Client Alert Archives

We are pleased to provide you with the November edition of Gibson Dunn’s digital assets regular update. This update covers recent legal news regarding all types of digital assets, including cryptocurrencies, stablecoins, CBDCs, and NFTs, as well as other blockchain and Web3 technologies. Thank you for your interest.

ENFORCEMENT ACTIONS

UNITED STATES

FTX Co-Founder Avoids Prison After Cooperating in Bankman-Fried Case and Providing Technical Information
On November 20, U.S. District Judge Lewis Kaplan sentenced Zixiao “Gary” Wang, the co-founder and Chief Technology Officer of bankrupt FTX, to time-served and three years of supervised release, citing his quick decision to cooperate with authorities and ongoing assistance to government authorities. Judge Kaplan also ordered Wang to forfeit more than $11 billion. Wang previously pleaded guilty to conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud, and conspiracy to commit securities fraud. Law360.
Defendants Sentenced to Terms of Imprisonment for Hacking Cryptocurrency Exchange and Money Laundering
On November 14, U.S. District Judge Colleen Kollar-Kotelly sentenced Ilya Lichtenstein to five years in prison and three years of supervised release for his role in laundering nearly 120,000 Bitcoin he stole from Bitfinex, a cryptocurrency exchange. The sentence was based in part on Lichtenstein’s “early and fulsome cooperation.” On November 18, Judge Kollar-Kotelly sentenced Lichtenstein’s wife, Heather Morgan (also known as “Razzlekhan”), to 18 months’ imprisonment for her role in the money laundering conspiracy. DOJ Press Release; Law360; The Block.
Federal Prosecutors Seek to Forfeit Digital Assets Linked to Alleged Bribes from Bankman-Fried to Chinese Officials
On November 12, federal prosecutors filed a civil forfeiture complaint in the Southern District of New York, seeking the forfeiture of millions of dollars’ worth of digital assets alleged to be linked to bribes paid by former FTX and Alameda Research CEO, Sam Bankman-Fried, to Chinese officials. Bankman-Fried arranged for these bribes to unfreeze approximately $1 billion in digital assets frozen on two Chinese exchanges. According to the complaint, Bankman-Fried directed transfers of more than $40 million in cryptocurrency to Chinese officials; after the first alleged transfer, the digital assets were no longer frozen. Complaint; The Block; Law360.
Operator of Cryptocurrency Money Laundering Service Sentenced to More Than 12 Years in Prison
On November 8, U.S. District Judge Randolph D. Moss sentenced Roman Sterlingov, the operator of Bitcoin Fog, to 150 months in prison for conspiring to commit money laundering, money laundering, and operating an unlicensed money transmitting business. “Bitcoin Fog” was a darknet site that made it more difficult to trace crypto transactions on public blockchains to identifiable entities and persons. The site was allegedly used to launder the proceeds of various criminal conduct, including narcotics trafficking and child sexual abuse material. The sentence includes a $395 million forfeiture order. Sterlingov has filed a notice of appeal. DOJ Press Release; Law360.
China and St. Kitts and Nevis Dual Citizen Pleads Guilty in $73 Million ‘Pig Butchering’ Crypto Scam
On November 12, Daren Li, a dual citizen of China and St. Kitts and Nevis, pleaded guilty to one count of conspiracy to commit money laundering in a $73 million cryptocurrency investment scam. Regulators, including the Commodity Futures Trading Commission, have raised concerns over similar “pig butchering” scams in which fraudsters build trust with their victims, induce them to send funds on false pretenses, and then abscond with the victims’ investments. The DOJ said that Li instructed co-conspirators to open U.S. bank accounts on behalf of shell companies and then monitored the conversion of victim funds to a stablecoin, which would subsequently be distributed to crypto wallets controlled by Li and other conspirators. DOJ Press Release; The Block.
BIT Mining Settles with DOJ for FCPA Violations and Pays $10 Million Fine
On November 19, BIT Mining, which operates a large cryptocurrency mining data center in Ohio and sells retail mining equipment, admitted guilt and agreed to pay $10 million for violating the Foreign Corrupt Practices Act (FCPA) for making illegal payments to Japanese officials in an attempt to open a lucrative resort and casino in Japan. In addition, a federal grand jury in the District of New Jersey returned an indictment against Bit Mining’s CEO, Zengming Pan, a Chinese national, charging him with four separate counts of violating the FCPA. The company has agreed to cooperate in ongoing and future investigations. DOJ Press Release; Be(In) Crypto.

INTERNATIONAL

United Kingdom Authorities Secure Convictions for Crypto-Investment Fraud
On November 7, the United Kingdom’s Financial Conduct Authority announced that it secured convictions against two individuals for engaging in a crypto-investment fraud. The individuals defrauded at least 65 investors out of £1.5 million ($1.9 million) by cold-calling consumers and operating a professional-looking website that offered large returns for fake crypto investments. Press Release; Law360.
South Korea Arrests 215 Individuals in Alleged $232 Million Crypto Fraud Scheme
On November 13, South Korean authorities arrested 215 individuals linked to a cryptocurrency investment scheme alleged to have defrauded tens of thousands of victims and caused losses exceeding 325 billion South Korean won (approximately $232 million). The scam took place between December 2021 and March 2023, with the individuals allegedly promising high returns in exchange for participation in private sale and early crypto investment opportunities. The funds were directed into 28 different kinds of crypto assets, 6 of which were self-issued by the defendants, listed on foreign exchanges, and bolstered by paid market-making teams that worked to manipulate their prices. CoinDesk; The Block.
Upbit Being Investigated for KYC Compliance Failures by South Korean Financial Authorities
On November 15, local reports revealed that Upbit, a leading South Korean crypto exchange, is being investigated for failure to implement measures to properly identify their customers as mandated by South Korean law governing Know Your Customer requirements. The South Korean Financial Intelligent Unit discovered the failure to implement adequate measures during a routine business license renewal, and the fines stipulated by law for the 550,000 potential violations identified could theoretically reach $39 billion. The Block; CryptoSlate.

REGULATION AND LEGISLATION

UNITED STATES

CFPB Finalizes Rule on Oversight of Digital Payment Apps and Excludes Digital Currency Transactions from its Reach
On November 21, the Consumer Financial Protection Bureau finalized a rule to increase oversight of nonbank companies that offer digital funds transfers and payment wallet apps and handle more than 50 million transactions per year, when the proposed rule had contemplated a much lower threshold of 5 million annual transactions. The final rule subjects “nonbank covered persons that are larger participants in a market for ‘general-use digital consumer payment applications’” to CFPB supervision and periodic examination. Importantly, the CFPB noted that given the evolving market for digital currencies, it would limit the final rule’s scope to transactions conducted in U.S. dollars, which excludes cryptocurrencies. Press Release; Law360.
Pennsylvania Lawmakers Propose Legislation Allowing for State Treasurer to Invest in Crypto Reserve
On November 14, Pennsylvania legislators introduced a bill, titled the Pennsylvania “Bitcoin Strategic Reserve Act,” that would allow the state treasurer to invest Bitcoin and other digital assets. The bill’s sponsor, Representative Mike Cabell, stated that investing in a Bitcoin reserve could be a “hedge against inflation” and assist the state in maintaining a “well-diversified and resilient portfolio.” The Block.
Detroit Approves Use of Cryptocurrency to Pay Taxes
On November 7, Detroit’s Treasury Office announced that city residents will have the option to pay taxes and fees with cryptocurrency. Detroit will accept only Bitcoin, Ether, Bitcoin Cash, Litecoin, and PUSD. The payment method will become available in mid-2025. Cointelegraph; CoinDesk.

INTERNATIONAL

Singapore Publishes Plans to Advance Commercialization of Tokenized Assets
On November 4, the Monetary Authority of Singapore announced two industry frameworks to facilitate the commercial acceptance and implementation of asset tokenization. The “Guardian Fixed Income Framework” provides industry guidance on implementing tokenization in debt capital markets and accelerating the adoption of tokenized fixed income assets. The “Guardian Funds Framework” sets forth recommendations for best practices for tokenized funds. Both frameworks were developed by Project Guardian, an industry group composed of financial institutions, associations, and international policymakers. Press Release; The Block.
Singapore Unveils SGD Testnet to Drive Innovation in Digital Asset Settlement
On November 4, Mr. Leong Sing Chiong, Deputy Managing Director (Markets & Development) of the Monetary Authority of Singapore (MAS), announced at the Layer One Summit the launch of the Singapore Dollar (SGD) Testnet. This initiative aims to provide financial institutions with access to a shared settlement asset for market testing. The SGD Testnet will feature a wholesale CBDC settlement facility, programmable transactions for tokenized assets, and interoperability with existing financial market infrastructures. MAS has initial participants, and is encouraging more institutions to propose innovative use cases. The Testnet is part of MAS’s broader digital asset initiatives, including Project Guardian and Project Orchid, to enhance Singapore’s digital money ecosystem. Speech.
Hong Kong Regulator Warns Crypto Firms Against the Misuse of the Word “Bank”
On November 15, the Hong Kong Monetary Authority (HKMA) published a press release to remind crypto firms that they should not use the word the word “bank” in the descriptions of their products or services if they are not a licensed bank in Hong Kong. Under the Banking Ordinance, it is an offence for any person to use the word “bank” in the name or description under which the person carries on business, or makes any representation that the person is a bank or is carrying on banking business in Hong Kong, other than a licensed bank in Hong Kong. Press Release.
New Zealand Announces Tax Work Priorities Aimed at Economic Growth and Includes Reporting by Crypto Companies to Tax Authorities
On November 13, New Zealand’s Inland Revenue Department announced priorities for the country’s tax regime, such as the proposed implementation of the Organization for Economic Cooperation and Development’s framework that requires crypto-asset service providers to automatically exchange tax information on transactions with the jurisdictions of residence of taxpayers. Law360.
Italy Considers Softening Crypto Tax Hike to 28% Instead of 42%
On November 12, news outlets reported that the Italian government under Prime Minister Giorgia Meloni plans to accept a proposal from The League, a junior partner in Meloni’s coalition, to reduce an anticipated tax increase on crypto trades, originally proposed to be set at 42%, to 28%. Italy currently levies a maximum of 26% on crypto trades. Bloomberg; The Block.
Russian Government Introduces Amendments to Tax Income from Crypto Trading and Mining
On November 18, Russia’s Ministry of Finance approved draft amendments to a bill that would introduce a 15% tax on income derived from crypto transactions and mining and classify cryptocurrencies as property for tax purposes. The Block; Yahoo!.

CIVIL LITIGATION

UNITED STATES

Federal Judge Vacates SEC’s Dealer Rule
On November 21, U.S. District Judge Reed O’Connor issued two orders vacating the SEC’s Dealer Rule in two separate cases brought against the SEC—one by investment trade groups and another by the Crypto Freedom Alliance of Texas and the Blockchain Association. The Dealer Rule purported to expand the definition of “dealer” under the Securities Exchange Act of 1934, to cover activities for one’s own investing and trading objectives as opposed to the purchase and sales of securities in service of customers. Judge O’Connor reasoned that the Rule “impermissibly exceeds the SEC’s statutory authority” because it “de facto removes the distinction between ‘trader’ and ‘dealer’ as they have commonly been defined for nearly 100 years.” Order; Reuters.
Attorneys General Sue SEC for Alleged Regulatory Overreach
On November 14, a group of 18 attorneys general and the DeFi Education Fund sued the SEC in the Eastern District of Kentucky for enforcement practices that allegedly violate “principles of federalism and separation of powers” by interfering with state regulation of digital assets. The complaint pushes back against the conclusion that crypto assets are uniformly considered securities under the Howey test. The plaintiffs seek a declaration that a “digital asset is not an investment contract” under federal law and an order enjoining the defendants “from bringing enforcement actions premised on the failure of digital asset platforms facilitating such secondary transactions to register as securities exchanges, dealers, brokers, or clearing agencies.” Complaint; Law360; The Block.
Bankrupt FTX and its Former Crypto Trading Affiliate Alameda Research Advance Flurry of Litigation to Claw Back Assets

Noteworthy litigation activity includes

Alameda’s Suit Against Crypto.com for Return of $11.4 Million in Assets
On November 7, Alameda filed suit in Delaware bankruptcy court against crypto exchange Crypto.com, seeking the return of $11.4 million in assets currently held on the platform. The complaint alleges that, after FTX commenced bankruptcy, Crypto.com locked Alameda’s account, preventing the debtors from recovering these assets, and Crypto.com failed to respond to requests to return the assets. Law360.
Alameda’s Suit Against Waves Founder for Return of $90 Million in Assets
On November 10, Alameda filed a lawsuit against Aleksandr Ivanov, the founder of Waves and its affiliated entities, to claw back at least $90 million of assets. Alameda previously deposited the assets with Vires.Finance, a liquidity platform operating on Waves, and claimed that Ivanov had since orchestrated a series of transactions that artificially inflated the value of Waves, while at the same time siphoning funds from Vires. The Block.
FTX’s Complaint Alleging Humpy the Whale Cost $1 Billion in Losses
On November 8, FTX’s estate sued crypto-trader Humpy the Whale, who they named as “Nawaaz Mohammad Meerun,” in Delaware Bankruptcy Court for allegedly having “orchestrated a series of massive market manipulation schemes and defrauded hundreds of millions of dollars from FTX.” CoinDesk
FTX’s Suit Against Binance and Its Former CEO for $1.8 BillionOn November 10, FTX’s estate sued Binance and former Binance CEO Changpeng “CZ” Zhao, seeking the return of $1.76 billion transferred cryptocurrency arising out of FTX’s use of customer deposits to repurchase shares in FTX. Responding to the suit, a Binance spokesperson said “[t]he claims are meritless, and we will vigorously defend ourselves.” CoinDesk; Law360.
Class-Action Lawsuit Against Elon Musk over Dogecoin Dropped
On November 15, a class of cryptocurrency investors withdrew their appeal of the dismissal of their Dogecoin case against Elon Musk. The plaintiffs had alleged, among other things, that Musk timed trades of Dogecoin in relation to his public statements and appearances related to the digital asset. The district court dismissed the lawsuit on August 29 of this year, holding that no reasonable investor could rely on Musk’s public statements about Dogecoin. Reuters; The Block.
Federal Judge Allows Claims Against Lido DAO and Some Investors to Proceed
On November 18, U.S. District Judge Vince Chabria declined to dismiss a suit against Lido DAO and three institutional investors, which was brought for losses incurred by the Plaintiff after purchasing the DAO’s tokens and claimed that Lido DAO violated the Securities Act by failing to register the tokens with the SEC. Judge Chabria held that: Lido is a general partnership under California law and thus capable of being sued; the complaint adequately alleged that the institutional investors, as members of the general partnership, could be held liable for the partnership’s activities; and that Lido “solicited” the purchase of the tokens—despite their purchase on a secondary market. Moreover, Judge Chabria held that liability incurred under Section 12(a)(1) of the Securities Act is not limited to sales made in a “public offering.” Order.
Crypto Company Celsius Reports Recovery of $92 Million
On November 13, Celsius Network’s estate representatives told a New York bankruptcy judge they recovered $92 million in litigation proceeds and are closing in on full distributions to customers. Celsius filed for bankruptcy in July 2022, a month after freezing customer withdrawals, effectively trapping $4.7 billion in digital assets on the Celsius platform. The litigation proceeds were gained through settlements of suits seeking to claw back payments made by Celsius in the 90 days before the Chapter 11 filing and settlements of ’Celsius’s claims in the Chapter 11 case of crypto miner Core Scientific. Law360.

SPEAKER’S CORNER

UNITED STATES

SEC Chair Gary Gensler to Leave SEC
On November 21, SEC Chair Gary Gensler announced that he will be leaving the commission on January 20. President-elect Trump had promised during his campaign to replace Gensler as SEC Chair, although Gensler would have been entitled to remain as an SEC commissioner. After taking office in April 2021, Gensler oversaw several rulemakings and enforcement actions affecting the crypto industry and the first approval of spot bitcoin and ether exchange-traded products. President-elect Trump has not yet named his nominee to succeed Gensler as SEC chair. Law360; CoinDesk.

OTHER NOTABLE NEWS

Canary Capital Files for First-Ever Hedera HBAR Spot ETF with SEC
On November 12, Canary Capital filed for a Hedera spot exchange-traded fund with the SEC—the first of its kind. HBAR is the native cryptocurrency of the decentralized Hedera network, which uses the Hashgraph consensus algorithm. The filing indicates that the Canary HBAR ETF plans to hold only HBAR, without using other financial instruments. The S-1 filing does not name a custodian or administrator. The Block.
Sen. Warren to Become Top Democrat on the Senate Banking Committee Amid Scrutiny from Crypto Industry
On November 13, Sen. Elizabeth Warren, known to be critical of the crypto industry, confirmed that she will take the spot as top Democrat on the influential Senate Banking Committee after current Chair Sherrod Brown (D-OH) lost his Senate reelection bid to Bernie Moreno. The Committee has jurisdiction over key agencies, including the SEC. Sen. Warren is pushing for the crypto industry to adhere to anti-money laundering rules and supports a bill that would extend Bank Secrecy Act requirements, including Know-Your-Customer rules, to miners, validators, and wallet providers. The Block; CoinDesk.
Congressional Results Stir Optimism in the Crypto Industry
Throughout president-elect Trump’s campaign he vowed to replace the SEC leader Gary Gensler with a more crypto-friendly SEC Chair and establish a bitcoin and crypto presidential advisory council. However, he was not the only candidate to have won in November holding crypto-friendly policies. Industry leaders anticipate legislative and policy developments in the digital asset space given the election results. NPR; Politico.

The following Gibson Dunn lawyers contributed to this issue: Jason Cabral, Kendall Day, Jeff Steiner, Sara Weed, Chris Jones, Sam Raymond, Nick Harper, Soumya Kandukuri*, Nicole Martinez, and John Seidman.

FinTech and Digital Assets Group Leaders / Members:

Ashlie Beringer, Palo Alto (+1 650.849.5327, [email protected])

Michael D. Bopp, Washington, D.C. (+1 202.955.8256, [email protected]

Stephanie L. Brooker, Washington, D.C. (+1 202.887.3502, [email protected])

Jason J. Cabral, New York (+1 212.351.6267, [email protected])

Ella Alves Capone, Washington, D.C. (+1 202.887.3511, [email protected])

M. Kendall Day, Washington, D.C. (+1 202.955.8220, [email protected])

Michael J. Desmond, Los Angeles/Washington, D.C. (+1 213.229.7531, [email protected])

Sébastien Evrard, Hong Kong (+852 2214 3798, [email protected])

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

Martin A. Hewett, Washington, D.C. (+1 202.955.8207, [email protected])

Sameera Kimatrai, Dubai (+971 4 318 4616, [email protected])

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

Stewart McDowell, San Francisco (+1 415.393.8322, [email protected])

Mark K. Schonfeld, New York (+1 212.351.2433, [email protected])

Orin Snyder, New York (+1 212.351.2400, [email protected])

Ro Spaziani, New York (+1 212.351.6255, [email protected])

Jeffrey L. Steiner, Washington, D.C. (+1 202.887.3632, [email protected])

Eric D. Vandevelde, Los Angeles (+1 213.229.7186, [email protected])

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

Sara K. Weed, Washington, D.C. (+1 202.955.8507, [email protected])

*Soumya Kandukuri, an associate in the Palo Alto office, is not yet admitted to practice law.

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.

This update explores how the concept of loss of profit in contractual liability has evolved in light of the enactment the Saudi Civil Transactions Law.

Recent developments, including the enactment of the Civil Transactions Law,[1] have clarified certain aspects of recoverable damages in contractual liability, particularly regarding the permissibility of loss of profit claims under Saudi law. This article explores how the concept of loss of profit in contractual liability has evolved in light of the enactment of the Civil Transactions Law.

A. Historical Stance on Loss of Profit Claims

Previously, Saudi courts generally excluded the recovery of loss of profits in breach of contract claims. This was based on the prevailing Islamic Shari’a principle that compensation must be certain, rather than speculative. Courts viewed claims for lost profits as speculative, and thus were routinely rejected.[2] However, there have been some court decisions that granted loss of profit claims, although these were exceptional and not part of a consistent judicial trend.[3]

While these outlier court decisions did not clearly articulate a consistent standard for when loss of profits can be compensated, they referred to Islamic Shari’a principles that suggest loss of profits may be compensated where the loss is ‘certain.’ Article 5 of Resolution No. 109/3/12 of the International Islamic Fiqh Academy asserts that “…the damages that may be compensated include actual financial damages, true losses, and certain loss of profit.” The key element here is the element of “certainty.” Although the courts have not articulated a clear threshold for certainty in these decisions, they implied that the loss of profit must be capable of being verified to avoid speculation.

B. Interpretation of Loss of Profit Claims Under the Civil Transactions Law

In June 2023, the Civil Transactions Law was promulgated by Royal Decree No. 191/D, dated 29/11/1444H. The enactment of the Civil Transactions Law has clarified the legal treatment of loss of profit claims, expressly permitting them.

However, the Civil Transactions Law does not provide specific criteria or standards for assessing such claims. This gave rise to uncertainty regarding how Saudi courts will approach claims for lost profits in breach of contract claims under the Civil Transactions Law. Therefore, claims for lost profits will most likely be assessed according to the general rules of contractual liability under the Civil Transactions Law. These include:

Contractual liability must be established: All elements of contractual liability, namely breach, damages, and causation, must be proven by the claimant.[4] Saudi courts have upheld this rule in multiple judgments, ensuring that a breach of contract claim is only successful when all three elements are satisfactorily established.[5]

Quantum must be proven: Establishing the occurrence of loss in not enough. The claimant must also prove quantum. In straightforward cases, such as those involving documentary evidence like invoices, proving the quantum of damages can be a relatively simple process. However, in more complex cases, expert evidence is typically required to establish the quantum of damages. This has been the standard practice in Saudi courts.

Recoverable losses must be typically foreseeable: If compensation is not specified in the contract, the court will determine it. If the obligation arises from the contract and there is no fraud or gross negligence, damages are limited to those damages that are foreseeable at the time of the contract.[6]

The loss must be a natural consequence of the breach: As a general rule, recoverable damages include moral and material damages naturally arising from the breach, including loss of profit. The Civil Transactions Law uses an objective standard to determine this. Damages are considered a natural consequence if the aggrieved party could not have avoided them by exercising reasonable care.[7]

The award must not enrich the creditor: The goal of awarding damages in breach of contract cases is to restore the non-defaulting party to the position they would have occupied if the contract had been properly performed. In other words, compensation is intended to “fully cover the loss” and restore the aggrieved party to their original position – or to the position they would have been in – had the loss not occurred.[8]

It is noteworthy that Article 1 of the Civil Transactions Law mandates that, in the absence of specific legal provisions, the courts must apply Islamic Shari’a principles that are consistent with the general provisions of the Civil Transactions Law. This means that, despite the Civil Transactions Law’s explicit allowance for loss of profit claims, the courts may still turn to Shari’a principles requiring certainty in such claims.

C. Conclusion

The treatment of loss of profit claims in Saudi Arabia has evolved with the introduction of the Civil Transactions Law, representing a significant shift in the legal landscape. While Saudi law now permits the recovery of lost profits, the courts have yet to establish clear guidelines on how such claims will be assessed. In the absence of detailed court decisions, the general rules of contractual liability will be controlling, and the courts may rely on Islamic Shari’a principles and the requirement for certainty in determining whether loss of profit claims are compensable. As the legal framework continues to develop, a clearer standard for these claims is likely to emerge.

[1] The Civil Transactions Law, promulgated by Royal Decree No. 191/D, dated 29/11/1444H.

[2] This position was upheld in multiple cases. See, for example, the Commercial Court of Appeal in Riyadh’s Decision No. 4655 of 1442H and the Court of Appeal in Mecca’s Decision No. 430329136 of 1443H.

[3] Court of Appeal of Board of Grievances’ Decision No. 2454 of 1437 and Jeddah Commercial Court of First Instance’s Decision No. 2393 of 1437H are examples of cases in which courts allowed claims for lost profits, citing Islamic Shari’a authorities that permit such claims if the loss is “certain.”

[4] Article 2(1) of the Evidence Law, promulgated by Royal Decree No. D/43, dated 25/5/1443: ((A claimant shall have the burden of proof and a defendant shall have the burden of defense.))

[5] For instance, the Commercial Court of Appeal in Riyadh’s Decision No. 4530050546 of 1445H: ((…if the three elements are satisfied, the claimant would be entitled to fair compensation for all damages; if one of those elements is not satisfied, the entitlement to compensation would terminate completely.))

[6] Article 180 of the Civil Transactions Law: ((If the amount of compensation is not specified in a contract or a legal provision, it shall be determined by the court in accordance with the provisions of Articles 136, 137, 138, and 139 of this Law. However, if the obligation arises from the contract, the debtor who has not committed any act of fraud or gross negligence shall be liable only for compensating harm that could have been anticipated at the time of contracting.))

[7] Article 137 of the Civil Transactions Law: ((The harm for which a person is liable for compensation shall be determined according to the aggrieved party’s loss, whether the loss is incurred or in the form of lost profits, if such loss is a natural result of the harmful act. Such loss shall be deemed a natural result of the harmful act if the aggrieved party is unable to avoid such harm by exercising the level of care a reasonable person would exercise under similar circumstances.))

[8] Article 136 of the Civil Transactions Law: ((Compensation shall fully cover the harm; it shall restore the aggrieved party to his original position or the position he would have been in had the harm not occurred.))

We are pleased to provide you with Gibson Dunn’s Accounting Firm Quarterly Update for Q3 2024. The Update is available in .pdf format at the below link, and addresses news on the following topics that we hope are of interest to you:

PCAOB Conducts Final Rulemaking of Biden Administration
Plaintiff Challenges Venue Transfer of PCAOB Litigation
Eighth Circuit Sees Influx of Briefs in SEC Climate Rule Litigation
Recent Court Rulings on Attorney Proffers and Their Implications
Federal Court Vacates FTC’s Non-Compete Rule
DOJ Launches New Whistleblower Program
California Supreme Court Issues Ruling on Arbitration Rights
Texas Supreme Court Rejects Challenge to State Court Structure
Other Recent SEC and PCAOB Enforcement and Regulatory Developments

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

Download Full Newsletter

Warmest regards,

Warmest regards,
Jim Farrell
Monica Loseman
Michael Scanlon

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

In addition to the practice group chairs, this update was prepared by David Ware, Timothy Zimmerman, Benjamin Belair, Monica Limeng Woolley, Bryan Clegg, Douglas Colby, Hayden McGovern, Nicholas Whetstone, and Ty Shockley.

Accounting Firm Advisory and Defense Group Chairs:

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

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

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

From the Derivatives Practice Group: The SEC announced that Gary Genseler will depart the agency on January 20, 2025 and the CFTC advanced a recommendation to expand the use of non-cash collateral through the use of distributed ledger technology this week.

New Developments

SEC Chair Gensler to Depart Agency on January 20. On November 21, the Securities and Exchange Commission (the “SEC”) announced that its 33rd Chair, Gary Gensler, will step down from the Commission effective at 12:00 pm on January 20, 2025. [NEW]
CFTC’s Global Markets Advisory Committee Advances Recommendation on Tokenized Non-Cash Collateral. On November 21, the CFTC’s Global Markets Advisory Committee (the “GMAC”), sponsored by Commissioner Caroline D. Pham, advanced a recommendation to expand the use of non-cash collateral through the use of distributed ledger technology. The GMAC’s Digital Asset Markets Subcommittee also presented on the progress of its Utility Tokens workstream. The recommendation by the GMAC’s Digital Asset Markets Subcommittee was approved without objection, marking the 14th GMAC recommendation advanced to the CFTC in the last 12 months, the most of any advisory committee ever in the same timeframe. The CFTC said that the recommendation provides a legal and regulatory framework for how market participants can apply their existing policies, procedures, practices, and processes to support use of DLT for non-cash collateral in a manner consistent with margin requirements. [NEW]
CFTC Staff Issues an Advisory Related to Clearing of Options on Spot Commodity Exchange Traded Funds. On November 15, the CFTC’s Division of Clearing and Risk (the “DCR”) issued a staff advisory relating to the clearing of options on spot commodity Exchange Traded Funds (“ETFs”). These options are on shares of the ETFs registered with the SEC as securities and the shares are listed and traded on a SEC-registered national securities exchange. These ETF options are cleared and settled by the Options Clearing Corporation (“OCC”) as the sole issuer of all equity options. The advisory states, in light of relevant precedents in the courts, it is substantially likely these spot commodity ETF shares would be held to be securities. Therefore, DCR indicated that its position is that the listing of these shares on SEC-registered national securities exchanges does not implicate the CFTC’s jurisdiction, and as such, the clearing of these options by OCC would be undertaken in its capacity as a registered clearing agency subject to SEC oversight. Accordingly, DCR said its position is that the CFTC does not have any more role regarding the clearing of these options on the part of OCC than with regard to OCC’s clearing of any security. [NEW]
CFTC Publishes Customer Alert Regarding CFTC v. Traders Domain FX Ltd. On November 14, the CFTC published an alert to customers who believe they may be victims of alleged fraud by Traders Domain FX Ltd. Customers are urged to complete this voluntary confidential customer survey, which will provide CFTC with pertinent information on this case.
CFTC Publishes Final Rule Adopting Amendments to Regulations Governing Registered Entities. On November 7, the CFTC adopted amendments to its regulations under the Commodity Exchange Act that govern how registered entities submit self-certifications, and requests for approval, of their rules, rule amendments, and new products for trading and clearing, as well as the CFTC’s review and processing of such submissions. According to the CFTC, the amendments are intended to clarify, simplify and enhance the utility of those regulations for registered entities, market participants and the CFTC. The effective date for this final rule is December 9, 2024.
CFTC Market Risk Advisory Committee to Hold Public Meeting on December 10. On November 5, the CFTC’s Market Risk Advisory Committee (“MRAC”) announced that, on December 10, 2024, from 9:30 a.m. to 12:30 p.m. (Eastern Standard Time), it will hold a public, in-person meeting at the CFTC’s Washington, DC headquarters, with options for virtual attendance. The MRAC indicated that it plans to discuss current topics and developments in the areas of central counterparty (“CCP”) risk and governance, market structure, climate-related risk, and innovative and emerging technologies affecting the derivatives and related financial markets, including discussions led by the CCP Risk & Governance and Market Structure subcommittees with recommendations related to CCP cyber resilience and critical third-party service providers and the cash futures basis trade, respectively.

