions in which the SEC has used the internal accounting controls provision to impose liability for non-financial related conduct.[21]

Disclosure Controls and Procedures

The court sided with SolarWinds in rejecting the SEC’s claims that the company failed to maintain and adhere to appropriate disclosure controls for cybersecurity incidents. The court was unwilling to accept the SEC’s argument that one-off issues—even if the company misapplied its existing disclosure controls in considering cybersecurity incidents—gave rise to a claim that the company failed to maintain such controls. Importantly, this case relates to conduct prior to the adoption of the SEC’s 2023 cybersecurity rules, which have made it even more important for companies to maintain appropriate controls.

The court acknowledged that SolarWinds had misclassified the severity level of two incidents under its Incident Response Plan (IRP) and failed to elevate a vulnerability to the CEO and CTO for disclosure.[22] However, the court found that these instances—without more—did not support a claim that SolarWinds maintained ineffective disclosure controls.

The SEC did not plead deficiency in the “construction” of SolarWinds’ IRP, nor did it allege routine misclassification of incidents or frequent errors as a result of applying that framework.[23] The court implied that disclosure controls do not have to be perfect—they should provide reasonable assurance that information is being collected for disclosure consideration. The court thus found that the one-off issues identified by the SEC in applying the IRP and associated cybersecurity disclosure controls were not, without more, sufficient to “plausibly impugn [a] company’s disclosure controls systems.”[24]

Key Takeaways

Internal Accounting Controls.

Notably, on June 18, 2024 the SEC claimed in a settlement that another company that had experienced cyber incidents violated rules relevant to internal accounting controls. The SEC alleged that the company failed to “provide reasonable assurances…that access to company assets is permitted only in accordance with management’s…authorization.”[25] The SEC’s claims and approach in that settlement were seen as particularly aggressive as the predicate cybersecurity incident (for which the controls would be relevant) did not impact financial systems or corporate financial and accounting data. That settlement also evoked a notable dissent from two Commissioners arguing that the internal accounting controls provision did not apply to a company’s overall cybersecurity program.
The court in this case comprehensively repudiated the SEC’s effort to bring an internal accounting controls violation based on Section 13(b)(2)(B) in the context of cybersecurity-related actions. The court found the SEC’s position that their authority to regulate an issuer’s “system of internal accounting controls” includes authority to regulate cybersecurity controls “not tenable,” and unsupported by the statute, legislative intent, or precedent. [26] The court held that the statute cannot be construed to broadly cover all systems public companies use to safeguard their valuable assets and that the statute’s reach is limited as it governs systems of “internal accounting controls.”[27]
As such, the SolarWinds decision calls into question—and may signal an end to—the SEC’s recent attempts to adopt an expansive reading of its rules relating to internal accounting controls to govern cybersecurity controls—whether or not such cybersecurity controls are relevant to the production of financial reports.

Disclosure Controls and Procedures.

The decision also calls into question the SEC’s ability to rely on claims of inadequate disclosure controls and procedures in similar circumstances, given that the court found that more than a single disclosure failure is required to put the adequacy of a company’s disclosure controls and procedures in issue.
While this fact-based finding provides reassurance that good-faith, day-to-day mistakes at a company may not be actionable, it remains important to design and maintain disclosure controls that provide for appropriate escalation and consideration.

Assessing Fraud Claims Based on Public Disclosures.

When evaluating the accuracy of public disclosures in the context of a securities fraud claim, representations are to be evaluated based on a holistic assessment, rather than each statement in isolation. The court rearticulated the long-standing view the investing public “evaluates the information available to it ‘as a whole.’” Nevertheless, a securities fraud claim may be pursued where there is evidence that the company—or a CISO or other company officer—is aware of inaccuracies at the time such statements are made.

[1] Opinion and Order, SEC v. SolarWinds Corp. and T. Brown, 1:23-cv-09518-PAE (S.D.N.Y. July 18, 2024) (hereinafter “Order”).

[2] Order at 3, 94–102.

[3] See Gibson Dunn Client Alert, “SEC as Cybersecurity Regulator” (June 20, 2024), available at https://www.gibsondunn.com/wp-content/uploads/2024/06/sec-as-cybersecurity-regulator.pdf?v2; R.R. Donnelley & Sons, No. 3-21969 (S.E.C. June 18, 2024) (order instituting cease and desist proceedings), available at https://www.sec.gov/files/litigation/admin/2024/34-100365.pdf.

[4] Complaint, SEC v. SolarWinds Corp. and T. Brown, No. 23-cv-9518 (Oct. 30, 2023), https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-227.pdf.

[5] In the Matter of Certain Cybersecurity-Related Events (HO-14225) FAQs, U.S. Securities and Exchange Commission, available at https://www.sec.gov/enforce/certain-cybersecurity-related-events-faqs.

[6] Am. Compl., SEC v. SolarWinds Corp. and T. Brown, No. 23-cv-9518-PAE (S.D.N.Y. Feb. 20, 2024).

[7] Mem. of Law in Support of Mot. to Dismiss, SEC v. SolarWinds Corp. and T. Brown, No. 23-cv-9518-PAE (S.D.N.Y. Mar. 22, 2024).

[8] See Order at 3.

[9] Order at 54.

[10] Order at 54.

[11] Order at 61.

[12] Order at 51 (citation omitted).

[13] Order at 68 (citation omitted).

[14] Order at 71–79.

[15] Order at 75.

[16] Order at 73.

[17] Order at 90.

[18] Order at 96.

[19] Order at 100.

[20] Order at 97–98.

[21] 2023 Year-End Securities Enforcement Update – Gibson Dunn (end notes 20–22); SEC Statement, The SEC’s Swiss Army Statute: Statement on Charter Communications, Inc. (Nov. 14, 2023), available at https://www.sec.gov/news/statement/peirce-uyeda-statement-charter-communications-111423#_ftn6.

[22] Order at 102–106.

[23] Order at 104.

[24] Order at 106.

[25] R.R. Donnelley & Sons, No. 3-21969 (S.E.C. June 18, 2024) (order instituting cease and desist proceedings), available at https://www.sec.gov/files/litigation/admin/2024/34-100365.pdf.

[26] Order at 96.

[27] Order at 96–97.

The following Gibson Dunn lawyers prepared this update: Mark Schonfeld, David Woodcock, Ronald Mueller, Brian Lane, Vivek Mohan, Stephenie Gosnell Handler, Sophie Rohnke, Michael Roberts, Sarah Pongrace, and Ashley Marcus.

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 Securities Enforcement, Privacy, Cybersecurity & Data Innovation, or Securities Regulation & Corporate Governance practice groups:

Securities Enforcement:
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Mark K. Schonfeld – New York (+1 212.351.2433, mschonfeld@gibsondunn.com)
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Privacy, Cybersecurity and Data Innovation:
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S. Ashlie Beringer – Palo Alto (+1 650.849.5327, aberinger@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, shandler@gibsondunn.com)
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Vivek Mohan – Palo Alto (+1 650.849.5345, vmohan@gibsondunn.com)
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Sophie C. Rohnke – Dallas (+1 214.698.3344, srohnke@gibsondunn.com )

Securities Regulation and Corporate Governance:Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
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Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com)

The challengers to the Rule have explained that if the court rules for them on the merits, then the remedy is for the court to vacate the Rule nationwide, in an order that is not limited to the parties in the case. A decision is expected by August 30.

This past Friday, July 19, global tax-consulting firm Ryan, LLC moved for summary judgment in its challenge to the Federal Trade Commission’s Non-Compete Rule in the U.S. District Court for the Northern District of Texas.[1] Gibson Dunn represents Ryan. A group of trade associations led by the United States Chamber of Commerce has likewise moved for summary judgment. Ryan and the trade associations previously won a preliminary injunction and stay of the Rule’s effective date (see Gibson Dunn’s July 5 client alert), which was limited to the parties to the case.[2]

Ryan’s primary argument—which the Court already found was likely to succeed—is that the FTC lacks statutory authority to promulgate the Non-Compete Rule. Ryan also argues that a grant of rulemaking authority to define “unfair methods of competition” would constitute an unconstitutional delegation of legislative power; that the rule is unlawfully retroactive; and that the FTC Commissioners are unconstitutionally insulated from the President’s control. Ryan further contends that the Non-Compete Rule is arbitrary and capricious in violation of the Administrative Procedure Act, because the FTC failed to justify the nearly universal breadth of its ban, overstated the Rule’s purported benefits, and understated its costs.

Ryan has asked the Court to vacate the Non-Compete Rule, with nationwide effect. As Ryan explained in its motion, under applicable Fifth Circuit precedent, if the Court rules for Ryan on the merits, then under the Administrative Procedure Act it is required to vacate the Rule in an order that is not limited to the parties to the case.

The Court has stated that it will rule on the summary judgment motions by August 30, shortly before the Rule is set to take effect on September 4. Briefing on Ryan’s and the trade associations’ motions, as well as the FTC’s expected cross-motion for summary judgment, is scheduled to be completed on August 16.

[1] Ryan’s brief in support of its motion is available here.

[2] Further analysis of the FTC’s Non-Compete Rule is available here.

Eugene Scalia, Allyson N. Ho, Amir C. Tayrani, Andrew Kilberg, Elizabeth A. Kiernan, Aaron Hauptman, and Josh Zuckerman represent Ryan, LLC and prepared this update.

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

Administrative Law and Regulatory:
Allyson N. Ho – Dallas (+1 214.698.3233, aho@gibsondunn.com)
Eugene Scalia – Washington, D.C. (+1 202.955.8673, escalia@gibsondunn.com)
Amir C. Tayrani – Washington, D.C. (+1 202.887.3692, atayrani@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, hwalker@gibsondunn.com)

Labor and Employment:
Andrew G.I. Kilberg – Washington, D.C. (+1 202.887.3759, akilberg@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214.698.3203, knelson@gibsondunn.com)
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Katherine V.A. Smith – Los Angeles (+1 213.229.7107, ksmith@gibsondunn.com)

Antitrust and Competition:
Rachel S. Brass – San Francisco (+1 415.393.8293, rbrass@gibsondunn.com)
Svetlana S. Gans – Washington, D.C. (+1 202.955.8657, sgans@gibsondunn.com)
Cynthia Richman – Washington, D.C. (+1 202.955.8234, crichman@gibsondunn.com)
Stephen Weissman – Washington, D.C. (+1 202.955.8678, sweissman@gibsondunn.com)

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

New Developments

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

New Developments Outside the U.S.

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

New Industry-Led Developments

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

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

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, jsteiner@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Adam Lapidus – New York (212.351.3869, alapidus@gibsondunn.com )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

William R. Hallatt , Hong Kong (+852 2214 3836, whallatt@gibsondunn.com )

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki , New York (212.351.4028, mtakagaki@gibsondunn.com )

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

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

Following his recent attacks on Tractor Supply, social media personality Robby Starbuck launched another campaign on July 9, this time against John Deere. In a series of posts on X, Starbuck criticized John Deere for its DEI policies, workplace affinity groups, sponsorship of Pride events, and affiliation with shareholder Bill Gates. In dozens of tweets and social media posts, Starbuck characterized John Deere’s policies as “woke,” “creepy,” “communist”-like, and “crazy,” and called upon his followers to complain to John Deere’s customer service office and directly to its CEO. On July 16, apparently in response to Starbuck’s campaign, John Deere announced that it will no longer participate in or support “social or cultural awareness parades, festivals, or events,” that it will audit training materials “to ensure the absence of socially-motivated messages,” that it will “reaffirm” that the “existence of diversity quotas and pronoun identification have never been and are not company policy,” and that its Business Resource Groups will focus exclusively on things like professional development, networking, and mentoring. However, John Deere said that it would “continue to track and advance the diversity of our organization.” Starbuck immediately claimed victory, but called John Deere’s commitments “half measures,” saying that customers “want to hear that DEI policies are entirely gone.” Starbuck has said that he is planning to “expose” another company soon and that he will be targeting companies that rely on politically conservative consumers.

