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This edition of Gibson Dunn’s Federal Circuit Update summarizes the current status of several petitions pending before the Supreme Court, addresses a proceeding by the Judicial Council of the Federal Circuit, and summarizes recent Federal Circuit decisions concerning indefiniteness, inherency, obviousness, enablement, and patent-eligibility.

Federal Circuit News

Supreme Court:

As we summarized in our March 2023 update, on March 27, 2023, the United States Supreme Court heard oral argument in Amgen Inc. v. Sanofi (U.S. No. 21-757) on enablement under 35 U.S.C. § 112. A decision in this case is expected by the end of June.

Noteworthy Petitions for a Writ of Certiorari:

This month, there is a new potentially impactful petition pending before the Supreme Court:

NST Global, LLC v. Sig Sauer Inc. (US No. 22-1001): The petition raises questions regarding whether the Patent Trial and Appeal Board’s (“Board’s”) decision to sua sponte construe a patent’s preambles as limiting violates certain statutory and constitutional rights of the patentee, and whether the Federal Circuit’s practice of Federal Circuit Rule 36, which provides for summary affirmance without opinion, violates “constitutional guarantees, statutory protections under 35 U.S.C. § 144, and undermines public trust in the judicial system.” The response is due on May 15, 2023.

As we summarized in our March 2023 update, there are several petitions pending before the Supreme Court. We provide an update below:

The Court is considering petitions in Avery Dennison Corp. v. ADASA, Inc. (US No. 22-822), Nike, Inc. v. Adidas AG et al. (US No. 22-927), and Ingenio, Inc. v. Click-to-Call Technologies, LP (US No. 22-873). After the respondents in these cases waived their right to file a response, the Court requested responses in all three cases. The responses are due May 2, 2023, May 18, 2023, and May 26, 2023, respectively.

The petitions in Arthrex, Inc. v. Smith & Nephew, Inc. (US No. 22-639), Interactive Wearables, LLC v. Polar Electro Oy (US No. 21-1281), and Tropp v. Travel Sentry, Inc. (US No. 22-22) are still pending. In Arthrex, a response was filed on April 12, 2023, and a reply was filed on April 28, 2023. The Solicitor General submitted its views in Interactive Wearables and Tropp, and the Court will consider these petitions during its May 11, 2023 conference.

The Court denied the petitions in Thaler v. Vidal (US No. 22-919) and Novartis Pharmaceuticals Corp. v. HEC Pharm Co., Ltd. (US No. 22-671).

Other Federal Circuit News:

Judicial Council of the Federal Circuit Proceeding. On April 14, 2023, the Judicial Council of the Federal Circuit released a statement confirming that a proceeding under the Judicial Conduct and Disability Act and the implementing Rules had been initiated naming Judge Pauline Newman as the subject judge. The full statement may be found here.

Upcoming Oral Argument Calendar

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

Key Case Summaries (April 2023)

Ironburg Inventions Ltd. v. Valve Corp., Nos. 21-2296, 21-2297, 22-1070 (Fed. Cir. Apr. 3, 2023): Ironburg sued Valve for infringing its video game controller patent. The case was tried before a jury over Zoom, and the jury returned a verdict finding that Valve willfully infringed certain claims of Ironburg’s patent. On appeal, Valve argued that the district court erred in concluding that the “elongate member” and “substantially the full distance between the top edge and the bottom edge” were not indefinite.

The majority (Stark, J., joined by Lourie, J.) affirmed on the indefiniteness issues and vacated and remanded on another issue. The majority reasoned that “elongate member,” which means a member that is longer than it is wide, was not indefinite even though it lacked objective guidance as to “how much longer than wider the member must be.” Despite the lack of “numerical precision,” the specification disclosed that the purpose of the elongate shape was to provide users of varying hand sizes the ability to engage the paddles in a comfortable position. The majority therefore concluded that a person of skill in the art could ascertain with reasonable certainty the scope of the claims. For similar reasons, the majority concluded that “substantially the full distance between the top edge and the bottom edge” was not indefinite.

Judge Clevenger dissented. In his view, an ordinary artisan “desiring to produce a non-infringing handheld controller” would need to know “where along the top edge to start the measurement, and where along the bottom edge to complete the measurement” to ascertain the “full distance” as recited in the claims. While the specification provides guidance for the top edge, because that is where the controls are mounted, there is no guidance for the bottom edge.

Arbutus Biopharma Corporation v. Modernatx, Inc., No. 20-1183 (Fed. Cir. Apr. 11, 2023): The Board determined that Arbutus’s U.S. Patent No. 9,404,127 directed to stable nucleic acid-lipid particles (“SNALP”) that have a non-lamellar structure and related methods was anticipated by another Arbutus patent, U.S. Patent No. 8,058,069. In particular, the Board found that the limitation reciting a non-lamellar morphology (the “morphology limitation”) is inherently disclosed by the ‘069 patent as a consequence of the composition of the disclosed SNALP and the method used to produce it.

The Federal Circuit (Reyna, J., joined by Schall and Chen, JJ.) affirmed. Because there was no dispute that the ‘069 patent did not explicitly teach the morphology limitation, the Court focused on whether the limitation was inherently disclosed and found no error in the Board’s conclusion that it was. In doing so, the Court rejected Arbutus’s argument that there is only a “probability” that the morphology limitation would result from controlling several variations of formulations and processes. Instead, it found that there are a “limited number of tools”—five formulations and two processes—that a person skilled in the art would follow that would result in a composition with the “inherent morphological property.”

Sanderling Management Ltd. v. Snap Inc., No. 21-2173 (Fed. Cir. Apr. 12, 2023): Sanderling sued Snap for infringing a patent directed to a method for distribution of dynamic digital promotional content. The district court granted Snap’s motion to dismiss because the patent claimed patent-ineligible subject matter under 35 U.S.C. § 101.

The Federal Circuit (Stark, J., joined by Chen and Cunningham, JJ.) affirmed. The Court concluded that the district court did not err by resolving the motion to dismiss without first undertaking claim construction. “If claims are directed to ineligible (or eligible) subject matter under all plausible constructions, then the court need not engage in claim construction before resolving a Section 101 motion.” The Court agreed with the district court that the claims were directed to the abstract idea “‘of providing information—in this case, a processing function—based on meeting a condition,’ e.g., matching a GPS location indication with a geographic location,” with no inventive concept.

UCB, Inc. v. Actavis Labs. UT, Inc., No. 21-1924 (Fed. Cir. Apr. 12, 2023): UCB developed and marketed Nuepro^®, a transdermal rotigotine patch to treat Parkinson’s. Nuepro^® used a drug-to-stabilizer ratio of 9:2, within the range of 9:1.5 to 9:5 claimed in UCB’s initial Nuepro^® patents. But in commercialization, the 9:2 ratio proved unstable. UCB reformulated to a ratio of 9:4 and was granted U.S. Patent No. 10,130,589, which claimed a range of 9:4 to 9:6. UCB then asserted the ‘589 patent in a Hatch-Waxman action against Actavis. Third Circuit Judge Kent Jordan, sitting as the trial judge by designation, held the asserted claims of the ‘589 patent to be invalid as anticipated and obvious over UCB’s earlier patents, which disclosed an overlapping range.

The Federal Circuit (Stoll, J., joined by Moore, C.J., and Chen, J.) affirmed on obviousness grounds only. The Court noted that UCB’s prior patents did not expressly disclose “a point” within the claimed range of 9:1.5 to 9:5 that fell within the newly claimed range of 9:4 to 9:6. As the Court explained, the disclosure of a range does not disclose points within the range. Nor is it sufficient that a skilled artisan might readily “envisage” points within the range. Instead, an overlapping range anticipates only if it describes the claimed range with “sufficient specificity” such that “there is no reasonable difference in how the invention operates over the ranges.” The Court thus determined that the district court misapplied the law on anticipation. But, as the Court noted, it need not resolve the issue of anticipation because an overlapping range creates a “presumption of obviousness,” and because the patentee failed to rebut that presumption, the Court upheld invalidity on that basis.