New Developments Outside the U.S.

IOSCO Publishes Consultation Report on Pre-Hedging. On November 21, IOSCO published a Consultation Report inviting feedback on its recommendations relating to pre-hedging practices. The Consultation Report offers a definition of pre-hedging and proposes a set of recommendations intended to guide regulators in determining acceptable pre-hedging practices and managing the associated conduct risks effectively. [NEW]
The ESAs Publish Joint Guidelines on the System for the Exchange of Information Relevant to Fit and Proper Assessments. On November 20, the European Supervisory Authorities (the “ESAs”) announced the development of an ESAs F&P Information System with the purpose of enhancing information exchange between supervisory authorities within the European Union (“EU”) and across different parts of the financial sector. The Joint Guidelines aim to clarify its use and how data can be exchanged. The Joint Guidelines are intended to ensure consistent and effective supervisory practices within the European System of Financial Supervision (“ESFS”) and facilitate information exchange between supervisors. They apply to competent authorities within the ESFS and focus on two main areas: use of the F&P Information System and information exchange and cooperation between the competent authorities when conducting fitness and propriety assessments. [NEW]
Active Account Requirement – ESMA is Seeking First Input Under EMIR 3. On November 20, the European Securities and Markets Authority (“ESMA”) published a Consultation Paper on the conditions of the Active Account Requirement (“AAR”) following the review of the European Market Infrastructure Regulation (“EMIR 3”). The amending Regulation introduces a new requirement for EU counterparties active in certain derivatives to hold an operational and representative active account at a CCP authorized to offer services and activities in the EU. ESMA is seeking stakeholder input on several key aspects of the AAR, including: the three operational conditions to ensure that the clearing account is effectively active and functional, including stress-testing; the representativeness obligation for the most active counterparties; and reporting requirements to assess their compliance with the AAR. ESMA indicated that it will consider the feedback received to this consultation by January 27, 2025 and aims to submit the final draft regulatory technical standards to the European Commission within six months following the entry into force of EMIR 3. ESMA will organize a public hearing on January 20, 2025. [NEW]
ESMA Proposes to Move to T+1 by October 2027. On November 18, ESMA published its Final Report on the assessment of shortening the settlement cycle in the EU. The report highlights that increased efficiency and resilience of post-trade processes that should be prompted by a move to T+1 would facilitate achieving the objective of further promoting settlement efficiency in the EU, contributing to market integration and to the Savings and Investment Union objectives. ESMA recommended that the migration to T+1 occurs simultaneously across all relevant instruments and that it is achieved in Q4 2027. Specifically, ESMA recommended October 11, 2027 as the optimal date for the transition and suggested following a coordinated approach with other jurisdictions in Europe. [NEW]
The ESAs Announce Timeline to Collect Information for the Designation of Critical ICT Third-Party Service Providers under the Digital Operational Resilience Act. On November 15, the ESAs published a Decision on the information that competent authorities must report to them for the designation of critical Information and Communication Technology (“ICT”) third-party service providers under the Digital Operational Resilience Act (“DORA”). In particular, the Decision requires competent authorities to report by April 30, 2025 the registers of information on contractual arrangements of the financial entities with ICT third-party service providers.
IOSCO Publishes Final Report on Promoting Financial Integrity and Orderly Functioning of Voluntary Carbon Markets. On November 14, IOSCO released its Final Report on promoting the financial integrity and orderly functioning of the Voluntary Carbon Markets (VCMs). The report outlines a comprehensive set of 21 Good Practices aimed at ensuring financial integrity in VCMs, which, according to IOSCO, could be applicable across all carbon credit markets. In addition, IOSCO and the World Bank published a policy note outlining high-level elements intended to promote financial integrity in carbon markets generally, using the occasion to announce a new partnership in 2025. [NEW]
ESMA Collects Data on Costs Linked to Investments in AIFs and UCITS. On November 14, ESMA announced it is launching a data collection exercise together with the national competent authorities (“NCAs”), on costs linked to investments in Alternative Investment Funds (“AIFs”) and Undertakings for Collective Investment in Transferable Securities (“UCITS”). ESMA with the NCAs has designed a two-stage data collection involving both manufacturers and distributors of investment funds. Information requested from manufacturers will provide an indication on the different costs charged for the management of the investment funds. Information requested from distributors (i.e., investment firms, independent financial advisors, neo-brokers) will inform on the fees paid directly by investors to distributors. A report based on this data will be submitted to the European Parliament, the Council and the European Commission in October 2025.

New Industry-Led Developments

Ark 51 Adopts CDM for CSA Data Extraction. On November 5, ISDA announced that Ark 51, an artificial intelligence (“AI”) and data analytics service developed by legal services provider DRS, has used the Common Domain Model (“CDM”) to convert information from ISDA’s regulatory initial margin (IM) and variation margin (“VM”) credit support annexes (“CSAs”) into digital form. Ark 51 is a contract and risk management system that uses AI to extract key data from legal agreements, including IM and VM CSAs. The CDM transforms that data into a machine-readable format that can be quickly and efficiently exported to other systems, cutting the resources associated with manual processing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A new final rule from the U.S. Department of the Treasury will expand CFIUS’s authority to request information from parties related to a transaction, increases potential penalty amounts, and expedites mitigation agreement negotiations in certain situations. With the exception of modifying the time frame within which parties are required to respond to mitigation agreement proposals, CFIUS largely adopted the language of its April 2024 proposed rule.

On November 18, 2024, the U.S. Department of the Treasury (“Treasury”), as Chair of the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) issued a final rule largely codifying a rule proposed in April 2024, with only a handful of small, yet meaningful, changes. As noted in the accompanying press release, the final rule:

Expands the types of information CFIUS can require transaction parties and other persons to submit in the process of reviewing non-notified transactions;
Allows the CFIUS Staff Chairperson to set, as appropriate, a timeline for transaction parties to respond to risk mitigation proposals for matters under active review to assist CFIUS in concluding its reviews and investigations within the time frame required;
Expands the circumstances in which a civil monetary penalty may be imposed due to a party’s material misstatement and omission, including when the material misstatement or omission occurs outside a review or investigation of a transaction and when it occurs in the context of CFIUS’s monitoring and compliance functions;
Substantially increases the maximum civil monetary penalty available for violations of obligations under the CFIUS statute and regulations, as well as agreements, orders, and conditions authorized by the statute and regulations, and introduces a new method for determining the maximum possible penalty for a breach of a mitigation agreement, condition, or order imposed;
Expands the instances in which CFIUS may use its subpoena authority, including in connection with assessing national security risk associated with non-notified reviews; and
Extends the time frame for submission of a petition for reconsideration of a penalty to CFIUS and the number of days for CFIUS to respond to such a petition.

The final rule, which modifies CFIUS’s current regulations implementing Section 721 of the Defense Production Act (“DPA”), will go into effect 30 days after publication in the Federal Register.

In light of the expanded scope of CFIUS’s enforcement and monitoring powers and the sharp increase in the maximum penalty associated with violations of the CFIUS regulations, transaction parties should carefully evaluate the CFIUS risks when considering potential investments and acquisitions and ensure adherence to any time frames for responding to CFIUS requests.

Finalizing the Proposed Rule: CFIUS’s Expanded Monitoring and Enforcement Capabilities

The final rule largely adopts the provisions set forth in the proposed rule discussed in detail in our previous analysis. We set forth a refresher on these changes below:

1. Expanded Scope of Information Requested in Non-Notified Reviews

The final rule expands the types of information that CFIUS can require transaction parties and other persons to submit, including by issuing subpoenas. In determining whether to issue an information request or subpoena, as appropriate, the Committee will consider a party’s relationship to the relevant transaction. Current regulations permit CFIUS to request transaction parties provide information necessary for the Committee to determine if a non-notified transaction constitutes a “covered transaction” under Part 800 or a “covered real estate transaction” under Part 802 of the CFIUS regulations. The final rule authorizes the Committee to issue requests more broadly to transaction parties and other persons for information to determine if a transaction (i) meets the criteria for a mandatory declaration and/or (ii) raises national security concerns. This expanded scope of information requests will, according to CFIUS, enhance the Committee’s ability to engage in preliminary fact-finding and further help determine whether to request transaction parties submit a declaration or notice for review.

2. Increased Obligations to Provide Information Related to Compliance Monitoring

The final rule also expands CFIUS’s ability to require parties to provide information to the Committee in two situations post-CFIUS review:

Monitoring Compliance: Situations in which the Committee requires information to monitor compliance with or enforce the terms of a mitigation agreement, order, or condition; and
Material Misstatements or Omissions: Situations in which the Committee seeks information to ascertain whether the transaction parties have made a material misstatement or omitted crucial information during the CFIUS’s review or investigation.

While such information is already routinely requested by the Committee, the final rule formalizes the current practice and explicitly obligates parties to respond. Additionally, the final rule changes the condition for the Committee to request such information from “[i]f deemed necessary by the Committee” to “[i]f deemed appropriate by the Committee,” thereby lowering the threshold for such requests. Consistent with current regulations, a subpoena may be issued to non-compliant parties, but the final rule specifically assigns this power to the Staff Chairperson (as opposed to the Committee as a whole) to increase operational efficiency.

CFIUS makes clear that even parties currently subject to a pre-existing mitigation agreement, condition, or order will be subject to such information requests to enable the Committee to fulfill its monitoring and enforcement responsibilities.

3. Increased Maximum Civil Monetary Penalties

The proposed rule noted a significant drop in the median value of covered transactions filed with CFIUS pursuant to a joint voluntary notice following the implementation of the Foreign Investment Risk Review Modernization Act of 2018 and the introduction of mandatory declarations. The Committee noted that the relatively low value of many transactions undermines the current penalty framework of imposing fines of up to greater of $250,000 or the value of the transaction. For example, for certain transactions with reported low values (or even a valuation of zero dollars), the maximum penalty de facto becomes $250,000, which the Committee considered an insufficient deterrent in many instances. Consequently, the final rule adopts the language of the proposed rule and, for the first time in 15 years, increases and expands the maximum civil penalties as of the effective date as follows:

Material Misstatements and Omissions in Submissions. The maximum civil monetary penalty for a declaration or notice with a material misstatement or omission, or a false certification, will increase from $250,000 to $5,000,000 per violation for material misstatements and omissions that occur as of the effective date, even if the underlying transaction was entered into or consummated prior to the effective date.
Expansion of Material Misstatements and Omissions Penalty to Information Request Responses. Under the current regulations, the above penalty only applies to material misstatements or omissions in the context of a declaration or notice filed with CFIUS, or a false certification. The final rule expands penalty coverage to (1) requests for information related to non-notified transactions, (2) certain responses to the Committee’s requests for information related to monitoring or enforcing compliance, and (3) other responses to the Committee’s requests for information, such as for agency notices. While this expanded coverage is significant, the final rule makes clear that the penalty provisions will not apply to all communications with the Committee; rather, only with respect to responses to requests that were made in writing by the Committee, specified a time frame for response, and indicated the applicability of penalty provisions. As with the above, such penalties will only be imposed for responses that are provided as of the effective date.
Failure to Submit Mandatory Declarations. The maximum civil monetary penalty for failure to submit a mandatory declaration will increase from the greater of $250,000 or the value of the transaction to the greater of $5,000,000 or the value of the transaction, including for transactions that were entered into or consummated prior to the effective date.
Material Mitigation Agreement Violations. The maximum civil monetary penalty for the violation of a mitigation agreement, intentionally or through gross diligence, will increase from the greater of $250,000 per violation or the value of the transaction to the greater of $5,000,000 per violation or the value of the transaction. Further, the concept of “transaction value” is revised to include the greater of:
- the value of the person’s interest in the U.S. business (or, as applicable, the parent of the U.S. business) at the time of the transaction;
- the value of the person’s interest in the U.S. business (or, as applicable, the parent of the U.S. business) at the time of the violation in question or the most proximate time to the violation for which assessing such value is practicable; or
- the value of the transaction filed with the Committee.

This expanded approach to transaction value will allow CFIUS greater latitude in imposing penalties, though CFIUS clarifies that the new penalties will only apply to mitigation agreements entered into, conditions imposed, or orders issued on or after the effective date of the final rule.

Extension of Penalty Petition Time frame from 15 to 20 Days. Under the current regulations, parties have up to 15 business days to submit a petition to the Committee in response to a penalty notice, and the Committee similarly has 15 business days to respond. Under the final rule, both time frames will be extended to 20 business days to account for the Committee’s routine practice of granting extensions for such petitions.

Parties subject to a mitigation agreement, condition, or order as of the effective date of the final rule will not be subject to the enhanced penalties for past violative conduct; however, the enhanced penalties will apply to any conduct by such parties that is outside the bounds of any such agreement, condition, or order—such as a material misstatement or omission made to the Committee on or after the effective date.

The Final Rule Alters the Time Frame for Parties to Respond to Mitigation Agreement Proposals

CFIUS has increasingly imposed mitigation agreements on transaction parties in order to address national security concerns. While the current regulations require parties to respond to follow-up information requests from CFIUS within three business days during the course of a transaction review, the regulations to date have been silent on the time frame within which parties must respond to mitigation proposals or revisions, including in the context of non-notified reviews. The proposed rule would have established a similar deadline of three business days for parties to provide substantive responses to proposed mitigation agreements to address current delays in the negotiation process. However, after receiving over 700 comments in response to the proposed rule—many of which raised concerns over this proposal—CFIUS adopted a more nuanced approach in the final rule.

In the final rule, the CFIUS Staff Chairperson may impose a time frame of no fewer than three business days for parties to a mitigation agreement to provide a substantive response to its terms, including revisions. Substantive responses include acceptance of terms as proposed, counterproposals, or a detailed statement of reasons explaining why a party or parties cannot comply with the terms as proposed (which may also include a counterproposal).

The final rule explicitly establishes factors for the CFIUS Staff Chairperson to consider when setting response deadlines as follows:

The statutory deadline for completing an investigation under Section 721 of the DPA, e., a 45-day investigation period, which follows an initial 45-day review period;
The risk to the national security of the United States arising from the transaction;
The party’s or parties’ responsiveness to the Committee;
The nature of the transaction;
The appropriateness of suspending, or imposing conditions on, the transaction as stipulated in the DPA; and
Other such factors the CFIUS Staff Chairperson may determine to be appropriate in connection with a specific transaction.

Importantly, if the parties fail to respond to mitigation proposals within the time frame prescribed by the CFIUS Staff Chairperson, the Committee may, at its discretion, reject the notice in its entirety. Further, under the current regulations, CFIUS may also act to unilaterally impose mitigation proposals to address national security risks.

CFIUS makes clear that the new time frame requirements will not apply to transactions already under review or investigation by the Committee as of the final’s rules effective date (i.e., 30 days after publication in the Federal Register), but the CFIUS Staff Chairperson may impose such response deadlines on any notice accepted by the Committee after the effective date. Because there is often a delay between the date a party submits a filing and when CFIUS officially accepts the filing, certain notices submitted close in time to the effective date may still be subject to the new requirements.

The final rule exemplifies the increasingly robust role CFIUS plays in aggressively monitoring and shaping foreign direct investment in the United States. In light of these efforts and the rising costs and consequences of non-compliance, transaction parties should carefully evaluate transactions involving foreign person investors, directly or indirectly, for CFIUS risks even in the early stages of deal discussions. We also recommend transaction parties take the following steps beginning now:

Consider the interested parties that CFIUS may request information from. While CFIUS declined to provide an enumerated list of the types of third parties it might request information from while reviewing a transaction and/or compliance with a mitigation agreement, CFIUS highlighted the possibility of requesting information from banks, underwriters, or service providers. Parties should consider their communications with these parties while engaging with CFIUS. For example, CFIUS may look to bankers to provide further insight into parties’ reasons for pursuing a transaction—a topic of great interest to CFIUS—and something the parties should consider when drafting a notice.

More carefully consider the rationale for forgoing a voluntary filing. CFIUS’s expanded authority to request more types of information earlier in the non-notified process may decrease the number of full notices requested but increase the number of transactions called in for preliminary questioning. In light of the potential to be questioned more often, transaction parties should be prepared to articulate their reasoning for forgoing a filing, including by, in some cases, formalizing the process for who makes and memorializes such decisions.

Plan proactively for mitigation. While CFIUS, in its comments to the final rules, suggests that a three-business day deadline to respond to a mitigation agreement would be appropriate for parties that have established a pattern of delayed responses, the fact of the matter is that many practitioners find that CFIUS identifies a threat and proposes mitigation very late in the statutory review period—without allowing time for otherwise attentive parties to meaningfully consider and negotiate a commercially workable agreement. On the other hand, CFIUS consistently cautions parties that they expect full compliance on the precise day that a mitigation agreement goes into effect, and that the parties are responsible to ensure full compliance is feasible. Given the increasing likelihood of being squeezed on both ends by tight timing to negotiate and high expectations for immediate compliance, parties need to have a plan in advance to immediately brief and involve all relevant U.S. business stakeholders in mitigation negotiations.

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

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, [email protected])
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202.887.3547, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, [email protected])
David P. Burns – Washington, D.C. (+1 202.887.3786, [email protected])
Nicola T. Hanna – Los Angeles (+1 213.229.7269, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202.955.8685, [email protected])
Amanda H. Neely – Washington, D.C. (+1 202.777.9566, [email protected])
Samantha Sewall – Washington, D.C. (+1 202.887.3509, [email protected])
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, [email protected])
Hugh N. Danilack – Washington, D.C. (+1 202.777.9536, [email protected])
Mason Gauch – Houston (+1 346.718.6723, [email protected])
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, [email protected])
Sarah L. Pongrace – New York (+1 212.351.3972, [email protected])
Anna Searcey – Washington, D.C. (+1 202.887.3655, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202.955.8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, [email protected])
Claire Yi – New York (+1 212.351.2603, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, [email protected])

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

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

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

Key Developments:

On October 8, the American Civil Rights Project (“ACR Project”) sent a letter notifying Sacramento County and the California Department of Social Services of its intent to sue to block the County’s Family First Economic Support Pilot Program. The program aims to provide basic minimum income for parents and guardians living in certain zip codes, who are under 200% of the federal poverty level and caring for children under the age of five who are “Black/African American or American Indian/Alaska Native.” ACR Project alleges that the Program is “racially exclusive” and “clearly violates . . . the California Constitution, the United States Constitution’s Equal Protection Clause, and Title VI of the Civil Rights Act of 1964,” along with Section 1981. ACR Project points out that the Program explicitly screens applicants based on race and therefore “disfavored races” will be “systematically rejected” if they try to apply. ACR Project sent the letter to provide notice “so that [the County] will not be able to contend later that [it was] not warned” that ACR Project will take further action if the Program remains in place.

On October 29, the Foundation Against Intolerance and Racism (FAIR) filed a complaint against the Washington State Housing Finance Commission, alleging that the state’s Covenant Homeownership Program limits benefits to applicants of certain races in violation of the Equal Protection Clause of the Fourteenth Amendment. FAIR claims that the program, which offers downpayment and closing cost assistance for first-time homebuyers, is available only to applicants who have a parent, grandparent, or great-grandparent who is Black, Hispanic, Native American, or one of several other racial or ethnic minorities. FAIR requests a judgment declaring that the program is unconstitutional, a permanent injunction prohibiting the enforcement of the discriminatory aspects of the Program, and nominal damages in the amount of $1.

On October 30, the Equal Protection Project (EPP) filed a complaint with the U.S. Department of Education’s Office for Civil Rights (OCR) against the University of Wisconsin-Madison (UW-Madison), alleging that the University’s Mentorship Opportunities in Science and Agriculture for Individuals of Color program violates federal antidiscrimination laws. EPP alleges that the program’s requirement that members be Black, Indigenous, or People of Color amounts to discrimination on the basis of race, color, and national origin in violation of the Fourteenth Amendment’s Equal Protection Clause. EPP also alleges that the program violates Title VI, which prohibits discrimination by entities that receive federal funding. EPP requests that OCR investigate the program and award remedial relief as needed, including imposing fines, initiating administrative proceedings, and referring the case to the Department of Justice.

On October 31, the United States District Court for the Eastern District of Kentucky issued an order clarifying and expanding the scope of a preliminary injunction issued last month enjoining the U.S. Department of Transportation’s Disadvantaged Business Enterprise (“DBE”) program. In October 2023, two non-minority contractors, represented by the Wisconsin Institute for Law & Liberty (“WILL”), challenged the DBE program’s purpose of directing at least 10% of federal transportation infrastructure funding to contracting firms owned by women and minorities. The October 31 court order clarified the geographical scope of the preliminary injunction, providing that the preliminary injunction order applies to every state where the plaintiffs operate. WILL issued a press release on its website, praising the court order and its nationwide reach.

On November 5, the Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) held an informal compliance conference with United Airlines regarding a complaint filed by America First Legal (AFL) in January of this year. In the complaint, AFL alleged that United is violating its federal contract covenants by instituting “diversity quotas” for certain training programs and including “unlawful benchmarks, classifications, and quotas” in its hiring goals. AFL also alleged that United is engaging in “unlawful subcontracting practices” through its supplier diversity program. According to a press release issued by AFL, United said at the compliance conference that its placement and hiring goals are not “requirements,” but rather “benchmarks” for expected workforce representation. AFL said United explained that if it fails to meet these benchmarks, the company will interpret this fact as a signal that it must reassess its employment practices, including by revising policies and practices, broadening recruitment and outreach, and instituting trainings.

Media Coverage and Commentary:

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

CNBC, “Retailers brace for DEI blowback in lead-up to election, holiday shopping season” (November 4): Gabrielle Fonrouge of CNBC reports that retailers are concerned that their DEI policies and initiatives might alienate shoppers during the upcoming holiday shopping season. Fonrouge reports that the concern stems from the recent trend of consumer backlash against DEI initiatives. Fonrouge highlights the experiences of Anheuser-Busch and Target, which both “faced severe blowback” and drops in sales for marketing campaigns and products “geared toward the LGBTQ community.” Fonrouge says that retailers are trying the “hedge their bets” by either preparing for potential backlash or “preemptively walking back certain policies and practices” relating to DEI.
Law.com, “Law Firm Diversity Pros Fear for Future of DEI Efforts Under Trump Presidency” (November 6): Law.com’s John Campisi reports that some members of the legal industry are concerned that the re-election of President Donald Trump will reverse recent progress made by law firms in increasing diversity among their ranks. Campisi reports that although industry leaders anticipate that the Trump administration will attempt to dismantle DEI programs and initiatives, they caution that it is too early to estimate the effect of the next administration’s policies. Several DEI professionals quoted in the article anticipate that law firms will remain committed to hiring and supporting candidates from diverse backgrounds. Joelle Emerson, co-founder and CEO of diversity consultancy Paradigm, told Campisi that the best thing for law firms to do is to resist “the idea that these concepts are controversial” and to “be clear about what, specifically, these programs and initiatives are designed to do.”
Law.com, “Newly Formed DEI Practices Expect Heightened Demand During Trump Administration” (November 12): Law.com’s Dan Roe reports that law firms expect an increase in demand for “practices and industry groups geared at advising clients on matters related to” DEI. Roe says that the demand is driven by increased opposition to DEI by lawmakers, federal agencies, and legal activists. Gibson Dunn partner and co-Chair of the firm’s Labor and Employment Practice Group Jason Schwartz commented on the current uncertain regulatory landscape, stating that “[t]here’s so much uncertainty in the law around this; the only people who benefit from this are lawyers, which is unfortunate. You want people to understand what the law is so you can follow it.” Schwartz cited the EEOC’s conflicting response to the Supreme Court’s SFFA decision as evidence of the confusing regulatory landscape surrounding DEI, but noted that the agency is unlikely to take a strong anti-DEI approach under the Trump administration until the makeup of the Commission changes.
Wall Street Journal, “Companies Walk a Tightrope on Diversity; ‘No Industry Should Feel Safe.’” (November 14): Jennifer Williams of the Wall Street Journal reports that anti-DEI activist Robby Starbuck is preparing a new list of companies to target through his social media campaigns. Starbuck told the Wall Street Journal that he will focus on companies in the retail industry going into the holiday season. Williams notes that companies’ responses to anti-DEI efforts have ranged from reshaping DEI policies, to eliminating DEI officers and goals, to scrubbing DEI language from public-facing materials. Gibson Dunn partner Jason Schwartz emphasized that many companies are “reframing some of their programs and the way they talk about them,” but are “not completely abandoning their efforts.”
Bloomberg Law, “Contractor Watchdog Under Trump Stands Ready to Police DEI Again” (November 7): Rebecca Klar of Bloomberg Law reports that the OFCCP under the new Trump administration is “poised to take a more antagonistic stance towards diversity, equity, and inclusion,” including revisiting an executive order issued during President Trump’s first term that limited federal contractors from carrying out DEI trainings that would “promote race or sex stereotyping or scapegoating” or could cause an individual to feel “guilt” based on their race or sex. Craig Leen, the director of the OFCCP during the first Trump administration, told Klar that the agency may also expand the ability of religious organizations to participate in federal contracting and enhance protections against religious bias. Klar also notes that Project 2025 proposes to eliminate the OFCCP entirely, and that the sub-agency may face reorganization under the new administration.
Washington Post, “Robby Starbuck declared war on DEI. Trump’s win could add momentum.” (November 15): Taylor Telford of the Washington Post reports that conservative activist Robby Starbuck plans to ramp up anti-DEI campaigns in the wake of the presidential election as part of his quest “to restore sanity to corporate America.” Telford says that Starbuck views the re-election of Donald Trump as “a referendum on wokeness,” and predicts that companies will be forced to reevaluate their DEI programs given President-elect Trump’s anti-DEI stance. Telford notes that “Starbuck’s campaigns serve as more of a litmus test of a company’s willingness to defend [DEI] policies – which many claim to prioritize – in the court of public opinion,” and that so far, companies have been unwilling to resist Starbuck’s campaigns. And “with Trump returning to the White House, momentum has swung to Starbuck’s side.” However, Telford reports that “[d]espite the pushback, most Americans approve of corporate DEI,” according to a Washington Post poll, with roughly 6 in 10 respondents saying they believe DEI programs are “a good thing.”