On June 24, 2024 and July 10, 2024, the Equal Protection Project (EPP) filed complaints with the U.S. Department of Education’s Office for Civil Rights (OCR) against Ithaca College and Rochester Institute of Technology. The EPP alleges that two of Ithaca College’s scholarship programs discriminate based on race and skin color in violation of Title VI because they are offered only to students of color. The EPP also alleges that Rochester Institute of Technology’s “Women in STEM” scholarship, which is offered exclusively to female, female-identifying, or non-binary students, discriminates based on sex and gender identity in violation of Title IX. OCR is evaluating both of EPP’s complaints.

On July 10, a three-judge panel for the Seventh Circuit affirmed summary judgment for Honeywell in Charles Vavra v. Honeywell International, Inc., No. 23-2823 (7th Cir.). Vavra argued that Honeywell violated Title VII and Illinois law by retaliating against him for refusing to watch a training video he claimed discriminated against white people. The district court granted summary judgment on Vavra’s claims last August after finding that he failed to show either that he was terminated due to bias or that the training itself was racist. Vavra appealed, and argued before the Seventh Circuit that the video crossed a line when it stated that workers carry unconscious biases. In an opinion written by Judge Kirsch, the court reasoned that Vavra could not have reasonably believed that the training video was discriminatory because he never watched it, and Vavra had failed to prove retaliatory motive..

On July 10, EEOC Vice Chair Jocelyn Samuels told attendees of an agency webinar that the Supreme Court’s recent decision in Muldrow v. City of St. Louis should have “no impact” on “lawful and appropriate” DEI work. While some have speculated that Muldrow will result in more challenges to company DEI programs, Vice Chair Samuels maintained that most company DEI efforts will remain unaffected by the decision. “The vast majority of the kinds of DEIA initiatives that employers are undertaking are what I call race-neutral,” she said, noting such programs “are carried out in ways that benefit everyone in the workplace.” EEOC Commissioner Kalpana Kotagal, who also spoke during the webinar, supported Samuels’ position, stating that “[a]s the case law is starting to really demonstrate, there are so many ways to lawfully implement DEIA initiatives that shouldn’t be difficult to defend and support.” Kotagal discussed examples of policies that she said remain lawful, such as targeted outreach to increase the diversity of applicant pools, voluntary employee affinity groups, and mentorship and training opportunities open to all applicants. “In general,” she said, “these kinds of programs are not going to be problematic because there’s no need to tie them to a protected class.”

Media Coverage and Commentary:

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

Wall Street Journal, “How Tractor Supply Decided to End DEI, and Fast” (June 30): The Journal’s Sarah Nassauer reports on Tractor Supply’s June 27 decision to end its DEI programming and climate change goals, in response to a public pressure campaign launched on June 6 by “former Hollywood director turned conservative activist” Robby Starbuck. Using publicly available statements and videos, including a video of Tractor Supply Chief Executive Hal Lawton talking about the importance of company diversity and inclusion, Starbuck called upon customers to boycott the company. The “effectiveness of Starbuck’s campaign,” writes Nassauer, seems like a sign of “how the tide has turned” against corporate DEI programming. Nassauer suggests that companies like Tractor Supply, whose customers skew more male, rural and conservative, are increasingly seeing DEI initiatives as presenting “too much of a risk.” But companies’ reactions to the current DEI backlash have varied. As David Glasgow, executive director of the Meltzer Center for Diversity, Inclusion and Belonging, told Nassauer, companies favored by “liberal consumers” are largely maintaining their DEI commitments. Tractor Supply’s decision, says Glasgow, represents “an illustration of the two Americas.”
Reuters, “Fearless Fund: Diversity funds and Black founders feel chill” (July 2): Reuters’ Krystal Hu reports that the Eleventh Circuit’s June 3 decision enjoining Fearless Fund’s Strivers Grant Contest, which provides financial support to Black female entrepreneurs, is having “a chilling effect across the small industry of diversity-focused venture capital funds.” The court’s decision could affect some $200 billion committed to similar funding initiatives nationwide, writes Hu. Recent data from Crunchbase indicates that venture funding of Black entrepreneurs, which “surged in 2021,” has since “plunged.” Hu notes that several of Fearless Fund’s financing partners have withdrawn, citing the court’s decision. But Hu says that the minority venture capital community is not backing down. “People have the right to fund marginalized communities if and when racial disparities exist, and that is something needs to be protected,” Arian Simone, CEO of Fearless Fund, told Hu. Shila Nieves Burney, a general partner at Zane Venture Fund, another Atlanta-based fund, told Hu that she will continue to “back diverse teams” despite the Eleventh Circuit decision. But Burney expressed concern that the already limited funding provided to Black entrepreneurs is under threat: “If Fearless Fund is not able to raise their next fund, that creates a huge gap in the ecosystem. When there’s an attack on Black VCs, who’s going to fill that gap?”
Law360, “Armstrong Teasdale Resisted Diversity, Ex-DEI VP Says” (July 5): Law360’s Lauren Berg reports on a lawsuit filed June 30 in Missouri state court by Armstrong Teasdale LLP’s former vice president of diversity, equity and inclusion. Sonji R. Young, a Black woman hired in February 2021 to be the firm’s first DEI officer, claims that she experienced sex, age, race, color, and disability discrimination, as well as retaliation and defamation. Young alleges that firm officers, partners, and staff—most of whom are white—repeatedly obstructed her efforts to improve diversity and inclusion at the firm by refusing to train her on firm systems, denying her requests for additional staff and for funding of employee resource groups, undermining her efforts to recruit diverse talent, and otherwise withholding their support for DEI initiatives. Young also alleges that she was terminated in February 2023 after recommending certain DEI-related changes to the firm’s managing partner.
Washington Post, “Many universities are abandoning race-conscious scholarships worth millions” (July 9): The Post’s Danielle Douglas-Gabriel reports on the elimination of race-conscious scholarship criteria at dozens of colleges and universities. The Post has identified nearly 50 institutions that have “paused, ended or reconfigured hundreds of race-conscious scholarships worth . . . at least $45 million.” Most of these changes are occurring at public universities in states like Wisconsin, Ohio, and Missouri, where Republican legislators have passed laws banning race-conscious financial aid. Because far more colleges and universities rely on financial aid to improve student body diversity, as opposed to race-conscious admissions policies, Douglas-Gabriel reports that higher education experts are worried that this shift will have “a more profound impact on diversity in higher education” than the SFFA affirmative action decision itself. Faced with legislative mandates, institutions in these states are now shifting scholarship eligibility criteria away from race and toward alternatives like household income, zip code, or first generation-student status. But even these alternatives, if too close a proxy for race, “could run afoul of the law,” New York University School of Law professor Kenji Yoshino told the Post. Douglas-Gabriel notes that many donors are unhappy with these changes, including Mary Willis and Cynthia Willis-Esqueda, sisters who helped create a scholarship for Black, Hispanic, and Native students in honor of their father, a former professor at the University of Missouri at Kansas City. Willis and Willis-Esqueda are considering legal action of their own, expressing anger “that anybody would dare to say that we can’t decide where our little bit of inheritance goes.”

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:

Do No Harm v. Pfizer, Inc., 646 F. Supp. 3d 490 (S.D.N.Y. 2022); No. 23-15 (2d Cir. 2024): 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 which provides college seniors with summer internships, two years of employment post-graduation, mentoring, and a two-year scholarship for a full-time master’s program. To be eligible, applicants must “[m]eet the program’s goals of increasing the pipeline for Black/African American, Latino/Hispanic and Native Americans.” Do No Harm requested a temporary restraining order and preliminary and permanent injunctions against the program’s eligibility criteria. In December 2022, the district court denied Do No Harm’s motion for a preliminary injunction and dismissed the case for lack of subject matter jurisdiction, finding that Do No Harm lacked Article III standing because it did not identify at least one member by name. Do No Harm appealed to the Second Circuit, which on March 6, 2024 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. (We previously covered this decision here.) Do No Harm petitioned for rehearing en banc.
- Latest update: On July 1, Pfizer filed its opposition to Do No Harm’s petition for rehearing en banc, arguing that the case does not conflict with Supreme Court or Second Circuit authority, create a conflict among the circuits, or present “a question of exceptional importance.”
Do No Harm v. Gianforte., No. 6:24-cv-00024-BMM-KLD (D. Mont. 2024): On March 12, 2024, Do No Harm filed a complaint on behalf of “Member A,” a white female dermatologist in Montana, alleging that a Montana law violates the Equal Protection Clause by requiring the governor to “take positive action to attain gender balance and proportional representation of minorities resident in Montana to the greatest extent possible” when making appointments to the state’s twelve-member Medical Board. Do No Harm alleges that since the ten already-filled seats are currently held by six women and four men, Montana law requires that the remaining two seats be filled by men, which would preclude Member A from holding the seat. On June 7, Governor Gianforte moved to dismiss for lack of jurisdiction.
- Latest update: On June 28, 2024, Do No Harm filed its opposition, arguing that its individual members have standing because the Supreme Court treats any statute that denies equal treatment as causing an injury in fact, regardless of whether a candidate has actually applied for a position. Further, Do No Harm argued that Governor Gianforte’s promise to interpret the Montana statute without discriminating does not fix the constitutional problem, because the plain text of the law “authorizes or encourages unconstitutional consideration of race and gender.”
Do No Harm v. National Association of Emergency Medical Technicians, No. 3:24-cv-11-CWR-LGI (S.D. Miss. 2024): On January 10, 2024, Do No Harm challenged the diversity scholarship program operated by the National Association of Emergency Medical Technicians (NAEMT), an advocacy group representing paramedics, EMTs, and other emergency professionals. NAEMT awards up to four $1,250 scholarships annually to students of color hoping to become EMTs or paramedics. Do No Harm requested a temporary restraining order, preliminary injunction, and permanent injunction against the program. On January 23, 2024, the court denied Do No Harm’s motion for a TRO, and NAEMT moved to dismiss Do No Harm’s amended complaint on March 18.
- Latest update: On June 6, 2024, Do No Harm filed a notice of supplemental authority, drawing the court’s attention to the Eleventh Circuit’s decision in Fearless Fund, which it argued supports the claim that Do No Harm has associational standing because its members are able and ready to apply for a scholarship. On June 25, the defendant submitted a response, arguing that Fearless Fund does not help establish injury in fact because there “was never any racial requirement” for applicants to the NAEMT scholarship, whereas Fearless Fund involved a diversity program that explicitly barred everyone but black females from applying.
Suhr v. Dietrich, No. 2:23-cv-01697-SCD (E.D. Wis. 2023): On December 19, 2023, a dues-paying member of the Wisconsin State Bar filed a complaint against the Bar over its “Diversity Clerkship Program,” a summer hiring program for first-year law students. The program’s application requirements had previously stated that eligibility was based on membership in a minority group. After the Supreme Court’s decision in SFFA, the eligibility requirements were changed to include students with “backgrounds that have been historically excluded from the legal field.” The plaintiff claims that the Bar’s program is unconstitutional even with the new race-neutral language, because, in practice, the selection process is still based on the applicant’s race or gender. The plaintiff also alleges that the Bar’s diversity program constitutes compelled speech and association in violation of the First Amendment. After reaching a partial settlement agreement with the Bar to remove the eligibility requirements concerning historically excluded backgrounds, the plaintiff filed an amended complaint, challenging three mentorship and leadership programs that allegedly discriminate based on race, which are funded by mandatory dues paid to the Bar. On May 31, the Bar moved to dismiss the amended complaint for failure to state a claim.
- Latest update: On June 28, 2024, the plaintiff opposed the Bar’s motion to dismiss, arguing that the Bar’s dues-funded programs are not “germane to the constitutional purpose” of a bar association, thereby violating the First Amendment. The plaintiff also argued that his claims are not time-barred because they accrue every day that the diversity program continues.