FS.com Inc. v. International Trade Commission (No. 22-1228) (Fed. Cir. Apr. 20, 2023): Corning filed a complaint with the International Trade Commission (“ITC”) alleging that FS was violating 19 U.S.C. § 1337 (“Section 337”) by importing high-density fiber optic equipment (commonly used in data centers) that infringed four of Corning’s patents. The administrative law judge (“ALJ”) determined FS violated Section 337 finding, in part, that certain claims were infringed, and rejecting FS’s invalidity challenges, including that certain claims were not enabled. The ITC declined to review the ALJ’s enablement determination and adopted the ALJ’s analysis.

The Federal Circuit (Moore, C.J., joined by Prost and Hughes, JJ.) affirmed. The claims at issue recited a fiber optic density of “at least” 98 or 144 fiber optic connections per U space. FS argued that these open-ended density ranges were not enabled because the specification only enables up to 144 fiber optic connections per U space and that the ITC erred in concluding that some inherent upper limit exists. The Court determined that the ITC properly construed these claims as covering only connection densities up to about 144 connections per U space in light of the specification and expert testimony that densities substantially above that were technologically infeasible.

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 or the authors of this update:

Blaine H. Evanson – Orange County (+1 949-451-3805, [email protected])
Audrey Yang – Dallas (+1 214-698-3215, [email protected])

Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:

Appellate and Constitutional Law Group:
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, jpoon@gibsondunn.com)

Intellectual Property Group:
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])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

London partner Penny Madden KC and of counsel Ceyda Knoebel are the authors of “Arbitrability and Public Policy Challenges,” [PDF] an extract from the third edition of Global Arbitration Review’s The Guide to Challenging and Enforcing Arbitration Awards published in April 2023.

The whole publication is available here.

Gibson Dunn’s Public Policy Practice Group is closely monitoring developments regarding the infrastructure permitting debate in Congress. We offer this alert summarizing and analyzing the U.S. Senate Environment and Public Works Committee’s hearing on April 26, 2023 to help our clients prepare for potential changes in infrastructure permitting and environmental authorization laws. We are also available to help our clients arrange meetings on Capitol Hill to discuss permitting reform proposals or to share real-world examples of how the permitting process has affected them.

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On April 26, 2023, the U.S. Senate Committee on Environment and Public Works (the “Committee”) held a hearing addressing the need to improve the federal infrastructure permitting process. During the hearing, witnesses testified on the necessity of various changes to the current permitting process, focusing on energy projects. Witnesses included:

Christy Goldfuss, Chief Policy Impact Officer, National Resource Defense Council (“NRDC”)
Dana Johnson, Senior Director of Strategy and Federal Policy, WE ACT
Christina Hayes, Executive Director, Americans for a Clean Energy Grid
Jay Timmons, President & CEO, National Association of Manufacturers
Marty Durbin, Senior Vice President of Policy, U.S. Chamber of Commerce

The majority of senators who spoke at the hearing expressed interest in finding a bipartisan compromise on permitting reform. Chairman Tom Carper (D-DE) highlighted recent legislation that has increased the need for permitting reform—especially the Infrastructure Investment and Jobs Act (also known as the Bipartisan Infrastructure Law); the Inflation Reduction Act; and the CHIPS and Science for America Act. Those three laws directed billions of taxpayer dollars to developing infrastructure projects across the United States, many of which must obtain federal permits.

We provide a full hearing summary and analysis below. Of particular interest to clients, however:

Chairman Carper set out three main goals he said any bipartisan permitting reform package must meet. It must (1) result in lower emissions and protect bedrock environmental laws; (2) support early and meaningful community engagement, especially for projects that affect historically disadvantaged communities; and (3) provide businesses—in particular, clean energy businesses—with certainty and unlock economic growth across the country.
Ranking Member Shelley Moore Capito (R-WV) emphasized the need for permitting reform to proceed through regular order (i.e., for it to go through the committee process rather than developed by an informal “gang”).
Both Chairman Carper and Ranking Member Capito commented on the importance of real-world examples to convey the need for permitting reform to the American public.
All members agreed that improving front-end community engagement is crucial for any permitting reform package.

Key substantive issues surrounding permitting reform raised in the hearing include: (1) the effectiveness of the FAST-41 permitting reforms; (2) the need for early planning and community engagement; (3) the scope of permitting reform; (4) enforceable timelines and regulatory clarity; (5) litigation; (6) critical minerals and microchip manufacturing; and (7) agency funding.

Effectiveness of FAST-41 Permitting Reforms

In his opening statement, Chairman Carper praised the effectiveness of the FAST-41 program, which created the Federal Permitting Improvement Steering Council (“FPISC” or “Permitting Council”) and provides an agency coordination process for facilitating the permitting process for some of the largest infrastructure projects. He noted that from 2010 to 2018, on average, it took 4.5 years to create a project’s environmental impact statement, but for FAST-41 projects, it took only 2.5 years. Chairman Carper’s support for the FAST-41 framework suggests he may be open to permitting reforms that rely on a similar framework that provide for increased agency communication, coordination, and transparency. Note, too, that Senator Manchin’s 2022 permitting bill heavily drew from the FAST-41 framework.

Similarly, Senator Pete Ricketts (R-NE) suggested that the federal permitting agencies should employ the Lean Six Sigma managerial process, which aims to reduce waste and inefficiencies. He observed that the Lean Six Sigma process cut the timeline for one type of permit in Nebraska from 190 days to 65 days over the course of one year without loosening environmental restrictions. Ms. Goldfuss observed that the FAST-41 process includes some of those same principles, such as the designation of a lead agency to engage with a project proponent and a public, online dashboard that offers transparency into the permitting process for individual projects.

Need for Early Planning and Community Engagement

Senators and witnesses alike agreed that early planning and community engagement is crucial for improving the permitting process. For example, Ms. Goldfuss commented that project sponsors and the government should work together to plan and site development in ways that minimize impact before permitting begins. She also encouraged the federal government to partner with state agencies to share data, mitigation options, and guidance, and she advocated for the federal government to use Inflation Reduction Act funds to help states with planning and permitting.

Likewise, Ms. Johnson advocated for early and ongoing communication during the project planning process. She suggested undertaking community engagement with a neutral party facilitating the conversation and making the comment process more accessible for people who do not have access to computers or who cannot attend public hearings.

Ms. Hayes also endorsed early and meaningful communication with communities and suggested that project sponsors should provide community benefits and revenue sharing. In his opening, Chairman Carper commended a West Virginia project for providing grants for communities surrounding a turbine wind farm and ensuring that construction jobs went to the local labor force.

Senator Ben Cardin (D-MD) expressed concern that rushing permitting processes will prevent community participation. Ms. Johnson responded that Congress cannot prioritize speed over quality and suggested frontloading the engagement process before work on an environmental impact statement or environmental assessment begins.

Scope of Permitting Reform

One of the clear divides between Republicans and Democrats is the scope of permitting reform—both regarding the types of projects such reforms will help and the reforms themselves.

Regarding the types of projects, throughout the hearing, Democrats focused on the need for increased energy transmission and green energy infrastructure. Ranking Member Capito, however, emphasized permitting reform needs to help all infrastructure projects, “not just a small subset that are politically favorable to one group or another.” Other Republicans echoed this sentiment. Mr. Durbin expressed the need for permitting reform to support natural gas development, including interstate pipelines, as well as critical mineral mining and broadband expansion.

Regarding reforms themselves, Ranking Member Capito argued that to make substantive change, Congress will have to amend the underlying environmental statutes, including the Clean Water Act, Clean Air Act, and the National Environment Policy Act (“NEPA”). Senator Kevin Cramer (R-ND) also endorsed amending the environmental statutes.

On the other hand, Ms. Goldfuss contended that “NEPA is not the problem.” She said that instead of focusing on NEPA reforms, agencies should be encouraged to make greater use of programmatic environmental impact statements using a “design one, build many” model. Regarding transmission lines, she argued that the Federal Energy Regulatory Commission and the Department of Energy should move quickly to designate national interest corridors.

Enforceable Timelines and Regulatory Clarity

Ranking Member Capito stated that there need to be “enforceable timelines with clear time limits and predictable schedules for environmental reviews and consequences for when agencies fail to act in a timely fashion.” Mr. Timmons echoed her concern for enforceable timetables in his opening statement, particularly for hydrogen, natural gas, and nuclear infrastructure.