Case Updates:

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

1. Employment discrimination and related claims:

Spitalnick v. King & Spalding, LLP, No. 24-cv-01367-JKB (D. Md. 2024): On May 9, 2024, Sarah Spitalnick, a white, heterosexual female, sued King & Spalding, alleging that the firm violated Title VII and Section 1981 by deterring her from applying to its Leadership Counsel Legal Diversity internship program. Spitalnick alleged that she believed she could not apply after seeing an advertisement that stated that candidates “must have an ethnically or culturally diverse background or be a member of the LGBT community.” On September 19, 2024, King & Spalding moved to dismiss, arguing that Spitalnick failed to state a claim, her claims were time-barred, and she lacked standing because she never applied to the program.
- Latest update: On November 8, 2024, Spitalnick responded to the firm’s motion to dismiss, arguing that her claim was not time-barred and that being deterred from applying was sufficient to confer standing.
Langan v. Starbucks Corporation, No. 3:23-cv-05056 (D.N.J. 2023): On August 18, 2023, a white, female former store manager sued Starbucks, claiming she was wrongfully accused of racism and terminated after she rejected Starbucks’ attempt to deliver “Black Lives Matter” T-shirts to her store. The plaintiff alleged that she was discriminated and retaliated against based on her race and disability as part of a company policy of favoritism toward non-white employees. On July 30, 2024, the district court granted Starbucks’ motion to dismiss, agreeing that the plaintiff’s claims under the New Jersey Law Against Discrimination were untimely and that she failed to sufficiently plead her tort or Section 1981 claims. The court found that she failed to allege that her termination was based on anything other than her “egregious” discriminatory comments and her violation of the company’s anti-harassment policy. On August 11, 2024, the plaintiff filed an amended complaint.
- Latest update: On November 8, 2024, the defendant moved to dismiss the amended complaint, arguing that the additional facts alleged to explain plaintiff’s untimeliness—specifically, her difficulty obtaining a right to sue letter—were insufficient to state a claim.
Miall v. City of Asheville, 1-23-cv-00259 (W.D.N.C. 2024): On September 26, 2023, five white residents of Asheville, North Carolina filed an amended complaint against the city, the city manager, and the mayor, alleging that the city violated the Equal Protection Clause, Title VI, Section 1981, and Section 1983 by preferring applicants of minority racial groups for seats on city boards. The plaintiffs sought to enjoin Asheville from using race as a factor in considering board applicants, and to require that the city review applicants without awareness of any applicant’s race or ethnicity. On November 14, 2023, the defendants moved to dismiss both the Section 1981 and Section 1983 claims.
- Latest update: On October 29, 2024, the district court denied the motion to dismiss the Section 1983 claim, which it held was plausibly pled. The court declined to accept a Magistrate Judge’s recommendation to dismiss the Section 1981 claim on the basis of the plaintiff’s race, holding that white litigants may sue under Section 1981.
Do No Harm v. William Lee, No. 3:24-cv-1334 (M.D. Tenn): On November 7, 2024, a membership organization of medical professionals, students, and policymakers sued Tennessee Governor William Lee, challenging a Tennessee law that requires the governor to consider race as a factor when making appointments to the state Board of Chiropractic Examiners. The organization seeks a declaratory judgment that the Tennessee law violates the Equal Protection Clause of the Fourteenth Amendment and seeks to enjoin continued enforcement of the three code sections.
- Latest update: An initial case management conference has been set for January.

2. Actions against educational institutions:

Palsgaard v. Christian et al., No. 1:23-cv-01228-SAB (E.D. Cal. 2023): On August 8, 2023, six professors in the State Center Community College district sued the college’s CEO and members of the Board of Governors, alleging that the school district’s diversity, equity, inclusion, and accessibility (DEIA) rules “discriminate based on viewpoint.” They seek to enjoin the rules—including a requirement that professors be evaluated based on their commitment to DEIA principles—and ask for a declaratory judgment that the rules violate the First and Fourteenth Amendments. On September 27, 2024, the professors filed a supplemental brief to differentiate their case from the district court’s decision in Johnson v. Watkins, where the court granted a motion to dismiss on similar facts. No. 1:23-cv-00848 (E.D. Cal. 2023).
- Latest update: On November 1, 2024, the defendants responded to the supplemental brief, arguing that, as in Johnson v. Watkins, the professors cannot show that the district can or will enforce the DEIA rules against them, and that they cannot bring a pre-enforcement challenge to non-binding district guidance.

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, Cate McCaffrey, Jenna Voronov, Emma Eisendrath, Felicia Reyes, Allonna Nordhavn, Janice Jiang, Laura Wang, Maya Jeyendran, Kristen Durkan, Ashley Wilson, Lauren Meyer, Kameron Mitchell, Chelsea Clayton, Albert Le, Emma Wexler, Heather Skrabak, and Godard Solomon.

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

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

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

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

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

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

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

An Expert Analysis of National Security Deference Given in the US and EU Foreign Direct Investment Regimes

Gibson, Dunn & Crutcher LLP is pleased to announce with Global Legal Group the release of the International Comparative Legal Guide – Foreign Direct Investment Regimes 2025. Gibson Dunn partners Stephenie Gosnell Handler and Robert Spano were contributing editors to the publication, which covers issues including foreign investment policy, law and scope of application, jurisdiction and procedure, and substantive assessment. The Guide, containing 2 expert analysis chapters and 30 jurisdiction-specific chapters, is live and FREE to access HERE.

Ms. Handler, Mr. Spano, partner Sonja Ruttmann, and associates Alexa Romanelli, Hugh Danilack, and Mason Gauch co-authored the Expert Analysis Chapter, “National Security Deference Given in the US and EU Foreign Direct Investment Regimes.”

Please view this informative and comprehensive chapter via the links below:

CLICK HERE to view “National Security Deference Given in the US and EU Foreign Direct Investment Regimes.”

CLICK HERE to view, download or print a PDF version.

The following Gibson Dunn lawyers assisted in preparing this publication: Stephenie Gosnell Handler, Robert Spano, Sonja Ruttmann, Alexa Romanelli, Hugh Danilack, and Mason Gauch.

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

Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, [email protected])

Robert Spano – London/Paris (+33 1 56 43 13 00, [email protected])

Sonja Ruttmann – Munich (+49 89 189 33 150, [email protected])

Alexa Romanelli – London (+44 20 7071 4269, [email protected])

Hugh N. Danilack – Washington, D.C. (+1 202.777.9536, [email protected])

Mason Gauch – Houston (+1 346.718.6723, [email protected])

In response to industry feedback, the SFC has refined the Guidelines, which now impose fewer regulatory obligations than the SFC originally proposed. Set out below is a key overview of the Guidelines.

On October 31, 2024, Hong Kong’ Securities and Futures Commission (SFC) published its conclusions[1] (the Consultation Conclusions) on Guidelines for Market Soundings[2] (the Guidelines). We previously published an alert[3] on SFC’s consultation in October 2023.

Implementation Timeline

The Guidelines are set to take effect on May 2, 2025. The SFC takes the view that a six-month transition should be sufficient as intermediaries should have existing controls in place to safeguard confidential information. Where an intermediary is not able to enhance its existing system, policies and procedures after the Guidelines take effect, the intermediary should, at a minimum, put in place interim measures to comply with the Guidelines.

Overview of the Guidelines

The Guidelines set out four Core Principles and prescriptive requirements applicable to a Disclosing Person (usually a sell-side broker in possession of the market sounding information) and a Recipient Person (usually a buy-side firm in receipt of the market sounding information) when they conduct market sounding activities, i.e., the communication or information flow from sell-side to buy-side for the purpose of gauging interests in a potential transaction. Market sounding is most seen in block trades and private placements.

In response to industry feedback, the SFC has refined the Guidelines which now impose fewer regulatory obligations than the SFC originally proposed. We set out below a key overview of the Guidelines.

Four core principles under the Guidelines

The four Core Principles under the Guidelines that apply to all intermediaries that conduct market sounding activities are:

Handling of Information: Safeguarding the confidentiality of market sounding information, and ensuring effective systems of functional barriers to prevent inappropriate disclosure, misuse and leakage of such information.
Governance: Putting in place robust governance and oversight arrangements to supervise market sounding activities.
Policies and Procedures: Establishing and maintaining effective policies and procedures with respect to market sounding activities.
Review and Monitoring Controls: Implementing controls to monitor and detect suspicious behaviors and potential misconduct, or potential unauthorized or inappropriate disclosure, misuse or leakage of market sounding information, or non-compliance with internal policies and procedures governing market sounding activities.

Key highlights of the requirements after considering industry feedback

Type of market sounding information: The Guidelines only apply to “confidential information in connection with possible transactions in listed securities regardless of the listing venue, or transactions involving other securities that are likely to materially affect the price of listed securities.” This means that the Guidelines do not automatically apply to all non-public information, as the information must be “confidential” in order to fall within scope of the Guidelines. In the FAQ[4] issued by the SFC, the SFC provided examples of market sounding information, including the name or specific information of the subject security, identity of the Market Sounding Beneficiary (i.e., the issuer, client or existing shareholding of the security in question), the Market Sounding Beneficiary’s intent to pursue a transaction or other specific terms relating to the transaction. The SFC made clear that routine discussions, such as speculative trade ideas or sourcing orders, remain outside the scope of the Guidelines.
In-scope “securities transactions”: The Guidelines only apply to market sounding in connection with transactions involving listed securities (regardless of whether listed in Hong Kong or elsewhere) and securities (e.g., debt securities) which is likely to have a material effect on the share price of listed securities. This is a narrower scope of “securities” than the SFC initially proposed in its consultation paper, although the SFC will keep in view the need to expand the type of transactions.
Removal of the proposed requirements around “cleansing”: Given the concerns of practical challenges to perform “cleansing” of market sounding information once it becomes public (e.g., the information may never become public if a transaction is cancelled), the SFC has removed this requirement from the Guidelines.
Record-keeping requirements only apply to the Disclosing Person: Under the Guidelines as refined, the Recipient Person is no longer required to keep records of the market sounding communications. Instead, only the Disclosing Person is required to keep such records through the use of authorized communication channels. The required retention period is also shortened to 2 years. Note that this is distinguished it from the shorter six-month retention period for regular telephone order instructions required under the SFC Code of Conduct.

Specific Requirements for Disclosing Persons

A Disclosing Person is required to obtain consent from the Market Sounding Beneficiary, determine in advance a standard set of information to be disclosed, and use standardized scripts to communicate market sounding information through authorized communication channels. At a minimum, the scripts should include a statement that the communication is for market sounding, and making a request for consent from the Recipient Persons (or potential investors) for receipt of the market sounding information, and agreeing to safeguard its confidentiality. Records of market sounding communications must be kept for not less than two years.

Specific Requirements for Recipient Persons

A Recipient Person should designate a person familiar with the internal polices on market sounding activities and inform the Disclosing Person who that person is upon being contacted by the Disclosing Person for market sounding. The Recipient Person should inform the Disclosing Person whether it wishes to, or not to, receive market soundings in relation to either all possible transactions or particular types of possible transactions from the Disclosing Person. Where the Disclosing Person does not specify whether the communication is a market sounding, the Recipient should use reasonable efforts to verify where it is in possession of market sounding information, for example, by making additional enquiries with the Disclosing Person and seek confirmation whether the information to be shared involves market sounding information.

Conclusions

The Guidelines only apply to intermediaries licensed by or registered with the SFC and do not have the force of law, However, the SFC highlighted that the Guidelines may be admissible in evidence in court proceedings under the Securities and Futures Ordinance (SFO) where relevant to questions that arise in the court proceedings. Failure to comply with the Guidelines may also call into question of fitness and properness of an intermediary or licensed/ registered individual, which may lead to investigations or disciplinary actions taken against the relevant persons by the SFC. Intermediaries should review and enhance their existing policies and procedures, and ensure that enhancements are implemented by May 2, 2025.

[1] https://apps.sfc.hk/edistributionWeb/api/consultation/conclusion?lang=EN&refNo=23CP6

[2] https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/Guidelines-for-Market-Soundings/Guidelines-for-Market-Soundings_ENG.pdf?rev=-1

[3] https://www.gibsondunn.com/hong-kong-sfc-consults-on-market-sounding-guidelines/.

[4] https://www.sfc.hk/en/faqs/intermediaries/supervision/Market-Soundings/Guidelines-for-Market-Soundings

The following Gibson Dunn lawyers prepared this update: William Hallatt, Becky Chung, and QX Toh.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact any member of Gibson Dunn’s Financial Regulatory team, including the following members in Hong Kong:

William R. Hallatt (+852 2214 3836, [email protected])
Emily Rumble (+852 2214 3839, [email protected])
Arnold Pun (+852 2214 3838, [email protected])
Becky Chung (+852 2214 3837, [email protected])
Jane Lu (+852 2214 3735, [email protected])

This edition of Gibson Dunn’s Federal Circuit Update for October 2024 summarizes the current status of petitions pending before the Supreme Court and recent Federal Circuit decisions concerning willfulness, false advertising, claim construction, and doctrine of equivalents.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

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

Edwards Lifesciences Corporation, et al., v. Meril Life Sciences Pvt. Ltd., et al. (US No. 24-428): The question presented is “Whether, under Hatch-Waxman’s safe harbor, an infringing act is ‘solely for uses reasonably related’ to the federal regulatory process, when the infringing act is performed for both regulatory and non-regulatory uses.” A response is due November 15, 2024. We summarized the original panel opinion in our March 2024 update.

We provide an update below of the petitions pending before the Supreme Court, which were summarized in our September 2024 update:

The Court will consider the petitions in Norwich Pharmaceuticals Inc. v. Salix Pharmaceuticals, Ltd. (US No. 24-294) and Zebra Technologies Corporation v. Intellectual Tech LLC (US No. 24-114) at its November 15, 2024 conference.

Federal Circuit News:

On October 22, 2024, the Federal Circuit announced the inauguration of the Kara Fernandez Stoll American Inn of Court in Charlotte, North Carolina. The full article is here.

Upcoming Oral Argument Calendar

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

Key Case Summaries (October 2024)

Provisur Technologies, Inc. v. Weber, Inc. et al., No. 23-1438 (Fed. Cir. Oct. 2, 2024): Provisur owns patents generally related to food-processing machinery. One patent relates to a fill and packaging apparatus for loading sliced food into packages. A jury found Weber willfully infringed and awarded Provisur damages. Weber filed post-trial motions on several issues, including moving for judgment as a matter of law (JMOL) on willfulness, which the district court denied.

The Federal Circuit (Moore, C.J., joined by Taranto and Checchi (district judge sitting by designation), JJ.) affirmed-in-part, reversed-in-part, and remanded. The Court explained that 35 U.S.C. § 298 prohibits patentees “from using the accused infringer’s failure to obtain the advice of counsel as an element of proof that the accused infringer willfully infringed.” The Court therefore determined that the district court erred in admitting evidence of the accused infringer’s failure to obtain the advice of counsel and should have granted Weber’s JMOL on willfulness.

Crocs, Inc. v. Effervescent, Inc. et al., No. 22-2160 (Fed. Cir. Oct. 3, 2024): Crocs sued several shoe distributors (collectively, “Dawgs”) for patent infringement in 2006. In 2017, after lengthy litigation, Dawgs filed an amended counterclaim alleging that Crocs had misled consumers by advertising that the material from which its products are made was “patented,” “exclusive,” and “proprietary.” The district court granted summary judgment to Crocs, holding that the terms “patented,” “proprietary,” and “exclusive” were claims of “inventorship” and were not directed to “the nature, characteristics, or qualities of Crocs’ products” as required under the law for a false advertising claim.

The Federal Circuit (Reyna, J., joined by Cunningham and Albright (district judge sitting by designation), JJ.) reversed. The Federal Circuit noted that “Crocs admit[ted] that is was never granted a patent for Croslite.” And when, like here, “a party falsely claims that it possesses a patent on a product feature and advertises that product feature in a manner that causes consumers to be misled about the nature, characteristics, or qualities of its product,” they could be subject to liability under Section 43(a) of the Lanham Act for false advertising.

UTTO Inc. v. Metrotech Corp., No. 23-1435 (Fed. Cir. Oct. 18, 2024): UTTO sued Metrotech for infringing its patent directed to a process for detecting and identifying “buried assets,” which are underground utility lines, in a way that reduces interference among buried assets. Metrotech sells an RTK-Pro locator device, which UTTO alleged infringes its patent. After three rounds of motions to dismiss under Rule 12(b)(6), the district court dismissed the case with prejudice. In doing so, the district court construed the claims in the UTTO patent as requiring that the “group of buried asset data points” be “two or more buried asset data points.” The Metrotech device uses only one data point at a time

The Federal Circuit (Taranto, J., joined by Prost and Hughes, JJ.) vacated-in-part, affirmed-in-part, and remanded. The Court stated that there was no categorical rule against engaging in claim construction at the motion to dismiss stage, and that not having a separate Markman set of proceedings is not procedural error. However, the Court determined that in this case, a fuller claim construction proceeding and analysis were required for why “group” should be “two or more.” The Court therefore vacated the dismissal of UTTO’s infringement claim and remanded for further claim construction proceedings.

NexStep, Inc. v. Comcast Cable Communications, LLC, No. 22-1815, 22-2005, 22-2113 (Fed. Cir. Oct. 24, 2024): NexStep sued Comcast for infringing patents related to audio data processing technology. A jury found no literal infringement of one of the patents but found infringement under the doctrine of equivalents. The district court set aside the verdict, granting JMOL of noninfringement due to a lack of evidence supporting the jury’s finding.

The panel majority (Chen, J., joined by Taranto, J.) affirmed. The majority stressed that “courts must employ ‘special vigilance’ to avoid overbroad applications of the doctrine of equivalents,” because “the doctrine of equivalents, when applied broadly, conflicts with the definitional and public-notice functions of the statutory claiming requirement.” Thus, there are “specific evidentiary requirements necessary to prove infringement under the doctrine of equivalents,” including “particularized testimony and linking argument.” The majority determined that the expert failed to identify what particular elements are allegedly equivalent and failed to explain why the function, way, and result are substantially similar. As a result, the majority concluded that the testimony failed to provide the requisite particularized testimony and linking argument. The majority rejected NexStep’s argument that the Court should adopt an exception for “easily understandable” technology as contrary to precedent and policy considerations.

Judge Reyna dissented on this issue and would have reversed the district court’s grant of JMOL of noninfringement. First, Judge Reyna stated that the majority failed to apply the substantial evidence standard of review to the totality of the evidence presented and narrowly focused on testimony for NexStep’s expert. Second, Judge Reyna expressed concern that the majority’s reasoning imposes a rigid new rule requiring expert opinion testimony to prove infringement under the doctrine of equivalents, which fails to account for the unique circumstances of each patent case.

The following Gibson Dunn lawyers assisted in preparing this update: Blaine Evanson, Jaysen Chung, Audrey Yang, Al Suarez, and Vivian Lu.

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, [email protected])
Audrey Yang – Dallas (+1 214.698.3215, [email protected])

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

Intellectual Property:
Kate Dominguez – New York (+1 212.351.2338, [email protected])
Y. Ernest Hsin – San Francisco (+1 415.393.8224, [email protected])
Josh Krevitt – New York (+1 212.351.4000, [email protected])
Jane M. Love, Ph.D. – New York (+1 212.351.3922, [email protected])

On November 4, 2024, Mayor Eric Adams signed into law the Safe Hotels Act (SHA), Int. No. 991-C, which regulates hotel operations through mandatory licensing, staffing, safety, and worker protection requirements.

The SHA mandates that all hotels operating in New York City obtain a license from the Department of Consumer Protection (DCWP), which may exercise broad discretion in determining license-application criteria and rendering decisions on license applications. The SHA also generally prohibits hotels with more than 100 employees from using subcontractors to fill housekeeping, front desk, or front service roles, instead requiring hotels to “directly employ” such “core employees,” with the notable exception of certain hotel operators as described below. In addition, the SHA permits hotel operators to continue existing third-party employment relationships based on the terms of existing contracting arrangements. Hotel operators, and by extension hotel owners and lenders who hold a security interest in hotels as collateral, should make efforts to ensure compliance with the SHA and to prepare for its financial and operational implications.

Licensing and Application

The SHA makes it unlawful for hotel operators to operate a hotel in New York City without a license. Licenses are valid for two years and must be obtained from the DCWP commissioner at a cost of $350.

The provisions governing the issuance and renewal of licenses do not contain any explicit criteria. The law simply mandates hotel operators to furnish sufficient information “as the commissioner shall require” to show the operator has “adequate procedures and safeguards to ensure compliance” with the SHA, including its staffing, employment, and guest-room cleanliness standards as set forth in more detail below. Despite this ambiguity, the SHA does not on its face require the commissioner to issue standards for such compliance.

The law largely defers to the terms of existing or future collective bargaining agreements between hotel operators and unionized employees. Rather than being required to document the sufficiency of their compliance procedures and safeguards for the commissioner, such operators subject to a collective bargaining agreement need show only that they have signed a collective bargaining agreement and that it “expressly incorporates the [SHA’s] requirements.” Doing so would yield a license that lasts for the longer of 10 years and the duration of the collective bargaining agreement.

Transfers of Ownership

The SHA also prohibits the transfer (assignment) of hotel licenses except those that comply with a separate law, section 22-510, which was enacted in 2020 and imposes employee-retention requirements on hotels that change hands.

Further, the commissioner may revoke a license from a hotel operator provided the licensee was notified of the anticipated revocation and given 30 days to correct the condition that warranted the revocation. The SHA does not set forth the conditions that would permit revocation of such license.

Direct-Employment Requirements and Exceptions for Pre-Existing Contracts

The SHA generally requires that hotels with more than 100 guest rooms “directly employ” all “core employees,” defined as employees “whose job classification is related to housekeeping, front desk, or front service at a hotel.” Such employees include, but are not limited to, room attendants, house persons, and bell or door staff. The definition of “core employees” excludes laundry employees, valet employees, concierge, reservation agents, telephone operators, engineering and maintenance employees, specialty cleaning employees, parking employees, security employees, lifeguards, spa, gym, and health club employees, minibar employees, audio-visual employees, cooks, stewards, bartenders, servers, bussers, barbacks, room service attendants, and other employees primarily working in food and beverage service operations. The SHA thus prohibits using staffing agencies or other contractors or subcontractors to fill core-employee roles, with a notable exception: hotel owners may retain “a single hotel operator to manage all hotel operations involving core employees.” These provisions will thus significantly impact how, going forward, hotel owners will be able to staff “core employee” positions, as defined by the SHA, particularly for hotels with business models that traditionally leverage several subcontractors for direct employment of their “core employees.”

In addition, the SHA creates an important temporary exemption from its direct-employment requirements for certain pre-existing agreements. Specifically, the law makes clear that its direct-employment requirements are not applicable to hotel owners or operators and contractors that have entered into an enforceable agreement before the SHA’s “effective date” of May 3, 2025, so long as the agreement terminates “on a date certain.” The direct-employment requirements do not go into effect for contracting agreements entered into before the SHA’s effective date (a) until 30 days after the agreement’s termination date for those agreements that terminate “on a date certain,” and (b) until December 1, 2026, for those agreements without a definite termination date. For agreements entered into on or after the SHA’s effective date, the direct-employment requirements do not go into effect until 180 days after the SHA’s effective date, on October 30, 2025.

Safety Requirements

The SHA mandates safety and cleanliness standards such as 24/7 front desk coverage, security when rooms are occupied, regular linen changes, daily room cleaning, a prohibition on bookings under four hours (except at airport hotels), and a prohibition “against facilitating human trafficking.” It also requires human trafficking training and free panic buttons for core employees. To safeguard employees, the SHA also includes an anti-retaliation measure to prevent retaliation against hotel staff who report alleged violations or unsafe practices.

Hotels should note that, effective immediately (as of November 4, 2024), the SHA prohibits hotel owners or operators from entering into an agreement that violates the SHA’s front desk staffing requirements. This section of the law is repealed once the rest of the law goes into effect on May 3, 2025.

Penalties for Non-Compliance

Violations of the SHA’s provisions carry escalating civil penalties, beginning with $500 for the first violation, $1,000 for the second violation issued for the same offense within a two-year period, $2,500 for the third violation issued for the same offense within a two-year period, and $5,000 for the fourth and all subsequent violations issued for the same offense within a two-year period.

Consideration for Lenders and Owners

Underwriting: As noted above, the SHA’s licensing requirement affords the DCPW commissioner wide discretion in issuing licenses. Its more lax application process for operators with collective bargaining agreements favors such operators over those without such agreements, creating market incentives that will impact the balance of power in negotiations between labor and hotel owners, and among owners with such agreements and those without them. Hotels that choose to enter into collective bargaining agreements will see an increase in labor costs and other associated costs. Additionally, the SHA’s direct-employment requirement substantially limits the work that hotels may delegate to subcontractors and staffing agencies, potentially increasing labor costs for hotel operators. These increased costs should be considered when underwriting the purchase of a hotel or the origination or purchase of a loan for which a hotel is collateral.
Preexisting subcontracts: Hotel owners and lenders should consider how best to leverage subcontracts or contracts that already exist or that may be executed before the SHA’s effective date of May 3, 2025.

As noted above, hotel owners have a window of time before the SHA’s effective date, during which time they can arrange their business operations to ensure compliance. Certain changes may require capital improvements or installation of new equipment. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update.

The full text of the bill may be found at the link below.

Read More

The following Gibson Dunn lawyers prepared this update: Andrew Lance, Anne Champion, Harris Mufson, Jonathan Soleimani, Nicole Jibrine, and Shlomo Rubinfeld.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more, please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Real Estate or Labor & Employment practice groups, or the following authors in New York:

Andrew Lance – Partner & Chair, Hotel & Leisure Practice Group
New York (+1 212.351.3871, [email protected])

Anne Champion – Partner, Litigation Practice Group
New York (+1 212.351.5361, [email protected]

Harris Mufson – Partner, Labor & Employment Practice Group
New York (+1 212.351.3805, [email protected])

Navigating turbulent waters in the face of an impending storm.

Using President-elect Trump’s first term as a guide, we assess it as highly likely that the next four years will see a fast-paced, aggressive, and far-reaching use of international trade tools to further the administration’s national security and foreign policy goals. These measures will be paired with diplomatic and other instruments of both soft and hard U.S. power. Companies, individuals, and organizations must stay abreast of changes in international trade rules in the United States and in any jurisdiction in which they have exposure to navigate what could be uncharted waters.

The second Trump administration, supported by a Republican-controlled Congress, is poised to deploy expansive international trade tools to respond to national security concerns and to achieve foreign policy goals. Based on our analysis of the first Trump administration’s trade practices, trends and developments under the Biden administration over the last four years, and President-elect Trump’s campaign promises and early personnel appointments, this alert explores key international trade issues and how they might unfold in the second Trump administration. While we assess that there will be some consistency—in particular with respect to the view that the People’s Republic of China (“China”) is a core focus and concern—in many respects the Trump administration is poised to deploy international trade measures in potentially radical ways.

In this note, we focus on seven key areas we assess to be among the most relevant to clients that have international exposure and that are involved in cross border investments and transactions: tariffs, the new outbound investment program, U.S. foreign direct investment review under the Committee on Foreign Investment in the United States (CFIUS), economic sanctions, export controls, the bulk sensitive personal data proposed rule, and the connected vehicles proposed rule. While many of these areas have a China focus, we also assess it as highly likely that the new administration will use these tools to address other national security and foreign policy issues, including with respect to the Middle East and Latin America.

Of course, the overview of the seven areas discussed below is not a comprehensive listing of likely international trade matters. There are many other international trade and investment issues that will almost certainly arise—both on the federal and state levels and emanating from not just the executive branch of government but also the legislative and judicial branches which have become increasingly involved, respectively, in promulgating and adjudicating on international trade. Moreover, other jurisdictions, in Europe, Asia, and the Americas may also deploy these tools either in opposition to U.S. measures or in pursuit of their own unrelated interests.

Understanding the trends in these and other key areas and monitoring ongoing developments will be critical for clients to successfully navigate the turbulent waters of a change in presidential administrations amid persistent and ever-growing national security threats.

1. Tariffs

Tariffs will be a key feature of international trade policy in the new administration. President-elect Trump has proposed to establish a universal baseline tariff of up to twenty percent on nearly all goods imported into the United States (the “Proposed Universal Tariff”) and a sixty percent tariff on all imports from China (the “Proposed China Tariff”, and together with the Proposed Universal Tariff, the “Proposed Tariffs”). Relatedly, President-elect Trump has reiterated calls from his first term to pass a “Reciprocal Trade Act“ which would empower the president to increase tariffs to either the rate imposed by the opposite country or the determined value of the applicable nontariff barriers.

While there are a handful of existing statutes that authorize the president to impose tariffs under certain circumstances, there are two that are most likely to provide support for the Proposed Tariffs.

First, Section 301 of the Trade Act of 1974[1] authorizes the president to impose tariffs in response to foreign practices that either violate trade agreements or are unjustifiable, unreasonable, or discriminatory and burden or restrict U.S. commerce. While Section 301 would authorize the Proposed China Tariff based on findings of unfair trade practices, it is unlikely to authorize the Proposed Universal Tariff, as it requires the identification of such acts, policies, or practices by a specific foreign country.

Second, Section 203 of the International Emergency Economic Powers Act (“IEEPA”)[2] authorizes the president, during a period of national emergency declared by the President, to regulate any importation of any property in which any foreign country or a national thereof has any interest. Section 203 may be invoked to authorize the Proposed Tariffs on the basis that trade deficits threaten the national security of the United States.

A possible, but less likely, option to support the Proposed Tariffs is Section 232 of the Trade Expansion Act of 1962, which authorizes the president to impose tariffs on imports of articles determined by a U.S. Department of Commerce (“Commerce”) investigation to undermine national security.[3] While Section 232 would authorize the Proposed China Tariff, doing so would be delayed by a lengthy investigation and could only be applied to specific articles with a national security nexus. Section 232 also may not be the most effective vehicle to authorize the Proposed Universal Tariff because there is unlikely to be a plausible national security nexus to imports of all articles from all countries.