2. Employment discrimination and related claims:

Beneker v. CBS Studios, No. 2:24-cv-01659-JFW-SSC (C.D. Cal. 2024): On February 29, 2024, a straight, white, male writer sued CBS, alleging that the network’s de facto hiring policy discriminated against him on the bases of sex, race, and sexual orientation in violation of Section 1981 and Title VII. CBS declined to hire the plaintiff as a staff writer multiple times, but did hire several black writers, female writers, and a lesbian writer. The plaintiff requested a permanent injunction against the de facto policy, a staff writer position, and damages. On May 23, 2024, CBS Studios and parent company Paramount Global moved to dismiss.
- Latest update: On June 24, 2024, the defendants filed a second motion to dismiss in light of the plaintiff’s voluntary dismissal of his Title VII claims and Section 1981 claims with respect to only the white female/lesbian writers. The defendants reaffirmed their theory that the First Amendment is a “complete bar” to the plaintiff’s remaining claims because CBS is an “expressive enterprise” and has the right to “select which writers are best suited” to convey its message. In the alternative, the defendants argued that two of the Section 1981 claims are time barred, in part because courts should not view discrete hiring decisions as creating “continuing violations” of Section 1981.
Sobol v. DeJoy, No. 1:22-cv-00170-MWJS-RT (D. Haw. 2022): On April 15, 2022, a white man sued the United States Postal Service (USPS) for selecting a Black woman for a managerial role instead of him, alleging retaliation, hostile work environment, constructive discharge, and discrimination in violation of Title VII and the ADEA. On March 18, 2024, USPS moved for summary judgment.
- Latest update: On July 9, 2024, the court granted USPS’s motion for summary judgment, finding that the plaintiff lacked sufficient evidence that the adverse employment action was discriminatory. The court also held that, even if the plaintiff could establish a prima facie case of discrimination, the USPS had asserted a legitimate, nondiscriminatory reason for its hiring decision.

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

Do No Harm v. Lee, No. 3:23-cv-01175-WLC (M.D. Tenn. 2023): On November 8, 2023, Do No Harm sued Tennessee Governor Bill Lee under the Equal Protection Clause of the Fourteenth Amendment, seeking to enjoin a 1988 Tennessee law requiring the governor to “strive to ensure” that at least one board member of the six-member Tennessee Board of Podiatric Medical Examiners is a racial minority. On February 2, 2024, Governor Lee moved to dismiss the complaint for lack of standing. On February 16, Do No Harm opposed, contending that it satisfied standing requirements despite relying only on anonymous members. On March 1, 2024, the Governor replied in support of his motion.
- Latest update: On June 28, 2024, Do No Harm filed a notice of supplemental authority, drawing the court’s attention to the Eleventh Circuit’s decision in the Fearless Fund case and the proceedings in American Alliance for Equal Rights v. Ivey, No. 2:24-cv-00104-RAH-JTA (M.D. Ala. 2024)—in both cases, the courts found that plaintiffs had satisfied the standing requirements even when they were suing on behalf of individual anonymous members. Do No Harm argued that these cases support its claim that its members individually have standing, even if they remain anonymous.
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 the governor to ensure there are no fewer than two individuals “of a minority race” on the Alabama Real Estate Appraisers Board. The Board has nine seats, including one for a member of the public with no real estate background, 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 requires 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. On March 29, 2024, Governor Ivey answered the complaint, admitting that the Board quota is unconstitutional and will not be enforced. On May 7, 2024, the court granted a motion to intervene by the Alabama Association of Real Estate Brokers (AAREB), a trade association and civil rights organization for Black real estate professionals. On May 14, 2024, AAREB answered the complaint, seeking a declaration that the challenged law is valid and enforceable. On May 20, 2024, AAER moved for judgment on the pleadings. On June 10, Governor Ivey responded in support of AAER’s motion for judgment on the pleadings, but Intervenor AAREB opposed the motion.
- Latest update: On June 26, 2024, AAER filed a reply brief in support of its motion for judgment on the pleadings, arguing that any “contested material factual allegations” related to standing were decided before AAREB intervened in the litigation, and that no other disputes remain outstanding.
Lynn v. Goff, No. 1:24-cv-00211-CL (D. Or. 2024): On February 1, 2024, a white public school teacher filed a complaint against the Interim Executive Director of the Oregon Teacher Standards and Practices Commission, alleging that a state program reimbursing “diverse” teachers for the cost of obtaining or renewing their teaching licenses violated the Equal Protection Clause of the Fourteenth Amendment. In its answer, Oregon denied that it engaged in discriminatory treatment on the basis of skin color alone.
- Latest update: On June 28, 2024, the parties filed a notice of joint advanced dispute resolution after Oregon issued a temporary rule to end the reimbursement program. The plaintiff agreed to voluntarily dismiss the case once the state issues a permanent rule.

4. Board of Director or Stockholder Actions:

Ardalan v. Wells Fargo, No. 3:22-cv-03811 (N.D. Cal. 2022): On June 28, 2022, a putative class of Wells Fargo stockholders brought a class action against the bank related to an internal policy requiring that half of the candidates interviewed for positions that paid more than $100,000 per year be from an underrepresented group. The plaintiffs alleged that the bank conducted sham job interviews to create the appearance of compliance with this policy and that this was part of a fraudulent scheme to suggest to shareholders and the market that Wells Fargo was dedicated to DEI principles.
- Latest update: On June 4, 2024, the plaintiffs moved to certify a class of all people and entities who had purchased Wells Fargo stock during the period when the bank allegedly engaged in sham job interviews. The plaintiffs also sought to remove the stay on discovery in order to prove that there are issues of law and fact common to the putative class. On June 25, 2024, the defendants opposed class certification, arguing that plaintiffs had not proved that they affirmatively met the requirements due to the stay. On July 7, the court granted the parties’ motion to continue certain deadlines and set a telephonic case management conference for August 1, 2024.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Blaine Evanson, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Zoë Klein, Mollie Reiss, Jenna Voronov, Alana Bevan, Marquan Robertson, 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, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, mdenerstein@gibsondunn.com)

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, zswilliams@gibsondunn.com)

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, msenger@gibsondunn.com)

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, bevanson@gibsondunn.com)

This update provides key takeaways on the new draft guidance and Diversity Action Plan requirements, including when the new requirements will go into effect, the types of clinical studies that require submission of a Diversity Action Plan, whether FDA intends to issue waivers for the requirements, and the consequences of failure to submit a Diversity Action Plan.

On June 26, 2024, FDA released its long-awaited draft guidance on Diversity Action Plans to increase enrollment of underrepresented populations in clinical trials of drugs and devices.[1] The highly anticipated guidance comes months after FDA’s statutory deadline for issuance of the guidance in December 2023.[2] The draft guidance reflects new congressional mandates and replaces FDA’s 2022 draft guidance on diversity plans.[3] The statutory requirement for drug and device sponsors to submit Diversity Action Plans will go into effect 180 days after FDA publishes a final guidance.[4] Failure to comply with Diversity Action Plan submission requirements is a prohibited act under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and could result in civil or criminal penalties.[5]

In April 2022, FDA released draft guidance recommending that sponsors of drugs and devices develop and submit Diversity Plans for clinical trials. In December 2022, Congress passed the Food and Drug Omnibus Reform Act (FDORA), which amended the FD&C Act to require the submission of Diversity Action Plans for certain drugs and devices.[6] This provision goes into effect 180 days after the publication of final guidance.[7]

FDA has described Diversity Action Plans as strategies for the enrollment and retention of clinically relevant study populations.[8] The new draft guidance describes the format and content of Diversity Action Plans, including the timing and process for submitting and receiving feedback on such plans. The guidance also outlines the criteria and process for FDA evaluation of requests for waivers of Diversity Action Plan requirements. Finally, the guidance provides recommendations for sponsors that publicly post information about their Diversity Action Plans.

Interested parties may submit comments on the draft guidance by September 26, 2024.[9] FDA is required to issue final guidance not later than June 2025 (9 months after the comment period closes on the draft guidance).[10] Sponsors of clinical trials for drugs and devices should monitor developments in this area, and work to ensure their clinical trial submissions meet these new standards.

When do the new Diversity Action Plan requirements go into effect?

The new Diversity Action Plan requirements will take effect 180 days after publication of final guidance and will apply to clinical trials for which enrollment begins after that date. However, because sponsors plan clinical trials in advance of enrollment, FDA provides in the new draft guidance three circumstances in which the agency does not expect submission of a Diversity Action Plan:

Clinical studies of drugs with protocols submitted within 180 days after publication of the final guidance, when enrollment is scheduled to begin 180 days after publication;
Clinical studies of devices received by FDA in investigational device exemption (IDE) applications within 180 days after publication of the final guidance; or
Clinical studies of devices that do not require submission of an IDE that are approved by an institutional review board or independent ethics committee within 180 days after publication of the final guidance.[11]

In these circumstances, there will continue to be a legal requirement to submit a Diversity Action Plan but, as indicated in the new draft guidance, FDA does not intend to take action to enforce that requirement.

What categories of study subjects must be included in a Diversity Action Plan?

Diversity Action Plans are not required to include any particular demographics. Under Sections 505(z) and 520(g)(9) of the FD&C Act, sponsors must submit Diversity Action Plans that include goals for clinical study enrollment. FDA encourages sponsors to list enrollment goals for race, ethnicity, sex, and age group in Diversity Action Plans. If goals for race, ethnicity, sex, and age group are listed in a Plan, Section 3602 of FDORA requires that each of those goals be disaggregated.

FDORA also requires that FDA issue guidance on the inclusion in Diversity Action Plans of certain categories of study subjects (i.e., age group, sex, race, and ethnicity) and provides that FDA “may include” guidance on other characteristics of study subjects (e.g., geographic location, socioeconomic status).[12] In the new draft guidance, FDA encourages sponsors to consider additional factors when developing enrollment goals, including geographic location, gender identity, sexual orientation, socioeconomic status, physical and mental disabilities, pregnancy, lactation, and comorbidity.

What types of clinical studies require submission of a Diversity Action Plan?

For drugs (including biologics regulated as drugs), sponsors conducting a Phase III study, or another pivotal study, must submit a Diversity Action Plan to FDA by the time they submit their study protocol.

For devices, sponsors must submit a Diversity Action Plan for any clinical study of a device:

in an application for an investigational device exemption (IDE); or
if an IDE is not required, in any premarket notification under Section 510(k) of the FD&C Act, request for de novo classification under Section 513(f)(2), or application for premarket approval under Section 515.[13]

Notwithstanding this statutory requirement, FDA explains in the new draft guidance that, because Diversity Action Plans may not be meaningful for certain device studies, the agency does not intend to receive or review Diversity Action Plans for device studies that are not designed to collect definitive evidence of the safety and effectiveness of a device for a specified use.[14]

In addition, although not a requirement, FDA strongly recommends that sponsors develop and implement a comprehensive diversity strategy across their entire clinical development program, including early studies, when possible.[15]

What information must be included in Diversity Action Plans?

Under Section 505(z) and 520(g)(9) of the FD&C Act, sponsors must include the following criteria in Diversity Action Plans:

Goals for enrollment, disaggregated by age group, sex, race, and ethnicity;
A rationale for enrollment goals; and
An explanation of how the sponsor intends to meet such goals

In the new draft guidance, FDA states that, to meet the statutory requirement for inclusion of a rationale for enrollment goals, a sponsor’s rationale must include sufficient information and analysis to explain how the sponsor determined its enrollment goals and provides detailed recommendations on information the rationale should include.[16] On measures to meet enrollment goals, FDA recommends that Diversity Action Plans include enrollment, retention, and monitoring strategies.[17] A Diversity Action Plan may be modified either at the sponsor’s request or based on FDA feedback.[18]

As required under FDORA, Diversity Action Plans must include a sponsor’s goals for enrollment, its rationale for such goals, and an explanation of how the sponsor intends to meet such goals.[19] FDORA directs FDA to issue updated guidance for sponsors on the form, manner, and content of Diversity Action Plans. Of note, sponsors are required to submit Diversity Action Plans in the “form and manner” specified by FDA in guidance. As such, though FDA guidance is typically nonbinding, once final, provisions in FDA guidance pertaining to the form and manner (i.e., process) of submission for Diversity Action Plans will have binding effect on drug and device sponsors.[20] Any FDA recommendations as to the content of Diversity Action Plans will not be binding.