Mr. Timmons also argued that the Environmental Protection Agency and other agencies should refrain from issuing new or shifting regulations and that Congress should hold the federal government accountable for implementing the congressional intent of the One Federal Decision effort, enacted as part of the IIJA.

Litigation

Senator Dan Sullivan (R-AK) expressed concern that litigation is unnecessarily hampering energy projects. Mr. Durbin responded that litigation against natural gas pipelines increases costs for manufacturers and consumers. He emphasized that natural gas is part of the clean energy economy, but litigation affects its reliability and affordability. Mr. Timmons argued that judicial review should be “meaningful and timely.”

In response to questioning from Senator Jeff Merkley (D-OR), Ms. Goldfuss acknowledged that the NRDC opposed Senator Manchin’s permitting proposal last Congress, in part because of the limited timeline for judicial review for certain projects.

Critical Minerals and Microchip Manufacturing

Several senators and witnesses discussed the need to improve the permitting process for mining critical minerals given the national security concerns associated with China manufacturing and processing 80 percent of the critical minerals used in modern technology.

Senator Mark Kelly (D-AZ) expressed his interest in permitting reform to help accelerate microchip manufacturing in the United States. He noted that application of the NEPA process to CHIPS Act funding recipients may unnecessarily delay meeting the national security goal of onshoring chips manufacturing. Mr. Durbin argued that all projects need to have environmental review and community input, but Congress needs to make sure the process is functional and that decisions can be made quickly to advance the CHIPS Act goals.

Agency Funding

Senators Merkley and Ed Markey (D-MA) argued that the real cause of permitting delays is underfunding of federal agencies. Senator Markey suggested that Congress should wait to see the impact of the recently passed Inflation Reduction Act’s allocation of $1 billion to agencies before making any further reforms to the permitting process.

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Senior members of Gibson Dunn’s Public Policy Practice Group have more than 40 years of combined experience on Capitol Hill. Our team includes former congressional staff and Administration officials who have significant experience tracking, developing, and implementing infrastructure permitting reform legislation and regulations. We also have strong working relationships with key members of Congress and Biden administration officials focused on federal permitting reform.

Our team is available to assist clients through strategic counseling; real-time intelligence gathering on federal permitting reform legislation; developing and advancing policy positions; drafting legislative text; shaping messaging; and lobbying Congress. We also work with clients to craft regulatory comment letters; advocate before executive branch agencies; and navigate legislative and regulatory changes to federal infrastructure permitting laws.

The following Gibson Dunn lawyers assisted in preparing this alert: Michael D. Bopp, Roscoe Jones Jr., David Fotouhi, Amanda Neely, Daniel P. Smith, and Miguel Mauricio.*

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Public Policy or Environmental Litigation and Mass Tort practice groups, or the following authors:

Michael D. Bopp – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-955-8256, [email protected])

Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-887-3530, [email protected])

David Fotouhi – Washington, D.C. (+1 202-955-8502, [email protected])

Amanda H. Neely – Washington, D.C. (+1 202-777-9566, [email protected])

Daniel P. Smith – Washington, D.C. (+1 202-777-9549, [email protected])

*Miguel Mauricio is a recent law graduate working in the firm’s San Francisco office who is not admitted to practice law.

On April 21, 2023, the Financial Stability Oversight Council (“FSOC”) proposed several changes to how the agency would designate nonbank financial companies as systemically important financial institutions (“SIFIs”), thereby subjecting them to supervision by the Federal Reserve and additional regulations. In the first of two proposed “interpretive guidance“ documents, FSOC would “revise and update” its 2019 Interpretive Guidance on several fronts, with the expressed goal of eliminating “hurdles” to FSOC’s ability to designate nonbank financial companies as systemically important. In the second proposed interpretive guidance document, FSOC sets forth an “analytic framework” that it would employ when assessing a company’s “potential risk or threat to U.S. financial stability,” and accordingly whether to designate the company as systemically important. FSOC has also issued factsheets for the first and second proposed interpretive guidances.

These new documents (together, the “Proposed Guidance”), if finalized, would implement several key changes to FSOC’s current Interpretive Guidance. Under the current Guidance, adopted in 2019, FSOC employed an “activities-based approach” to assess risk and would designate individual entities as SIFIs only as a “last resort.” The Proposed Guidance would eliminate any requirement to use an activities-based approach before designating individual entities. The Proposed Guidance would also remove any obligation that FSOC consider a company’s likelihood of material financial distress before designating that company. Finally, the Proposed Guidance eliminates any requirement that FSOC conduct a cost-benefit analysis before designating companies as SIFIs. These changes would expand FSOC’s ability to designate nonbank financial companies as SIFIs, and thus to subject them to additional regulation.

Below, we provide background information on FSOC’s designation process; Gibson Dunn’s challenge to FSOC’s designation of MetLife; the key changes that the Proposed Guidance would implement; the likely implications of those changes; and, finally, the steps to be taken now by concerned parties.

I. Background of FSOC’s Designation Process

Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) established FSOC and gave it the power to designate a nonbank financial company as a SIFI, meaning that FSOC has determined that material financial distress at the company, or the company’s nature, scope, size, scale, concentration, interconnectedness, or mix of activities, could pose a threat to U.S. financial stability. 12 U.S.C. § 5323(a)(1). This designation imposes on the designated nonbank financial company Federal Reserve examination, supervision, and enforcement authority, as well as enhanced prudential standards—including heightened capital and liquidity requirements, leverage limits, resolution planning, concentration limits, and stress testing and early remediation requirements. Id.

In 2012, FSOC promulgated guidance describing the manner in which the agency would make designation determinations. This guidance provided, for example, that FSOC would assess the company’s vulnerability to material financial distress before addressing the effect of that potential distress, and that the agency would assess the company’s threat to U.S. financial stability. See Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 77 Fed. Reg. 21,637, 21,653 (Apr. 11, 2012).

In FSOC’s thirteen years of existence, the agency has designated four nonbank financial companies as SIFIs: American International Group, Inc.; General Electric Capital Corporation; Prudential Financial, Inc.; and MetLife, Inc. Only MetLife challenged its designation.

Represented by Gibson Dunn, MetLife brought suit in federal district court, which court ruled that FSOC’s designation of MetLife was arbitrary and capricious and ordered FSOC to rescind the designation. See MetLife, Inc. v. Fin. Stability Oversight Council, 177 F. Supp. 3d 219 (D.D.C. 2016). The district court first held that FSOC had violated its own rules by failing to consider whether MetLife was vulnerable to material financial distress, and whether hypothetical distress at MetLife would pose a threat to U.S. financial stability. Id. at 233–39. The district court also held that FSOC’s designation decision was arbitrary and capricious because it failed to consider the costs of designating MetLife. Id. at 239–42. FSOC appealed the decision to the D.C. Circuit, but then voluntarily dismissed its appeal. See MetLife, Inc. v. Fin. Stability Oversight Council, No. 16-5086, 2018 WL 1052618, at *1 (D.C. Cir. Jan. 23, 2018). On remand, the district court denied a motion to vacate the portion of its opinion that held FSOC was required to perform a cost-benefit analysis. See Order, MetLife, Inc. v. Fin. Stability Oversight Council, No. 1:15-cv-00045-RMC, Dkt. 129 (D.D.C. Feb. 28, 2018).

By 2018, FSOC had rescinded all of its prior designations. Then, in 2019, FSOC amended its regulations, adopting many of the positions that MetLife had presented in the litigation. See Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 84 Fed. Reg. 71,740 (Dec. 30, 2019). In particular, the agency adopted an activities-based approach to assessing potential risks to U.S. financial stability, which focuses on working with other federal and state financial regulators to identify and regulate particularly risky activities, and considers designating individual companies to be a last-resort option. FSOC also committed to performing cost-benefit analyses during its designation decisions, and to assessing the likelihood that the entity would actually experience material financial distress.

II. FSOC’s Proposed Guidance Changes

FSOC’s new Proposed Guidance would disavow many of the changes that FSOC made in its 2019 Interpretive Guidance in response to the MetLife decision. As noted above, three changes in the Proposed Guidance would prove especially important.