Regardless of the authority used to implement the Proposed Tariffs, such actions along with likely retaliation by foreign governments could significantly impact global supply chains and could lead to decreases in the availability of certain goods and increases in the cost of goods around the world. Already, the European Union (“EU”) and China have indicated they are prepared to retaliate should President-elect Trump move forward with the Proposed Tariffs. We note that President-elect Trump’s promise to reduce regulation and taxes during his second term could offset some of the impact of the Proposed Tariffs.

Any executive action that might be taken to impose the Proposed Tariffs will almost certainly be the subject of substantial legal challenges, particularly as the U.S. Constitution provides that Congress has general tariff authorities. However, challenging the Proposed Tariffs could still prove difficult, particularly those imposed under IEEPA, which broadly authorizes the president to impose tariffs based on a national emergency declaration. Despite the newfound possibility of meaningful challenges to agency decisions due to the fall of Chevron deference[4] and the revitalization of the major questions doctrine, we assess that in other than truly unusual matters, it is likely that courts could continue to broadly defer to the executive in matters of national security and foreign affairs.

Alternatively, the new administration could look to effectuate the Proposed Tariffs legislatively—something that has not happened since the Smoot-Hawley Tariff Act of 1930. President-elect Trump’s team has reportedly engaged the House Ways and Means Committee about developing legislation that would cut taxes and raise revenue through tariff increases. There has also been legislation proposed in both the Senate and the House to strip China of its Permanent Normal Trade Relations (“PNTR”) status, create a new China-specific tariff schedule, and impose 100% tariffs on goods critical to U.S. national security.[5] Should such legislation succeed—now more likely given the Republican control of both houses of Congress—it would be very difficult to challenge congressionally enacted tariffs.

2. Outbound Investment

Outbound investment controls, particularly regarding U.S. investment in China, will also play a meaningful role in the second Trump administration’s international trade policy. On October 28, 2024, the U.S. Department of the Treasury (“Treasury”) issued a final rule implementing an outbound investment control regime targeting artificial intelligence (“AI”), semiconductors and microelectronics, and quantum computing investments involving China which raise national security concerns. The regulations’ prohibitions and reporting requirements take effect on January 2, 2025. For more details about the final rule, please refer to our prior client alert.

Treasury provided that the final rule “sought to maintain the goals of both open investment and protection of national security.” But as hawkishness toward China seems poised to grow in the second Trump administration (and enjoys a large degree of bipartisan support), that balance could tip towards protecting national security. While the regulations are presently targeted at U.S. outbound investments in China and limited to a narrow group of critical technology sectors, the regime could be expanded both with respect to target countries and sectors of interest. For example, the second Trump administration could expand the list of restricted investments to other sensitive sectors such as hypersonics, satellite-based communications, and networked laser scanning systems with dual-use applications.[6]

Although the Biden administration relied on executive authorities in promulgating its outbound investment regime, Congress may quickly seek to enact its own regime. House Speaker Mike Johnson, Foreign Affairs Committee Chairman Michael McCaul, and Select Committee on the Chinese Communist Party Chairman John Moolenaar strongly support addressing outbound investment in the FY 2025 National Defense Authorization Act (“NDAA”)—a “must pass” piece of legislation that funds the military and to which unrelated amendments (regularly involving sanctions and trade matters) are frequently attached.

The day after Treasury released the final rule, Chairman Moolenaar issued a statement “commending” the regulation but calling for Congress to “build on these rules and address a broader set of technologies and transactions that threaten our national security.”[7] However, House Financial Services Committee Chairman Patrick McHenry favors a sanctions regime rather than a sectoral approach to limiting outbound investment. He had opposed the inclusion of outbound investment provisions in the FY 2024 NDAA, effectively blocking it from becoming law, and appears poised to do so again this year. Moolenaar has made clear that House leadership is pushing for legislation before the next Congress and hinted that such legislation could involve a compromise including both sanctions and sectoral regulation.[8] But with McHenry retiring from Congress and Republicans poised to control the executive and both houses of Congress, proponents of stronger outbound investment regulation could decide to forego a negotiated compromise and push for more aggressive legislation in the new Congress.

3. CFIUS

In contrast to the new and rapidly developing outbound investment regime, we assess that the Committee on Foreign Investment in the United States (“CFIUS”) we continue its efforts. CFIUS’s reviews of inbound investment—which also enjoy bipartisan support—are unlikely to undergo meaningful changes under President-elect Trump. Both the Biden and first Trump administrations have been tough on Chinese investment into the United States, and this stance will continue and perhaps intensify. In addition to a generally harsh climate for Chinese investment, we have seen—for many years—calls from Congressional leaders on both sides of the aisle to more strictly scrutinize Chinese investments in agricultural land near military bases (discussed in a prior alert). This rigorous scrutiny of Chinese investment in real estate is likely to evolve further, including through ever-increasing state and local legislative efforts, in addition to CFIUS reviews.

While major changes to CFIUS’s regulations and practices are unlikely, there may be some shift in priorities. For example, during the Biden administration, CFIUS carefully scrutinized investments from Saudi Arabia. Under the leadership of President-elect Trump, who previously enjoyed a relatively close relationship with Saudi Arabia, CFIUS may place slightly lower scrutiny on Saudi investments. Similarly, potential easing of Russian sanctions (described below) could crack the door for a return to Russian minority investments in U.S. businesses.

Although CFIUS is unlikely to undergo any paradigm shift in the next year or so, its importance as a regulatory gating item for transactions will continue apace and could grow. Under the Biden administration, CFIUS took unprecedented actions to ramp up enforcement activities related to CFIUS filings and noncompliance with mitigation agreements reached that allowed certain investments to proceed so long as the parties complied with agreed upon restrictions. We discussed CFIUS’s formal guidelines for enforcement and subsequent increase in the frequency and size of civil monetary penalties in a prior alert. One indicator of President-elect Trump’s stance on CFIUS enforcement is the fact that, of the fewer than ten transactions that CFIUS has referred to a President to block since its inception, then-President Trump was responsible for blocking four during his first term. CFIUS’s enforcement focus is likely to persist under the incoming administration.

4. Sanctions

Although expanded tariffs have taken center stage with respect to a second Trump administration’s trade policy toward China, we assess it as likely that the Trump White House will also leverage economic sanctions in the strategic competition between Washington and Beijing. The first Trump administration and the outgoing Biden administration have each imposed restrictions on the ability of U.S. persons to invest in publicly traded securities of certain named Chinese companies. Those measures presently restrict dealings involving sixty-eight entities that appear by name on the Non-SDN Chinese Military-Industrial Complex Companies (“NS-CMIC”) List maintained by Treasury’s Office of Foreign Assets Control (“OFAC”). The second Trump administration may continue to expand the number of entities named to the NS-CMIC List, further restricting U.S. investment in certain Chinese public companies. It may also designate additional individuals and entities to OFAC’s more restrictive Specially Designated Nationals and Blocked Persons (“SDN”) List. Designations to the SDN List were employed during President-elect Trump’s first term in response to various foreign policy disputes with China, including to impose consequences on certain Hong Kong and mainland Chinese government officials for their alleged involvement in implementing the 2020 Hong Kong National Security Law or perpetrating human rights abuses in China’s Xinjiang Uyghur Autonomous Region. Upon returning to the White House, President Trump could resume the practice he began in his first administration of imposing blocking sanctions on senior Hong Kong, and potentially mainland Chinese, government officials.

The Trump administration could also revive certain China-related sanctions authorities that have fallen dormant during the Biden administration. For example, during his first term in office, President Trump signed into law the Hong Kong Autonomy Act (“HKAA”), which authorizes the imposition of sanctions such as asset freezes and visa bans on individuals identified by the U.S. Secretary of State as enforcing the Hong Kong National Security Law. Notably, the HKAA authorizes “secondary” sanctions on non-U.S. financial institutions that knowingly conduct “significant” transactions with such designated persons—potentially subjecting non-U.S. financial institutions that engage in such dealings to a range of consequences, including loss of access to the U.S. financial system. Although the United States has yet to designate any non-U.S. financial institutions under this authority, the recent passage of a new National Security regime in Hong Kong suggests that it remains a viable tool for the Trump White House should the new administration be inclined to further pressure Beijing.

Following Russia’s full-scale invasion of Ukraine in early 2022, a coalition of global powers—including the United States, the EU, the United Kingdom, Canada, Australia, and Japan—deployed an unprecedented barrage of trade restrictions on Russia. Novel, targeted measures were unleashed and, as the war in Ukraine unfolded, the United States and its allies incrementally expanded the scope of blocking sanctions, sectoral sanctions targeting specific segments of the Russian economy, services bans (including on the maritime transport of Russian origin crude purchased at or above a specified price), export controls, and import bans.

The first Trump administration imposed sanctions on more targets in each of its four years than any previous administration. However, in light of President-elect Trump’s pronouncements on the campaign trail about quickly ending the war in Ukraine and his recent statements on the proper use of sanctions as short-term coercive tools (having condemned long-term use of sanctions as weakening the dollar’s dominance as a global currency), U.S. sanctions on Russia could potentially be eased under the second Trump administration as part of a negotiated resolution to the conflict.

Should President-elect Trump be inclined to relax U.S. sanctions on Russia, there are several avenues at his disposal to do so. For example, upon re-entering the White House, President Trump could narrow or revoke existing measures that have been implemented solely via executive order (e.g., the prohibition on “new investment” in the Russian Federation set forth in Executive Order 14071) by issuing new or amended executive orders, or by issuing permissive general licenses. Because many of the Biden-era sanctions measures targeting Russia are ones implemented solely via executive order, they are among those measures which are susceptible to unilateral amendment or revocation by the new executive, President Trump.

Where statutes direct the president to impose sanctions in response to specific events, President Trump may enjoy less flexibility to unilaterally alter the status quo. For example, the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), which imposed sanctions on Iran, North Korea, and Russia, and codified certain Obama-era sanctions authorities, provides that the president must submit the easing or lifting sanctions promulgated under CAATSA for congressional review. Specifically, the president must submit a report to the appropriate congressional committees describing the proposed action and supporting reasons. Congress’s views are subject to presidential veto, and congressional checks can merely delay, not stop, presidential action. Thus, although CAATSA creates some hurdles to lifting certain Russia sanctions, President-elect Trump may still do so, especially given Republican party control of both the House and the Senate.

Furthermore, while the modus operandi of the Biden administration has been to garner international cooperation in the field of sanctions—exemplified most prominently by relying on a coalition of G7 and other partner countries to coordinate a collective response to Russia’s invasion of Ukraine—the first Trump administration favored unilateral actions and an often-confrontational stance toward traditional U.S. allies. EU officials anticipate a decrease in multilateral cooperation during President Trump’s second term and are reportedly working on domestic measures to guarantee the efficacy and endurance of sanctions on Russia, including through tighter enforcement. The United Kingdom has also reaffirmed its “iron-clad” support for Ukraine, and the Starmer government has not indicated any intention to scale back sanctions on Russia. The Russia-related regulatory environment is already difficult to navigate as even coordinated measures do not always align across jurisdictions. Further divergence among the United States, the United Kingdom and the EU could dramatically increase the compliance burden for global enterprises.

A second Trump administration could also aggressively wield sanctions to advance U.S. national security objectives in the Middle East, with a particular focus on Iran and its regional proxies. Notably, the United States during President-elect Trump’s first term withdrew from the Joint Comprehensive Plan of Action (“JCPOA”)—the 2015 Iran nuclear deal—and launched a “maximum pressure” economic campaign that aimed to deny Tehran the resources needed to fund its destabilizing activities. Although the outgoing Biden administration has left most U.S. sanctions on Iran in place—and indeed has continued to periodically designate additional Iranian parties to the SDN List, including Iranian government officials, entities involved in exporting unmanned aerial vehicles to Russia, and entities involved in the Iranian petroleum and petrochemicals trade—the pace of Iran-related sanctions designations could sharply increase upon President-elect Trump’s return to office.

As part of a widely anticipated resumption of the “maximum pressure” campaign, the second Trump administration could also target third-country shipping companies, port operators, oil traders, and financial institutions that enable Iranian oil exports. President-elect Trump could also continue his predecessor’s practice of using U.S. counter-terrorism sanctions authorities expansively to target Iran-backed militias, including Hamas, Hezbollah, and the Houthis. In a possible break from the current administration and in light of certain early nominees to core Middle East policy positions, we assess it as possible that the President-elect could revoke a February 2024 executive order that created a new West Bank sanctions program which has been used to target a small number of Israeli settlers.

As discussed in our 2023 Year-End Sanctions and Export Controls Update, the Biden administration brought record-breaking sanctions enforcement actions, as well as an increased focus on and dedication of resources to criminal enforcement of sanctions violations. Indeed, the Biden Administration has actually broken the Trump Administration’s sanctions record, with each of his four years in office seeing record numbers of additions to OFAC sanctions lists. This has been matched by an increasing pace and severity of civil and criminal enforcement actions. Although aggressive enforcement of sanctions is likely to continue, the Trump administration could effect a shift in the industries and types of violations that give rise to enforcement actions by OFAC and the U.S. Department of Justice (“DOJ”). For example, while the Biden administration has heavily focused on the virtual currency sector, including the largest settlement in OFAC history with a cryptocurrency exchange, the Trump campaign has signaled the potential for a friendlier regulatory environment for cryptocurrency industry participants.

5. Export Controls

As was the case in the first Trump administration, export controls targeting China are expected to play a key role in the second Trump administration’s management of the U.S.-China strategic competition. The first Trump administration deployed export controls to respond to several Chinese actions deemed contrary to U.S. interests and values, including:

Chinese industrial policy initiatives, such as Made in China 2025 and the National Innovation-Driven Development Strategy, that are designed to catalyze Chinese advancements, and ultimately leadership, in strategic technologies including advanced manufacturing, AI, information technology, robotics and semiconductors;
China’s strategy of military-civil fusion (“MCF”), which seeks to integrate commercial advancements in advanced technologies (including quantum computing, big data, semiconductors, 5G, advanced nuclear technology, aerospace technology, and AI) into military applications to further the Chinese military’s technological capabilities; and
Alleged deficiencies in China’s human rights record through the use of surveillance and other technologies as well as Chinese actions in Hong Kong.

Measures adopted by the first Trump administration included, among others, enhanced scrutiny requirements for an increasing number of civil and military Chinese end users and end uses in China; changes to China-related export license requirements; designation of several large, multinational Chinese firms to the Entity List, including the Semiconductor Manufacturing International Corporation; targeted controls on Huawei, including by designating Huawei to the Entity List and crafting a Huawei-specific foreign direct product rule intended to impede Huawei’s ability to procure certain items; and the removal of Hong Kong as a separate destination under the Export Administration Regulations (“EAR”).

The Biden administration continued the first Trump administration’s widespread deployment of export controls to counter China and in fact implemented an even more expansive regime. Notably, the Biden administration’s controls on semiconductors marked a fundamental shift in the U.S. government’s long-standing policy on such export controls: in contrast to the previous approach of maintaining a relative advantage (i.e., “two generations ahead”) in certain key technologies, the Biden Administration views it as a national security imperative to “maintain as large of a lead as possible.” President-elect Trump’s expected appointments of “China hawks” to key national security positions for his second term appear to indicate a continuation of this maximalist approach to export controls.

The second Trump administration will also likely see the continued and enhanced focus on restricting exports of “emerging technologies” to China. The Biden administration has focused on technological competition with China by controlling the export to China of advanced technologies such as advanced integrated circuits, semiconductor manufacturing equipment, and items related to AI and quantum computing and by working to multi-lateralize these controls with counterparts in Europe, Japan and South Korea outside of the traditional multilateral regimes like the Wassenaar Arrangement.

The Biden administration has also issued proposed rules that would greatly expand the licensing requirements that would apply to exports of most items to companies and other entities in China with ties to its military and intelligence sectors, and to U.S. person services to these same entities even when no U.S. exports are involved. The second Trump administration could build upon these policies by lowering the De Minimis Rule value threshold at which foreign made items that incorporate U.S. controlled content would be subject to export controls and by imposing controls on additional sectors.

Restrictions could also come in the form of modifications to some of the more technical aspects of the EAR. For example, partly in response to China’s MCF strategy, the first Trump administration removed License Exception Civil End Users (“CIV”) which previously authorized exports, reexports, and transfers of certain national security-controlled items, without prior review by BIS and subject to satisfaction of certain conditions, to multiple countries including China. Senator Marco Rubio, the presumptive Secretary of State, has previously called for the Bureau of Industry and Security (“BIS”) to adopt a “blanket ‘presumption of denial’” posture for export license applications seeking to send “critical technology” to any entity in China. While the Department of State does not exercise control over the EAR, Senator Rubio’s comments are instructive of the types of changes to export controls that advisors may be considering. And although President-elect Trump has distanced himself from Project 2025, regulatory changes proposed in Project 2025’s Mandate for Leadership provide an insight into the export controls thinking of potential advisors. Project 2025’s proposals with respect to China and other countries of concern include:

eliminating the “specially designed” licensing exceptions;
redesignating China and Russia to more highly prohibitive export licensing groups (country groups D or E);
eliminating license exceptions;
broadening foreign direct product rules;
reducing the de minimis threshold from twenty-five percent to ten percent, or zero percent for critical technologies;
tightening the deemed export rules to prevent technology transfer to foreign nationals from countries of concern;
tightening the definition of “fundamental research” to address exploitation of the open U.S. university system by authoritarian governments through funding, students and researchers, and recruitment;
eliminating license exceptions for sharing technology with controlled entities/countries through standards-setting “activities” and bodies; and
improving regulations regarding published information for technology transfers.

Combined, such modifications to the EAR have the potential for significant impact on bilateral trade between the United States and China and could severely restrict Chinese companies’ ability to source items subject to the EAR (including many foreign-manufactured goods). These changes may also have significant collateral consequences for non-U.S. companies who continue to make use of supply chains that include links in China. They may also have a significant impact on the ability of the United States to continue to attract the world’s best and brightest to pursue graduate studies in U.S. universities, the ability of U.S. companies to participate in global standards development for next generation technologies, and lead to decreasing use of U.S. origin software, technology, and design and production by non-U.S. companies.

Notably, the Department of State administers and enforces the International Traffic in Arms Regulations (“ITAR”). ITAR, which applies only to items designed for and used in military and intelligence applications, is the other primary legal regime for implementing U.S. export controls. Should Senator Rubio be confirmed as the Secretary of State, and given his focus on export controls during his time in the Senate, he is likely to ensure that State Department reviewers in interagency export licensing reviews and in Entity List and other restricted party export control designations take less business-friendly positions in any determinations that touch on China.

Consistent with the approach of the first Trump administration and the Biden administration, the second Trump administration may aggressively use Entity List designations to target entities in China. Persons added to the Entity List are subject to additional licensing requirements and specific, often restrictive, licensing policies. For instance, Project 2025’s proposals specifically advocate for designating certain Chinese apps to the Entity List in an effort to prevent the applications’ software from updating within the United States, with the ultimate goal of rendering these applications (and potentially others) non-functional in the United States over time.

One of the major export controls-related complaints of the China hawks in D.C. is the approval rate of licenses for export of EAR controlled items to China, including items controlled for national security purposes. The House Foreign Affairs Committee as well as the Select Committee on the Chinese Communist Party have called for implementing significant restrictions on licensing requirements, and in particular imposing a “policy of denial” for all exports of national security-controlled items to China. Taken within the context of the generally aggressive view on China the second Trump administration is expected to hold, we could see a fundamental shift in export licensing policy, and in particular, the number of licenses granted, especially for the export to China of “critical technology” such as semiconductors and advanced computing items.

Another area of export controls that could receive significant attention under the second Trump administration is enforcement. Reports in late October and early November 2024 that highly advanced semiconductor technology manufactured by TSMC, which is subject to U.S. export controls, was found in Huawei’s Ascend 910B chips has highlighted the difficulties that the U.S. government faces in enforcing its panoply of China-focused export controls. In fact, this is not the first time that doubts regarding the efficacy of export controls have been raised. Huawei’s use of an indigenously designed and produced 7 nm chip in its Mate 60 Pro phone (the release of which was timed during Commerce Secretary’s Raimondo visit to China in August 2023) raised similar concerns. Influential members of Congress have repeatedly focused on what they consider inadequate enforcement and implementation of export controls. There could be increased pressure on the incoming administration to prioritize enforcement.

Although the second Trump administration is widely expected to pursue an aggressive export controls policy, there are several factors that could temper its approach, at least in certain instances. During the first Trump administration, media reports indicated that Chinese leader Xi Jinping’s personal intervention persuaded President Trump to temporarily roll back certain restrictions targeting Huawei. Personal diplomacy of a similar nature could impact the severity, duration, targets or other aspects of certain export controls. Moreover, recent media reports indicate that Chinese officials are in increasing contact with American business leaders, including individuals identified as close to President-elect Trump and with business interests in China, to counter the influence of the China hawks. China could attempt to use such high-level intermediaries to moderate current and proposed export controls.

Lastly, over the past several years, China has steadily built up its economic lawfare toolkit. These tools give Beijing the ability to not only counter U.S. economic statecraft, but also to use its economic strengths to further its foreign policy goals. For instance, primarily in response to the semiconductors-related export controls, China imposed export controls on gallium, germanium, and graphite, key critical minerals with applications in a range of industries. The list was further expanded to include antimony. China has threatened to cut Japan’s access to critical minerals essential for automotive production if Japan imposes further semiconductor-related export controls on China. Separately, China has imposed standalone export controls on several technologies, and in October 2024 published comprehensive export controls regulations to regulate dual-use items, which include provisions similar to the EAR’s de minimis rule and foreign direct product rules to regulate foreign-produced items incorporating Chinese-origin items or produced using Chinese technology. More recently, China sanctioned Skydio, the largest American drone manufacturer, ostensibly for its sales to Taiwan and for its lobbying efforts against Chinese drone manufacturer DJI. As part of the sanctions, Beijing banned Chinese companies, including Chinese entities of non-China-headquartered companies, from supplying Skydio with critical components, including battery supplies from its sole provider. China’s ability, and willingness, to leverage these tools, which could cause significant adverse consequences for U.S. companies, could also serve as a moderating force in the Trump administration’s export controls deliberations. On the other hand, formalized weaponization of the supply chain could empower Trump administration officials calling for strategic decoupling.

One other issue that we are following closely—in the event that the new administration is successful in ending the Ukraine war (on whatever terms can be agreed)—is the possibility that in addition to the easing of sanctions, President-elect Trump may seek to ease export controls restrictions which have also played a significant role in the U.S. and international response to Russian aggression. While it would be legally possible for President-elect Trump to ease many of these restrictions, it is also possible that allies across the G7 would be unwilling to do so. Similarly, if a “grand bargain” is made with China, there is a similar potential of easing of many of these restrictions as well.

6. Bulk Sensitive Personal Data Notice of Proposed Rulemaking

President-elect Trump is likely to advance efforts to restrict and prohibit the transfer of sensitive data to foreign adversaries. However, despite both the Trump and Biden administrations’ efforts to protect sensitive U.S. data and the bipartisan consensus about the risks posed, the fate of a potentially high-impact rule recently proposed by the Biden administration to regulate transfers of bulk sensitive data to foreign adversaries remains uncertain.

Efforts to restrict foreign adversaries’ access to sensitive data concerning U.S. persons span both the Trump and Biden administrations. In his first term, President-elect Trump issued an executive order restricting the acquisition or use of communications and information technology by foreign adversaries seeking to obtain sensitive data about U.S. persons. The U.S. government’s focus on disrupting the flow of sensitive data to adversaries has continued under the Biden administration. At the forefront of these efforts is a notice of proposed rulemaking (“NPRM”) issued by DOJ on October 21, 2024 which would, for the first time, allow DOJ to restrict or prohibit the bulk transfer of certain categories of sensitive data to individuals or entities associated with six “countries of concern.”

The NPRM follows a February 28, 2024 executive order in which President Biden called for DOJ to address the risk that bulk sensitive data on U.S. persons could be accessed and weaponized by foreign adversaries for espionage, influence, and blackmailing operations. The NPRM would impose compliance and due diligence requirements on U.S. entities involved in data brokerage transactions, data transfers, vendor and employment agreements, and investment agreements for certain kinds of data above specified quantity thresholds. Regulated data would include genomic, biometric, geolocation, health, financial, personally identifiable, and government-related information. Regulated entities would be expected to create risk-based compliance programs which would vary based on the size of the regulated entities and the volume and type of data which they process. Presently, only data transferred to six “countries of concern”—China, Cuba, Iran, North Korea, Russia, and Venezuela—would fall within the proposed rule’s scope. Except for China, each of the countries of concern is already subject to broad-reaching sanctions which comprehensively limit their ability to do business with U.S. persons.

The proposed rule’s future is uncertain. The NPRM is subject to public comment until November 29, 2024, after which DOJ may attempt to issue a final rule before the presidential transition on January 20, 2025. To do so, DOJ would first consider public comments, issue a final rule, and publish the rule in the Federal Register. Either the White House Office of Information and Regulatory Affairs (OIRA) or DOJ itself is likely to deem the rule a “major rule” for purposes of the Congressional Review Act[9] (“CRA”), since DOJ estimates that the combined value of lost transactions resulting from the proposed rule would exceed $300 million annually[10], far surpassing the CRA’s $100 million annual economic impact threshold for major rules. As a result, the rule would take effect no earlier than sixty days after publication. Even if the rule were not deemed major, DOJ would have fewer than two months between the public comment period and President-elect Trump’s inauguration in which to issue the final rule and yet less time if it was in fact a major rule. In any event, Congress could overturn the rule through a joint resolution of disapproval under the CRA.

If DOJ publishes its final rule before January 20, it is unclear whether the Trump administration will allow it to remain in place. The NPRM aligns with the first Trump administration’s hawkish stance: since China is not subject to the same comprehensive sanctions as the other five “countries of concern,” data transfers to Chinese persons and entities would likely constitute the vast majority of transactions subject to the rule’s restrictions or prohibitions. As noted above, the proposed rule also addresses a bipartisan concern that received significant attention in the first Trump administration: the flow of sensitive data about U.S. persons to foreign adversaries. The Trump administration could therefore decide to retain the rule because it is consistent with the administration’s policy priorities.

The second Trump administration could also amend the rule, revoke it and replace it with a regulation or executive order of its own, or work with Congress to address the issue. In this case, the second Trump administration’s emphasis on deregulation could result in efforts to restrict bulk sensitive data transfers in ways that would impose fewer compliance and due diligence requirements on U.S. entities. Carveouts and exceptions in the NPRM—including, for example, with respect to data transfers between U.S. companies and their foreign subsidiaries—would likely remain or be expanded. Revocation or amendment of the rule would require notice and public comment and could be disruptive for U.S. entities already adjusting or expanding their compliance and due diligence programs in anticipation of the NPRM’s promulgation.

If the NPRM is not issued as a final rule under the Biden administration, the second Trump administration could also choose not to act on the issue. Indeed, Congress has already taken action: in the Protecting Americans’ Data from Foreign Adversaries Act of 2024 (“PADFAA”), signed by President Biden in April, Congress empowered the U.S. Federal Trade Commission to regulate data brokers engaging in sensitive data transactions with entities affiliated with China, Russia, North Korea, and Iran.[11] While PADFAA and the NPRM overlap in many respects, importantly, PADFAA’s narrow definition of “data brokers” and its provisions excepting many types of data brokers from its scope mean that allowing the NPRM to lapse, or declining to issue a similar rule, would leave substantial gaps in the United States’ response to the access and weaponization of U.S. persons’ sensitive data by foreign adversaries.

7. Connected Vehicles Notice of Proposed Rulemaking

Another key rule to watch in the second Trump administration is the Biden administration’s proposed connected vehicles rule. On September 23, 2024, BIS announced an NPRM that, once implemented, would ban certain imports of vehicles from China (including Hong Kong) and Russia, as well as key hardware and software components, based on identified “undue or unacceptable risks” to national security and the privacy of U.S. citizens.

There is likely bipartisan consensus to finalize the rule. However, it remains to be seen whether BIS will finalize the rule before the second Trump administration begins. The comment period closed on October 28, 2024, and BIS has stated that its goal is to publish a final rule by January 2025. If finalization slips past inauguration day, it is possible the second Trump administration could consider revising and strengthening the rule. In any event, the connected vehicles rule could serve as a model for additional rules in the new Trump administration to address the increasing bipartisan concern about national security risks posed by foreign adversaries.

The connected vehicles NPRM effectuates EO 13873, which, inter alia, identifies “undue or unacceptable risks” posed by a class of transactions that involve information and communications technology and services (“ICTS”) designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary.[12] Such ICTS includes “connected software applications,” as outlined in greater detail in the ICTS regulations currently in effect.[13]

According to the NPRM, the proposed regulations are meant to address, in part, the ability of China and Russia—under their respective domestic legal and regulatory regimes—to compel companies subject to their jurisdiction to cooperate with security and intelligence services. Such access could enable China and Russia to exfiltrate sensitive data and potentially allow remote access and manipulation of connected vehicles in the United States.