Will FDA issue waivers for the Diversity Action Plan requirements?

The new draft guidance includes information on waivers for the Diversity Action Plan requirement, including eligibility criteria and FDA’s process of review. FDORA authorizes FDA to waive the submission and content requirements for Diversity Action Plans, if FDA determines:

A waiver is necessary based on what is known or can be determined about the prevalence or incidence of the disease or condition for which the product is under investigation (including in terms of the patient population that may use the product);
Conducting a clinical investigation in accordance with a Diversity Action Plan would otherwise be impracticable; or
A waiver is necessary to protect public health during a public health emergency.[21]

However, FDA notes that, given the importance of increasing enrollment of historically underrepresented populations in clinical research, full or partial waivers will be granted only in “rare instances.”[22] For example, FDA states that it generally does not intend to waive the Diversity Action Plan requirement even if the disease or condition being studied is “relatively homogenous with respect to race, ethnicity, sex, or age group.”[23] Because FDA is required to respond to a waiver request within 60 days of receipt, sponsors should submit waiver requests as early as feasible, and no later than 60 days before the Diversity Action Plan is required for submission.[24]

What are the consequences for failure to submit a Diversity Action Plan?

As discussed above, under sections 505(z) and 520(g)(9) of the Federal Food, Drug, and Cosmetic Act, submission of a Diversity Action Plan is required for certain clinical studies for drugs and devices. A Diversity Action Plan must include the sponsor’s goals for enrollment, rationale for such goals, and an explanation of how the sponsor intends to meet such goals. The Plan must be submitted in the form and manner specified by FDA in guidance, not later than, for drugs, the date on which the sponsor submits the protocol to FDA for a Phase III or other pivotal study, and for devices, in an investigational device exemption or, if an investigational device exemption is not required, in any premarket notification under section 510(k), request for classification under section 513(f)(2), or application for premarket approval under section 515. Any modifications to the Plan must be in the form or manner specified by FDA in guidance.

Failure to comply with these Diversity Action Plan statutory requirements constitute a prohibited act under the FFDCA. For drugs, it is a prohibited act under Section 301(d) of the FFDCA to introduce or deliver for introduction, or cause the introduction or delivery for introduction, into interstate commerce any drug in violation of Section 505, including Section 505(z). For devices, it is a prohibited act under 301(q)(1) to fail or refuse to comply with any requirement prescribed under Section 520(g), or to fail or refuse to furnish any notification or other material or information required by or under 520(g).

FDA’s new draft guidance does not discuss consequences for failure to comply with the new Diversity Action Plan statutory requirements. The absence of information in the draft guidance on enforcement mechanisms for failure to comply with the Diversity Action Plan requirements signals that, at this time, FDA is looking to encourage compliance on the part of drug and device sponsors, as opposed to appearing enforcement focused. This approach may change in the final guidance, given strong stakeholder interest in this issue.

Notably, there is no requirement that a sponsor meet the goals outlined in a Diversity Action Plan. FDA notes in the new draft guidance that if such goals are not being met or not expected to be met at the conclusion of a trial, sponsors should include as part of applicable periodic reporting requirements (e.g., investigational new drug application (IND) or IDE annual reports) an explanation for that outcome and mitigation strategies.[25]

[1] FDA, Diversity Action Plans to Improve Enrollment of Participants from Underrepresented Populations in Clinical Studies: Draft Guidance for Industry (June 2024) (hereinafter referred to as “Guidance”).

[2] See Section 3602(b) of the Food and Drug Omnibus Reform Act of 2022 (FDORA), passed as part of the Consolidated Appropriations Act, 2023, Pub. L. No. 117-328, 136 Stat. 4459 (2023).

[3] FDA, Diversity Plans to Improve Enrollment of Participants From Underrepresented Racial and Ethnic Populations in Clinical Trials; Draft Guidance for Industry; Availability (April 2022).

[4] See Section 3602(c) of FDORA. This submission requirement applies only with respect to clinical studies for which enrollment begins after 180 days after the publication of final guidance.

[5] See Sections 505(z)(3), 520(g)(9) of the Federal Food, Drug, and Cosmetic Act; see also Sections 301(d), (q)(1), 303 of the FD&C Act.

[6] See Section 3601 of FDORA.

[7] See Section 3602(c) of FDORA. This submission requirement applies only with respect to clinical studies for which enrollment begins after 180 days after the publication of final guidance.

[8] FDA Notice of Availability: Draft Guidance on Diversity Action Plans, 89 Fed. Reg. 54010 (June 28, 2024).

[9] 89 Fed. Reg. 54010, 54011 (June 28, 2024).

[10] See Section 3602(b)(2) of FDORA.

[11] Guidance at 2.

[12] See Section 3602(a) of FDORA.

[13] Sponsors of devices being studied as described in section 21 CFR 812.2(c) are not required to submit Diversity Action Plans. See 520(g)(9)(A)(ii).

[14] Guidance at 6-7.

[15] Guidance at 7.

[16] Guidance at 22-23.

[17] Guidance at 23.

[18] Guidance at 18.

[19] See Sections 505(z)(2), 520(g)(9)(B).

[20] 89 Fed. Reg. 54010 (June 28, 2024).

[21] See Sections 505(z)(4), 520(g)(9)(C).

[22] Guidance at 20.

[23] Guidance at 20.

[24] Guidance at 20.

[25] Guidance at 19.

The following Gibson Dunn lawyers assisted in preparing this update: Katlin McKelvie and Carlo Felizardo.

Gustav W. Eyler – Washington, D.C. (+1 202.955.8610, geyler@gibsondunn.com)
Katlin McKelvie – Washington, D.C. (+1 202.955.8526, kmckelvie@gibsondunn.com)
John D. W. Partridge – Denver (+1 303.298.5931, jpartridge@gibsondunn.com)
Jonathan M. Phillips – Washington, D.C. (+1 202.887.3546, jphillips@gibsondunn.com)
Carlo Felizardo – Washington, D.C. (+1 202.955.8278, cfelizardo@gibsondunn.com)

Ramirez v. Charter Communications, Inc., S273802 – Decided July 15, 2024

The California Supreme Court held today that an arbitration agreement may be unconscionable if it requires a party resisting arbitration to pay the other party’s attorney’s fees, requires arbitration of claims commonly brought by employees but not those commonly brought by employers, or unreasonably shortens a statute of limitations. Yet even if an agreement contains unconscionable provisions, a court must analyze whether they may be severed and the rest of the agreement enforced.

“[T]he decision whether to sever unconscionable provisions and enforce the balance is a qualitative one, based on the totality of the circumstances. The court cannot refuse to enforce an agreement simply by finding that two or more collateral provisions are unconscionable as written and eschewing any further inquiry.”

Justice Corrigan, writing for the Court

Background:

Angelica Ramirez, a former employee of Charter Communications, filed a lawsuit alleging discrimination, harassment, retaliation, and wrongful discharge under California’s Fair Employment and Housing Act. Charter sought to compel arbitration under the arbitration agreement Ramirez signed as a condition of her employment. The trial court found the arbitration agreement procedurally and substantively unconscionable, determined that severance of those provisions was improper, and denied the motion to compel arbitration. The Court of Appeal affirmed.

The California Supreme Court granted review to determine whether various provisions of the arbitration agreement were in fact unconscionable and, if so, whether they could be severed from the agreement.

Issues:

Is an arbitration agreement unconscionable when it lacks mutuality in terms of the claims subject to and excluded from arbitration, shortens the period for filing claims, truncates discovery, or requires a party resisting arbitration to pay the other side’s attorney’s fees?
Is severance improper when an arbitration agreement contains more than one unconscionable provision?

Court’s Holdings:

While the lack of mutuality, shortening of the period for filing claims, and requirement that a party resisting arbitration pay the other side’s attorney’s fees may be unconscionable, a provision limiting discovery is not unconscionable when an arbitrator can order additional discovery.
No. Even if an arbitration agreement contains more than one unconscionable provision, courts must conduct a qualitative analysis to determine, under the totality of the circumstances, whether the unconscionable provisions may be severed from the agreement.

What It Means:

The Court clarified that, when analyzing whether a provision limiting discovery renders an arbitration agreement unconscionable, courts must focus on circumstances known at the time the agreement was made and should not consider post-contract formation circumstances.
When drafting arbitration agreements, employers should ensure mutuality in terms to prevent a finding of unconscionability. An agreement may not, for example, compel arbitration of claims more likely to be brought by an employee but exclude arbitration of claims likely to be brought by an employer.
There is no bright line rule prohibiting severance when an arbitration agreement contains more than one unconscionable provision. Regardless of how many unconscionable provisions an agreement contains, courts must conduct a qualitative analysis to determine whether the agreement’s unconscionability can be cured by severing the unconscionable provisions.
The Court concluded that enforcing the rules of unconscionability does not violate the Federal Arbitration Act.

The Court’s opinion is available here.

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Michael J. Holecek +1 213.229.7018 mholecek@gibsondunn.com

Related Practice: Labor and Employment

Jason C. Schwartz
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Katherine V.A. Smith
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Jesse A. Cripps
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Related Practice: Litigation

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This alert was prepared by Michael Holecek, Ryan Azad, and Thomas Cochrane.

From the Derivatives Practice Group: This week, President Biden announced his intent to nominate Julie Brinn Siegel to be a Commissioner of the CFTC. Siegel is the Senior Coordinator for Management at the Office of Management and Budget.