First, FSOC’s Proposed Guidance would abandon its activities-based approach to preventing material financial distress in the U.S. economy. Under that approach, FSOC monitors the economy and works with federal and state financial regulators to identify particular activities that could pose a risk to U.S. financial stability in certain contexts. Once they identify a risky activity, FSOC works with those regulatory bodies to address the identified potential risk, and considers designating a particular company to be a last resort. This approach enables regulators to promulgate consistent and predictable rules that govern a particular market as a whole, rather than singling out certain entities for unique treatment. The Proposed Guidance, however, would drop that approach in favor of more aggressively designating individual firms based on “non-exhaustive” risk factors contained in the new “analytic framework,” including leverage, liquidity risk and maturity mismatch, interconnections, operational risks, complexity or opacity, inadequate risk management, concentration, and destabilizing activities.

Second, the Proposed Guidance would eliminate any requirement that FSOC consider a company’s likelihood of material financial distress before designating that company as a SIFI. The Proposed Guidance suggests that inquiring into the likelihood of material financial distress is neither “required [n]or appropriate” because such distress can be difficult to recognize or predict. Accordingly, when evaluating future designations, FSOC would “presuppos[e]” that a company is experiencing material financial distress—irrespective “of the likelihood” of such distress in the real world—and assess the impact that this hypothetical distress might have on the broader economy.

Third, the Proposed Guidance would eliminate any requirement that FSOC conduct a cost-benefit analysis before designating a nonbank financial company as a SIFI, despite the district court’s ruling in MetLife that failure to conduct that analysis was arbitrary and capricious and violated the Supreme Court’s ruling in Michigan v. EPA, 576 U.S. 743 (2015), which had held that when a statute allows an agency to regulate when “appropriate,” the agency must consider the costs of its regulation. The Proposed Guidance posits that weighing the increased costs from regulatory burdens against the potential benefits of designation is not “useful or appropriate,” given difficulties in assessing costs and the “potentially enormous” benefits of designation in averting financial crises. It portrays its loss in the district court as having no legal significance on this point. See FSOC, Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies at 16 n.16 (Apr. 21, 2023).

III. Implications of the Proposed Guidance

The goal of the Proposed Guidance is to broaden—and accelerate—FSOC’s ability to identify and designate certain nonbank financial companies as SIFIs, and thus to subject them to additional and potentially onerous supervision, examination, and regulation. The retreat from an activities-based approach would also limit companies’ ability to know in advance what activities would risk designation, and thus to plan their future behavior. Recent statements by financial regulators suggest that the targets of FSOC’s proposed approach may include traditional nonbank financial companies (for instance, insurers, hedge funds, open-end funds, and money-market funds), along with more recent market entrants (such as stablecoin issuers and other FinTechs engaged in financial activities, including nonbank peer-to-peer payments companies).

The Proposed Guidance may be vulnerable to many of the same objections that prevailed in the MetLife litigation. For example, footnote 16 of the Proposed Guidance asserts that FSOC need not conduct any cost-benefit analysis because MetLife was wrongly decided and has no “preclusive effect.” But, as noted above, the district court rejected the government’s attempt, after it had dismissed its appeal, to vacate the cost-benefit portion of the court’s opinion. Moreover, the district court had explained that its cost-benefit decision was compelled by the Supreme Court’s decision in Michigan v. EPA. See MetLife, 177 F. Supp. 3d at 240 (citing Michigan, 576 U.S. at 752). FSOC remains bound by the Supreme Court’s Michigan decision and any designation that ignores cost-benefits considerations will be vulnerable to the same argument on which Gibson Dunn prevailed in MetLife.

Similarly, the district court held that the text of the Dodd-Frank Act itself mandates an inquiry into a company’s likelihood of material financial distress, see MetLife, 177 F. Supp. 3d at 241 (citing 12 U.S.C. § 5323(a)(2)(K))—the same inquiry that the Proposed Guidance now seeks to discard.

IV. Next Steps

FSOC’s Proposed Guidance is subject to public notice and comment for 60 days following publication of the Proposed Guidance in the Federal Register. Incisive comments may have an effect on the substance of the final documents, and may also form the basis for any future court challenges to FSOC’s final guidance and to any nonbank financial company’s potential designation.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Administrative Law and Regulatory, Financial Institutions, or FinTech and Digital Assets practice groups, or the following authors:

Eugene Scalia – Washington, D.C. (+1 202-955-8673, [email protected])
Ashlie Beringer – Palo Alto (+1 650-849-5327, [email protected])
M. Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])
Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
Amir C. Tayrani – Washington, D.C. (+1 202.887.3692, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
Jason J. Cabral – New York (+1 212-351-6267, [email protected])
Lochlan F. Shelfer – Washington, D.C. (+1 202-887-3641, [email protected])

On April 6, 2023, President Biden signed an executive order entitled “Modernizing Regulatory Review” (the “Order”). The Order makes a number of significant changes to the process by which the White House Office of Information and Regulatory Affairs (“OIRA”) reviews significant regulatory measures. Under executive orders issued by previous presidents, all “significant regulatory actions” are subject to OIRA review, and agencies must perform a cost-benefit analysis of the action before it is undertaken. President Biden’s new Order narrows the definition of what constitutes a “significant regulatory action,” including by doubling the monetary threshold of annual effects on the national economy (raising it from $100 million to $200 million) and adjusting the threshold based on changes in Gross Domestic Product going forward.

The Order also directs the White House Office of Management and Budget (“OMB”) to propose revisions to OMB Circular A-4, which is the primary guidance document governing how executive branch agencies conduct cost-benefit analyses. On April 6, OMB issued its proposed revisions. They include changes to –

lower discount rates that convert future costs and benefits into current dollars;
provide greater weight to the distributional effects of a regulatory action; and
encourage the assessment of even highly uncertain effects of regulatory action.

If finalized, OMB’s proposed revisions would represent the most significant change to how agencies conduct cost-benefit analysis since Circular A-4 was first issued in 2003. In combination with the changes effected by the Order, OMB’s proposal would likely lead to more and faster regulatory action, by, for instance, reducing OIRA oversight and relieving agencies of their obligation to prepare cost benefit analyses for certain regulatory measures. Similarly, many of OMB’s changes could result in agencies more frequently concluding that a regulatory measure is cost-justified. For example, because the costs of new regulations are often incurred in the near-term, while the benefits often accumulate more gradually over longer periods of time, the lower discount rates OMB proposes may mean that agencies will be more likely to find that the benefits of a regulatory action outweigh its costs. This is particularly true for regulations that address longer term phenomena, such as climate change, which is an example OMB discusses in its proposal.

OMB’s proposed changes could also lead to greater litigation vulnerability for certain regulatory measures. In particular, a court may be more likely to find an action arbitrary and capricious if it is based on highly uncertain benefit assessments that are identified by commenters during the notice and comment process. Some of OMB’s revisions to how costs and benefits are weighed could create opportunities for commenters to challenge agencies’ analyses.

By its terms, the Order only applies to “executive departments and agencies.” Independent agencies, such as the FTC, SEC, and FCC, are apparently not covered. That makes sense because they are not subject to the regulatory review process that President Biden’s Order is modifying. Independent agencies will thus be largely unaffected by many of the changes the Order is introducing. However, in some instances, independent agencies voluntarily follow the guidance set forth in Circular A-4, or otherwise interact with OIRA regarding cost-benefit analyses, as in connection with the Congressional Review Act. To the extent independent agencies follow the guidance in Circular A-4, their regulatory analyses may therefore be affected by the proposed changes.