The proposed measure focuses on hardware and software integrated into a car’s Vehicle Connectivity System (“VCS”) and the software integrated into its Automated Driving System (“ADS”). Both are critical systems that allow for external connectivity and autonomous driving capabilities in the increasingly commonplace “connected vehicles” traversing American roads. The proposed rule would apply to all on-road vehicles such as cars, trucks, and buses, but would exclude vehicles not used on public roads like agricultural or mining vehicles.

In general, the NRPM would prohibit the import and sale in the United States of (1) completed connected vehicles that incorporate covered software designed or developed by persons under Chinese (or Russian) control, and (2) such VCS or ADS components. In order to import VCS hardware or completed connected vehicles, or sell completed connected vehicles manufactured outside of the United States that are not prohibited, companies would be required to submit “Declarations of Conformity” to BIS. These submissions would require substantive technical information—including a Hardware Bill of Materials and Software Bill of Materials, as relevant.

Once implemented, the final regulations will have a delayed impact in theory, but companies will need to proactively take steps to prepare for new compliance obligations and supply chain requirements (including designing and manufacturing processes associated with the identified vehicle model years). As proposed, the software prohibitions impacting connected vehicle manufacturers would take effect for Model Year 2027 vehicles. As proposed, the hardware prohibitions impacting VCS hardware importers and connected vehicle manufacturers would take effect for Model Year 2030 vehicles, or starting on January 1, 2029 for units without a model year. Parties (including manufacturers and importers) impacted by the new regulations, once implemented, will need to carefully review and modify supply chains involving covered vehicles, hardware, or software from China (including Hong Kong) or Russia unless a general or specific authorization applies.

[1] Trade Act of 1974, 19 U.S.C. § 2411, Pub. L. No. 93-618, § 301, 88 Stat. 1978.

[2] 50 U.S.C. § 1702.

[3] Trade Expansion Act of 1962, 19 U.S.C. § 1862, Pub. L. No. 87-794, § 232, 76 Stat. 872 (1962).

^[4] See Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024) (Supreme Court overruled the Chevron doctrine but noted that agency interpretation of a statute will be accorded Skidmore deference).

[5] E.g., S. 5264, Neither Permanent Nor Normal Trade Relations Act, 118th Cong. (Sept. 25, 2024), https://www.congress.gov/bill/118th-congress/senate-bill/5264/text.

[6] Indeed, proposed outbound legislation circulating in Congress already contemplates including these sectors. See, e.g., S. Amend. 3284 to National Defense Authorization Act for Fiscal Year 2025 (NDAA), S. 4638, 118th Cong. (2024), https://www.congress.gov/amendment/118th-congress/senate-amendment/3284/text?s=a&r=1.

^[7] Press Release, Chairman of the Select Comm. on the Strategic Competition Between the U.S. and the Chinese Communist Party John Moolenaar, Moolenaar: Biden Regulations on Outbound Investment to China a Good Step, Congress Must Strengthen (Oct. 29, 2024), https://selectcommitteeontheccp.house.gov/media/press-releases/moolenaar-biden-regulations-outbound-investment-china-good-step-congress-must.

[8] Jasper Goodman, POLITICO Pro Q&A: Rep. John Moolenaar, Politico Pro (Nov. 8, 2024), https://subscriber.politicopro.com/article/2024/11/politico-pro-q-a-rep-john-moolenaar-00188480?site=pro&prod=alert&prodname=alertmail&linktype=article&source=email.

[9] See 5 U.S.C. §§ 801–808.

[10] See NPRM at 269–70.

[11] Protecting Americans’ Data from Foreign Adversaries Act (PADFAA), 15 U.S.C. § 9901.

[12] Executive Order 13,873 invoked the International Emergency Economic Powers Act and the National Emergencies Act to provide BIS the authority to engage in rulemaking. Securing the Information and Communications Technology and Services Supply Chain, 84 Fed. Reg. 22,689 (May 15, 2019).

[13] See 15 C.F.R. Part 791.

The following Gibson Dunn lawyers prepared this update: Adam M. Smith, Donald Harrison, Stephenie Gosnell Handler, Christopher Timura, David Wolber, Amanda Neely, Michelle Weinbaum, Samantha Sewall, Audi Syarief, Chris Mullen, Scott Toussaint, Anna Searcey, Dharak Bhavsar, Hugh Danilack, Irene Polieri, Hui Fang*, and Karsten Ball*.

Gibson Dunn attorneys are available to counsel clients regarding potential or ongoing transactions and other compliance or public policy concerns. 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:

* Hui Fang and Karsten Ball, associates working in the firm’s Washington, D.C. office, are not yet admitted to practice law.

From the Derivatives Practice Group: This week, the European Supervisory Authorities published a Decision on the information that competent authorities must report to them for the designation of critical Information and Communication Technology third-party service providers under the Digital Operational Resilience Act.

New Developments

CFTC Publishes Customer Alert Regarding CFTC v. Traders Domain FX Ltd. On November 14, the CFTC published an alert to customers who believe they may be victims of alleged fraud by Traders Domain FX Ltd. Customers are urged to complete this voluntary confidential customer survey, which will provide CFTC with pertinent information on this case. [NEW]
CFTC Publishes Final Rule Adopting Amendments to Regulations Governing Registered Entities. On November 7, the CFTC adopted amendments to its regulations under the Commodity Exchange Act that govern how registered entities submit self-certifications, and requests for approval, of their rules, rule amendments, and new products for trading and clearing, as well as the CFTC’s review and processing of such submissions. According to the CFTC, the amendments are intended to clarify, simplify and enhance the utility of those regulations for registered entities, market participants and the CFTC. The effective date for this final rule is December 9, 2024.
CFTC Market Risk Advisory Committee to Hold Public Meeting on December 10. On November 5, the CFTC’s Market Risk Advisory Committee (“MRAC”) announced that, on December 10, 2024, from 9:30 a.m. to 12:30 p.m. (Eastern Standard Time), it will hold a public, in-person meeting at the CFTC’s Washington, DC headquarters, with options for virtual attendance. The MRAC indicated that it plans to discuss current topics and developments in the areas of central counterparty (“CCP”) risk and governance, market structure, climate-related risk, and innovative and emerging technologies affecting the derivatives and related financial markets, including discussions led by the CCP Risk & Governance and Market Structure subcommittees with recommendations related to CCP cyber resilience and critical third-party service providers and the cash futures basis trade, respectively.
Commissioner Pham Announces CFTC Global Markets Advisory Committee Meeting on November 21. CFTC Commissioner Caroline D. Pham, sponsor of the Global Markets Advisory Committee (“GMAC”), announced the GMAC will hold a virtual public meeting Thursday, Nov. 21, from 9:30 a.m. to 10:30 a.m. EST. At this meeting, the GMAC will hear a presentation by the Tokenized Collateral workstream of the GMAC’s Digital Asset Markets Subcommittee on expanding use of non-cash collateral through use of distributed ledger technology and consider a recommendation from the Subcommittee. The meeting will also include a presentation by the Utility Tokens workstream of the Digital Asset Markets Subcommittee summarizing their work to-date on defining utility tokens and developing guidance for market participants.

New Developments Outside the U.S.

The ESAs Announce Timeline to Collect Information for the Designation of Critical ICT Third-Party Service Providers under the Digital Operational Resilience Act. On November 15, the European Supervisory Authorities (“ESAs”) published a Decision on the information that competent authorities must report to them for the designation of critical Information and Communication Technology (“ICT”) third-party service providers under the Digital Operational Resilience Act (“DORA”). In particular, the Decision requires competent authorities to report by April 30, 2025 the registers of information on contractual arrangements of the financial entities with ICT third-party service providers. [NEW]
ESMA Collects Data on Costs Linked to Investments in AIFs and UCITS. On November 14, ESMA announced it is launching a data collection exercise together with the national competent authorities (“NCAs”), on costs linked to investments in Alternative Investment Funds (“AIFs”) and Undertakings for Collective Investment in Transferable Securities (“UCITS”). ESMA with the NCAs has designed a two-stage data collection involving both manufacturers and distributors of investment funds. Information requested from manufacturers will provide an indication on the different costs charged for the management of the investment funds. Information requested from distributors (i.e., investment firms, independent financial advisors, neo-brokers) will inform on the fees paid directly by investors to distributors. A report based on this data will be submitted to the European Parliament, the Council and the European Commission in October 2025. [NEW]

New Industry-Led Developments

Ark 51 Adopts CDM for CSA Data Extraction. On November 5, ISDA announced that Ark 51, an artificial intelligence (“AI”) and data analytics service developed by legal services provider DRS, has used the Common Domain Model (“CDM”) to convert information from ISDA’s regulatory initial margin (IM) and variation margin (“VM”) credit support annexes (“CSAs”) into digital form. Ark 51 is a contract and risk management system that uses AI to extract key data from legal agreements, including IM and VM CSAs. The CDM transforms that data into a machine-readable format that can be quickly and efficiently exported to other systems, cutting the resources associated with manual processing.

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

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

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

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

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

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

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

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

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

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

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

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

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

Gibson Dunn has created a Presidential Transition Task Force to track and analyze key activities throughout the transition and into the early days of the Trump-Vance Administration and the 119th Congress. Through Gibson Dunn’s Task Force, we plan to keep our clients and friends informed of notable developments, to explain certain transition resources and how they work, and to predict what the administration is likely to focus on in a variety of areas post-inauguration. This is the Task Force’s first release. There will be a number that will follow.

To understand the priorities and strategies of the incoming Trump-Vance administration, we can look to President-elect Trump’s track record from his first term and his statements on the campaign trail regarding his post-inauguration priorities. Those priorities likely will include a largely deregulatory agenda coupled with additional regulation in some discrete areas. The President-elect also will be looking to extend provisions of the Tax Cuts and Jobs Act (“TCJA”), the signature legislative achievement of his first term. Certain corporate tax provisions are set to expire in 2025 and individual rate cuts are slated to expire in 2026. Additionally, he will be looking to confirm as many administration officials and federal judges as possible.

The President-elect will have several tools available to him and a Republican-controlled Congress to halt or otherwise claw back federal regulations promulgated during the Biden Administration, enact legislative priorities, and staff the executive and judicial branches (as well as independent agencies) with his nominees. This alert discusses the transition process as well as several of these tools and their likely efficacy and limits in facilitating the implementation of President-elect Trump’s agenda. These executive and congressional tools include: (1) a White House memorandum that directs federal agencies to freeze the finalization of pending rules (or repeal or modification of rules or policy documents under the ordinary procedures), (2) legislative repeal of rules promulgated in the last few months of the Biden Administration under the Congressional Review Act, (3) the budget reconciliation process in Congress, and (4) confirmation of executive branch and judicial appointees with a simple majority vote in the Senate. In addition, the Department of Justice could decline to defend certain regulatory actions in court, increasing the likelihood those actions would be vacated. Each of these tools is discussed below.

President-elect Trump also has floated significant initiatives to reform the administrative state for which these tools may become important. For example, he announced that Elon Musk and Vivek Ramaswamy will head a task force to audit the federal government for inefficiencies. He also committed to slashing ten regulations for every new regulation his administration implements. Finally, President-elect Trump promised to reissue and expand an executive order that converted tens of thousands of career government employees into political appointees. If these employees lose civil service protections, President-elect Trump would have more power to replace them.

I. Transition Mechanics and Personnel

A. Transition Process

The Trump Administration will be the first to take office under the Electoral Count Reform and Presidential Transition Improvement Act, enacted in December 2022 to address challenges that arose most prominently in the 2020–2021 transition period. That bill amended two laws—the Presidential Transition Act of 1963 and the Electoral Count Act of 1887 (“ECA”).[1]

The Presidential Transition Act, as amended, directs the General Services Administration and the President to enter into memoranda of understanding with the campaigns prior to the election. The memoranda provide the conditions under which the candidates may receive access to federal transition funding, facilities, agency documents, and security clearances. They also are to include the transition team’s ethics plan, which is to address the role of registered lobbyists and foreign agents and prevent transition team members from working on matters that may give rise to a conflict of interest. Although the conflict-of-interest provisions are supposed to be the equivalent of the criminal statutory provisions that apply to federal employees, the transition team is responsible for enforcing its own ethical code.

To date, the Trump transition team has not signed either of the required memoranda of understanding. Until the transition team signs the memoranda, it can accept unlimited private contributions and does not have to disclose them.[2] But it also means the transition team currently does not have access to federal agency resources—including significant amounts of briefing materials—or security clearances. Reporting suggests that the Trump transition team is planning to sign the memoranda at some point.[3]

As the transition moves forward, we can expect to see President-elect Trump send agency review teams, also known as landing teams, to key agencies to assess personnel, budget, and ongoing work. The Biden Administration established a formal transition process earlier this year, led by the Office of Management and Budget and General Services Administration, and directed that all agencies identify career officials to lead the transition process and prepare detailed briefing materials by November 1.[4]

At the same time, the transition team will be vetting candidates for top-level agency and White House positions. For those who require Senate confirmation, the transition team will begin working with relevant congressional committees to get their paperwork in order so the committees can move quickly once President-elect Trump is inaugurated. The transition team also will continue drafting “Day One” executive orders and proposed regulations—a process President-elect Trump’s allies began at the America First Policy Institute nearly as soon as he left office in 2021.[5]

B. Transition and Administration Personnel

Former Trump Small Business Administration head Linda McMahon and CEO of Cantor Fitzgerald Howard Lutnick are co-chairing the transition. McMahon is focusing on developing policy, while Lutnick is leading the personnel effort. The honorary co-chairs are Donald Trump, Jr., Eric Trump, Vice President-elect JD Vance, Robert F. Kennedy, Jr., and former Representative Tulsi Gabbard. Susie Wiles, who will serve as the President’s Chief of Staff, also will be involved in the transition. The transition is relying on a number of advisors from the America First Policy Institute and former administration personnel from the first Trump Administration. The reported members of the team—acting as either official members or unofficial advisors—include:

Economic Policy:
Jamieson Greer, Former USTR Chief of Staff
Vince Haley, Former Trump speechwriter
Robert Lighthizer, Former U.S. Trade Representative
Kevin Warsh, Former Member of the Federal Reserve Board of Governors

Technology Policy:
Michael Kratsios, Former Trump Administration Chief Technology Officer
Gail Slater, Economic policy advisor to Vice President-elect JD Vance

Energy Policy:
Doug Burgum, Governor of North Dakota
Harold Hamm, Executive Chairman, Continental Resources

Department of Defense:
Robert Wilkie, Former Secretary of Veterans Affairs

Department of Homeland Security:
Rob Law, Former Chief of Policy at USCIS

Department of Justice:
Mark Paoletta, Former Office of Management and Budget General Counsel

Other:
David Bernhardt, Former Interior Secretary
Doug Hoeschler, Former Director of the White House Office of Intergovernmental Affairs

II. Regulatory Moratorium and Postponement

As President Biden did at the start of the current administration and as President Trump did at the start of his first administration, on January 20, 2025, President-elect Trump likely will direct executive branch agencies to freeze pending rulemakings and recommend that independent regulatory agencies do the same.[6] He also may request that departments and agencies withdraw proposed rules that have been sent to the Office of the Federal Register (OFR) but have not yet been published and postpone the effective dates of rules that have been published but have not yet taken effect, although these options may face immediate challenges under the Administrative Procedure Act (“APA”).

On January 20, 2021, at the start of the Biden Administration, Assistant to the President and Chief of Staff Ronald A. Klain sent a memorandum to the heads and acting heads of all executive departments and agencies asking them to take the following steps “to ensure that the President’s appointees or designees ha[d] the opportunity to review any new or pending regulations”:

Refrain from proposing or issuing any rule in any manner—including by sending a rule to the OFR—until after review and approval by a department or agency head appointed or designated by President Biden;
Withdraw from the OFR any regulations that had been sent to the OFR but not yet published in the Federal Register for review and approval; and
Consider postponing for 60 days the effective date of regulations that had been published in the Federal Register but had not yet taken effect.[7]

The Klain memorandum permitted exceptions for “emergency . . . situations related to health, safety, environmental, financial, or national security matters” and “regulations promulgated pursuant to statutory or judicial deadlines.”[8] This memorandum was generally understood not to apply to independent agencies, but a new administration might take a more aggressive approach and seek to exert more direct control over traditionally independent agencies such as the Securities and Exchange Commission (“SEC”) and Federal Trade Commission (“FTC”). [9]

At the start of the first Trump Administration in 2017, Assistant to the President and Chief of Staff Reince Preibus issued a similar memorandum, although there were some differences from the Klain iteration.[10] First, the Klain memorandum allowed exceptions for “emergency situations” relating to “environmental . . . matters,” whereas the Preibus memo did not.[11] Second, the Klain memorandum asked agencies to “consider” extending the effective dates of rules that had not taken effect, rather than requiring them to do so.[12] The change in the Klain memorandum was likely due to court rulings during the first Trump Administration holding that delays in the effective date of Obama Administration rules violated the APA because the delays did not go through the notice-and-comment process.[13] Third, the Klain memorandum suggested that before the effective dates of rules were extended, agencies should provide 30 days for parties to “provide comments about issues of fact, law, and policy raised by those rules,” likely to reduce the risk of similar legal challenges. [14]

Although it is difficult to evaluate the effect of these memoranda on federal agencies, it appears that agencies generally comply with their instructions. For example, in February 2002, the Government Accountability Office determined that “federal agencies delayed the effective dates for 90 of the 371 final rules that were subject to” a similar memorandum published at the beginning of the Bush Administration (i.e., had been published in the Federal Register but had not yet taken effect when President Bush took office), and that a majority of the rules that were not delayed were non-controversial rules that the White House had previously agreed should be issued as scheduled.[15]

Independent regulatory agencies in some cases also abide by the regulatory moratoria, although they have not delayed the effective dates of previously published rules.[16] An agency is an “independent regulatory agency” if it is “run by principal officers appointed by the President, whom the President may not remove at will but only for cause.”[17] In contrast to non-independent agencies (sometimes referred to as executive agencies), the President’s control over independent agencies is limited by his inability to fire the commissioners, board members, and directors that make these agencies’ final decisions, unless he has “cause” to remove them from office. For-cause removal protections are typically understood to preclude the President from removing an agency official simply because the President disagrees with the official’s policy decisions.[18] At the SEC, for example, five commissioners decide whether to propose and adopt new regulations, and under current law the President is widely believed to lack the ability to prevent them from doing so if he disagrees (though an aggressive administration might argue that the President’s lack of control over independent agencies is unconstitutional). Likewise, if the President orders the commissioners to repeal regulations adopted during the Biden Administration, nothing clearly requires them to obey that order. In contrast, if the Administrator of the Environmental Protection Agency (“EPA”) refuses to repeal a regulation that the President wants to eliminate, then the President undoubtedly can replace him or her with a new Administrator.

It is likely that President-elect Trump will direct his Chief of Staff to issue a memorandum similar to the Klain and Preibus memoranda directing executive departments and encouraging independent regulatory agencies to refrain from promulgating any new rules left over from the Biden Administration, and to postpone the effective dates of rules that have been published but have not yet taken effect.

Generally, once final legislative rules have been published in the Federal Register, the only way for a new administration to eliminate or change them is through the notice-and-comment rulemaking process delineated in the APA.[19] The APA specifies only very narrow exceptions to notice-and-comment for legislative rules on the theory that regulated parties are entitled to notice of the regulations with which they must comply and an opportunity to comment on the government’s proposal and explain what compliance will entail.[20] These limited exceptions include when the agency is issuing a “rul[e] of agency organization, procedure, or practice,” or when the agency determines “for good cause” that notice-and-comment procedures are “impracticable, unnecessary, or contrary to the public interest.”[21] Agencies have typically relied on one or more of these exceptions when they have attempted to postpone the effective dates of published rules at the direction of a new administration without following the notice-and-comment process.[22] In many instances, however, courts have invalidated these changes as requiring notice-and-comment rulemaking.[23]

Of course, a new administration can also reverse or modify the prior administration’s rules through the ordinary procedures that govern agency decisionmaking. In seeking to undo a prior administration’s policies through these ordinary procedures, a key issue includes whether the prior administration adopted the policy through notice-and-comment rulemaking or more streamlined mechanisms.

As relevant here, the APA distinguishes two kinds of actions: (1) legislative rules adopted by, for example, notice-and-comment rulemaking and (2) interpretive rules, statements of policy, and guidance documents. Legislative rules must go through notice-and-comment rulemaking absent an exception, whereas other kinds of agency documents such as guidance letters can be adopted (or withdrawn) through more informal procedures. Agencies must typically “use the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance.”[24] Accordingly, it is generally harder to repeal or amend a rule adopted through notice-and-comment rulemaking than to repeal or amend interpretive rules, statements of policy, or guidance documents. And, as explained above, a new administration that tries to bypass notice-and-comment rulemaking may run into legal obstacles.

III. The Congressional Review Act

The Congressional Review Act (“CRA” or “Act”) enables Congress to enact joint resolutions invalidating new rules adopted by federal agencies.[25] Among other things, the Act provides for expedited procedures that enable Congress to repeal a new regulation relatively quickly and with a simple majority in the Senate.[26]

A. Background and Process

Other than at the start of a new presidential administration, the CRA is generally not a widely used tool for invalidating new regulations because the President is likely to veto any resolution invalidating a rule adopted by an agency during his administration.[27] President Obama, for example, vetoed five disapproval resolutions during the 104th Congress, and President Biden vetoed a resolution disapproving the National Labor Relations Board’s joint employer rule in May 2024.[28] In theory, a President might seek to deploy the CRA to repeal a regulation adopted by an independent agency like the SEC or Federal Communications Commission (“FCC”) because they are not currently subject to the President’s direct control and supervision. However, the CRA has never been used in this manner.

Although the CRA was used to invalidate a rule only once in the first twenty years after it was enacted in 1996, recent Congresses have more aggressively used the CRA to overturn final rules adopted in the last year of an outgoing administration. At the start of the first Trump Administration, Congress used the CRA to overturn 16 rules, including rules adopted by the SEC, Department of Education, and Department of Labor. In 2021, at the onset of the Biden Administration, Congress used the CRA to overturn three rules that had been adopted by the first Trump Administration.[29]

As these examples show, the CRA is most effective at the start of a new administration in which the same political party controls both houses of Congress and did not control the White House during the prior administration—i.e., in the very circumstances that likely will occur come January 2025. It is also helpful in enabling Congress to repeal so-called “midnight regulations” adopted during the prior administration’s final months. As discussed in further detail below, however, the Act’s timing provisions render its expedited-repeal provisions inapplicable to the vast majority of regulations adopted during the Biden Administration.

The Act includes a series of complicated deadlines that govern when new rules take effect, when Congress may propose and adopt joint resolutions invalidating them, and when Congress may take advantage of the Act’s expedited procedures. The process is as follows: Starting from the later of the date an agency publishes a rule in the Federal Register or submits it to Congress, Congress has sixty days to introduce a joint resolution disapproving the rule in either chamber, excluding days either chamber is adjourned for more than three days during a congressional session.[30] To give Congress sufficient time to review rules a president submits in the waning days of a session, any rule submitted less than sixty House legislative days or sixty Senate session days prior to at least one chamber adjourning for more than three days without a session (usually only at the end of a congressional session) gets a new sixty-day review period, starting from the fifteenth House or Senate legislative day of the new session. This new sixty-day period also excludes days either chamber is adjourned for more than three days during the session.[31]

In practice, if one party holds the majority in both chambers, Congress can move a joint resolution through this process very quickly, requiring very little Senate floor time, which is the limiting factor for much legislation. After introduction, the joint resolution goes to the appropriate House or Senate committee.[32] The House follows its usual legislative course of considering joint resolutions in committee and on the floor with passage requiring a simple majority vote. During its sixty-session-day review period, however, the Senate may use fast-track procedures to consider a CRA resolution. Twenty calendar days after introduction, in the Senate, if the committee has not already reported the resolution, thirty senators may file a petition on the Senate floor to discharge the joint resolution from committee.[33] Once the resolution is reported or discharged, a senator may move to consider the resolution on the floor. That motion is subject to a simple majority vote, and is privileged, meaning that the motion to consider it may not be postponed and no one can move to consider other business. After the Senate passes the motion to consider the resolution, debate is limited to 10 hours divided equally between supporters and opponents—meaning that the Senate does not have to follow its usual cloture procedures to end debate, which usually require a super-majority vote. The Senate also may consider a non-debatable motion to limit debate.[34] The joint resolution itself may not be amended.[35] Once debate has concluded, the Senate may pass the resolution by a simple majority vote.[36] Once either the House or Senate passes a joint resolution, it is transmitted directly to the floor rather than a committee of the other chamber.[37] Once Congress passes the resolution, as with other legislation, the President may sign or veto it, and, if he vetoes it, Congress may override the veto with a two-thirds majority vote of each chamber.

If Congress enacts a CRA joint resolution overturning a regulation, the agency may not reissue the rule “in substantially the same form” unless Congress passes legislation authorizing such a rule.[38] Note that the CRA deadlines do not affect rules’ effective dates. The CRA does require that major rules—i.e., rules that have an annual economic effect of more than $100 million, result in “a major increase in costs or prices,” or have “significant adverse effects on” competition or employment—generally may not take effect until sixty calendar days after an agency submits the rule to Congress or publishes the rule in the Federal Register, whichever is later.[39] The APA requires only a thirty-day delay for other rules. Once these time periods expire, the rules may take effect, even if a CRA resolution is pending. If Congress passes a CRA resolution after the rule takes effect, the rule “shall be treated as though [it] had never taken effect.”[40]

B. Application to Biden-Era Regulations

Wary of the CRA, agencies now try to finalize rules sufficiently in advance of a presidential election to prevent the streamlined legislative procedures in the CRA from being available to the next administration and Congress. As relevant here, the Biden Administration finalized new rules almost daily in April 2024 on matters ranging from “forever chemicals” to nursing homes.[41]

Because we do not know yet for certain how many legislative days will pass before the House and Senate will adjourn on January 3, 2025, we cannot precisely calculate which rules will be subject to the CRA in the 119th Congress, but the Congressional Research Service estimates that rules submitted to the House or Senate on or after August 1, 2024 will qualify for the additional review period.[42] That means the sixty-day time limit has already expired for most of the major regulations adopted during the Biden Administration.

Still, according to one estimate, the next Congress could use the CRA to repeal several dozen significant new rules.[43] If the cutoff is August 1, vulnerable rules include construction and safety standards for manufactured housing and lead and copper in drinking water.[44] Moreover, the Biden Administration (including independent agencies) has yet to finalize some significant rules such as the Department of Labor’s heat-stress regulation, the Food and Drug Administration’s proposed rules to ban flavored cigars and menthol cigarettes, the FTC’s proposed rule to ban junk fees, the SEC’s proposed Best Execution rule, the Federal Reserve’s proposed rule implementing the Basel III capital requirements, and several of the EPA’s proposed rules on “high-priority” chemicals. These pending rulemakings will be vulnerable to the CRA if agencies finalize them between now and January 20, or if an independent agency finalizes a pending rulemaking after January 20 over the Trump Administration’s opposition. And repeal under the Act would have the added effect of preventing agencies from readopting substantially similar rules in the future.

IV. Reconciliation

Budget reconciliation is a fast-track procedure by which Congress can pass legislation that affects federal spending. Part of the Congressional Budget Act of 1974, reconciliation permits Congress to pass certain types of budget and tax-related legislation without facing a filibuster in the Senate.[45]

A. Background and Process

Each year, Congress prepares a budget for the federal government by adopting a budget resolution—that is, a resolution adopted by both houses of Congress that sets forth the levels of spending, revenue, and debt.[46] Because the bill is not submitted to the President for signature, the budget resolution itself lacks the force of law.

A budget resolution may include “reconciliation instructions” designed to reconcile existing law with the dictates of the budget resolution. These instructions direct particular congressional committees to propose legislation that will help achieve the resolution’s goals, without specifying the changes that should be made.[47] For example, the 2021 budget resolution directed 12 Senate committees and 13 House committees to increase the deficit between FY 2022 to FY 2031 by a specified amount for each committee totaling no more than $1.75 trillion.[48]

When multiple committees are subject to reconciliation instructions, each committee submits its proposed amendments to the relevant chamber’s budget committee, which packages together and reports the amendments without substantive changes in a single, consolidated reconciliation bill.[49] There are no immediate penalties if the reconciliation bill fails to satisfy the reconciliation instructions, but the committees generally satisfy them. (If they do not, the reconciliation bill can be amended on the floor.) Notably, the targets set by the reconciliation instructions apply only to the initial proposals from the committees, not to the final bill that results from the reconciliation process.