New Developments

President Biden Announced Intent to Nominate Julie Brinn Siegel as a Commissioner of the CFTC. On July 11, President Biden announced his intent to nominate Julie Brinn Siegel to be a Commissioner of the CFTC. Siegel currently serves as the federal government’s deputy chief operating officer as Senior Coordinator for Management at the Office of Management and Budget (OMB). Prior to that, Siegel served as Secretary of the Treasury Janet Yellen’s Deputy Chief of Staff and served as Senior Counsel and Policy Advisor to U.S. Senator Elizabeth Warren (D-MA). Last month, President Biden nominated CFTC Commissioner Johnson to be Assistant Secretary for Financial Institutions at the Department of Treasury and nominated CFTC Commissioner Christy Goldsmith Romero to be Chair and Member of the Federal Deposit Insurance Corporation (FDIC) which, if confirmed by the Senate, would leave open two Democratic Commissioner seats at the CFTC. Siegel, if nominated and confirmed by the Senate, would take the seat of Commissioner Goldsmith Romero. [NEW]
First Interagency Fraud Disruption Conference Focuses on Combatting Crypto Schemes Commonly Known as “Pig Butchering.” On July 11, the CFTC and the DOJ’s Computer Crime and Intellectual Property Section’s National Cryptocurrency Enforcement Team (“NCET”) convened the first Fraud Disruption Conference to work on efforts to combat a type of fraud commonly known as “pig butchering”. It is estimated that Americans are scammed out of billions per year, making this a top law enforcement priority. The working group addressed strategies to prevent victimization; using technology to disrupt the fraud; and collaboration on enforcement efforts. Several agencies also collaborated on an anti-victimization messaging campaign to warn Americans to remain vigilant against emerging fraud threats. [NEW]
Supreme Court Overrules Chevron, Sharply Limiting Judicial Deference To Agencies’ Statutory Interpretation. On June 28, the Supreme Court overruled Chevron v. Natural Resources Defense Council, a landmark decision that had required courts to defer to agencies’, including the CFTC’s, reasonable interpretations of ambiguous statutory terms. For a more detailed analysis of the ruling please refer to Gibson Dunn’s client alert, available here.
CFTC Announces Supervisory Stress Test Results. On July 1, the CFTC issued Supervisory Stress Test of Derivatives Clearing Organizations: Reverse Stress Test Analysis and Results, a report detailing the results of its fourth Supervisory Stress Test (“SST”) of derivatives clearing organization (“DCO”) resources. Among other findings, the 2024 report concluded the DCOs studied hold sufficient financial resources to withstand many extreme and often implausible price shocks. The purpose of the analysis was twofold: (1) to identify hypothetical combinations of extreme market shocks, concurrent with varying numbers of clearing member (“CM”) defaults, that would exhaust prefunded resources (DCO committed capital, and default fund), and unfunded resources available to the DCOs (this represents the reverse stress test component), and (2) to analyze the impacts of DCO use of mutualized resources on non-defaulted CMs.
CFTC Staff Issues a No-Action Letter Regarding Certain Reporting Requirements for Swaps Transitioning from CDOR to CORRA. On June 27, the CFTC Division of Market Oversight (“DMO”) and Division of Data (“DOD”) issued a staff no-action letter regarding certain Part 43 and Part 45 swap reporting obligations for swaps transitioning under the ISDA LIBOR fallback provisions from referencing the Canadian Dollar Offered Rate (“CDOR”), to referencing the risk-free Canadian Overnight Repo Rate Average (“CORRA”) following the cessation of CDOR after June 28, 2024. The letter states DMO and DOD will not recommend the CFTC take enforcement action against an entity for failure to timely report under Part 45 the change in a swap’s floating rate. This letter covers those floating rate changes that are made under the ISDA LIBOR fallback provisions from CDOR to CORRA, but only in the event the entity uses its best efforts to report the change by the applicable deadline in Part 45 and in no case reports the required information later than five business days from, but excluding, July 2, 2024. The letter also states DMO and DOD will not recommend the CFTC take enforcement action against an entity for failure to report under Part 43 the change in the floating rate for a swap modified after execution to incorporate the ISDA LIBOR fallback provisions to transition from referencing CDOR to referencing CORRA.
CFTC Extends Public Comment Period for Proposed Amendments to Event Contracts Rules. On June 27, the CFTC announced it is extending the deadline for public comment on a proposal to amend its event contract rules. The extended comment period will close on August 8, 2024. The CFTC is providing an extension to allow interested persons additional time to analyze the proposal and prepare their comments. The proposal would amend CFTC Regulation 40.11 to further specify types of event contracts that fall within the scope of Commodity Exchange Act (“CEA”) Section 5c(c)(5)(C) and are contrary to the public interest, such that they may not be listed for trading or accepted for clearing on or through a CFTC-registered entity.

New Developments Outside the U.S.

ESAs Consult on Guidelines under the Markets in Crypto-Assets Regulation. On July 12, the European Supervisory Authorities (“ESAs”) published a consultation paper on Guidelines under Markets in Crypto-assets Regulation (“MiCA”), establishing templates for explanations and legal opinions regarding the classification of crypto-assets along with a standardized test to foster a common approach to classification. [NEW]
ESAs Report on the Use of Behavioral Insights in Supervisory and Policy Work. On July 11, the ESAs published a joint report following their workshop on the use of behavioral insights by supervisory authorities in their day-to-day oversight and policy work. The report provides a high-level overview of the main topics discussed during the workshop held in February 2024 for national supervisors and other competent authorities, where participants explored the added value of behavioral insights in their work by exchanging their experiences and discussing the challenges they face. [NEW]
ESMA Publishes the 2024 ESEF Reporting Manual. On July 11, ESMA published the update of its Reporting Manual on the European Single Electronic Format (“ESEF”) supporting a harmonized approach for the preparation of annual financial reports. ESMA has also updated the Annex II of the Regulatory Technical Standards (“RTS”) on ESEF. [NEW]
ESMA Publishes Statement on Use of Collateral by NFCs Acting as Clearing Members. On July 10, ESMA issued a public statement on deprioritizing supervisory actions linked to the eligibility of uncollateralized public guarantees, public bank guarantees, and commercial bank guarantees for Non-Financial Counterparties (“NFCs”) acting as clearing members, pending the entry into force of EMIR 3.
ESMA Launches New Consultations. On July 10, ESMA published a new package of public consultations with the objective of increasing transparency and system resilience in financial markets, reducing reporting burden and promoting convergence in the supervisory approach. [NEW]
ESMA Consults on Rules to Recalibrate and Further Clarify the Framework. On July 9, ESMA launched new consultations on different aspects of the Central Securities Depositories Regulation (“CSDR”) Refit. The proposed rules relate to the information to be provided by European CSDs to their national competent authorities (“NCA”s) for the review and evaluation, the information to be notified to ESMA by third-country CSDs, and the scope of settlement discipline. [NEW]
ESMA Consults on Liquidity Management Tools for Funds. On July 8, ESMA announced it is seeking input on draft guidelines and technical standards under the revised Alternative Investment Fund Managers Directive (“AIFMD”) and the Undertakings for Collective Investment in Transferable Securities (“UCITS”) Directive. Both Directives aim to mitigate potential financial stability risks and promote harmonization of liquidity risk management in the investment funds sector. [NEW]
ESMA Consults on Reporting Requirements and Governance Expectations for Some Supervised Entities. On July 8, ESMA launched two consultations on proposed guidance for some of its supervised entities. The consultations are aimed at the following entities supervised by ESMA: Benchmark Administrators, Credit Rating Agencies, and Market Transparency Infrastructures. The Consultation Paper sets out the information ESMA expects to receive and a timeline for supervised entities to provide the required information. The objective of the Draft Guidelines is to ensure consistency in cross-sectoral reporting. [NEW]
ESMA Puts Forward Measures to Support Corporate Sustainability Reporting. On July 5, ESMA published a Final Report on the Guidelines on Enforcement of Sustainability Information (“GLESI”) and a Public Statement on the first application of the European Sustainability Reporting Standards (“ESRS”). ESMA reports that these documents will support the consistent application and supervision of sustainability reporting requirements.
ESMA Releases New MiCA Rules To Increase Transparency for Retail Investors. On July 4, ESMA published the second Final Report under the Markets in Crypto-Assets Regulation (MiCA) covering eight draft technical standards that aim to provide more transparency for retail investors, clarity for providers on the technical aspects of disclosure and record-keeping requirements, and data standards to facilitate supervision by National Competent Authorities (“NCAs”). The report covers public disclosures, as well as descriptions on how issuers should disclose price-sensitive information to the public to prevent market abuses, such as insider dealing.
ESMA Reappoints Three Members to its Management Board. On July 4, ESMA announced that it has reappointed three current members to its Management Board. The appointments took place at the Board of Supervisors meeting on July 3. The Management Board, chaired by Verena Ross, Chair of ESMA, is responsible for ensuring that the Authority carries out its mission and performs the tasks assigned to it under its founding Regulation.
EBA and ESMA Publish Guidelines on Suitability of Management Body Members and Shareholders for Entities Under MiCA. On June 27, EBA and ESMA published joint guidelines on the suitability of members of the management body, and on the assessment of shareholders and members with qualifying holdings for issuers of asset reference tokens (“ARTs”) and crypto-asset service providers (“CASPs”), under the MiCA. The first set of guidelines covers the presence of suitable management bodies within issuers of ARTs and CASPs. The second set of guidelines concerns the assessment of the suitability of shareholders or members with direct or indirect qualifying holdings in a supervised entity.

New Industry-Led Developments

Trade Associations Submit Letter on EMIR IM Model Validation. On July 8, ISDA, the Alternative Investment Management Association (“AIMA”), the European Fund and Asset Management Association (“EFAMA”) and the Securities Industry and Financial Markets Association’s asset management group (“SIFMA AMG”) submitted a letter to the ESAs and the European Commission on initial margin (“IM”) model approval requirements set out in the European Market Infrastructure Regulation (“EMIR 3.0”). The letter highlights challenges posed by the three-month period granted to the European Banking Authority and NCAs to validate changes to an IM model and describes how the ISDA Standard Initial Margin Model (“ISDA SIMM”) schedule can be amended to address these issues. [NEW]
ISDA Proceeds with Development of an Industry Notices Hub. On July 1, ISDA announced it will proceed with the development of an industry-wide notices hub, following strong support from buy- and sell-side institutions globally. The new online platform will allow instantaneous delivery and receipt of critical termination-related notices and help to ensure address details for physical delivery are up to date, reducing the risk of uncertainty and potential losses for senders and recipients of these notices.
ISDA Publishes Framework to Prepare for Close Out of Derivatives Contracts. On June 27, ISDA published the ISDA Close-out Framework that market participants can use to help prepare for potential terminations of collateralized derivatives contracts. ISDA stated that the launch of the ISDA Close-out Framework is in response to the March 2023 failure of Signature Bank and SVB in the US, which, according to ISDA, highlighted the complexities of potentially terminating over-the-counter derivatives trading relationships following various post-crisis regulatory reforms. Specifically, the reforms require that in-scope entities post margin for non-cleared derivatives transactions, while various jurisdictions have introduced mandatory stays on termination rights and remedies as part of bank resolution regimes. ISDA stated that the ISDA Close-out Framework is intended to be used as a preparatory resource to help firms coordinate internal business functions and stakeholders and internal and external legal, operational, risk management, infrastructure and other relevant service providers to ensure they are adequately prepared for any potential future stress events.

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

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, jsteiner@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Adam Lapidus – New York (212.351.3869, alapidus@gibsondunn.com )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

William R. Hallatt , Hong Kong (+852 2214 3836, whallatt@gibsondunn.com )

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki , New York (212.351.4028, mtakagaki@gibsondunn.com )

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

This edition of Gibson Dunn’s Federal Circuit Update for June 2024 summarizes the current status of a couple petitions pending before the Supreme Court and recent Federal Circuit decisions concerning damages, trade secret misappropriation, patent eligibility under 35 U.S.C. § 101, and induced infringement.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

There was a new potentially impactful petition filed before the Supreme Court in June 2024:

United Therapeutics Corp. v. Liquidia Technologies, Inc. (US No. 23-1298): “1. Whether the IPR statute and SAS require the Federal Circuit to review de novo, or only for an abuse of discretion, the PTO’s reliance on new grounds and new printed publications—not raised in the initial petition—when deciding to cancel patent claims. 2. Whether, if § 312 is deemed ambiguous, the Court should overrule Chevron.” The respondent waived its right to respond, the Court requested a response, which is due August 12, 2024.

We also provide an update below of the petitions pending before the Supreme Court that were summarized in our May 2024 update:

In Chestek PLLC v. Vidal (US No. 23-1217), the response brief is due August 14, 2024. Five amicus curiae briefs have been filed. In Cellect LLC v. Vidal (US No. 23-1231), the response brief is due August 21, 2024, and seven amicus curiae briefs have been filed.

Upcoming Oral Argument Calendar

The list of upcoming arguments at the Federal Circuit is available on the court’s website.

Key Case Summaries (June 2024)

EcoFactor, Inc. v. Google LLC, No. 23-1101 (Fed. Cir. June 3, 2024): EcoFactor sued Google alleging infringement of patents directed to smart thermostats in computer-networked heating and cooling systems, which adjusts the user’s thermostat settings to reduce strain on the electricity grid during periods of high demand. Following a jury trial, the jury found infringement and awarded damages to EcoFactor. Google moved for a new trial on damages, which the district court denied.

The majority (Reyna, J., joined by Lourie, J.) affirmed. The majority reasoned that EcoFactor’s damages expert based his royalty rate on comparable license agreements and the testimony of EcoFactor’s CEO, and thus, the royalty rate was sufficiently reliable. The majority therefore concluded that the district court did not abuse its discretion in denying the motion for a new trial.

Judge Prost dissented-in-part. Judge Prost reasoned that the royalty rate from EcoFactor’s damages expert “rests on EcoFactor’s self-serving, unilateral recitals of its beliefs in the license agreements,” which were “directly refuted” by two of the license agreements and “have no other support . . . to back them up.” Judge Prost concluded that the “law does not allow damages to be so easily manufactured.” Judge Prost then noted that the royalty rate suffered from another problem in that it included the value of non-asserted patents, which EcoFactor’s damages expert did not properly apportion. Judge Prost therefore determined that the analysis performed by EcoFactor’s damages expert was unreliable, and the district court abused its discretion by not granting a new trial on damages.