Interested parties have until June 6 to submit comments on OMB’s proposed changes to Circular A-4.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Administrative Law and Regulatory Practice or Public Policy groups, or the following authors in Washington, D.C.:

Eugene Scalia (+202-955-8210, [email protected])

Helgi Walker (+202-887-3599, [email protected])

Michael Bopp (+202-955-8256, [email protected])

Blake Lanning (+202-887-3794, [email protected])

We are pleased to provide you with Gibson Dunn’s Accounting Firm Quarterly Update for Q4 2022. 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 Announces New Enforcement Director
PCAOB Advisory Group Meeting Suggests Topics of Regulatory Interest
PCAOB Releases 2022 Annual Report
PCAOB and U.S. Senators Raise Questions About Crypto “Proof of Reserves” Reports
PCAOB Sued as Unconstitutional by John Doe Plaintiff
SEC Files Petition for Certiorari in SEC v. Jarkesy
CPAB Brings Rare Enforcement Action Against U.S. Firm
House Signals More SEC Oversight
Ninth Circuit and Ohio Supreme Court Issue Rulings of Interest on Employment Arbitration Agreements and Ransomware Attack Insurance
NLRB Issues Decision on Enforceability of Severance Agreement Provisions
SDNY Criminal Motion Alleges Conflict in Representing Both Company and Employee
Other Recent SEC and PCAOB Regulatory Developments

Read More

Accounting Firm Advisory and Defense Group:

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

Ron Hauben – Co-Chair, New York (+1 212-351-6293, [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])

Mass arbitration is a growing phenomenon in which thousands of plaintiffs—often consumers, employees, or independent contractors—bring arbitration demands against a company at the same time. Pursuing arbitrations in this manner can impose significant, even crippling, costs on companies, particularly in light of the hefty filing fees that many arbitration providers charge. Many companies, however, have deployed successful strategies for deterring and defending against mass arbitrations, primarily through the careful drafting of their arbitration agreements. This webcast describes some of these strategies, as well as recent developments in the law affecting mass arbitrations and the ethical concerns surrounding this issue.

PANELISTS:

Dhananjay (DJ) Manthripragada is a partner in the Los Angeles and Washington, D.C. offices of Gibson, Dunn & Crutcher. He is Chair of the firm’s Government Contracts practice group, and also a member of the Litigation, Class Actions, Labor & Employment, and Aerospace and Related Technologies practice groups. Mr. Manthripragada has a broad complex litigation practice, and has served as lead counsel in precedent setting litigation before several United States Courts of Appeals, District Courts in jurisdictions across the country, California state courts, the Court of Federal Claims, and the Federal Government Boards of Contract Appeals. He has first-chair trial experience and has successfully tried to verdict both jury and bench trials, and has served as lead counsel in arbitration and other alternative dispute resolution forums. His practice spans a wide range of industries, and he has represented some of the world’s leading aerospace and defense, logistics/transportation, high-technology, finance, and pharmaceutical companies in their most significant matters. Mr. Manthripragada is also highly regarded as a trusted advisor to clients regarding significant compliance/enforcement, contract, dispute resolution, and employment issues. He was recognized in The Best Lawyers in America® Ones to Watch in Commercial Litigation in 2021 and 2022.

Michael Holecek is a litigation partner in the Los Angeles office of Gibson, Dunn & Crutcher, where his practice focuses on complex commercial litigation, class actions, labor and employment law, and data privacy—both in the trial court and on appeal. Mr. Holecek has first-chair trial experience and has successfully tried to verdict both jury and bench trials, he has served as lead arbitration counsel, and he has presented oral argument in numerous appeals. Mr. Holecek has also authored articles on appellate procedure, civil discovery, corporate appraisal actions, data privacy, and bad-faith insurance litigation.

Jesenka Mrdjenovic is Of Counsel in Gibson, Dunn & Crutcher’s Washington, D.C. office, where she practices in the firm’s Litigation Department. Ms. Mrdjenovic represents clients in complex litigation and appellate matters, with a particular focus on class action defense. She has represented clients at the trial and appellate levels in matters involving constitutional, employment, intellectual property, consumer protection, and antitrust law. Ms. Mrdjenovic previously served as senior counsel for one of the nation’s largest mortgage lenders and Chief Litigation Officer to a holding company connecting more than 100 portfolio entities in a broad range of industries. In her role as an in-house attorney, Ms. Mrdjenovic managed complex litigation matters and advised senior management on a variety of legal, contract, and regulatory issues.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 General hour.

Gibson, Dunn & Crutcher LLP is authorized by the Solicitors Regulation Authority to provide in-house CPD training. This program is approved for CPD credit in the amount of 1.0 hour. Regulated by the Solicitors Regulation Authority (Number 324652).

Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 1 hour toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

Application for approval is pending with the Colorado, Virginia, Texas and Washington State Bars.

Washington, D.C. partners Helgi Walker and Russell Balikian and associate Robert Batista are the authors of “In Axon, Justices Continue Reining In Administrative State,” [PDF] published by Law360 on April 21, 2023.

Washington, D.C. partner Lucas Townsend, Dallas partner Brad Hubbard and Los Angeles associate Matt Aidan Getz contributed to the article.

Washington, D.C. partner Elizabeth Ising, Dallas partner Krista Hanvey, Washington, D.C. associate Geoffrey Walter and Dallas associate Gina Hancock are the co-authors of “Executive Compensation Disclosure Handbook: A Practical Guide to the SEC’s Executive Compensation Disclosure Rules,” [PDF] published by Donnelley Financial Solutions in February 2023.

The New York City Department of Consumer and Worker Protection, or DCWP, released final rules on April 6 regarding the city’s Local Law 144 and announced that it would begin enforcement on July 5.

Local Law 144 restricts employers and employment agencies from using an automated employment decision tool in hiring and promotion decisions unless it has been the subject of a bias audit by an “independent auditor” no more than one year prior to use. The law also imposes certain posting and notice requirements to applicants and employees subject to the use of AEDTs.

The DCWP is vested with the authority to amend the Rules of the City of New York under the New York City Charter and New York City Administrative Code. As detailed below, the DCWP’s final rules make a number of noteworthy changes and attempt to clarify the law.

1. The rules attempt to clarify the scope of covered AEDTs.

Local Law 144 defines an AEDT as:

Any computational process, derived from machine learning, statistical modeling, data analytics, or artificial intelligence, that issues simplified output, including a score, classification, or recommendation, that is used to substantially assist or replace discretionary decision making for making employment decisions that impact natural persons.

The final rules seek to clarify two of the key phrases within this definition.

The final rules define “machine learning, statistical modeling, data analytics, or artificial intelligence” as a group of mathematical, computer-based techniques:

That generate a prediction, e.g., an assessment of a candidate’s fit or likelihood of success, or a classification, e.g., categorizing applicants based on skill sets or aptitude; and

For which a computer identifies, at least in part, the inputs and their relative importance and, if applicable, other parameters to improve the model’s predictive accuracy.

The phrase “to substantially assist or replace discretionary decision making” is defined as:

To rely solely on a simplified output (score, tag, classification, ranking, etc.), with no other factors considered; or
To use a simplified output as one of a set of criteria where the simplified output is weighted more than any other criterion in the set; or
To use a simplified output to overrule conclusions derived from other factors including human decision-making.

Notably, this definition appears to permit employers to use the AEDT without conducting a bias audit where an AEDT’s output falls outside the specified circumstances.

Local Law 144 provides several examples of tools outside the scope of covered AEDT, i.e., calculators, junk email filters and spreadsheets. The final rules, however, do not provide any further examples.

Read More

Reproduced with permission. Originally published by Law360, New York (April 19, 2023).

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 authors:

Harris M. Mufson – Co-Chair, Whistleblower Team, New York (+1 212-351-3805, [email protected])

Danielle J. Moss – New York (+1 212-351-6338, [email protected])

Emily Maxim Lamm – Washington, D.C. (+1 202-955-8255, [email protected])

The Biden administration has been steadily evolving its views of national security risks and priorities—and what measures the executive branch will take to mitigate those risks. Last fall’s National Security Strategy called out critical technology and cybersecurity as key national security concerns. This focus sharpened with the release of the National Cybersecurity Strategy last month. And, most recently, the administration has submitted a $3.1 billion budget request for the Cybersecurity and Infrastructure Security Agency (CISA), a 22 percent increase from its request last year, to implement that strategy and fund other initiatives. While strategy is not policy, and budget proposals are not appropriations, these are strong signals of the shifting winds of the administration regarding the tools and incentives the administration will deploy to mitigate cybersecurity risks.

After years of relying on largely voluntary standards to encourage companies to harden their cybersecurity defenses, interspersed with incentives including funding and grants, the administration has definitively taken the position that it does not think companies have done enough. Accordingly, the new cybersecurity strategy calls for a heavier hand. Should the strategy be implemented, companies can expect to see direct liability, new regulations, and lawsuits from the federal government itself for companies that fail to make secure products, do not adopt minimum security measures, or misrepresent the actions they have taken. These new measures come as the administration is increasingly focused on strategic competition with China.