The procedural rules that govern consideration of reconciliation bills make a profound difference in the Senate, which—unlike the House—does not use bill-specific rules to limit debate time or structure amendments. Most significantly, the rules restrict debate on reconciliation bills to 20 hours and prohibit a filibuster, thus eliminating the need for a 60-vote supermajority to invoke cloture and proceed to a vote on final passage of the bill.[50] The practical effect of this provision is that reconciliation bills can pass the Senate by a simple majority.

The “Byrd Rule” limits the permissible scope of a reconciliation bill in the Senate.[51] Named for the late West Virginia Senator Robert Byrd, the rule generally provides that provisions “extraneous to the instructions to a committee” may be stricken from the reconciliation bill and may not be offered as an amendment.[52] The Byrd Rule defines “extraneous” material to include six types of provisions: (1) provisions that do not affect the budget (unless this is due to offsetting changes to revenues and outlays); (2) provisions that increase the budget deficit, if the committee does not satisfy the reconciliation instructions; (3) provisions that are outside the jurisdiction of the relevant committee; (4) provisions that produce budgetary changes that are merely incidental to the provisions’ non-budgetary components; (5) provisions that increase the budget deficit for a year not within the scope of the budget resolution or the reconciliation bill; and (6) provisions that would make changes to Social Security programs.[53] When a senator raises a Byrd Rule objection, the Senate Parliamentarian decides the question, unless the Senate—using ordinary rules—votes to waive the objection.[54] In practice, many of these deliberations take place prior behind the scenes in Byrd Rule sessions between Senate committee staff and the Parliamentarian prior to floor consideration of the bill.

Once the House and Senate have agreed on their respective reconciliation bills, they work out the differences between them to develop a final bill that will be voted on by both chambers. This process typically occurs through a conference committee consisting of members from both chambers.

B. Examples and Implications

Reconciliation has been used more than 20 times since 1980 to achieve results favored by both major parties. In 2001 and 2003, for example, Congress used reconciliation to enact tax cuts proposed by President Bush; in 2010, Democrats used it to enact a portion of the Affordable Care Act (“ACA”); the first Trump Administration used it to enact the Tax Cut and Jobs Act; and in 2022, Democrats again used reconciliation to enact the Inflation Reduction Act.[55] There is no requirement that reconciliation be used to decrease the deficit.

Because it precludes a filibuster in the Senate, reconciliation is an attractive tool for a congressional majority to accomplish certain economic objectives, like revising tax rates and changing mandatory spending programs.[56] Indeed, the reconciliation process was used by the Republican Senate during the first Trump Administration and congressional Republicans to pass the TCJA and the Republican majority will likely try to use it again to extend those cuts. The reconciliation process could also be used to adjust spending on veterans and even to repeal some aspects of the ACA, as House Republicans voted to do in 2016.[57] But it is not a filibuster cure-all. The Byrd Rule sharply limits the types of provisions that may be enacted through the reconciliation process, and while the boundaries of the rule are subject to interpretation—making the Senate Parliamentarian’s role an important one—the limitations it imposes are meaningful. Ultimately, the reconciliation process is best viewed as having the potential to secure significant changes to relatively narrow areas of U.S. law and policy.

V. Appointments and Confirmations

In light of changes to the filibuster over the last decade, President-elect Trump will need only a simple Senate majority to confirm his judicial and executive branch nominees. Senate Democrats reinterpreted Senate rules in 2013 “so that [most] federal judicial nominees and executive-office appointments could advance to confirmation votes by a simple majority of senators, rather than the 60-vote supermajority” previously required to defeat a filibuster.[58] Republicans expanded the interpretation in 2017 to allow Supreme Court nominees to be confirmed by a simple majority.[59] And both parties have recently modified the “blue slip” tradition that required senators from the state where there is a vacancy to sign off on judicial nominees for courts of appeals; although the parties still expect consultation between the White House and senators from the vacancy state, they will call nominees to a vote even if a senator does not return a blue slip. By contrast, both parties have continued to observe the tradition for judicial nominees for district courts, with the result that as a practical matter individual senators from the state where there is a vacancy still can block district court nominees.

For much of President Biden’s term, the Senate was evenly divided between Democrats and Republicans. Thus, President Biden often needed the votes of every single Democratic senator, plus Vice-President Harris’s tiebreaking vote, to confirm his nominees. Beginning next year, Republicans will control the Senate with at least 53 seats, giving President-elect Trump more leeway to confirm his choices on a purely partisan basis even if he loses the votes of three members of the Republican party.

VI. Reversing Course in Pending Regulatory Challenges

In the case of final rules that are already subject to legal challenge in federal court, whether a new administration can or is likely to opt not to defend a previous administration’s final rule depends on a number of factors. A new administration may choose not to appeal a ruling invalidating its predecessor’s final rule or, on rare occasions, concede the legal invalidity of a rule being challenged. The Department of Justice and agencies may also ask federal courts for extensions of litigation deadlines to permit agencies to reconsider their policies; courts are generally more receptive to these extension requests given that they are less susceptible to the charge that the agency is using litigation to bypass the normal requirements of the APA.

If the agency is an independent regulatory agency (such as the SEC, FTC, or Federal Reserve), it is more difficult for a new administration to direct the agency to abandon the defense of existing regulations because, as explained above, the heads of independent regulatory agencies can only be removed “for cause.” Still, the new heads and majorities of independent agencies will likely share some of the same goals as the new administration and can decide that they do not wish to defend an existing rule adopted in the last administration. For example, a new majority at the SEC may pull back from the current majority’s aggressive approach towards regulation and enforcement of digital assets such as cryptocurrencies. Agencies without independent litigating authority may need to coordinate with the Department of Justice to achieve that result. And the issue becomes further complicated for Supreme Court litigation, because most independent agencies are required by statute to be represented by the Solicitor General in the Supreme Court and even agencies that have a high degree of independent litigating authority generally must, in that forum, secure approval from the Department of Justice or at least the absence of any objection to proceed.[60]

If the agency is not an independent agency, a new president could direct the agency to refrain from defending a prior administration’s regulation. The more likely scenario, however, is that the heads of agencies—independent or not—who are appointed by the new administration might ask the Department of Justice not to defend a rule, and the Department of Justice can agree or refuse. If the Department of Justice agrees not to defend a final rule in a pending legal challenge, it could move for a voluntary remand back to the agency to reevaluate the rule. Courts often grant federal agencies’ motions for voluntary remand because they allow the agency to correct its own errors without expending the resources of the court in reviewing a record that may be incorrect or incomplete, or in a case that may be mooted by subsequent agency action.[61] In litigation, it also is possible for a new administration to support a stay of the rule pending completion of the litigation.

Recent administrations have changed the government’s position in pending legal challenges to the prior administration’s rules. For example, the Trump Administration declined to seek a rehearing after a court vacated the Department of Labor’s “fiduciary rule.” The Department of Justice dropped its appeal in a dispute between MetLife Inc. and the Financial Stability Oversight Council. During the Bush Administration, the EPA and Attorney General were directed to review Clean Air Act enforcement actions stemming from Clinton-era investigations to determine whether they should be continued. The review resulted in the EPA dismissing enforcement actions (launched by the Clinton Administration) against dozens of coal-fired power plants.[62] The Bush administration prosecutors also changed course from the Clinton administration in the Microsoft antitrust litigation, which reportedly resulted in the company obtaining a more favorable settlement than had been offered previously.[63] In the case of the Biden administration’s Non-Compete Rule, Department of Labor Independent Contractor Rule, and other regulations currently being reviewed by federal courts, the Trump administration could use a similar approach and opt to move for a voluntary remand back to the agency to repeal or revise the regulations being challenged.[64]

Still, some Supreme Court Justices have criticized the executive branch for acquiescing to injunctions or vacatur of a prior administration’s rules. In one notable example, President Biden’s Department of Justice and Department of Homeland Security declined to appeal an injunction invalidating the Trump Administration’s so-called Public Charge Rule. The Supreme Court initially granted certiorari to address whether states could intervene to defend the rule, but ultimately dismissed the writ of certiorari as improvidently granted. In a concurrence, Chief Justice Roberts (joined by Justices Thomas, Alito and Gorsuch) expressed concern that a strategy of “rulemaking-by-collective-acquiescence” may allow a new administration to circumvent the APA’s requirements for repealing final rules, although he ultimately agreed that dismissal was appropriate because the specific procedural posture could complicate the Court’s resolution of important questions in the case.[65]

Some states have subsequently argued that courts should permit them to intervene in pending cases against the federal government to avoid this problem, and this strategy may repeat itself with Democratic state Attorneys General in the next Trump Administration[66] More generally, states are increasingly seeking to intervene or participate as plaintiffs in regulatory litigation. For example, in 2022, several states with Republican attorneys general sought to intervene in litigation challenging Title 42, a component of the Public Health Service Act of 1944 that enables the Centers for Disease Control director, with approval of the President, to restrict entry of individuals from a country in which there is a communicable disease.[67] States with Democratic attorneys general will likely take a similar approach in the next Trump Administration.

For similar reasons, companies with an interest in upholding regulations that are currently being challenged in court may wish to consider intervening as defendants to make it more difficult for the next administration to settle or acquiesce to an adverse ruling. The presence of an intervening defendant can make it more difficult for the government to change positions in the middle of litigation challenging an agency’s rule and, even if the government does change positions, an intervening defendant can make it more difficult for the government to prevent a federal court from upholding the rule on the merits.

VII. Executive Orders and Presidential Directives and Memoranda

In recent administrations, presidents have increasingly turned to executive orders and presidential memoranda and directives to achieve certain legislative and regulatory priorities without the assistance of Congress or federal agencies.

A. Executive Orders

Executive orders are presidential directives that have the force of law when they are issued pursuant to a valid claim of constitutional or statutory authority.[68] Unlike legislation and federal regulations, presidents are free to revoke, modify, or supersede executive orders at any time.[69] Indeed, new administrations often begin their terms by acting quickly to revoke previously issued orders. In October 2019, for example, President Trump revoked President Barack Obama’s executive order relating to protections for qualified civil service workers.[70] On his first day in office, President Biden issued an executive order revoking a number of executive orders issued by President Trump[71]

President Biden has issued 143 executive orders during his presidency. In his 100-day action plan for his first term, President Trump pledged that he would immediately “cancel every unconstitutional executive action, memorandum and order issued by President Obama” in order “to restore security and the constitutional rule of law.”[72] During this year’s campaign, he pledged that he would “sign an executive order directing every federal agency to immediately remove every single burdensome regulation driving up the cost of goods.”[73] While there has been much speculation about precisely which executive orders President-elect Trump could revoke, they may include:

Regulatory Review
- EO 14094 (directing the Office of Management and Budget to revise how executive branch agencies conduct cost-benefit analyses)
Economy
- EO 14036 (directing agencies to take a variety of steps to regulate business’s competitive practices)
Energy and the Environment
- EO 14008 (rejoining the Paris Climate Agreement)
Labor and Federal Employment
- EO 14035, 14091 (implementing plans to improve diversity, equity, and inclusion within the federal workforce)

B. Presidential Directives, Memoranda, and Proclamations

In addition to executive orders, past presidents have used various written instruments to direct the executive branch and implement policy.[74] These include presidential memoranda, directives, and proclamations, which generally are less formal than executive orders and need not be published in the Federal Register unless the President determines that they “have general applicability and legal effect.”[75] Like executive orders, presidential memoranda, directives, and proclamations can be undone by new executive actions revoking the prior action.[76]

President Biden has used these instruments, particularly presidential memoranda, to achieve numerous policy goals.[77] For example, in January 2021, President Biden issued several memoranda, including on discrimination in housing and the Deferred Action for Childhood Arrivals (“DACA”) program.[78] President-elect Trump may revoke President Biden’s presidential memoranda when he assumes office on January 20, 2025, and he is likely to issue some of his own to shape the course of the administrative state during his term.

Conclusion

The tools and strategies we have discussed will be available to President-elect Trump and the likely Republican-controlled Congress in their efforts to halt or repeal regulatory actions undertaken during the Biden Administration, pursue legislative initiatives (such as extending the TCJA), and confirming judges and members of the President-elect’s team. Each of these tools is limited in certain respects. For example, an effort to repeal President Biden’s core legislative and regulatory enactments—with the exception of executive orders and presidential directives and memoranda, which may be revoked immediately and unilaterally by President-elect Trump—will not be immediate and will require coordination and a multi-pronged approach. However, if pursued over time, these tools—as we have seen through their historical application—can be effective in furthering the President-elect’s agenda.

[1] 3 U.S.C. § 102; 3 U.S.C. § 15.

[2] See 3 U.S.C. § 102 note.

[3] Betsy Klein, What We Know About the Transition So Far, CNN (Nov. 6, 2024, 11:49 AM), https://www.cnn.com/2024/11/06/politics/what-we-know-about-the-transition-so-far/index.html.

[4] See Office of Management and Budget, Memorandum for Heads of Executive Departments and Agencies (April 26, 2024), https://www.whitehouse.gov/wp-content/uploads/2024/04/M-24-13-Implementing-the-Presidential-Transition-Act.pdf; Office of Management and Budget, Memorandum for Heads of Executive Departments and Agencies (Sept. 6, 2024), https://www.whitehouse.gov/wp-content/uploads/2024/09/M-24-17_2024-Memo-Guidance-on-Presidential-Transition-Planning.pdf.

[5] See Dave Davies, How a Little-Known Organization is Poised to Shape a Second Trump Administration, NPR (Oct. 30, 2024), https://www.npr.org/2024/10/30/g-s1-30917/how-a-little-known-organization-is-poised-to-shape-a-second-trump-administration.

[6] See Memorandum from Reince Preibus to the Heads and Acting Heads of Executive Departments and Agencies, 82 Fed. Reg. 8346 (Jan. 20, 2017, published Jan. 24, 2017) (the “Preibus memorandum”).

[7] Memorandum from Ronald A. Klain to the Heads and Acting Heads of Executive Departments and Agencies, 86 Fed. Reg. 7424 (Jan. 20, 2021, published Jan. 28, 2021) (the “Klain memorandum”).

[8] Id.

[9] Id.

[10] Preibus memorandum, supra note 6.

[11] Id.

[12] Id.

[13] See Open Cmtys. Alliance v. Carson, 286 F. Supp. 3d 148, 152 (D.D.C. 2017); Pineros y Campesinos Unidos Del Noroeste v. Pruitt, 293 F. Supp. 3d 1062, 1066-67 (N.D. Cal. 2018).

[14] Klain memorandum, supra note 7.

[15] See U.S. Gov’t Accountability Office, GAO-02-370R, Regulatory Review: Delay of Effective Dates of Final Rules Subject to the Administration’s January 20, 2001 Memorandum 2-5 (Feb. 15, 2002) (“GAO Report”).

[16] Compare Securities & Exchange Commission Acting Chairman Laura S. Unger, “What’s New in the Land of Regulation?” (Mar. 2, 2001), https://www.sec.gov/news/speech/spch465.htm (announcing plan to defer any rulemaking in light of the Card memorandum); with GAO Report at 4-5 (noting that none of the 30 final rules that were issued by independent regulatory agencies (the FCC, Nuclear Regulatory Commission, and SEC) during the period subject to the Card memorandum were delayed).

[17] See Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 483 (2010).

[18] See id. at 502.

[19] See 5 U.S.C. § 551 et seq. The APA defines “rule making” as the “agency process for formulating, amending, or repealing a rule.” Id. § 551(5). The APA generally requires agencies to (1) publish a notice of proposed rulemaking in the Federal Register; (2) allow interested parties an opportunity to participate in the rulemaking process by providing “written data, views, or arguments”; and (3) publish a final rule 30 days before it becomes effective. Id. § 553. See also Humane Soc’y v. Dep’t of Agric., 41 F.4th 564, 575 (D.C. Cir. 2022) (holding that once a rule was “made available for public inspection” through the Federal Register, it “prescribe[d] law with legal consequences,” and the “APA require[d] the agency to undertake notice and comment before repealing it”).

[20] Id. § 553(b)(3).

[21] Id.

[22] GAO Report, supra note 15, at 6 & app. I.

[23] See, e.g., Am. Pub. Gas Ass’n v. United States Dep’t of Energy, 72 F.4th 1324, 1339-40 (D.C. Cir. 2023) (Department of Energy failed to show good cause to circumvent APA notice-and-comment requirements); Regeneron Pharms., Inc. v. United States Dep’t of Health & Hum. Servs., 510 F. Supp. 3d 29, 45-50 (S.D.N.Y. 2020) (plaintiffs were likely to succeed on the merits in arguing that an agency lacked good cause to implement President Biden’s executive orders without using notice and-comment procedures); Clean Water Action v. EPA, 936 F.3d 308, 314-15 (5th Cir. 2019) (“the modification of effective dates is itself a rulemaking” that requires notice-and-comment procedures); Air All. Houston v. EPA, 906 F.3d 1049, 1065 (D.C. Cir. 2018) (“EPA may not employ delay tactics to effectively repeal a final rule while sidestepping the statutorily mandated process for revising or repealing that rule on the merits.”); Nat. Res. Def. Council v. Abraham, 355 F.3d 179, 204-06 (2d Cir. 2004) (rejecting the Department of Energy’s arguments that its notice delaying a published rule’s effective date in accordance with the Card memorandum was a procedural rule exempt from the notice-and-comment requirements, or that there was “good cause” to not comply with the notice-and-comment requirements).

[24] Perez v. Mortgage Bankers Ass’n, 575 U.S. 92, 101 (2015).

[25] See 5 U.S.C. §§ 801–808.

[26] See id. § 802.

[27] See Curtis W. Copeland & Richard S. Beth, Cong. Research Serv., RL34633, Congressional Review Act: Disapproval of Rules in a Subsequent Session of Congress 1 (2008), available at https://www.fas.org/sgp/crs/misc/RL34633.pdf; Diego Areas Munhoz, Biden Vetoes Resolution to Block Labor Board Joint Employer Rule, Bloomberg, May 3, 2024, available at https://news.bloomberglaw.com/daily-labor-report/biden-vetoes-resolution-to-block-labor-board-joint-employer-rule.

[28] Christopher M. Davis & Richard S. Beth, Cong. Research Serv., IN10437, Agency Final Rules Submitted After May 30, 2016, May Be Subject to Disapproval in 2017 Under the Congressional Review Act 1 (2016), available at https://www.fas.org/sgp/crs/misc/IN10437.pdf.

[29] Maeve P. Carey & Christopher M. Davis, Cong. Research Serv., R43992, The Congressional Review Act (CRA): Frequently Asked Questions (2021), available at https://crsreports.congress.gov/product/pdf/R/R43992.

[30] 5 U.S.C. § 802(a).

[31] Id.

[32] 5 U.S.C. § 802(b).

[33] 5 U.S.C. § 802(c).

[34] Id.

[35] 5 U.S.C. § 802(d).

[36] Id.

[37] 5 U.S.C. § 802(f).

[38] 5 U.S.C. § 801(b)(2).

[39] 5 U.S.C. § 801(a)(3), 804(2).

[40] 5 U.S.C. § 801(f).

[41] 5 U.S.C. § 802(d).

[42] CRA Lookback Period Currently Estimated to Begin in August 1 Time Frame, Cong. Research Serv. (Aug. 21, 2024), https://crsreports.congress.gov/product/pdf/IN/IN12408.

[43] See George Washington University Regulatory Studies Center, Congressional Review Act Window Exploratory Dashboard, https://regulatorystudies.columbian.gwu.edu/congressional-review-act-window-exploratory-dashboard.

[44] See id.

[45] 2 U.S.C. §§ 601-608.

[46] See id. § 632.

[47] See id. § 641.

[48] S. Con. Res. 14, 117th Cong. (2021).

[49] See 2 U.S.C. § 641(b).

[50] See id. § 641(e)(2).

[51] Id. § 644.

[52] Id. § 644(a).

[53] Id. § 644(b)(1)(A).

[54] See id. § 644(e).

[55] See Manu Raju, GOP Targets Budget Process for Tax Reform, Politico (Jan. 13, 2015), http://www.politico.com/story/2015/01/gop-tax-reform-114201.

[56] Congress addresses discretionary spending separately through the appropriations process.

[57] See Jennifer Haberkorn, Trump Victory Puts Obamacare Dismantling Within Reach, Politico (Nov. 9, 2016), http://www.politico.com/story/2016/11/trump-victory-obamacare-risk-231090.

[58] Paul Kane, Reid, Democrats Trigger ‘nuclear’ Option; Eliminate Most Filibusters on Nominees, Wash. Post (Nov. 21, 2013), https://www.washingtonpost.com/politics/senate-poised-to-limit-filibusters-in-party-line-vote-that-would-alter-centuries-of-precedent/2013/11/21/d065cfe8-52b6-11e3-9fe0-fd2ca728e67c_story.html; see also Valerie Heitshusen, Cong. Research Serv., Majority Cloture for Nominations: Implications and the ‘Nuclear’ Proceedings 4-5 (Dec. 6, 2013), https://www.fas.org/sgp/crs/misc/R43331.pdf (“CRS Nominations Report”). Note that the Senate “did not change the text of Rule XII of the [Senate] Standing Rules,” but rather “established a new precedent by which it reinterpreted the provisions of Rule XXII to require only a simple majority to invoke cloture on most nominations.” CRS Nominations Report, supra note 58, at 4-5; see also id. at 8- 9 (providing a detailed discussion of the procedures the Senate majority used to set new precedent in relation to consideration of nominations).

[59] Ed O’Keefe & Sean Sullivan, Senate Republicans go ‘nuclear,’ pave the way for Gorsuch confirmation to Supreme Court, Wash. Post (April 6, 2017), https://www.washingtonpost.com/powerpost/senate-poised-for-historic-clash-over-supreme-court-nominee-neil-gorsuch/2017/04/06/40295376-1aba-11e7-855e-4824bbb5d748_story.html.

[60] See, e.g., 12 U.S.C. § 5564(e) (“Appearance Before the Supreme Court”) (“The [CFPB] may represent itself in its own name before the Supreme Court of the United States, provided that the Bureau makes a written request to the Attorney General within the 10-day period which begins on the date of entry of the judgment which would permit any party to file a petition for writ of certiorari, and the Attorney General concurs with such request or fails to take action within 60 days of the request of the Bureau.”).

[61] See, e.g., Ethyl Corp v. Browner, 989 F.2d 522, 524 (D.C. Cir. 1993); SKF USA Inc. v. United States, 254 F.3d 1022, 1029 (Fed. Cir. 2001); Citizens Against Pellissippi Parkway Extension, Inc. v. Mineta, 375 F.3d 412, 417 (6th Cir. 2004); Sierra Club v. Van Antwerp, 560 F. Supp. 2d 21, 24-25 (D.D.C. 2008).

[62] Elizabeth Shogren, EPA Drops Its Cases Against Dozens of Alleged Polluters, N.Y. Times, Nov. 6, 2003.

[63] D. Ian Hopper, New Administration Takes Less Fractured View of Microsoft, AP, Sept. 7, 2001, available at http://cjonline.com/stories/090701/usw_microsoft.shtml#.WDR6k-YrLGh; Jonathan Krim, Circumstance Had Role in U.S.-Microsoft Deal, Wash. Post, Nov. 3, 2001, at A21.

[64] Tim Devaney, 14 Obama regs Trump could undo, TheHill.com (Nov. 12, 2016), http://thehill.com/regulation/305673-14-obama-regs-trump-could-undo.

[65] Arizona v. City & County of San Francisco, 142 S. Ct. 1926, 1928 (2022) (Roberts, J., concurring) (quoting City & County of San Francisco v. United States Citizenship and Immigration Servs., 992 F.3d 742, 744 (9th Cir. 2021) (VanDyke, J., dissenting)).

[66] See, e.g., Brief for Petitioners at 4, Arizona v. Mayorkas, No. 22-592 (2022).

[67] 42 U.S.C. § 265.

[68] Vivian S. Chu & Todd Garvey, Cong. Research Serv., Executive Orders: Issuance, Modification, and Revocation 1-2 n.3 (Apr. 16, 2014), https://www.fas.org/sgp/crs/misc/RS20846.pdf (quoting Staff of House Comm. on Gov’t Operations, 85th Cong., 1st Sess., Executive Orders and Proclamations: A Study of A Use of Presidential Powers (Comm. Print 1957)); see also John Contrubis, Cong. Research Serv., Executive Orders and Proclamations 2 & n.4 (Mar. 9, 1999), http://www.llsdc.org/ assets/sourcebook/crs-exec-orders-procs.pdf.

[69] Chu & Garvey, supra note 68, at 7.

[70] Exec. Order No. 13897 (Oct. 31, 2019) (revoking Exec. Order No. 13495 (Jan. 30, 2009)).

[71] Exec. Order No. 13985 (Jan. 20, 2021) (revoking Exec. Order No. 13950 (Sept. 22, 2020); Exec. Order No. 13958 (Nov. 2, 2020)); https://www.whitehouse.gov/briefing-room/statements-releases/2021/01/20/fact-sheet-president-elect-bidens-day-one-executive-actions-deliver-relief-for-families-across-america-amid-converging-crises/.

[72] Donald Trump’s Contract with the American Voter, Donald J. Trump for President (Oct. 23, 2016), https://www.donaldjtrump.com/contract/.

[73] Robin Bravender, Trump Says New Cabinet Official Will “reduce cost of living,” E&ENews (Oct. 31, 2024), https://www.eenews.net/articles/trump-says-new-cabinet-official-will-reduce-cost-of-living/.

[74] Chu & Garvey, supra note 68, at 1.

[75] See id. at 1-2 & n.7 (citing 44 U.S.C. § 1505).

[76] Contrubis, supra note 68, at 19.

[77] John T. Woolley & Gerhard Peters, Biden’s Use of Discretion, The American Presidency Project (Feb. 10, 2023), https://www.presidency.ucsb.edu/analyses/bidens-use-discretion.

[78] Presidential Memorandum, Preserving and Fortifying Deferred Action for Childhood Arrivals (DACA), 86 Fed. Reg. 7053 (Jan. 20, 2021); Presidential Memorandum, Redressing Our Nation’s and the Federal Government’s History of Discriminatory Housing Practices and Policies, 86 Fed. Reg. 7487 (Jan. 26, 2021).

The following Gibson Dunn lawyers prepared this update: Michael Bopp, Stuart Delery, Helgi Walker, Tory Lauterbach, Jacob Spencer, Andrew Kilberg, Matt Gregory, and Amanda Neely.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Public Policy, Administrative Law & Regulatory, or Energy Regulation & Litigation practice groups, or the following in the firm’s Washington, D.C. office:

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

Stuart F. Delery – Co-Chair, Administrative Law & Regulatory Practice Group,
(+1 202.955.8515, [email protected])

Eugene Scalia – Co-Chair, Administrative Law & Regulatory Practice Group,
(+1 202.955.8673, [email protected])

Helgi C. Walker – Co-Chair, Administrative Law & Regulatory Practice Group,
(+1 202.887.3599, [email protected])

Matt Gregory – Partner, Administrative Law & Regulatory Practice Group,
(+1 202.887.3635, [email protected])

Andrew G.I. Kilberg – Partner, Administrative Law & Regulatory Practice Group,
(+1 202.887.3759, [email protected])

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

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

Jacob T. Spencer – Partner, Administrative Law & Regulatory Practice Group,
(+1 202.887.3792, [email protected])

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

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

The key takeaways for industry are:

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

Federal Rules

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

First Trump Administration Recission of Federal Rules

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

Lessons for the Second Trump Administration

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

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

California Rules

Outlook for Section 209 Waivers

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

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

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

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

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

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

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

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

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

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

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

Potential CARB Retroactive Enforcement in the Second Trump Administration

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

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

Waiver Litigation

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

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

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

Implications for Enforcement

Federal Enforcement

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

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

CARB Enforcement

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

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

Conclusion

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

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

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

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

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

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

[5] Id.

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

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

[8] See id.

[9] See 42 U.S.C. § 7543.

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

[11] See Gunasekara, supra note 3.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[27] Id. at 294.

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

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

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

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

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

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

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

Environmental Litigation and Mass Tort:

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

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

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

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

From the Derivatives Practice Group: The CFTC published a final rule adopting amendments to regulations governing the self-certification of registered entities.