Insulet Corp. v. EOFlow, Co. Ltd., No. 24-1137 (Fed. Cir. June 17, 2024): Insulet and EOFlow manufacture insulin pump patches. Starting in the early 2000s, Insulet developed the wearable insulin pump OmniPod® followed by next generation products in 2007 and 2012. EOFlow began developing its own product in 2011, the EOPatch®, followed by its next generation product in 2017. Around that time, four former Insulet employees were hired by EOFlow, and allegedly passed confidential information to EOFlow. Insulet sued EOFlow for misappropriation of trade secrets. Insulet moved for a preliminary injunction, arguing it was likely to be irreparably harmed by the misappropriation, particularly in light of news that Medtronic would imminently acquire EOFlow, which would provide a source of capital for EOFlow and increase competition with Insulet. The district court granted the preliminary injunction.

The Federal Circuit (Lourie, J., joined by Prost and Stark, JJ.) reversed. Under the Defend Trade Secrets Act (“DTSA”), the statute of limitations to bring a trade secret misappropriation claim is three years. 18 U.S.C. § 1836(d). EOFlow had raised a statute of limitations challenge; however, the district court expressed no opinion on the matter. The Federal Circuit held that it was an abuse of discretion to ignore this argument, which was a material factor in evaluating a likelihood of success on the merits. The Court further held that, even if the statute of limitations argument had been addressed, Insulet had not established a likelihood of success on the merits because it had not alleged a trade secret with particularity, as required by the DTSA. Specifically, Insulet “advanced a hazy grouping of information that the court did not probe with particularity to determine what, if anything, was deserving of trade secret protection.” Instead, the district court should have determined what “specific information” was alleged to be the trade secret, such as “particular design drawings and specifications for each physical component and subassembly.” The Court also determined that the district court failed to assess whether the information was generally known or reasonably ascertainable through proper means, such as reverse engineering, particularly in light of tear-down videos and Insulet’s own publications that were available on the internet. And finally, the Court determined that the district court failed to consider the disclosures in Insulet’s own patents related to the OmniPod. If certain components of the OmniPod were known to the public through patent disclosures, then those components would unlikely merit trade secret protection.

Beteiro, LLC v. DraftKings Inc., No. 22-2275 (Fed. Cir. June 21, 2024): Beteiro owns four patents directed to methods that enable users to participate in online gambling using a user communication device by first determining whether the user is physically located in a state that allows gambling by using the GPS on the mobile device. DraftKings filed a motion to dismiss under Rule 12(b)(6) on the grounds that the patents were directed to patent-ineligible subject matter under 35 U.S.C. § 101, and the district court granted the motion.

The Federal Circuit (Stark, J., joined by Dyk and Prost, JJ.) affirmed. At step one, the Court stated that the claims are directed to the abstract idea of “exchanging information concerning a bet and allowing or disallowing the bet based on where the user is located.” In doing so, the Court specifically found that Beteiro’s patent claims “exhibit several features that are well-settled indicators of abstractness,” such as detecting information, generating and sending notifications, receiving messages (bets), determining legality (GPS location), and processing information (allowing/disallowing bets). The Court also determined that the claims were drafted in a result-oriented, functional manner, using language that described the desired outcomes without explaining how to achieve them. The Court further determined that the claims did not recite any improvement in the way computers operate, and thus, the claims were directed to an abstract idea. As to step two, the Court determined that the use of GPS on a mobile phone was conventional, contrary to Beteiro’s contentions.

Amarin Pharma, Inc. v. Hikma Pharmaceuticals USA Inc., No. 23-1169 (Fed. Cir. June 25, 2024): Amarin sells icosapent ethyl (an omega-3 fatty acid commonly found in fish oils) under the brand name Vascepa® for the treatment of patients with high triglyceride levels. In 2012, Amarin received FDA approval for treatment of severe hypertriglyceridemia, a condition where a patient’s blood triglyceride is at least 500 mg/dL (“the SH indication”), and later in 2019, for treatment to reduce cardiovascular risk in patients having blood triglyceride levels of at least 150 mg/dL (“the CV indication”). Hikma submitted an Abbreviated New Drug Application (“ANDA”) for approval of its generic icosapent ethyl in 2016 when Vascepa® was only approved for the SH indication, and in 2019, opted to carve out the additional CV indication by seeking FDA approval only for uses not covered by Amarin’s newly listed CV indication patents. However, around the same time, Hikma also removed the CV limitation of use from its product label, which had originally been included when it initially filed its ANDA. Hikma then issued several press releases advertising its product as a generic version of Vascepa®, referencing Vascepa®’s $1.1 billion in sales, which included sales for all uses of Vascepa® including the CV indication that made up 75% of the sales.

Amarin sued Hikma for inducing infringement of two of its patents directed to uses of icosapent ethyl based on (1) Hikma’s public statements in press releases and on its website, and (2) the product label for its generic icosapent ethyl product. Hikma moved to dismiss under Rule 12(b)(6), and the district court granted the motion. The district court found that the removal of the CV limitation of use from the product label would not be understood by physicians as suggesting that Hikma’s product had been approved for the CV indication. The district court also found that while Hikma’s press releases and website were relevant to an intent to induce, it did not rise to the level of encouraging, recommending, or promoting Hikma’s generic for the CV indication.

The Federal Circuit (Lourie, J., joined by Moore, C.J., and Albright, J. (sitting by designation)) reversed, holding that the district court had to examine the label and public statements in its totality to determine what they “would communicate to physicians and the marketplace.” In so holding, the Court noted that while the underlying case was a traditional Hatch-Waxman case, the issue on appeal was nothing more than “a run-of-the-mill induced infringement case.” The Court concluded that while the label alone would not recommend, encourage, or promote infringement, a physician would read Hikma’s press releases as an instruction or encouragement to prescribe Hikma’s product for any FDA-approved use, which included the CV indication that Hikma carved out from its ANDA. The Court concluded that these allegations, taken together, plausibly stated a claim for induced infringement.

The following Gibson Dunn lawyers assisted in preparing this update: Blaine Evanson, Audrey Yang, Al Suarez, Evan Kratzer, and Julia Tabat.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups, or the following authors:

Blaine H. Evanson – Orange County (+1 949.451.3805, bevanson@gibsondunn.com)
Audrey Yang – Dallas (+1 214.698.3215, ayang@gibsondunn.com)

Appellate and Constitutional Law:
Thomas H. Dupree Jr. – Washington, D.C. (+1 202.955.8547, tdupree@gibsondunn.com)
Allyson N. Ho – Dallas (+1 214.698.3233, aho@gibsondunn.com)
Julian W. Poon – Los Angeles (+ 213.229.7758, jpoon@gibsondunn.com)

Intellectual Property:
Kate Dominguez – New York (+1 212.351.2338, kdominguez@gibsondunn.com)
Y. Ernest Hsin – San Francisco (+1 415.393.8224, ehsin@gibsondunn.com)
Josh Krevitt – New York (+1 212.351.4000, jkrevitt@gibsondunn.com)
Jane M. Love, Ph.D. – New York (+1 212.351.3922, jlove@gibsondunn.com)

A proposed rule from the Committee on Foreign Investment in the United States would substantially expand the scope of covered real estate transactions subject to national security review during a time of growing concern around foreign acquisitions of U.S. land.

Over the past year, national security risks associated with foreign acquisitions of certain real estate, including agricultural land, have been an issue of growing concern. This increasing national security concern has manifested in several key developments: (i) a rise in efforts by state and local governments to implement their own real-estate focused national security reviews, which we described in a previous client alert, (ii) a notable and recent presidential block of a major real estate transaction,[1] and (iii) bipartisan federal legislative support for stronger restrictions on acquisitions of U.S. land by foreign adversaries.[2]

Most recently, on July 8, 2024, the Committee on Foreign Investment in the United States (“CFIUS”) issued a Notice of Proposed Rulemaking (“NPRM” or the “proposed rule”) to expand its jurisdiction to review and potentially block certain real estate transactions involving foreign persons. The scope of the update is noteworthy. The proposed rule would add nearly 60 locations to CFIUS’s existing list of military installations whose proximity to a potential real estate purchase could create CFIUS jurisdiction, bringing the total list to over 250 installations—and representing a roughly 30% increase in a single update.[3]

This alert provides: (i) a brief refresher on CFIUS’s jurisdiction over real estate transactions, (ii) a summary of the proposed rule, (iii) a discussion of historical trends and projections regarding CFIUS’s review of real estate transactions, and (iv) key takeaways for dealmakers.

I. Refresher on CFIUS’s Jurisdiction Over Real Estate Transactions.

The Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) provided CFIUS with expanded jurisdiction over (among other things) certain real estate transactions. Using that new jurisdiction, CFIUS drafted rules for “certain transactions by foreign persons involving real estate in the United States” (the “real estate rules”), which became effective in February 2020. The real estate rules provided the process for CFIUS to review acquisitions involving a foreign person purchasing, leasing, or gaining certain other land rights in property close to military installations and other sensitive areas. Specifically, the real estate rules set out four categories of locations that could subject a real estate transaction to CFIUS’s jurisdiction and listed each of these sets of locations in an Appendix to the rules (“Appendix A”).

Part 1 of Appendix A provides locations for which a property may be subject to review based on being in “close proximity” to (i.e., within one mile of) a listed military installation.
Part 2 of Appendix A provides locations for which a property may be subject to review based on being within the “extended range” (i.e., between one and one hundred miles from) a listed military installation.
Part 3 of Appendix A lists missile launch ranges (i.e., geographic areas) for which a property being in the extended area of that range may subject it to CFIUS review.
Part 4 of Appendix A lists offshore training areas where a property being in the extended range of that area may subject it to CFIUS review.

Congress’s policy rationale for providing CFIUS with authority over real estate transactions was—and remains—driven by intelligence collection risks. As CFIUS’s press release for the NPRM noted, FIRRMA allows CFIUS to review transactions that could “reasonably provide the foreign person the ability to collect intelligence on activities being conducted at such an installation, facility, or property; or could otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance.”

There are limited exceptions to CFIUS jurisdiction over “covered real estate”; most notably, if such real estate falls within an “urbanized area” or “urban cluster.” Yet, there is a meaningful limitation to this exception, as it does not apply where such real estate is (1) located within, or will function as part of, a covered port or (2) is within “close proximity” to certain military installations or other sensitive government sites.

II. Updates to CFIUS’s List of Sensitive U.S. Military Installations.

The proposed rule seeks to expand the list of covered military installations, the second such expansion of covered real estate installations since the real estate rules were promulgated under FIRRMA. The real estate rules themselves note that the Department of Defense (“DoD”) will continue “on an ongoing basis” to assess and update Appendix A.[4]

A noteworthy transaction served as the precursor to the first update to Appendix A. In January 2023, CFIUS determined that it did not have jurisdiction to review an acquisition of land by Chinese food manufacturer Fufeng Group Ltd. That land was near Grand Forks Air Force Base, which was not among the military installations listed in Appendix A. Ostensibly in response to public outcry around CFIUS’s determination that it lacked jurisdiction over this acquisition, in August 2023, DoD issued a final rule adding eight military installations to Appendix A, including Grand Forks Air Force Base.

This NPRM, coming nearly a year after the prior Appendix A expansion, would add a substantially increased number of military installations, with 59 proposed additions. The proposed rule is not immediately effective. CFIUS provided for a 30-day public comment period, following which CFIUS is expected to promptly publish a final rule. Once implemented, and assuming no changes are made to the proposed list of new military installations, the NPRM will bring the total number of military installations listed in Part 1 of Appendix A to 162 and Part 2 to 65, while making the following updates:

Expand CFIUS’s jurisdiction over real estate transactions to include 40 new military installations in Part 1 of the list (“close proximity,” i.e., within a one-mile radius);
Expand CFIUS’s jurisdiction over real estate transactions to include 19 new military installations in Part 2 of the list (“extended range,” i.e., within a 100-mile radius);
Move eight military installations from part 1 to part 2;
Remove one installation from part 1 and two installations from part 2;
Revise the definition of the term “military installation,” including to expand the definition of an installation to encompass “Army depots, arsenals, and military terminals,” “Marine Corps installations, logistic battalions and support facilities,” and Space Force bases, and expand other parts of the definition to encompass each of the Armed Forces; and
Update the names of 14 installations and the location of seven others.