Below, we highlight the four main tools that companies should know about that the Biden Administration has vowed to use to secure critical infrastructure and industry from cyber threats.

1. Direct liability for software vendors. First, the Biden administration says that software companies and vendors should be directly liable for failing to adopt “reasonable” security measures into the programs used to power critical infrastructure and other areas. The administration said it has been unhappy with voluntary efforts to increase software security, which have made progress but has been inconsistent across industries. And, because the administration believes that software vendors and companies that control data are in the best position to address this liability, it said that they should bear responsibility for failing to adopt those reasonable measures and not their end users and infrastructure providers who will be impacted by those failures directly.

“We’re all walking around with unsafe technology. So we have to change the incentives,” CISA Director Jen Easterly told a House subcommittee recently as she sought funding for the federal government’s efforts. “We may need to look at certain liability for whether manufacturers have duty of care to be able to protect those consumers.”

The legislation the administration is contemplating to implement this liability would prohibit software terms of service from disclaiming all liability for security flaws, even if the flaw is from open-source software that has been integrated into the commercial project, and would also impose higher standards of care in high-risk areas.

2. New rulemaking and legislation to fill in regulatory gaps. Second, in addition to legislation on direct liability, the administration is planning new rulemaking and other legislation to close gaps in existing law that impose minimum security standards in a host of industries. In particular, cloud-based services are not all covered by existing regulations despite being integrated into systems across industries. These new regulations should be “performance-based,” the administration said, and modeled after voluntary frameworks from the National Institute of Standards and Technology (NIST) and CISA.

This comes in the wake of other rulemaking for such standards in the oil and gas pipeline, aviation, rail, and water sectors. And other legislative efforts have also advanced security measures, such as the Cyber Incident Reporting for Critical Infrastructure Act of 2022 (CIRCIA) that requires critical infrastructure providers to notify federal authorities about cybersecurity incidents. The administration is advancing rulemaking to implement CIRCIA as well, with CISA in the lead.

The administration seeks to pair these new requirements with new funding and financial incentives to speed compliance. While some companies can absorb these costs, others have low margins that make this difficult. Thus, in those areas, the administration is encouraging regulators to tilt incentives to reduce these costs, such as through favorable tax and rate-setting arrangements. Such arrangements would be on top of the funding that the government is already pouring into this area through the CHIPS and Science Act, the Inflation Reduction Act, and the Bipartisan Infrastructure Law. Further, the administration said it is exploring a government-backed support for the cyber insurance market to protect it in the event of a catastrophic event.

3. Government to lead the way—including as a plaintiff. Third, in all of these areas, the administration also signaled that it will itself set the bar for private industry to follow, such as by updating its own technology and through procurement processes to test new cybersecurity requirements, and will update its own technology using standards that it wants private industry to adopt as well. For example, the administration is prioritizing cryptography upgrades to public computer networks to be resistant to quantum-based efforts to compromise those networks. This is not just to secure the government’s own networks but also to set the bar that it expects the private sector to follow.

The administration has also signaled it will increase regulatory harmonization, make it easier for companies reporting an incident to connect with the appropriate officials quickly, modernize federal technology, and engage in research and development efforts. Given the increasing patchwork of notification requirements and various government equities in cyber incidents, such harmonization is critical to reducing the regulatory burden on companies—particularly during the high operational tempo of cyber incident response.

The federal government has indicated that it will continue to bring actions to enforce cybersecurity commitments. For example, the Department of Justice has already used the False Claims Act to pursue companies that allegedly misrepresent cybersecurity commitments in their federal contracts. And the Department of Justice has also launched a new nationwide “disruptive technology strike force” with the Commerce Department to coordinate efforts to respond to threats to critical infrastructure.

4. Shifting focus from criminal groups to state actors. Finally, the administration has signaled that the central threat that it has built its strategy around is from state actors. While criminal groups using ransomware to extract groups are still addressed by the administration’s strategy, it is the governments of China, Russia, Iran, and North Korea where the strategy is focused. The administration has highlighted the efforts of those state actors, and in particular China, to carry out cyber attacks and compromise vulnerable infrastructure. In an echo of the National Security Strategy, the cybersecurity strategy highlights that China “now presents the broadest, most active, and most persistent threat.” And also without naming China, the strategy notes that domestic networks should reduce their dependence “on critical foreign products and services from untrusted suppliers,” pointing to the longstanding controversy over China-based companies that supply hardware and equipment for U.S. computer networks.

The administration’s cybersecurity strategy further highlights the administration’s increased cross-border efforts to coordinate cybersecurity efforts with Australia, the United Kingdom and other European countries, India, Japan, and others.

In sum, the key takeaways for private industry in the administration’s cybersecurity strategy, as reinforced by budget priorities, are that companies in an ever-wider set of industries will not only be tempted into compliance with new funding or cajoled from the bully pulpit to increase their cybersecurity measures, but will also have to contend with a more forceful response from government that will expect them to meet security standards and promises—and face liability if they fail to do so. This increased enforcement may also be complicated by multiple agencies pursuing the same actions, resulting in the potential for companies having to deal with overlapping and uncoordinated inquiries. And with the increasing focus on state actors in place of cybercriminals, the strategy shows less of a focus on private ransomware issues and an increasing national security response that may serve as a prioritization filter. While the strategic objectives outlined in the cyber strategy and backed by the budget proposal will require significant executive action prior to coming into effect, companies should prepare now to meet the shifting approach towards increased cybersecurity requirements and liability.

The following Gibson Dunn lawyers assisted in preparing this alert: Alexander Southwell, Stephenie Gosnell Handler, and Eric Hornbeck.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any member of the firm’s Privacy, Cybersecurity & Data Innovation practice group:

United States
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, [email protected])
Jane C. Horvath – Co-Chair, PCDI Practice, Washington, D.C. (+1 202-955-8505, [email protected])
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, [email protected])
Matthew Benjamin – New York (+1 212-351-4079, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
David P. Burns – Washington, D.C. (+1 202-887-3786, [email protected])
Gustav W. Eyler – Washington, D.C. (+1 202-955-8610, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])
Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, [email protected])
Lauren R. Goldman – New York (+1 212-351-2375, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Kristin A. Linsley – San Francisco (+1 415-393-8395, [email protected])
Vivek Mohan – Palo Alto (+1 650-849-5345, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Rosemarie T. Ring – San Francisco (+1 415-393-8247, [email protected])
Ashley Rogers – Dallas (+1 214-698-3316, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, [email protected])
Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])

Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0) 1 56 43 13 00, [email protected])
Kai Gesing – Munich (+49 89 189 33-180, [email protected])
Joel Harrison – London (+44(0) 20 7071 4289, [email protected])
Vera Lukic – Paris (+33 (0) 1 56 43 13 00, [email protected])

Asia
Connell O’Neill – Hong Kong (+852 2214 3812, [email protected])
Jai S. Pathak – Singapore (+65 6507 3683, [email protected])

Dallas partner Allyson Ho is the co-author of “The Supreme Court Should Move to Protect Victims of True Threats,” [PDF] published by Bloomberg Law on April 17, 2023.

Decided April 14, 2023

Axon Enterprise, Inc. v. FTC (No. 21-86), SEC v. Cochran (No. 21-1239)

The Supreme Court held today in two related cases that federal district courts have jurisdiction to resolve certain challenges to the structure or existence of the Federal Trade Commission (“FTC”) and Securities and Exchange Commission (“SEC”), rejecting the argument that litigants can raise such challenges only on review of a final agency action before the court of appeals.

Background: Federal district courts have jurisdiction to hear “civil actions arising under the Constitution.” 28 U.S.C. § 1331. Federal courts of appeals also have jurisdiction to review certain agency actions, including final orders of the FTC and SEC. 15 U.S.C. §§ 45, 78y(a)(1).

Axon Enterprise, a company that was subject to an FTC enforcement action, and Michelle Cochran, a certified public accountant who was subject to an SEC enforcement action, each sued the respective agency in federal district court while their enforcement actions were pending. Axon and Cochran argued that the agencies’ basic structure and operations were unconstitutional and the pending enforcement actions were unlawful.