New Developments

CFTC Publishes Final Rule Adopting Amendments to Regulations Governing Registered Entities. On November 7, the CFTC adopted amendments to its regulations under the Commodity Exchange Act that govern how registered entities submit self-certifications, and requests for approval, of their rules, rule amendments, and new products for trading and clearing, as well as the CFTC’s review and processing of such submissions. According to the CFTC, the amendments are intended to clarify, simplify and enhance the utility of those regulations for registered entities, market participants and the CFTC. The effective date for this final rule is December 9, 2024. [NEW]
CFTC Market Risk Advisory Committee to Hold Public Meeting on December 10. On November 5, the CFTC’s Market Risk Advisory Committee (“MRAC”) announced that, on December 10, 2024, from 9:30 a.m. to 12:30 p.m. (Eastern Standard Time), it will hold a public, in-person meeting at the CFTC’s Washington, DC headquarters, with options for virtual attendance. The MRAC indicated that it plans to discuss current topics and developments in the areas of central counterparty (“CCP”) risk and governance, market structure, climate-related risk, and innovative and emerging technologies affecting the derivatives and related financial markets, including discussions led by the CCP Risk & Governance and Market Structure subcommittees with recommendations related to CCP cyber resilience and critical third-party service providers and the cash futures basis trade, respectively. [NEW]
CFTC Warns of Potential Dangers for Messaging App Users. On October 31, the CFTC Office of Customer Education and Outreach released a customer advisory alerting messaging app users to beware of schemes to defraud them of assets, specifically crypto assets. Fraudsters are exploiting the default settings of commonly used messaging apps, telephone networks, and mobile devices to lure users into crypto pump-and-dump schemes and other scams.
Commissioner Pham Announces CFTC Global Markets Advisory Committee Meeting on November 21. CFTC Commissioner Caroline D. Pham, sponsor of the Global Markets Advisory Committee (“GMAC”), announced the GMAC will hold a virtual public meeting Thursday, Nov. 21, from 9:30 a.m. to 10:30 a.m. EST. At this meeting, the GMAC will hear a presentation by the Tokenized Collateral workstream of the GMAC’s Digital Asset Markets Subcommittee on expanding use of non-cash collateral through use of distributed ledger technology and consider a recommendation from the Subcommittee. The meeting will also include a presentation by the Utility Tokens workstream of the Digital Asset Markets Subcommittee summarizing their work to-date on defining utility tokens and developing guidance for market participants.
SEC Adopts Rule Amendments and New Rule to Improve Risk Management and Resilience of Covered Clearing Agencies. On October 25, the SEC adopted rule amendments and a new rule to improve the resilience and recovery and wind-down planning of covered clearing agencies. The rule amendments establish new requirements regarding a covered clearing agency’s collection of intraday margin as well as a covered clearing agency’s reliance on substantive inputs to its risk-based margin model. The new rule prescribes requirements for the contents of a covered clearing agency’s recovery and wind-down plan. The rule amendments require that a covered clearing agency that provides central counterparty services has policies and procedures to establish a risk-based margin system that monitors intraday exposures on an ongoing basis, includes the authority and operational capacity to make intraday margin calls as frequently as circumstances warrant (including when risk thresholds specified by the covered clearing agency are breached or when the products cleared or markets served display elevated volatility), and documents when the covered clearing agency determines not to make an intraday call pursuant to its written policies and procedures.
SEC Division of Examinations Announces 2025 Priorities. On October 21, the SEC’s Division of Examinations released its 2025 examination priorities. The Division of Examinations indicated that it will continue to focus on whether security-based swap dealers (“SBSDs”) have implemented policies and procedures related to compliance with security-based swap rules generally, including whether they are meeting their obligations under Regulation SBSR to accurately report security-based swap transactions to security-based swap data repositories and, where applicable, whether they are complying with relevant conditions in SEC orders governing substituted compliance. For other SBSDs, the Division of Examinations said that it may focus on SBSDs’ practices with respect to applicable capital, margin, and segregation requirements and risk management. The Division of Examinations also indicated that it expects to assess whether SBSDs have taken corrective action to address issues identified in prior examinations. Additionally, the Division of Examinations advised that it may begin conducting examinations of registered security-based swap execution facilities in late fiscal year 2025.

New Developments Outside the U.S.

ESAs Publish 2024 Joint Report on Principal Adverse Impacts Disclosures Under the Sustainable Finance Disclosure Regulation. On October 30, the European Supervisory Authorities (“ESAs”) published their third annual Report on disclosures of principal adverse impacts under the Sustainable Finance Disclosure Regulation (“SFDR”). The Report assesses both entity and product-level Principal Adverse Impact disclosures under the SFDR. These disclosures aim at showing the negative impact of financial institutions’ investments on the environment and people and the actions taken by asset managers, insurers, investment firms, banks and pension funds to mitigate them.
The ESAs Finalize Rules to Facilitate Access to Financial and Sustainability Information on the ESAP. On October 29, the ESAs published the Final Report on the draft implementing technical standards (“ITS”) regarding certain tasks of the collection bodies and functionalities of the European Single Access Point (“ESAP”). The requirements are designed to enable future users to be able to access and use financial and sustainability information effectively and effortlessly in a centralized ESAP platform.
ESMA Consults on Amendments to MiFID Research Regime. On October 28, ESMA launched a consultation on amendments to the research provisions in the Markets in Financial Instruments II (“MiFID II”) Delegated Directive following changes introduced by the Listing Act. The Listing Act introduces changes that enable joint payments for execution services and research for all issuers, irrespective of the market capitalization of the issuers covered by the research. The Consultation Paper includes proposals to amend Article 13 of the MiFID II Delegated Directive in order to align it with the new payment option offered.

New Industry-Led Developments

Ark 51 Adopts CDM for CSA Data Extraction. On November 5, ISDA announced that Ark 51, an artificial intelligence (AI) and data analytics service developed by legal services provider DRS, has used the Common Domain Model (CDM) to convert information from ISDA’s regulatory initial margin (IM) and variation margin (VM) credit support annexes (CSAs) into digital form. Ark 51 is a contract and risk management system that uses AI to extract key data from legal agreements, including IM and VM CSAs. The CDM transforms that data into a machine-readable format that can be quickly and efficiently exported to other systems, cutting the resources associated with manual processing. [NEW]
ISDA Letter to FASB on Share-based Payment from a Customer in a Revenue Contract. On October 21, ISDA submitted a response to the Financial Accounting Standards Board (“FASB”) on File Reference No. 2024-ED100, Derivatives Scope Refinements and Scope Clarification for a Share-based Payment from a Customer in a Revenue Contract. ISDA believes the FASB’s proposal will improve the application and relevance of the Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606) guidance and has provided potential refinements to the guidance in the letter.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Introduction

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

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

Background

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

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

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

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

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

Changes Effectuated by the Final Rule

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

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

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

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

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

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

[1] 42 U.S.C. § 1320-7k(d).

[2] Id.; 31 U.S.C. § 3729(a)(1)(g).

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

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

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

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

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

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

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

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

[11] Id.

[12] Id.

[13] Id. at 1871-72.

[14] Id. at 1871.

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

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

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

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

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

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

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

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

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

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

Key Developments:

On October 29, the Sixth Circuit upheld summary judgment in favor of Berea College with respect to a white professor’s claims that the college discriminated against him on the basis of race and age in violation of Title VII and the ADEA. Porter v. Sergent et al., No. 23-5944 (6th Cir. 2024). The professor was fired after he emailed all students and faculty “a survey to measure ‘community perceptions and attitudes about academic freedom, freedom of speech, and hostile work environments under civil rights law,’” which contained “hypothetical scenarios based on Porter’s observations of [a colleague’s] Title IX investigation.” The professor claims “Berea fired him because he is an older, white male,” relying on an alleged comment made at a hiring committee meeting that the department did not need “any more old white guys.” The unanimous three-judge panel consisting of Judges Griffin, Kethledge, and Bush found that this comment did not influence the school’s termination decision. The panel also rejected the argument that younger female professors were not disciplined for refusing to attend meetings, while white male professors were disciplined for similar conduct, because the plaintiff was not disciplined for such conduct himself. (The court permitted the professor’s defamation claim to go to a jury.)

On October 30, a unanimous three-judge panel of the Fifth Circuit affirmed a decision by the U.S. District Court for the Southern District of Texas that a white professor who never applied for a position at Texas A&M University lacked standing to bring a reverse-discrimination case against the school. Lowery v. Texas A&M Univ, No. 23-20481 (5th Cir. 2023). The professor alleged that Texas A&M favored women and non-Asian minorities as professorial candidates, and that although he was “able and ready,” he did not apply for a position under a belief that it would be a “futile gesture.” In a per curiam opinion, Judges Jones, Willett, and Engelhardt found his failure to apply “fatal” to the case, noting that he had applied for a position at another university with similar practices. America First Legal represents the plaintiff.

On October 23, 2024, the Equal Protection Project (EPP) filed a complaint with the U.S. Department of Education’s Office for Civil Rights against Santa Clara University (SCU). EPP alleges that SCU’s Black Corporate Board Readiness Program (BCBR) violates Title VI of the Civil Rights Act. The BCBR is described as “designed to accelerate diverse representation in corporate governance,” and is allegedly available only to Black individuals.

On October 25, 2024, a coalition of investors, financial advisors, and fiduciaries led by Inspire Investing, an investment firm that promotes “biblically responsible investing,” released an open letter addressed to Fortune 1000 companies, responding to an October 15, 2024 open letter signed by 40 Democratic House Members that urged company leaders to continue to defend DEI. The investors’ response argues that corporate DEI efforts “divide[] employees from each other,” “punish[] dissenting views,” and have “little if any link [to] company performance metrics.” The letter claims that DEI programs pose “serious legal risk” following the Supreme Court’s decisions in Students for Fair Admission v. Harvard, and City of St. Louis v. Muldrow.

Media Coverage and Commentary:

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

The New York Times, “A New Business on Wall Street: Defending Against D.E.I. Backlash” (October 24): Lauren Hirsch of The New York Times reports on the emerging business strategies of Wall Street law and communications firms to help companies prepare for attacks on their corporate DEI efforts. Hirsch highlights Robby Starbuck, who has targeted companies like Tractor Supply and John Deere, as a prominent figure in the opposition to corporate DEI programs in the wake of SFFA. Hirsch notes that companies are responding to the threat of anti-DEI attacks by “conducting vulnerability assessments, compiling research reports and writing plans for what to do if Starbuck comes calling.” And although companies are trying to mitigate the legal risk associated with DEI programs, Jason Schwartz, co-chair of Gibson Dunn’s Labor & Employment practice, says that after speaking with approximately 50 major companies about restructuring their diversity programs, few are willing to abandon these initiatives entirely.
Bloomberg, “Companies Are Dropping the D or E From DEI to Avoid Criticism” (October 28): Bloomberg’s Jeff Green reports that companies are altering the terminology used to describe their DEI initiatives in response to ongoing backlash from conservative activists. According to a poll conducted by The Conference Board, just over 50% of 60 surveyed executives have modified diversity program descriptions, with an additional 20% considering similar adjustments. Green says that many companies are opting to drop “equity” from their program titles, as it is perceived as the most controversial term. Green highlights that it remains unclear whether these terminology changes reflect substantive modifications to DEI programs or merely an attempt to avoid controversy.
The New York Times, “The Anti-D.E.I. Agitator That Big Companies Fear Most” (November 1): The New York Times’ David Segal profiles conservative anti-DEI activist Robby Starbuck and his role in the “counterreaction” to corporate DEI. Segal says that Starbuck views DEI as “wokeness run amok.” According to Segal, Starbuck “nearly always interprets corporate responses to his campaigns as complete surrender and often overstates his financial effect on corporate profits,” but Wall Street analysts disagree and believe that stocks “have risen and fallen for unrelated reasons.” Segal says that many companies targeted by Starbuck announced changes to their DEI programs “while restating a broad commitment to a diverse workplace.”
Bloomberg, “Boeing Dismantles DEI Team as Pressure Builds on New CEO” (November 1): Jeff Green and Julie Johnson of Bloomberg report that Boeing has “dismantled its global diversity, equity and inclusion department,” as part of a broader restructuring of the company’s workforce. Green and Johnson say that staff from Boeing’s DEI office will be combined with another human resources team focused on talent and employee experience. Anti-DEI activist Robby Starbuck claimed credit for the move, saying that he had alerted Boeing that he was considering launching a campaign against their diversity programs before the company announced its changes. In a statement, Boeing said it “remains committed to recruiting and retaining top talent and creating an inclusive work environment.”

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:

Faculty, Alumni, and Students Opposed to Racial Preferences (FASORP) v. Northwestern University, No. 1:24-cv-05558 (N.D. Ill. 2024): On September 30, 2024, nonprofit advocacy group FASORP filed an amended complaint against Northwestern University, alleging that discriminatory practices at Northwestern Law School violate Title VI, Title IX, and Section 1981. The suit claims that three anonymous FASORP members were wronged by the consideration of race and sex in law school faculty hiring decisions, and that student editors of the Northwestern University Law Review give discriminatory preference to “women, racial minorities, homosexuals, and transgender people when selecting their members and editors” and when selecting articles to publish. The amended complaint also alleges plagiarism among candidates who were selected for law school faculty positions and in articles published by the Law Review. FASORP seeks to enjoin Northwestern from (1) considering race, sex, sexual orientation, or gender identity in the appointment, promotion, retention, or compensation of its law school faculty or the selection of articles, editors, and members of the Northwestern University Law Review, and (2) soliciting such identity information from law school faculty candidates or Law Review applicants. FASORP also asked the court to order Northwestern to establish a new policy for selecting law school faculty and law review articles, editors, and members, to appoint a court monitor to oversee all related decisions, and to enjoin the university from accepting any federal funds until it has ceased all alleged discriminatory practices.
- Latest update: On October 28, 2024, Northwestern moved to dismiss the first amended complaint for lack of standing and failure to state a claim. Northwestern argues that FASORP lacks standing because it has not sufficiently alleged its anonymous members’ qualifications or the steps the members took to attempt to join the Law School’s faculty. In addition, Northwestern argues that the complaint does not allege that FASORP members are qualified to submit, or did in fact submit, articles to the Law Review, or are or were ever Northwestern students. Even if FASORP has standing, Northwestern argues that its claims are outside the ambit of Title VI and Title IX, and its Section 1981-based claims are meritless, vague, and conclusory. A telephonic hearing on the motion to dismiss is set for March 11, 2025.
Khatibi v. Hawkins, No. 23-cv-06195 (C.D. Cal. 2023), on appeal No. 24-3108 (9th Cir. 2024): On August 1, 2023, doctors Azadeh Khatibi and Marilyn M. Singelton, along with Do No Harm, a “membership group for medical professionals and others opposing diversity, equity and inclusion initiatives,” sued officials of the Medical Board of California, alleging that the Board unconstitutionally compelled their speech in violation of the First Amendment. Plaintiffs challenged a California law that, since January 1, 2022, has required all Continuing Medical Education (CME) courses to “contain curriculum that includes the understanding of implicit bias.” Khatibi and Singelton allege that, but for this law, they would never include implicit bias training in their medical curriculum because it is unrelated to their courses. On May 2, 2024, the Court granted the defendants’ motion to dismiss without leave to amend, adopting their argument that the requirements do not violate the First Amendment because teaching CME courses is government speech that is part of a state licensing scheme, and, much like teachers of a state-mandated public school curriculum, the doctor-educators are not associated with the contents of their course. On May 15, 2024, the plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. On August 23, 2024, the plaintiffs filed their opening brief.
- Latest update: On October 24, 2024, the defendants filed their answering brief, arguing that the “implicit bias requirement does not implicate [] First Amendment rights because the content of CME courses is government speech.” The defendants also argue that even if the content is private speech protected under the First Amendment, it is a valid condition applied to a discretionary government benefit.
American Alliance for Equal Rights v. Southwest Airlines Co., No. 24-cv-01209 (N.D. Tex. 2024): On May 20, 2024, American Alliance for Equal Rights (AAER) filed a complaint against Southwest Airlines, alleging that the company’s ¡Latanzé! Travel Award Program, which awards free flights to students who “identify direct or parental ties to a specific country” of Hispanic origin, improperly discriminates based on race. AAER seeks a declaratory judgment that the program violates Section 1981 and Title VI, a temporary restraining order barring Southwest from closing the next application period (set to open in March 2025), and a permanent injunction barring enforcement of the program’s ethnic eligibility criteria. On August 22, 2024, Southwest moved to dismiss, arguing that the case was moot because the company had signed a covenant with AAER that eliminated the challenged provisions from future program application cycles.
- Latest update: On October 17, 2024, AAER responded to Southwest’s motion to dismiss, arguing it has standing to seek nominal damages but conceding that Southwest’s covenant could moot AAER’s request for injunctive relief.

2. Employment discrimination and related claims:

Bradley, et al. v. Gannett Co. Inc., 1:23-cv-01100 (E.D. Va. 2023): On August 18, 2023, white plaintiffs sued Gannett over its alleged “Reverse Race Discrimination Policy,” claiming Gannett’s expressed commitment to having its staff demographics reflect the communities it covers violates Section 1981. On August 21, 2024, the court granted Gannett’s motion to dismiss, holding that Gannett’s diversity policy alone did not establish disparate treatment, since it did not define any specific goals or quotas. The court also held that each named plaintiff had failed to state a claim for individual relief pursuant to Section 1981 and dismissed the class allegations because the class was not ascertainable and lacked commonality. On September 19, 2024, the plaintiffs filed a second amended complaint. On October 3, 2024, Gannett moved to dismiss the second amended complaint for failure to state a claim and moved to dismiss or strike the class allegations.
- Latest update: On October 17, 2024, the plaintiffs filed an opposition to Gannett’s motion to dismiss and strike class allegations. The plaintiffs argued that their second amended complaint clarified several of their arguments and sufficiently alleged a class that could meet the requirements for class certification. Furthermore, the plaintiffs argued that in its motion to dismiss, Gannett failed to acknowledge the Fourth Circuit’s recent decision in Duvall v. Novant Health, Inc., an “on point intervening decision” that held policies similar to Gannett’s were discriminatory. In its response, filed on October 23, 2024, Gannett reaffirms its position that the plaintiffs’ allegations were conclusory and failed to assert facts giving rise to any claims of discrimination. Additionally, Gannett argues that the plaintiffs’ reliance on Duvall was misplaced because it interpreted Title VII, not Section 1981. On October 29, Judge Rossie D. Alston, Jr. terminated the oral argument set for November 6 because he will decide the motion on the papers.
Dill v. International Business Machines, Corp., No. 1:24-cv-00852 (W.D. Mich. 2024): On August 20, 2024, America First Legal filed a reverse discrimination suit against IBM on behalf of a former IBM employee, alleging violations of Title VII and Section 1981. The plaintiff claims that IBM placed him on a performance improvement plan as a “pretext to force him out of [IBM] due to [its] stated quotas related to sex and race.” The plaintiff seeks back pay, damages for emotional distress, and a declaratory judgment that IBM’s policies violate Title VII and Section 1981. The complaint cites to a leaked video in which IBM’s Chief Executive Officer and Board Chairman, Arvind Krishna, allegedly states that all executives must increase representation of underrepresented minorities on their teams by 1% each year in order to receive a “plus” on their bonuses.
- Latest update: On October 23, 2024, IBM moved to dismiss the complaint for failure to state a claim for race and gender discrimination under Title VII and Section 1981. IBM contends that the plaintiff failed to make any factual allegations and merely relied on his personal beliefs and conjecture. Further, IBM argues that the plaintiff failed to plead sufficient “background circumstances to support the suspicion that the defendant is that unusual employer who discriminations against the majority” as required in the Sixth Circuit. (The continued viability of this test is before the Supreme Court in Ames v. Ohio Department of Youth Services (No. 23-1039).)
De Piero v. Pennsylvania State University, No. 2:23-cv-02281-WB (E.D. Pa. 2023): A white male professor sued his employer, Penn State University, claiming that university-mandated DEI trainings, discussions with coworkers and supervisors about race and privilege in the classroom, and comments from coworkers about his “white privilege” created a hostile work environment that led him to quit his job. He claimed that after he reported this alleged harassment and published an opinion piece objecting to the impact of DEI concepts in the classroom, the university retaliated against him by investigating him for bullying and aggressive behavior towards his colleagues. The plaintiff alleged harassment, retaliation, and constructive discharge in violation of Title VI, Title VII, Section 1981, Section 1983, the First Amendment, and Pennsylvania civil rights laws.
- Latest update: On October 21, 2024, the defendants moved for summary judgment on the plaintiff’s hostile work environment claims. The defendants argue the plaintiff cannot show that he experienced discrimination based on his race because he was not required to attend any of the meetings about which he complains. Defendants also argue that the plaintiff cannot show respondeat superior liability for Penn State, and that his claim for punitive damages fails as a matter of law.
Fuzi v. Worthington Steel Co., No. 3:24-cv-01855-JRK (N.D. Ohio 2024): A former employee sued Worthington Steel for religious discrimination and retaliation in violation of Title VII, claiming he was fired for opposing Worthington’s DEI initiative that included a requirement that employees use each other’s preferred pronouns. The plaintiff claims that the policy violated his Christian beliefs, and that he was fired in retaliation for filing an EEOC charge relating to his complaints.
- Latest update: The docket does not yet 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, [email protected])

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

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

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

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

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

We are pleased to provide you with Gibson Dunn’s ESG update covering the following key developments during October 2024. Please click on the links below for further details.

I. GLOBAL

Taskforce on Nature-related Financial Disclosures (TNFD) publishes guidance on nature transition planning

On October 27, 2024, the TNFD published guidance on drafting a nature transition plan. The paper also defines a nature transition plan and explains how to disclose it in accordance with the TNFD recommended disclosures. Specifically, a nature transition plan is a plan laying out the organization’s goals, targets, actions, and other accountability mechanisms to respond and contribute to the transition set out by the Global Biodiversity Framework (GBF). The GBF’s transition is to halt and reverse biodiversity loss by 2030 and put nature on a path to recovery by 2050. In creating the draft guidance, the TNFD states it built on current market practice for climate transition planning.

International Sustainability Standards Board (ISSB) finalizes updates to the Sustainability Accounting Standards Board (SASB) Standards Taxonomy

In October 2024, the ISSB published updates to incorporate amendments previously made to the SASB Standards. First, in June 2023, amendments were adopted to align the SASB standards with the International Financial Reporting Standards (IFRS) S2 Climate-related Disclosures. The IFRS S2 sets out the requirements for disclosing information about climate-related risks to which the entity is exposed, as well as climate-related opportunities available to the entity. Second, in December 2023, amendments were made to improve the international applicability of the SASB standards. These amendments apply to non-climate-related content and were designed to aid preparers in applying the standards regardless of the jurisdiction in which they operate or the accounting principles used. The updates are also intended to support consistency between the SASB and other standards, such as the IFRS Sustainability Disclosure Taxonomy.

II. UNITED KINGDOM

UK Government issues response on UK Carbon Border Adjustment Mechanism (UK CBAM) consultation

On October 30, 2024, the UK Government published its response to the UK CBAM consultation. UK CBAM is intended to ensure that “highly traded, carbon intensive” imported goods are subject to a carbon price that is comparable to goods produced in the UK. The Government confirmed that it would introduce UK CBAM on January 1, 2027, initially applying to goods imported from the aluminum, cement, fertilizer, hydrogen, iron and steel sectors. The sectoral scope will remain under review and products from the glass and ceramic sectors will be considered for future inclusion. It would apply to “direct” and “indirect” (including certain “precursor”) product emissions, and the overall UK CBAM liability is intended to account for carbon prices applicable in other jurisdictions.

New duty on UK employers to prevent sexual harassment in the workplace comes into force

On October 26, 2024, the Worker Protection (Amendment of Equality 2010) Act 2023, which places a new positive and anticipatory legal duty on UK employers to take “reasonable steps” to prevent sexual harassment in the workplace, came into force. Guidance suggests the duty covers sexual harassment by clients, customers and other third parties (not just by other employees). Under the new rules, the Employment Tribunal will have the power to uplift compensation for harassment by a maximum of 25% where an employer is found to have breached this duty. The Equality and Human Rights Commission has provided guidelines on the reasonable steps employers can take to identify risks and prevent sexual harassment, including: (i) developing effective anti-harassment policies; (ii) adopting a zero-tolerance approach; (iii) conducting risk assessments; (iv) training staff on dealing with potential incidents; and (v) monitoring complaints and outcomes.

We note that the Employment Rights Bill (discussed below) expands the employer’s obligation by requiring them to take “all reasonable steps” to prevent sexual harassment in the workplace.

Institute of Directors publishes a voluntary code of conduct for directors

Following a public consultation undertaken between June and August 2024, on October 23, 2024, the Institute of Directors launched a Code of Conduct to help directors of UK companies make better decisions and to provide organizational leaders with a behavioral framework to help them build and maintain the trust of the wider public in their business activities. The voluntary Code is structured around the following six key principles of director conduct: (1) leading by example: demonstrating exemplary standards of behavior in personal conduct and decision-making; (2) integrity: acting with honesty, adhering to strong ethical values, and doing the right thing; (3) transparency: communicating, acting and making decisions openly, honestly and clearly; (4) accountability: taking personal responsibility for actions and their consequences; (5) fairness: treating people equitably, without discrimination or bias; and (6) responsible business: integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts.

House of Lords Select Committee publishes its report on The Modern Slavery Act

On October 16, 2024, the House of Lords Modern Slavery Act 2015 Committee published a report on the Modern Slavery Act 2015. In the report titled “The Modern Slavery Act 2015: becoming world-leading again,” the Select Committee recommends: (i) that the UK Government’s immigration policy and legislation should recognize and consider the difference between migrants who come to the UK willingly and those who have come because they have been trafficked; (ii) creation of an arms-length single enforcement body to ensure stronger compliance with relevant labor rights and standards, which should act as a single point of contact for labor exploitation across all sectors; and (iii) legislation requiring companies meeting the threshold to undertake modern slavery due diligence in their supply chains. The UK Government is required to respond by December 16, 2024.

UK’s cap-and-floor scheme to support energy storage investment

On October 10, 2024, the UK Government announced a new scheme to promote investment in long duration electricity storage capacity, including for renewable energy sources. This announcement follows the UK Government’s 2024 consultation proposing a “cap-and-floor” scheme, which the Government believes would provide a guaranteed minimum income for developers, in return for a limit on revenues. The scheme is expected to open next year, with Ofgem acting as the regulator.

UK Government publishes its Employment Rights Bill

On October 10, 2024, the UK Government published its Employment Rights Bill (the “Bill”). The Bill proposes enhancements to “Day One” employee rights including removing the qualifying periods for protection from unfair dismissal, flexible working, parental leave, paternity leave, and bereavement leave. The Bill also provides for sexual harassment to become a protected disclosure under whistleblowing laws, as well as changes: (i) to the controversial practice of dismissing and re-hiring employees as a means of unilaterally changing terms of employment; (ii) to the ability of employers to engage workers on “zero hours” contracts; and (iii) 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). The Bill seeks to establish a single enforcement body for UK employment laws and an extension to the time limits for bringing employment claims before the Employment Tribunal. In addition, the Bill imposes further obligations on employers to address the gender pay gap, extend the gender pay gap regime to include race and disability and support employees going through menopause. The consultation process is expected to begin in 2025. Please see here for our detailed briefing.

UK Government pledges £21.7 billion in funding for carbon capture and storage projects

On October 4, 2024, the UK Government announced that funding will be made available to launch the UK’s first carbon capture sites, which includes Teesside and Merseyside. Over the next 25 years, funding of up to £21.7 billion is expected to be made available to be allocated between carbon capture, use and storage, and hydrogen.

III. EUROPE

Sustainability Statements among the European Securities and Markets Authority’s (ESMA) Key Three Enforcement Priorities

The initial reports under the Corporate Sustainability Reporting Directive (CSRD) are expected in reporting season on financial years ending December 31, 2024, i.e., in Q1/Q2 2025, and will be closely monitored by ESMA. The CSRD establishes a comprehensive reporting framework that includes more than 1,000 specific data points. On October 24, 2024, the ESMA outlined the European common enforcement priorities for the 2024 reporting period, highlighting sustainability statements as one of three key focus areas. ESMA, together with national enforcers in the EU, will pay particular attention to these areas when examining the application of the relevant reporting requirements. This comes alongside other important issues, including companies’ assessments of materiality and the disclosure of methodologies used to evaluate the materiality of certain topics.

EU invests EUR 4.8 billion in Decarbonization Projects Funded by Carbon Pricing

The European Commission announced on October 23, 2024, that it has chosen 85 projects focused on decarbonization technologies to receive EUR 4.8 billion in grants funded through its EU Emissions Trading System (EU ETS). This is the fourth and largest round of the Innovation Fund, bringing the total amount awarded to date to EUR 12 billion. This latest round is notable for including projects of different sizes, from large and medium-scale initiatives to small and pilot projects. It also emphasizes the manufacturing of clean technologies, supporting the development and operation of production facilities for key components in wind and solar energy, heat pumps, electrolyzers, fuel cells, energy storage technologies and the battery supply chain. The Commission plans to announce the next call for proposals for the Innovation Fund in December 2024.

EU Council agrees to delay the EU Deforestation Regulation (EUDR) Applicability by one year

On October 16, 2024, following a proposal by the European Commission on October 2, 2024, the Council of the European Union decided to extend the application timeline for the EUDR. The EUDR, which is directly applicable in all EU member states, in its current form starts to be effective from December 31, 2024 for large and medium sized companies and from June 30, 2025, for micro and small enterprises. In case the European Parliament ratifies the EU Council’s decision in its plenary session on November 13/14, 2024, the EUDR will only be phased-in for large and medium-sized companies on December 30, 2025, and for micro and small enterprises on June 30, 2026, allowing companies to better prepare for its vast array of requirements.