III. Trends and Projections for CFIUS Review of Real Estate Transactions.

Since the CFIUS real estate rules became effective in 2020, there have been very few reviews of “covered real estate transactions.” CFIUS’s annual report to Congress for 2021 provided data showing that zero of the 272 notices and only one of the 164 short-form declarations filed with the Committee were for a covered real estate transaction. In 2022, only one of the 286 notices and five of the 154 short-form declarations were for covered real estate transactions.

There are likely several reasons why there have been so few covered real estate CFIUS filings in the past years. One possible reason is that many transactions that involved covered real estate also implicate a U.S. target’s broader assets and operations, governance rights, or access to technical information or personal data, resulting in CFIUS jurisdiction based on its authority to review “control” transactions and “non-controlling” covered investments.

Another reason is that, following FIRRMA, some transactions require mandatory filings with CFIUS, but covered real estate transactions are subject only to voluntary filings. In fact, a covered real estate transaction for which the parties did not file a voluntary CFIUS notice was the subject of a recent presidential order. In May 2024, following a CFIUS-initiated review that identified a risk to national security arising from the potential for foreign surveillance and intelligence collection activities, President Biden issued a presidential decision requiring Chinese cryptocurrency mining company MineOne to divest an acquisition of Wyoming real estate located in “close proximity” to a U.S. Air Force base with strategic missile silos.[5]

We do not expect the overall number of real estate reviews to rise substantially because of the additions in the NPRM, but we do expect CFIUS to closely scrutinize the more limited universe of transactions that implicate covered real estate—whether or not those transactions result in voluntary filings with the Committee—and to take bold action with respect to those transactions when warranted.

CFIUS is likely to consider possibilities to further expand or enhance its jurisdiction over real estate transactions owing, in part, to bipartisan support from U.S. legislators. As is often the case for national security initiatives, there exists bipartisan federal legislative support for tougher scrutiny on foreign acquisitions of U.S. land. In response to the NPRM, Chairman of the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party John Moolenaar (R-MI) made a statement in support of the proposed rule calling for even tougher measures to restrict “foreign adversaries” from purchasing land that would “leave our military facilities susceptible to surveillance.” U.S. Senator Sherrod Brown (D-OH) also issued a statement in support, noting the importance of protecting agricultural land near military bases. As the presidential election draws near, lawmakers on both sides of the aisle are likely to maintain focus on national security issues. This continued support paves the way for CFIUS to continue updating its rulemaking around real estate, echoed in Assistant Secretary of the Treasury for Investment Security Paul Rosen’s comments in the NPRM press release that CFIUS “will remain responsive to the evolving nature of the risks we face to ensure we are protecting our military installations and related defense assets.”

IV. Key Takeaways and Next Steps for Dealmakers.

The proposed rule is likely to be finalized and implemented by fall of this year. Considering this timeline, transaction parties should act now to update their approach to potentially implicated transactions. We recommend taking note of the following:

CFIUS will continue its efforts to identify and review non-notified real estate transactions. Especially given the intense scrutiny of foreign investments in U.S. real estate by U.S. federal, state, and local government authorities, as well as certain segments of the private sector and U.S. media, CFIUS will continue its efforts to identify and review covered real estate transactions. Some reviews could result in CFIUS identifying a threat to national security posed by a prior investment and the need for mitigation measures up to and including divestment.

The expanded list of installations should inform current deal diligence. Because transactions under consideration or negotiation today may not sign until after a final rule is published later this year, transaction parties should immediately begin considering the NPRM when conducting due diligence of real estate investments and acquisitions. Moreover, for transactions subject to CFIUS’s “control” or “covered investment” jurisdiction, the NPRM provides important insight into the locations that CFIUS considers most sensitive and likely to raise national security considerations.

Foreign parties can still acquire rights in covered real estate. Although the proposed rule does not distinguish between investors of different jurisdictions,[6] CFIUS will continue to evaluate transactions using a case-by-case, transaction-specific approach that accounts for the risk profile of the investors. CFIUS filings for covered real estate transactions remain voluntary, and foreign investors will continue to be able to receive CFIUS approvals for these transactions. Of note, the blocked acquisition we discussed in this alert involved a Chinese-backed acquirer and indications that the real estate could be used for surveillance. Not every covered real estate transaction poses a risk to U.S. national security and, even when CFIUS does identify a threat, in many cases the threat can be mitigated through manageable conditions on the foreign investor’s physical access to, and use of, the land. Moreover, the “urbanized area” and “urban cluster” exceptions discussed above continue to apply.

In addition to conducting CFIUS-focused risk analysis, transaction parties must consider state and local foreign investment reviews—at least for now. Currently, approximately twenty states have implemented some form of restriction on foreign investment in real estate, and over a dozen states are currently considering bills that would establish similar restrictions.[7] As described in a previous client alert, these state-level restrictions may not ultimately survive legal challenges on the grounds of the U.S. Constitution’s “supremacy clause” —the legal argument being that Congress has already reserved the power to regulate foreign investment in real estate with FIRRMA. However, until successfully challenged, these state and local rules also merit consideration for parties undergoing real estate transactions near U.S. military installations.

[1] See Order of May 13, 2024, Regarding the Acquisition of Certain Real Property of Cheyenne Leads by MineOne Cloud Computing Investment I L.P., 89 Fed. Reg. 43,301 (May 16, 2024).

[2] See, e.g., Protecting America’s Agricultural Land from Foreign Harm Act of 2023, S. 926, 118th Cong. (2023); Countering Communist China Act, H.R. 7476, 118th Cong. (2024).

[3] Note that the proposed rule would not amend the lists of three missile launch areas and twenty-three offshore training “geographic areas” also enumerated in the CFIUS rules, and discussed herein in Section I.

[4] “The Department of Defense will continue on an ongoing basis to assess its military installations and the geographic scope set under the rule to ensure appropriate application in light of national security considerations.” Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States, 85 Fed. Reg. 3,158, 3,160 (Jan. 17, 2020)

[5] Order of May 13, 2024, Regarding the Acquisition of Certain Real Property of Cheyenne Leads by MineOne Cloud Computing Investment I L.P., 89 Fed. Reg at 43,301

[6] Note that CFIUS’s real estate rules do provide for certain “excepted investors” from the United Kingdom, Canada, Australia, and New Zealand.

[7] See Micah Brown & Nick Spellman, “Statutes Regulating Ownership of Agricultural Land,” The Nat’l Agric. L. Center, https://nationalaglawcenter.org/state-compilations/aglandownership (last updated Nov. 30, 2023); April J. Anderson et al., Cong. Rsch. Serv., LSB11013, State Regulation of Foreign Ownership of U.S. Land: January to June 2023 (2023).

The following Gibson Dunn lawyers prepared this update: Michelle Weinbaum, Chris Mullen, Mason Gauch, Stephenie Gosnell Handler, and David Wolber.

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

United States:
Ronald Kirk – Co-Chair, Dallas (+1 214.698.3295, rkirk@gibsondunn.com)
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202.887.3547, asmith@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, shandler@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, ctimura@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202.887.3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213.229.7269, nhanna@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202.955.8685, cmbrown@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202.887.3509, ssewall@gibsondunn.com)
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, mweinbaum@gibsondunn.com)
Mason Gauch – Houston (+1 346.718.6723, mgauch@gibsondunn.com)
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, cmullen@gibsondunn.com)
Sarah L. Pongrace – New York (+1 212.351.3972, spongrace@gibsondunn.com)
Anna Searcey – Washington, D.C. (+1 202.887.3655, asearcey@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202.955.8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, stoussaint@gibsondunn.com)
Claire Yi – New York (+1 212.351.2603, cyi@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, szhang@gibsondunn.com)

Asia:
Kelly Austin – Hong Kong/Denver (+1 303.298.5980, kaustin@gibsondunn.com)
David A. Wolber – Hong Kong (+852 2214 3764, dwolber@gibsondunn.com)
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing (+86 10 6502 8534, qyue@gibsondunn.com)
Dharak Bhavsar – Hong Kong (+852 2214 3755, dbhavsar@gibsondunn.com)
Felicia Chen – Hong Kong (+852 2214 3728, fchen@gibsondunn.com)
Arnold Pun – Hong Kong (+852 2214 3838, apun@gibsondunn.com)

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Patrick Doris – London (+44 207 071 4276, pdoris@gibsondunn.com)
Michelle M. Kirschner – London (+44 20 7071 4212, mkirschner@gibsondunn.com)
Penny Madden KC – London (+44 20 7071 4226, pmadden@gibsondunn.com)
Irene Polieri – London (+44 20 7071 4199, ipolieri@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Nikita Malevanny – Munich (+49 89 189 33 224, nmalevanny@gibsondunn.com)
Melina Kronester – Munich (+49 89 189 33 225, mkronester@gibsondunn.com)
Vanessa Ludwig – Frankfurt (+49 69 247 411 531, vludwig@gibsondunn.com)

Gibson, Dunn & Crutcher LLP announces release of Edition 14 of Lexology In-Depth: International Investigations.

Gibson, Dunn & Crutcher LLP is pleased to announce with Lexology the release of International Investigations. Gibson Dunn partner Stephanie L. Brooker was the Contributing Editor of the publication, which explores the scope of corporate and individual liability and the regulatory and criminal investigations process in the United States and abroad. The Treatise is FREE for a limited time to access HERE.

Ms. Brooker, partners M. Kendall Day and David C. Ware, of counsel Bryan H. Parr, and associate Jack Strachan jointly authored the United States chapter.

You can view this informative and comprehensive treatise via the links below:

CLICK HERE to view Lexology In-Depth: International Investigations

CLICK HERE to view the United States chapter

The following Gibson Dunn lawyers contributed to this publication: Stephanie L. Brooker, M. Kendall Day, David C. Ware, Bryan H. Parr, Jack Strachan.

Gibson Dunn has deep experience with investigations, corporate compliance, and white collar defense.

About the Authors:

Stephanie Brooker, a partner in the Washington, D.C. office of Gibson Dunn, is Co-Chair of the firm’s Global White Collar Defense and Investigations, Anti-Money Laundering, and Financial Institutions Practice Groups. Stephanie served as a prosecutor at DOJ, including serving as Chief of the Asset Forfeiture and Money Laundering Section, investigating a broad range of white-collar and other federal criminal matters, and trying 32 criminal trials. She also served as the Director of the Enforcement Division and Chief of Staff at FinCEN, the lead U.S. anti-money laundering regulator and enforcement agency. Stephanie has been consistently recognized by Chambers USA for enforcement defense and BSA/AML compliance as an “excellent attorney,” who clients rely on for “important and complex” matters, and for providing “excellent service and terrific lawyering.” She has also been named a National Law Journal White Collar Trailblazer and a Global Investigations Review Top 100 Women in Investigations.

Kendall Day is a nationally recognized white-collar partner in the Washington, D.C. office of Gibson Dunn, where he is Co-Chair of Gibson Dunn’s Global Fintech and Digital Assets Practice Group, Co-Chair of the firm’s Financial Institutions Practice Group, co-leads the firm’s Anti-Money Laundering practice, and is a member of the White Collar Defense and Investigations and Crisis Management Practice Groups. Kendall is recognized as a leading White Collar Attorney in the District of Columbia by Chambers USA – America’s Leading Business Lawyers. Most recently, Kendall was recognized in Best Lawyers 2024 for white-collar criminal defense. Prior to joining Gibson Dunn, Kendall had a distinguished 15-year career as a white-collar prosecutor with DOJ, rising to the highest career position in DOJ’s Criminal Division as an Acting Deputy Assistant Attorney General (“DAAG”). As a DAAG, Kendall had responsibility for approximately 200 prosecutors and other professionals. Kendall also previously served as Chief and Principal Deputy Chief of the Money Laundering and Asset Recovery Section. In these various leadership positions, from 2013 until 2018, Kendall supervised investigations and prosecutions of many of the country’s most significant and high-profile cases involving allegations of corporate and financial misconduct. He also exercised nationwide supervisory authority over DOJ’s money laundering program, particularly any BSA and money-laundering charges, DPAs and non-prosecution agreements involving financial institutions.