The district courts in both cases dismissed the complaints, holding that the specialized judicial-review provisions in the FTC Act and Exchange Act deprived them of jurisdiction by funneling review of final agency orders to the federal courts of appeals. The Fifth and Ninth Circuits reached different conclusions on that issue—the Ninth Circuit affirmed the dismissal for lack of jurisdiction, but the en banc Fifth Circuit reasoned that structural constitutional challenges to an agency’s jurisdiction were not the sort of claims Congress meant to funnel to the courts of appeals through the statutory review scheme.

Issue: Whether, by giving the courts of appeals jurisdiction to review final agency orders of the FTC and SEC, Congress stripped federal district courts of jurisdiction to hear constitutional challenges to the agencies’ structure or existence.

Court’s Holding:

Federal district courts have jurisdiction under 28 U.S.C. § 1331 to hear cases raising structural challenges to the FTC or SEC.

“[T]he review schemes set out in the Exchange Act and the FTC Act do not displace district court jurisdiction over Axon’s and Cochran’s far-reaching constitutional claims.”

Justice Kagan, writing for the Court

Gibson Dunn submitted an amicus brief on behalf of Raymond J. Lucia, Sr., George R. Jarkesy, Jr., and Christopher M. Gibson, in support of respondent in No. 21-1239: Michelle Cochran

What It Means:

Today’s decision allows people and businesses subjected to FTC and SEC (and potentially other) administrative enforcement actions to promptly raise certain structural challenges in court, without having to first complete long and costly agency proceedings (which often settle before a final order). As the Court recognized, permitting suits to proceed in federal district court allows regulated parties to vindicate the “here-and-now injury” of being subjected to unconstitutional administrative processes.
The Court’s holding likely implicates other agencies subject to similar review provisions, such as the Consumer Financial Protection Bureau.
More generally, the Court’s decision confirms that Congress’s establishment of special administrative review procedures does not necessarily require a claim to be channeled through that administrative process when: (1) doing so would preclude meaningful judicial review, (2) the claim is collateral to the administrative-review provisions, and (3) the claim is beyond the agency’s expertise to adjudicate.
The Court focused its holding on structural constitutional claims and did not specifically address whether other types of claims—fact-specific constitutional due-process claims, for example—may be raised directly in federal court or must instead proceed through the administrative-review process first.
The decision will likely keep pressure on the SEC to file contested claims in district court, providing regulated entities challenging SEC actions with greater procedural rights and protections than are available in administrative proceedings.
Today’s decision—issued with no dissent—reflects the current Court’s strong interest in reining in excesses of the administrative state by reinforcing constitutional limitations on the structure, composition, and operation of administrative agencies.

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

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

Related Practice: Administrative Law and Regulatory Practice

Eugene Scalia
+1 202-955-8210
[email protected]

Helgi C. Walker
+1 202.887.3599
[email protected]

Related Practice: Antitrust and Competition

Rachel S. Brass
+1 415.393.8293
[email protected]

Stephen Weissman
+1 202.955.8678
[email protected]

Related Practice: Securities Enforcement

Richard W. Grime
+1 202.955.8219
[email protected]

Mark K. Schonfeld
+1 212.351.2433
[email protected]

David Woodcock
+1 214.698.3211
[email protected]

Related Practice: Litigation

Reed Brodsky
+1 212.351.5334
[email protected]

Theane Evangelis
+1 213.229.7726
[email protected]

Veronica S. Moyé
+1 214.698.3320
[email protected]

In an April 13, 2023 webcast, the CHIPS Program Office (“CPO”) at the Department of Commerce provided a deep dive on the Financial Information requirements for funding applications and pre-applications. We have provided a fulsome discussion of CHIPS Act funding in our previous alerts here and here. The key takeaway from this most recent discussion is that applicants need to prepare thorough financial statements both for their pre-applications and even more so for their final applications. The financial analysis needs to give the government confidence that the projects already have solid financial backing and strong future prospects for financial success.

In particular, the CPO addressed the evaluation criteria for Financial Information, the differences—both in form and substance—between Financial Information submitted at the pre-application and application stages, and published resources and templates that can guide the preparation of these materials.

The CPO stressed that this guidance applies only to applicants applying for funding pursuant to its first Notice of Funding Opportunities (“NOFO”).[1] Detailed application instructions for other applicants will be released after the publication of the second and third NOFOs, in late spring and fall 2023, respectively.

I. Evaluation Criteria for Financial Information

As discussed in our previous alert, the CPO will evaluate all applications and pre-applications according to six key criteria: (1) economic and national security objectives; (2) commercial viability; (3) financial strength; (4) technical feasibility and readiness; (5) workforce development; and (6) projects’ broader impacts.[2] During the April 13th webcast, CPO staff emphasized that the Financial Information an applicant provides will be the primary source by which their application’s commercial viability and financial strength will be assessed.[3]

Commercial Viability: To establish a project’s commercial viability, Financial Information should demonstrate:
- a demand for the product;
- the size and diversity of the product’s customer base;
- expected volume and pricing dynamics;
- the stability of key supplies; and
- the project’s ability to counter potential technological obsolescence.

This reinforces a continuing CPO CHIPS Act tenet of deploying CHIPS Act capital to projects that have the optimal path for a combination of commercial success, onshoring of fabrication (particularly for leading nodes), and/or bolstering of sensitive industry verticals such as defense applications.

Financial Strength: Applicants should use their Financial Information submissions to paint a clear picture of their own financial strength, as well as that of their project and their corporate parent (if applicable). Additionally, the CPO stressed that it will prioritize projects that demonstrate meaningful third party financial validation, and thus do not rely solely on CHIPS Act funding, but have secured commitments for concurrent third-party investments, loans and associate guarantees, and/or local or state government incentives.[4]

II. Differences Between Pre-Application and Application Financial Information

At a high level, CPO staff described the difference between pre-application and final application financials as the level of necessary granularity. Because the pre-application’s primary objective is to create a dialogue and opportunity for feedback from the CPO, Financial Information at this stage needs only to provide “sufficient preliminary information on the proposed project(s)” to enable meaningful feedback from the CPO.[5] (CPO staff emphasized, however, that the more detail they receive at the pre-application stage, the better they can evaluate the project’s strengths and weaknesses.)[6] When judging the merits of a final application, on the other hand, applicants’ Financial Information must be extensive and detailed.

In addition to this high-level guidance, the CPO noted specific differences between the materials required to complete the Financial Information portions of the pre-application and the application, listed below:[7]

Pre-Application	Full Application
I. Financial Information Narrative	I. Financial Plan
II. Financial Ownership Structure	II. Sources and Uses of Funds
III. Sources and Uses of Funds	III. Project Cash Flow, Balance Sheet, and Income Statement Projections
IV. Company Financials	IV. Scenario Analyses
V. Summary Financials	V. CHIPS Incentives Request
VI. CHIPS Incentives Request	VI. CHIPS Loan or Loan Guarantee Request

For example, whereas both the pre-application and application require some form of summary narrative, the application specifically requires a financial plan for each proposed project, including narratives on cash flow projections, key equity return and debt service metrics, and sensitivity analyses.

Applicants should be sure to consult the NOFO and the CPO’s Guiding Principles for Full Application Financial Model to ensure that the final application’s Financial Information moves beyond “preliminary information” and provides the level of granularity necessary to obtain funding.

III. Resources and Templates

The CPO has prepared and published a number of resources and templates for the preparation of applications and pre-applications under the first NOFO, including extensive materials on the Financial Information requirements.[8]

One of the most substantial aspects of the Financial Information is the need for a dynamic financial model including variable inputs for key assumptions. This model must be comprehensive, including variables such as funding sources and cash flows to (in the final application) scenario analyses, internal rates of return, and risk and debt service metrics. Companies are free to use their own financial models and plans to satisfy these requirements, but the CPO has also created a Pre-Application Example Financial Model (and accompanying Pre-Application Example Financial Model White Paper) to demonstrate the types of financial data needed at the pre-application stage. As applicants move to the final application stage, they should also consult the Guiding Principles for Full Application Financial Model. These models demonstrate the level of specificity and types of data the CPO expects to see in an application’s Financial Information. CPO staff reiterated, however, that they are merely examples. Depending on an applicant’s unique business needs, additional data fields may be necessary.[9]

While these reference guides are illustrative examples of the financials CPO expects to review, applicants will be required to submit templates for certain parts of their pre-application and application Financial Information. These required templates are:

Pre-Application	Application
Pre-Application Sources and Uses Template	Full Application Offline Template Sources and Uses Full Application Offline Incentives Request

Guidance on how to use these templates can be found in the Pre-Application Instructions and the Sources and Uses of Funds Instructions.