Open letter urges EU to establish ambitious investment plan for climate and biodiversity goals

On October 9, 2024, a coalition of 47 businesses, civil society organizations, and investors published a letter, urging the EU to establish an investment plan to achieve its climate and biodiversity targets. The letter emphasizes the need for swift mobilization of public and private resources to limit global warming and preserve ecosystems. It is argued that a predictable regulatory framework is crucial to attract private investment necessary to facilitate the green transition. Thus, without a long-term strategy, the EU may risk losing its competitive edge and undermining the Clean Industrial Deal. Notable signatories of the open letter include World Wildlife Foundation, the European Environmental Bureau, and Uber.

ESMA published first report on EU Carbon Markets for 2024

On October 7, 2024, ESMA published the first edition of its EU Carbon Markets report. The report will be published annually and provides an overview of the EU Emissions Trading System. According to the report, the prices in the EU Emissions Trading System have decreased significantly since the beginning of 2023. This is attributed to a combination of lower demand for EU emissions, falling natural gas prices and decarbonization of the European energy sector, along with increased supply following the decision to auction additional allowances to finance the REPowerEU plan.

CSRD Transposition is progressing

A new draft of the Luxembourg CSRD transposition law has been published. Enactment of the transposition laws in Poland and Spain is imminent. An overview of the transposition of CSRD into national laws can be found here.

IV. NORTH AMERICA

U.S. House bill could alter the reporting of greenhouse gas emissions caused by federal legislation

On October 29, 2024, U.S. Representative Joe Neguse (D-CO) introduced H.R. 10074, a bill directing the Comptroller General of the United States, in coordination with the National Academy of Sciences, to study alternatives for a nonpartisan congressional office or agency to project the net greenhouse gas emissions likely to be caused by federal legislation. The bill also includes a provision for studying lessons that can be learned from states that have “successfully implemented carbon scoring for legislative proposals,” such as California. Co-sponsors of the bill include Representative Kathy Castor (D-Fl), Representative Sean Casten (D-IL), and Representative Jared Huffman (D-CA).

The Hershey Company (Hershey) accused of material misrepresentations related to bubble gum product

On October 24, 2024, plaintiffs filed a class action complaint against Hershey alleging, among other claims, that the company violated provisions of the California Business and Professions Code by issuing false and misleading statements regarding the company’s products. The complaint targets Hershey’s claims regarding its commitment to the planet, communities, and children, and the plaintiff’s claim that testing shows that the company’s popular Bubble Yum Original Flavor Bubble Gum contains organic fluorine, perfluoroalkyl and polyfluoroalkyl (PFAS) chemicals in levels dangerous to the health of the children who are targets of company marketing. California law prohibits manufacturers from selling juvenile products containing PFAS substances.

New York City Comptroller proposes fossil fuel ban in pension fund investing

On October 22, 2024, New York City Comptroller Brad Lander announced that his office will propose ceasing future investments in midstream and downstream infrastructure by New York City’s three public pension funds. The pension funds completed their exit from fossil fuel reserve investments in 2022, and this next proposal will be presented to the trustees of the funds in early 2025. This policy builds from previous action taken by Comptroller Lander and the trustees of several New York education retirement systems to decarbonize the holdings of those retirement funds.

House of Representatives introduces Stop Woke Investing Act

On October 22, 2024, U.S. Representative Andy Biggs (R-AZ) introduced the Stop Woke Investing Act, which would require the U.S. Securities and Exchange Commission (the “SEC”) to allow companies to determine which shareholder proposals to include on their proxy cards and limit the number of shareholder proposals a company is required to include on its proxy card (the number to be determined by the company’s filing status). For example, a company that is a large accelerated filer would not need to include more than seven shareholder proposals, while a non-accelerated filer would not need to include more than two shareholder proposals. This bill is identical to the Stop Woke Investing Act introduced by Senator Eric Schmitt (R-MO) in late 2023 and referred to the Senate Banking, Housing and Urban Affairs committee (though the bill did not progress further).

WisdomTree Asset Management, Inc. (WisdomTree) settles enforcement action related to ESG investment strategy

On October 21, 2024, the SEC charged investment advisor WisdomTree with making misstatements and failing to comply with the company’s own ESG investment strategy. The SEC’s order asserts that WisdomTree claimed in prospectuses for ESG-marketed funds that the funds would not invest in companies “involved in certain controversial products or activities,” including fossil fuels and tobacco. However, the SEC alleged that WisdomTree’s screening process was inadequate, resulting in the ESG-marketed funds investing in companies deriving revenues from fossil fuels and tobacco. The SEC’s order found that WisdomTree violated the antifraud provisions and the compliance rule in the Investment Advisers Act of 1940. WisdomTree consented to entry of the SEC’s final order and agreed to pay a $4 million penalty.

SEC seeks comments on Green Impact Exchange, LLC (GIX) registration

On October 21, 2024, the SEC issued an order instituting proceedings to determine whether to grant or deny GIX’s application for registration as a national securities exchange. GIX filed its Form 1 application with the SEC on May 9, 2024, and seeks to operate a fully automated electronic equity trading platform. If the SEC grants GIX’s application, companies whose securities are listed on another national securities exchange may apply to list their securities on GIX. GIX proposes to require all companies listing their securities on the trading platform to comply with GIX’s Green Governance Standards. According to GIX’s Form 1 application (Exhibit H-5), these standards provide investors with information regarding the “quality of a listed company’s commitment to sustainable ways of doing business,” rather than enforcing targets or reporting frameworks. The SEC’s order requests comments from interested persons on or before November 15, 2024.

Bill seeks to prevent federal agencies from considering the social cost of carbon and other greenhouse gases in agency action

On October 11, 2024, U.S. Representative Richard Hudson (R-NC) introduced the Transparency and Honesty in Energy Regulations Act of 2024. The bill seeks to prohibit federal agencies from considering the social cost of carbon, methane, nitrous oxide or any other greenhouse gas as part of any cost-benefit analysis, rulemaking, issuance of any guidance, agency action, or as a justification for any rulemaking, guidance document, or agency action. An additional section of the bill requires the head of each federal agency to submit a report to House and Senate committees detailing the number of proposed and final rulemakings, guidance documents or agency actions since January 2009, that have used the social cost of carbon or any of the other listed emissions or greenhouse gases. Twelve members, all Republicans, co-sponsored the proposed legislation.

Canada to require mandatory climate disclosures for large companies and provide sustainable investment guidelines

On October 9, 2024, the Canadian government announced its intention to require mandatory climate-related financial disclosures. The purpose of these disclosures, which apply to large, federally incorporated private companies, is to “help investors better understand how large businesses are thinking about and managing risks related to climate change, ensuring that capital allocation aligns with the realities of a net-zero economy.” The specific information included in these disclosures is yet to be determined, but the disclosure requirements will be incorporated into the Canada Business Corporations Act through an amendment. The reporting requirements will not apply to small and medium-sized businesses. The government may encourage voluntary disclosure, however.

The Canadian government also announced its decision to introduce Made-in-Canada sustainable investment guidelines intended to serve as a tool for “investors, lenders, and other stakeholders navigating the global race to net-zero by credibly identifying ‘green’ and ‘transition’ economic activities.”

U.S. Commodity Futures Trading Commission (CFTC) files lawsuit alleging carbon credit misrepresentations

On October 2, 2024, the CFTC filed a complaint in the U.S. District Court for the Southern District of New York against Kenneth Newcome, former chief executive officer and majority shareholder of carbon credit project developer C-Quest, alleging violations of securities laws. The complaint claims that Newcome “engaged in a fraudulent scheme that involved reporting false and misleading information to at least one carbon credit registry…to obtain carbon credits for beyond what the company was entitled to receive, and to increase the company’s revenue by millions of dollars.” The alleged violations occurred between 2019 and December 2023. As part of the remedy requested, the CFTC seeks orders requiring Newcome to pay a penalty, disgorge all benefits received from the alleged violations, and refrain from entering into future transactions involving certain commodities.

This complaint follows and relates to a CFTC order initiating administrative proceedings against CQC Impact Investors LLC (CQC) and an order initiating proceedings against Jason Steele, CQC’s former chief operating officer. Both orders were issued on September 30, 2024. For more on this CFTC action, see the CFTC press release relating to this matter.

In case you missed it…

The Gibson Dunn Workplace DEI Task Force has published its updates for October summarizing the latest key developments, media coverage, case updates, and legislation related to diversity, equity, and inclusion.

V. APAC

Asia Investor Group on Climate Change (AIGCC) calls for ambitious energy targets in Japan’s 7th Strategic Energy Plan

On October 24, 2024, AIGCC submitted a position paper on Japan’s upcoming 7th Strategic Energy Plan. AIGCC urged for Japan to set ambitious energy transition targets, emphasizing the importance of renewable energy expansion, clear phaseout plans for fossil fuels, and carbon pricing mechanisms. The position paper highlights the need for investor input in policy development, a high-ambition scenario aligned with a 1.5°C pathway, and integration of emission reduction technologies to attract capital and strengthen Japan’s position in sustainable industries.

Hong Kong unveils Sustainable Finance Action Agenda

On October 21, 2024, the Hong Kong Monetary Authority (HKMA) introduced its Sustainable Finance Action Agenda, setting out its vision and targets for banks to reach net-zero financed emissions by 2050. Banks are expected to disclose climate-related risks, align with global standards, and make transition plans available by 2030 on a “comply or explain” basis. The agenda also focuses on HKMA’s own investment sustainability, incentivizing green finance innovations, and addressing talent gaps in sustainable finance. These initiatives underscore Hong Kong’s aim to become a sustainable finance hub in Asia.

Australia releases Guide on AI for ESG practitioners

On October 21, 2024, the Australia Department of Industry, Science and Resources and the National Artificial Intelligence Centre jointly published an introductory guide to AI for ESG practitioners, highlighting how AI can help address urgent challenges in health, climate change, sustainability, accessibility, and inclusion. The introductory guide addresses why ESG practitioners should consider responsible use of AI, how to assess AI in the ESG sector, ideas for enhancing ESG solutions with AI and steps to start responsibly using AI in ESG contexts.

Malaysia’s ESG Disclosure Report: Establishing Baseline Standards for Reporting Practices

On October 15, 2024, the Securities Commission Malaysia (SC) and the World Bank released a joint report on “ESG Disclosure Assessment of Malaysia’s Listed Companies and Recommendations for Policy Development” at the SC-World Bank Conference 2024. This report, based on a comprehensive assessment of ESG practices among 90 companies and major asset owners, sets a baseline for sustainable reporting. While highlighting strong governance and social reporting, it identifies gaps in environmental metrics, especially on climate and biodiversity. The report concluded with a set of recommendations, including enhancing disclosure practices and supporting Malaysia’s National Sustainability Reporting Framework.

Hong Kong Code of Conduct for ESG ratings and data products providers

On October 3, 2024, the International Capital Market Association (ICMA) published the Hong Kong Code of Conduct for ESG Ratings and Data Products Providers (the Code). Modeled on international best practices and sponsored by the Hong Kong Securities and Futures Commission, the Code is a voluntary Code of Conduct that aims to establish and promote a globally consistent, interoperable, and proportionate voluntary code for providers offering ESG ratings and data products and services in Hong Kong. The Code is closely aligned to the recommendations by the International Organization of Securities Commissions’ Report on “Environmental, Social and Governance (ESG) Ratings and Data Products Providers.” Following the publication, the ICMA is responsible for hosting and maintaining the Code.

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

Warmest regards,
Susy Bullock
Elizabeth Ising
Perlette M. Jura
Ronald Kirk
Michael K. Murphy
Robert Spano

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

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

The following Gibson Dunn lawyers prepared this update: Lauren Assaf-Holmes, Carla Baum, Mitasha Chandok, Becky Chung, Georgia Derbyshire, Ferdinand Fromholzer, Muriel Hague, William Hallatt, Beth Ising, Sarah Leiper-Jennings, Vanessa Ludwig, Babette Milz*, Johannes Reul, Annie Saunders, Helena Silewicz*, QX Toh, and Katherine Tomsett.

*Helena Silewicz, a trainee solicitor in London, and Babette Milz, a research assistant in Munich, are not admitted to practice law.

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

ESG Practice Group Leaders and Members:
Susy Bullock – London (+44 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213.229.7121, [email protected])
Ronald Kirk – Dallas (+1 214.698.3295, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, [email protected])
Robert Spano – London/Paris (+33 1 56 43 13 00, [email protected])

The much-anticipated guidance for the new corporate offence of failure to prevent fraud (the “Guidance”) was published on 6 November 2024. This starts the countdown to the offence coming into force on 1 September 2025.[1]

Introducing a “failure to prevent” offence for fraud will have a significant impact on the ability of law enforcement agencies to combat fraud. The SFO said it is “looking forward to using it to penalise large organisations who should be doing better”[2] and the SFO’s Director, Nick Ephgrave, recently told the Financial Times that deferred prosecution agreements (DPAs) “could come back with a vengeance once a new offence that puts the onus on businesses to prevent fraud comes into force.”[3] The Guidance itself mentions the prospect of DPAs.

The Guidance states that the failure to prevent fraud offence should make it easier to hold organisations to account. The Government hopes that the offence will improve fraud prevention procedures and ultimately drive a major shift in corporate culture.[4]

A) Recap of the failure to prevent fraud offence

The offence of failure to prevent fraud was introduced by the Economic Crime and Corporate Transparency Act 2023 (ECCTA).[5] Under the new offence, an organisation will be criminally liable[6] where a specified fraud offence[7] is committed by a person associated with the organisation (such as an employee or agent) with the intention of benefitting, for example, the organisation or its clients. Senior managers need not have ordered or known about the fraud.

The offence applies to large organisations, which are those meeting at least two of the following conditions: a turnover of more than £36m, more than £18m in total assets, or more than 250 employees.[8] A defence is available where an organisation had reasonable prevention procedures in place, or where it was unreasonable to expect it to have such procedures.

B) What does the Guidance say?

The Guidance offers clarification of certain aspects of the offence in section 199 ECCTA, provides examples of hypothetical scenarios in which the offence may apply and makes recommendations as to how companies should prepare for the new offence coming into force. However, it remains to be seen how the offence will be prosecuted in practice. We have outlined key aspects of the Guidance below.

1. Territoriality

ECCTA states that the failure to prevent fraud offence applies to organisations wherever incorporated or formed.[9] However, a UK nexus is required for the offence to be committed, which means “one of the acts which was part of the underlying fraud took place in the UK or that the gain or loss occurred in the UK.”[10] The Guidance indicates that this means that a fraud which takes place entirely outside the UK could be prosecuted if, for example, there were UK-based victims.

2. Offences committed by associated persons

The concept of a person associated with an organisation will be familiar from the UK Bribery Act. The Guidance confirms that an employee, agent or subsidiary of a large organisation automatically falls within the definition of associated person, and a person who provides services for or on behalf of the organisation is an associated person while they provide those services.[11]

Crucially, the associated person does not need to have been convicted of one of these offences. However, the prosecution must prove to a criminal standard that the person committed the offence before the organisation can be convicted of failure to prevent fraud.[12]

3. Subsidiaries

In respect of subsidiaries, the guidance indicates that:

a large organisation can be prosecuted where the underlying offence is committed corporately by one of its subsidiaries and where the beneficiary is the parent organisation or its clients to whom the subsidiary provides services for or on behalf of the parent;
such a parent company can also be prosecuted if an employee of its subsidiary commits a relevant offence that is intended to benefit the parent company;
a subsidiary of a large organisation can be prosecuted if an employee of the subsidiary commits a relevant offence that is intended to benefit the subsidiary even if the subsidiary itself is not a large organisation.[13]

4. Benefit

The issue of who is intended to benefit from the underlying offence is key to determining whether a company can be held accountable.[14] The benefit can be direct or indirect, actual or intended.[15] The benefit can be to the company, its clients, or a subsidiary of the client.[16] This is broader than the UK Bribery Act, which focuses on intended benefit to the organisation.

5. What do reasonable fraud prevention procedures look like in practice?

The defence of having reasonable fraud prevention measures in place is difficult to define, and the Guidance does not attempt to set out an exhaustive list of steps that companies should take: in fact, it notes expressly that even strict compliance with the Guidance may not be sufficient where a company faces particular risks arising from the nature of its business.

Nevertheless, the Guidance does set out six defining principles which should inform a company’s fraud prevention framework. Some key points are highlighted below:

Top level commitment

The Guidance stresses that senior management should take the lead when it comes to fraud prevention: this will include fostering a culture in which staff feel able to report potential cases of fraud, and communicating clearly the company’s policies and codes of practices to staff.
Where fraud prevention measures are overseen by a Head of Compliance or someone in a similar role, that person should have direct access to the company’s board or CEO, and senior management should ensure that a reasonable and proportionate budget is in place to train staff and implement the company’s fraud prevention plan.

Risk assessment

The Guidance makes clear that “it will rarely be considered reasonable not to have even conducted a risk assessment” but it acknowledges that companies may find it most effective to extend existing risk assessments which are already in place.
The Guidance suggests that companies should consider the different levels of fraud risk presented by different categories of associated person, taking into account their opportunity and motive to commit fraud, as well as the potential for the “rationalisation” of a fraud: in other words, does a company’s culture and/or sector tolerate fraud, and do staff feel able to escalate any potential concerns?
A risk assessment is not a one-off exercise: the Guidance states that the assessment should be revisited at consistent intervals, perhaps annually or bi-annually, and that a court may consider that reasonable procedures were not in place at the time of any alleged fraud if the risk assessment has not been recently reviewed.

Proportionate risk-based prevention procedures

Once the risk assessment has been carried out, a fraud prevention plan should be put in place. This should be proportionate to the risks identified and their potential impact.
Reasonable fraud prevention procedures should look to reduce the opportunity and motive to commit fraud, put in place consequences for committing fraud and reduce what the Guidance describes as “ethical fading”; in other words, where fraudulent behaviour becomes normalised within a company or industry.
The Guidance acknowledges that many companies will be regulated, but stresses that processes and procedures already in place to ensure compliance with other regulations will not automatically qualify as reasonable procedures for the purposes of ECCTA.
One interesting exception identified in the Guidance, presumably inspired by lessons from the Covid-19 pandemic, is where there is an emergency; i.e. where there is “a risk of widespread loss of life or damage to property, or significant financial instability”. The Guidance recognises that an emergency may not be foreseeable, and that it may therefore be reasonable not to have had fraud prevention procedures in place. Nevertheless, the guidance stresses that reasonable procedures should be put in place as quickly as reasonably possible once the emergency has passed.

Due diligence

Again, the Guidance acknowledges that many companies will already have due diligence procedures in place, but states that it will not necessarily be sufficient to apply existing procedures.
The Guidance highlights the need to carry out due diligence on associated persons and in relation to any anticipated mergers or acquisitions. It suggests using appropriate technology to help, including third-party tools, and notes the importance of integrating existing fraud prevention measures following a merger or acquisition.

Communication and training

Clear communication of a company’s stance on fraud at all levels of the organisation is important, and the Guidance suggests incorporating this in existing policies.
Companies should put in place training for staff which is proportionate to the risks involved. That may involve additional training for those in high-risk positions. As with the risk assessment, training should be kept up to date, particularly as new staff join or existing staff change roles, and the effectiveness of the training should be monitored.
The Guidance also highlights the need for a robust whistleblowing process.

Monitoring and review

When it comes to detecting fraud, the Guidance again highlights the use of technology such as data analytics tools, and poses the question (but does not answer it!) as to whether AI could be used to identify potential fraud.
Companies may need to modify existing systems to identify and investigate fraud committed against the organisation to ensure that fraud designed to benefit the organisation or its clients can also be detected.
The Guidance stresses the need for independent, fair, legally compliant and properly resourced investigations into any suspected fraud.
A company will need to keep under review the nature of the risks it faces, given these are likely to change over time: this means fraud prevention measures may need to change too. The Guidance suggests that reviews should happen at regular intervals, such as annually or bi-annually, and that they can be conducted internally or by an external party.
However, where a company is audited by an external auditor, that audit alone is not sufficient evidence of the existence of reasonable fraud prevention

C) Practical steps to take now

By way of key takeaways, we recommend that clients think about the following next steps:

Conduct a risk assessment for the organisation as a whole. It is clear that this is the minimum first step towards having reasonable fraud prevention procedures in place and, given the scope of the different definitions in ECCTA, is likely to require revision or development of existing assessments;
Establish a reasonable and proportionate fraud prevention plan;
Review existing policies and procedures and ensure that the company’s stance of preventing fraud is clearly communicated to staff;
Check what training is currently provided to staff and consider where additional training on preventing fraud could be necessary;
Ensure that robust whistleblowing policies and procedures are in place;
Where in doubt, seek expert advice.

[1] https://www.gov.uk/government/news/new-failure-to-prevent-fraud-guidance-published

[2] https://globalinvestigationsreview.com/article/senior-sfo-lawyer-failure-prevent-fraud-heralds-exciting-time-the-agency

[3] https://www.ft.com/content/b7540e7a-97fb-481a-8805-92fb54a425f2

[4] Guidance Failure to Prevent Fraud, chapter 1.1. See also our previous client alert published on 12 January 2024: Extraterritorial Impact of New UK Corporate Criminal Liability Laws – Gibson Dunn

[5] ECCTA s.199

[6] ECCTA s.199 and Guidance Failure to Prevent Fraud, chapter 1.1

[7] Including fraud by false representation, fraud by failing to disclose information, fraud by abuse of position, cheating the public revenue, false accounting, false statements by company directors and fraudulent trading: see ECCTA, schedule 13.

[8] ECCTA s.201. The conditions must be met in the financial year of the organisation that precedes the year of the fraud offence.

[9] ECCTA s.199(13)

[10] Guidance Failure to Prevent Fraud chapter 2.5

[11] ECCTA s.199 (7) and (8) and Guidance Failure to Prevent Fraud chapter 2.3

[12] Guidance Failure to Prevent Fraud chapter 2.2

[13] Guidance Failure to Prevent Fraud chapter 2.3.1 and ECCTA s.199

[14] Guidance Failure to Prevent Fraud chapter 2.4

[15] ECCTA s.199 (1) and (2)

[16] Guidance Failure to Prevent Fraud chapter 2.4 and 2.5

The following Gibson Dunn lawyers prepared this update: Allan Neil, Patrick Doris, Christopher Loudon, Marija Bračković, Amy Cooke, and Katherine Tomsett.

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

Allan Neil – London (+44 20 7071 4296, [email protected])
Patrick Doris – London (+44 20 7071 4276, [email protected])
Christopher Loudon – London (+44 20 7071 4249, [email protected])
Maria Bračković – London (+44 20 7071 4143 [email protected])
Amy Cooke – London (+44 20 7071 4041, [email protected])
Katherine Tomsett – Hong Kong (+65 6507 3673, [email protected])

This update provides an overview of shareholder proposals submitted to public companies during the 2024 proxy season, including statistics and notable decisions from the staff of the Securities and Exchange Commission on no-action requests.

I. Summary of Top Shareholder Proposal Takeaways from the 2024 Proxy Season

As discussed in further detail below, based on the results of the 2024 proxy season, there are several key takeaways to consider for the coming year:

Shareholder proposal submissions rose yet again. For the fourth year in a row, the number of proposals submitted increased. In 2024, the number of proposals increased by 4% to 929—the highest number of shareholder proposal submissions since 2015.
The number of governance and social proposals increased, while civic engagement and environmental proposals decreased. Governance proposals increased notably, up 13% from 2023, with the increase largely attributable to proposals related to the adoption of prescriptive majority voting director resignation bylaws. The number of social proposals also increased, up 4% compared to 2023. In contrast, civic engagement and environmental proposals declined 10% and 4%, respectively. The five most popular proposal topics in 2024, representing 34% of all shareholder proposal submissions, were (i) climate change, (ii) nondiscrimination and diversity-related, (iii) simple majority vote, (iv) director resignation bylaws, and (v) independent chair. Of the five most popular topics in 2024, all but two were also in the top five in 2023 (simple majority vote and director resignation bylaws replaced shareholder approval of certain severance agreements and special meetings).
The no-action request volumes and outcomes appear to have reverted to pre-2022 norms, with the number of no-action requests increasing significantly and the percentage of proposals excluded pursuant to a no-action request continuing to rebound from 2022’s historic low. There were 267 no-action requests submitted to the Staff in 2024, representing a submission rate of 29%, up significantly from a submission rate of 20% in 2023 and consistent with a submission rate of 29% in 2022. The overall success rate for no-action requests, after plummeting to only 38% in 2022, continued to rebound in 2024, with a success rate of 68%, compared to a success rate of 58% in 2023. Success rates in 2024 improved for resubmission, violation of law, ordinary business, and substantial implementation grounds, while success rates declined for procedural and duplicate proposal grounds.
The number of proposals voted on increased yet again, but overall voting support remained at historically low levels, and only 4% of proposals submitted received majority support. In 2024, over 55% of all proposals submitted were voted on, compared with 54% of submitted proposals voted on in 2023. Average support across all shareholder proposals was 23.0%, roughly level with average support of 23.3% in 2023 and the lowest average support in over a decade. Average support for governance proposals increased from 2023, while overall support for both environmental and social proposals declined. In both cases, the decline appears to have been driven by the submission of proposals that are overly prescriptive or not particularly germane to a company’s core operations and the low voting support for proposals that challenged companies’ focus on certain ESG-related policies and practices. While the number of shareholder proposals that received majority support increased to 39 in 2024, up from 25 in 2023, majority-supported proposals still represented only 4% of proposals submitted, up slightly from 3% in 2023.
Anti-ESG proposals proliferated in 2024, but shareholder support was low. The 2024 proxy season saw a continued rise in the use of the Rule 14a-8 process by proponents critical of corporate initiatives or corporate leadership that they view as inappropriately involved in environmental, social or political agenda (referred to as “anti-ESG” proposals). This year, 107 proposals were submitted by anti-ESG proponents, on topics ranging from traditional corporate governance matters to proposals challenging companies’ diversity, equity and inclusion programs and opposing efforts to reduce greenhouse gas emissions. Of the proposals submitted by anti-ESG proponents, 78 were voted on, receiving average support of 2.4%. Notably, no anti-ESG proposal received more than 10% support.
With SEC amendments to Rule 14a-8 and legislative reform efforts stalled, stakeholder challenges to the SEC’s role in the shareholder proposal process foment uncertainty. In July 2022 the SEC proposed amendments to Rule 14a-8 to significantly narrow key substantive bases that companies use to exclude shareholder proposals on substantial implementation, duplication, and resubmission grounds remain stalled. At the same time, after a flurry of activity in July 2023, the Republican ESG Working Group formed by the Chair of the Financial Services Committee of the U.S. House of Representatives appears to have stalled in its efforts to reform the Rule 14a-8 no-action request process. However, ongoing legal action by two stakeholder groups (the National Center for Public Policy Research (“NCPPR”) and the National Association of Manufacturers (“NAM”)), and Exxon Mobil Corp.’s legal challenge to a proposal, as well as recent Supreme Court decisions that could further invigorate challenges to the SEC’s authority to adopt Rule 14a-8, signal that uncertainty about the shareholder proposal process and the SEC staff’s role in adjudicating Rule 14a-8 no-action requests will persist.
Proponents and third parties continue to use exempt solicitations to advance their agendas. Exempt solicitation filings remained at record levels, with the number of filings reaching a record high again this year—up over 69% compared to 2021. As in prior years, the vast majority of exempt solicitation filings in 2024 were filed by shareholder proponents on a voluntary basis—i.e., outside of the intended scope of the SEC’s rules—in order to draw attention and publicity to pending shareholder proposals. Continuing a trend first noted last year, third parties are intervening in the shareholder proposal process by using exempt solicitation filings to provide their views on shareholder proposals submitted by unaffiliated shareholder proponents. In addition, some third parties have used exempt solicitation filings to disseminate their general views on social or governance topics beyond those raised by a specific shareholder proposal.

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The following Gibson Dunn lawyers prepared this update: Aaron Briggs, Elizabeth Ising, Julia Lapitskaya, Ronald O. Mueller, Michael Titera, Lori Zyskowski, Geoffrey Walter, Victor Twu, Natalie Abshez, Meghan Sherley, Nicholas Whetstone, Chad Kang, Nathan Marak, Antony Nguyen, and Jack Strachan.

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

Aaron Briggs – San Francisco, CA (+1 415-393-8297, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Julia Lapitskaya – New York, NY (+1 212-351-2354, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael Titera – Orange County, CA (+1 949-451-4365, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])
Geoffrey E. Walter – Washington, D.C. (+1 202-887-3749, [email protected])
David Korvin – Washington, D.C. (+1 202-887-3679, [email protected])