David C. Ware is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He is a member of the firm’s Securities Enforcement, Securities Litigation, Accounting Firm Advisory and Defense, and White Collar Defense and Investigations Practice Groups. David’s practice focuses on government investigations and enforcement actions, internal investigations, and litigation in the areas of auditing and accounting, securities fraud, and related aspects of federal regulatory and criminal law. He also counsels clients concerning compliance with SEC and PCAOB rules and standards. Prior to joining Gibson Dunn, Mr. Ware spent nearly six years at the PCAOB’s Division of Enforcement and Investigations, rising to the position of Associate Director. While at the PCAOB, David was responsible for numerous complex and high-profile investigations, including acting as the lead attorney in some of the PCAOB’s most significant enforcement actions.

Bryan H. Parr is of counsel in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the White Collar Defense and Investigations, Anti-Corruption & FCPA, and Litigation Practice Groups. His practice focuses on white-collar defense and regulatory compliance matters around the world. Bryan has extensive expertise in government and corporate investigations, including those involving the Foreign Corrupt Practices Act (FCPA) and anticorruption. He has defended a range of companies and individuals in U.S. Department of Justice (DOJ), SEC, and CFTC enforcement actions, as well as in litigation in federal courts and in commercial arbitrations. In his FCPA practice, Bryan regularly guides companies on creating and implementing effective compliance programs, successfully navigating compliance monitorships, and conducting appropriate M&A-related FCPA diligence and integration. He is recognized as a leading corporate crime and investigations lawyer by Chambers & Partners Latin America for his significant activity and experience in the region. He is proficient in Portuguese, French, and Spanish, and works professionally in all three languages.

Jack Strachan is an associate in the Washington, D.C. office of Gibson, Dunn & Crutcher. He is a member of the firm’s Corporate Department. Jack earned his law degree from the University of Michigan Law School, as well as a B.A. in Economics and Philosophy from the University of Michigan.

Contact Information:

For assistance navigating these issues, please contact the Gibson Dunn lawyer with whom you usually work, the leaders or members of the firm’s White Collar Defense and Investigations practice group, or the authors:

Stephanie L. Brooker – Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202.955.8220, kday@gibsondunn.com)
David C. Ware – Washington, D.C. (+1 202.887.3652, dware@gibsondunn.com)
Bryan H. Parr – Washington, D.C. (+1 202.777.9560, bparr@gibsondunn.com)
Jack Strachan – Washington, D.C. (+1 202.777.9445, jstrachan@gibsondunn.com)

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

New Developments

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

New Developments Outside the U.S.

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

New Industry-Led Developments

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

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

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, jsteiner@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Adam Lapidus – New York (212.351.3869, alapidus@gibsondunn.com )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

William R. Hallatt , Hong Kong (+852 2214 3836, whallatt@gibsondunn.com )

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki , New York (212.351.4028, mtakagaki@gibsondunn.com )

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

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

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

Background

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

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

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

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

The Court’s Opinion

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

What It Means:

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

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

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

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

Administrative Law and Regulatory:
Eugene Scalia – Washington, D.C. (+1 202.955.8673, escalia@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, hwalker@gibsondunn.com)

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

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

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

1. Implementing Workforce Changes(view details)

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

2. Enforcement of UK Employment Law (view details)

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

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

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

4. Working Arrangements (view details)

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

5. Employment Status (view details)

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

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

APPENDIX

Implementing Workforce Changes

Unfair Dismissal

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

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

Dismissal and Re-engagement

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

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

Redundancy and TUPE

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

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

Enforcement of UK Employment Law

Establishing a Single Enforcement Body

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

Employment Tribunal Claims

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

Collective Grievances

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

Discrimination, Diversity, Equity and Inclusion

Pay Gap Reporting and Action Plans

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

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

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

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

Workplace Harassment and Whistleblowing

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

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

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

Family Leave Rights

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

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

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

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

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

Working Arrangements

Engagement of Casual and/or Low Paid Workers

The Labour government has committed to:

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

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

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

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

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

Right to Disconnect and Work Autonomously

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

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

Right to Flexible Working

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

Trade Unions

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

Employment Status

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

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

Further updates

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

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

James A. Cox (+44 20 7071 4250, jcox@gibsondunn.com)

Georgia Derbyshire (+44 20 7071 4013, gderbyshire@gibsondunn.com)

Olivia Sadler (+44 20 7071 4950, osadler@gibsondunn.com)

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

Key Developments

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

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

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

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

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

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

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

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

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

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

Media Coverage and Commentary:

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

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

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

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

Case Updates:

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

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

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

2. Employment discrimination and related claims:

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

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, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, mdenerstein@gibsondunn.com)

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, zswilliams@gibsondunn.com)

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, msenger@gibsondunn.com)

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, bevanson@gibsondunn.com)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

United States:
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Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, shandler@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, ctimura@gibsondunn.com)
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Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, mweinbaum@gibsondunn.com)
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, cmullen@gibsondunn.com)
Sarah L. Pongrace – New York (+1 212.351.3972, spongrace@gibsondunn.com)
Anna Searcey – Washington, D.C. (+1 202.887.3655, asearcey@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202.955.8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, stoussaint@gibsondunn.com)
Claire Yi – New York (+1 212.351.2603, cyi@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, szhang@gibsondunn.com)

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

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

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

Background

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

Key Changes to Prevailing Wage Requirements

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

Timing of Wage Determination

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

Curing Failures to Pay Appropriate Wages

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

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

Key Changes to Apprenticeship Requirements

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

Applicability After Facility is Placed in Service

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

Threshold Number of Construction Employees

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

Requests to Registered Apprenticeship Programs

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

Key Changes to Recordkeeping Requirements

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

Personal Identifying Information

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

Options for Compliance

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

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

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

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

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

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

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

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

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

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

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

Tax:
Michael Q. Cannon – Dallas (+1 214.698.3232, mcannon@gibsondunn.com)
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Blake Hoerster– Dallas (+1 214.698.3180, bhoerster@gibsondunn.com)
Duncan Hamilton– Dallas (+1 214.698.3135, dhamilton@gibsondunn.com)
Nathan Sauers – Houston (+1 346.718.6715, nsauers@gibsondunn.com)

Cleantech:
John T. Gaffney – New York (+1 212.351.2626, jgaffney@gibsondunn.com)
Daniel S. Alterbaum – New York (+1 212.351.4084, dalterbaum@gibsondunn.com)
Adam Whitehouse – Houston (+1 346.718.6696, awhitehouse@gibsondunn.com)

Power and Renewables:
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Nicholas H. Politan, Jr. – New York (+1 212.351.2616, npolitan@gibsondunn.com)

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

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

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

JUDGE JONES, writing for the Court

Background:

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

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

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

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

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

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

Issue:

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

Court’s Holding:

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

What It Means:

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

The Court’s opinion is available here.

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

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Related Practice: Appellate and Constitutional Law

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

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

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

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

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

JUSTICE BARRETT, writing for the Court

Background:

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

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

Issue:

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

Court’s Holding:

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

What It Means:

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

The Court’s opinion is available here.

Appellate and Constitutional Law

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: Administrative Law and Regulatory Practice

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Helgi C. Walker
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hwalker@gibsondunn.com

Stuart F. Delery
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sdelery@gibsondunn.com

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

City of Grants Pass v. Johnson, No. 23-175 – Decided June 28, 2024

Today, the Supreme Court held 6–3 that the constitutional prohibition on “cruel and unusual punishments” does not forbid low-level fines and jail terms for camping on public property.

“At bottom, the question this case presents is whether the Eighth Amendment grants federal judges primary responsibility for assessing th[e] causes [of homelessness] and devising those responses. It does not.”

Justice Gorsuch, writing for the Court

Background:

The Eighth Amendment provides that “cruel and unusual punishments” shall not be “inflicted.” In Martin v. Boise, 920 F.3d 584 (9th Cir. 2019), the Ninth Circuit held that it would be cruel and unusual to impose any punishment, no matter how small, for sleeping on public property if a person has “no access to alternative shelter.” Id. at 615. Punishing a person for such “‘an involuntary act or condition,’” the Ninth Circuit reasoned, would be tantamount to punishing the “status” of homelessness. Id. at 616-617.

Shortly after Martin, plaintiffs sued Grants Pass, a small city in Oregon. The plaintiffs claimed that Grants Pass’s prohibitions against camping on public property violate the Cruel and Unusual Punishments Clause because the number of homeless people in the jurisdiction exceeds the number of shelter beds. Applying Martin,the district court certified a class of “involuntarily homeless” people in Grants Pass and granted the plaintiffs summary judgment. After the Ninth Circuit affirmed, Grants Pass’s petition for rehearing en banc was denied by a 14-to-13 margin, with the dissenters joining five opinions criticizing Martin and its extension in this case. The Supreme Court then granted a cert petition to decide whether the Ninth Circuit has correctly interpreted the Eighth Amendment.

Issue:

Does the enforcement of generally applicable laws regulating camping on public property constitute “cruel and unusual punishment” prohibited by the Eighth Amendment?

Court’s Holding:

Low-level fines and jail terms are not cruel and unusual punishments for public camping, even as applied to someone who is involuntarily homeless.

What It Means:

The Supreme Court began with a discussion of the practical implications of the Ninth Circuit’s Martin rule. Although the Court recognized that “the Ninth Circuit’s intervention in Martin was well-intended,” the Court emphasized that many cities use public-camping ordinances “as one important tool among others to encourage individuals experiencing homelessness to accept services and to help ensure safe and accessible sidewalks and public spaces.” The Court noted evidence that acceptance of service decreased under Martin—for example, shelter utilization had dropped by 40% in Grants Pass since the classwide injunction.
The Supreme Court held that low-level fines and jail terms are ordinary punishments that are neither cruel nor unusual under the Eighth Amendment. The Court also rejected the plaintiffs’ reliance on Robinson v. California, 370 U.S. 660 (1962), which held that the Eighth Amendment prohibited the government from making the “status” of being an addict a crime, regardless of the punishment. As the Court explained, public camping, even when purportedly compelled by one’s circumstances, is conduct rather than status under Robinson and therefore subject to the standard Eighth Amendment analysis.
The Supreme Court also reasoned that the Eighth Amendment should not be distorted to address questions that other constitutional provisions and common-law doctrines address. For example, the Court identified the Due Process Clause as the traditional basis for constitutional arguments about criminal responsibility and the defense of “necessity” as the traditional state-law doctrine potentially available to those jailed or fined for doing something (like public camping) that they had no choice but to do. The Eighth Amendment, the Court explained, simply does not provide any guideposts to decide when cities can regulate public camping.
The Court highlighted the broad coalition of hundreds of amici that supported review of Grants Pass’s case. As the Court observed, almost half the States, California Governor Newsom, San Francisco Mayor London Breed, and the cities of Anchorage, Honolulu, Los Angeles, Phoenix, Portland, and Seattle, among many others, criticized the Ninth Circuit for tying governments’ hands in responding to the urgent homelessness crisis. The Court’s decision returns the “full panoply of tools in the policy toolbox” to “the people and their elected representatives.”

Gibson Dunn represented the City of Grants Pass as Petitioner.

The Court’s opinion is available here.

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
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Related Practice: Litigation

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Related Practice: Real Estate

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This alert was prepared by associates Patrick Fuster, Daniel Adler, Lefteri Christos, and Karl Kaellenius.