Additional resources and templates can be found at the CHIPS for America Guides and Templates webpage.

IV. How Gibson Dunn Can Assist

Gibson Dunn has an expert team tracking implementation of the CHIPS Act closely, including semiconductor industry subject matter experts and our Public Policy Practice Group professionals. Our team is available to assist eligible clients to secure funds throughout the application process. We also can engage with our extensive contacts at the Department of Commerce and other federal agencies to facilitate dialogue with our clients and discuss the structure of future CHIPS Act programs being developed.

________________________

[1] 5 U.S.C. § 4651(2); U.S. Dep’t of Commerce Nat’l Institute of Standards and Technology Notice of Funding Opportunity, CHIPS Incentives Program—Commercial Fabrication Facilities, https://www.nist.gov/system/files/documents/2023/02/28/CHIPS-Commercial_Fabrication_Facilities_NOFO_0.pdf [hereinafter, NOFO]; Department of Commerce Webcast (Apr. 13, 2023).

[2] NOFO at 58–64.

[3] Department of Commerce Webcast (Apr. 13, 2023).

[4] Id.

[5] Id.

[6] Id.

[7] NOFO at 35–37, 43–47.

[8] CHIPS for America Guides and Templates: CHIPS Incentives Program—Commercial Fabrication Facilities (last accessed Apr. 13, 2023), https://www.nist.gov/chips/guides-and-templates-chips-incentives-program-commercial-fabrication-facilities.

[9] Department of Commerce Webcast (Apr. 13, 2023).

The following Gibson Dunn lawyers prepared this client alert: Ed Batts, Michael Bopp, Roscoe Jones, Jr., Amanda Neely, Danny Smith, and Sean Brennan.*

Michael D. Bopp – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-955-8256, [email protected])

Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-887-3530, [email protected])

Ed Batts – Palo Alto (+1 650-849-5392, [email protected])

Amanda H. Neely – Washington, D.C. (+1 202-777-9566, [email protected])

Daniel P. Smith* – Washington, D.C. (+1 202-777-9549, [email protected])

*Daniel P. Smith is of counsel working in the Washington, D.C. office who is admitted only in Illinois and practicing under supervision of members of the District of Columbia Bar under D.C. App. R. 49. Sean J. Brennan is an associate working in the firm’s Washington, D.C. office who currently is admitted to practice only in New York.

The German Government adopted the draft of the 11th amendment to the Act against Restraints on Competition on 5 April 2023. The initial draft had been published by the German Ministry of Economic Affairs and Climate Action on 26 September 2022 (see our earlier client alert of 30 September 2022 here).

The ministry’s initial draft of the 11th amendment to the German Act against Restraints of Competition (“ARC”) (“initial draft bill”) triggered a broad public debate and has been criticized by various stakeholders, including some of the largest business associations. In particular, it has been criticized that the initial draft bill provided for unbalanced and overreaching additional powers for the German Federal Cartel Office’s (“FCO”), including an ultima ratio power to unbundle undertakings. These concerns have partly been addressed in the revised draft bill (“revised draft bill”). In particular the revised draft bill increases the threshold for the new ultima ratio powers compared to the initial draft bill. Still, the revised draft bill marks a substantial shift towards a new era of antitrust law enforcement, with extensive powers of the FCO to intervene in markets, even without a need to establish antitrust law infringements.

The main aspects of the revised draft bill include: (i) a revision of the sector inquiry tool and related interventional powers of the FCO; (ii) the facilitation of disgorgements of economic benefits; and (iii) the implementation of the DMA in the national framework of public and private enforcement.

New intervention powers of the FCO after completion of a sector inquiry

The FCO can conduct a sector inquiry if it suspects that competition in the market under investigation is restricted or distorted, unrelated to a specific competition law infringement. Such a sector inquiry is generally concluded with a report on the competitive conditions on the market under investigation. As of today, the FCO can only impose remedies if it finds that the restraint of competition is based on an infringement of antitrust law.

The revised draft bill gives power to the FCO to intervene on the market on which it was found that competition has been disrupted, even when there is no infringement of antitrust law. This would be an absolute novelty to German antitrust law.
The interventional powers of the FCO require that there is a “substantial and continuing distortion of competition on at least one market which is at least nationwide, on several individual markets or across markets”. This is supposed to clarify that the distortion of competition must have a certain intensity and cannot be only temporary. It marks one of the changes compared to the initial draft bill where a “significant, persistent or repeated distortion of competition” was required. The revised draft bill includes a non-exhaustive list of factors relevant for the assessment of a distortion of competition on the one hand, as well as the continuance of this distortion of competition (continued in the previous three years and is not expected to end in the upcoming two years) on the other hand.
If the FCO determines that there is a substantial and continuing distortion of competition, it can impose behavioral or structural remedies against one or more undertakings, including:
- Granting access to data, interfaces, networks or other facilities;
- Specifications to the business relationships between companies in the markets under review;
- Establishing transparent, non-discriminatory and open norms and standards;
- Requirements for certain types of contracts or contractual arrangements also with regard to the disclosure of information;
- Prohibition of unilateral disclosure of information that favors parallel behavior by companies;
- The organizational separation of corporate or business units; and
- As a ultima ration, the FCO may impose unbundling remedies on companies with a dominant market position and companies with paramount significance for competition across markets according to (the recently introduced) Sec. 19a ARC. In contrast to the initial draft bill, the revised draft bill does not provide for these remedies if a dominant position or paramount significance for competition across markets cannot be established. However, according to the revised draft bill, assets only have to be sold if the sales price is at least 50% of the price determined by an auditor that has been engaged by the FCO. If the actual sales price is below the price determined by the auditor, an additional payment in the amount of half of the difference between the audited value and the actual sales price has to be paid to the selling company from federal funds.

Additional / extended merger control after completion of a sector inquiry

As already provided for in the initial draft bill, the FCO can impose an obligation on specific undertakings to notify any future concentrations even if they do not meet (i.e. fall below) the regular merger control notification thresholds. This notification requirement can be imposed on companies if there are “objectively verifiable indications that future mergers could significantly impede effective competition in Germany in one or more of the economic sectors” specified in the sector inquiry report. A de minimis exception applies to transactions in which the buyer generated turnover with customers in Germany in its last completed financial year of less than EUR 50 million and/or the target of less than EUR 500,000. This “special notification obligation” expires after three years, but it can be extended.

Simplified disgorgement of economic benefits

Pursuant to the existing Sec. 34 ARC, in cases of an infringement of antitrust law, the FCO can order the disgorgement of profits achieved by a company as a result of an antitrust infringement. However, since the legal requirements for such a disgorgement are rather high, this provision has not been applied much in practice in the past.

The revised draft bill aims at facilitating the use of this instrument by the FCO. It holds that the FCO no longer has to prove an intentional or negligent infringement of antitrust law before making use of the disgorgement mechanism of Sec. 34 ARC. Further, the revised draft bills facilitates the establishment of economic benefits associated with antitrust infringements. If a violation of antitrust law is determined, the revised draft bill includes a presumption that the antitrust law infringement has resulted in an economic benefit for the concerned undertaking. The amount of the economic benefit can be estimated by the FCO, and there is even a legal presumption that at least 1% of the national turnover of the concerned company relating to the products and services affected by the antitrust law infringement are subject to disgorgement. A rebuttal of this presumption requires that neither the legal entity directly involved in the infringement nor its group generated a profit in the respective amount during the relevant period. However, the amount to be paid must not exceed 10% of the total turnover of the undertaking in the fiscal year preceding the decision of the authority.

Regarding the time frame in which the FCO can disgorge economic benefits, the revised draft bill retains the current legal status: The disgorgement of economic benefits may be ordered only within a period of up to seven years after the termination of the infringement and for a maximum period of five years. The initial draft bill provided a time period of ten years after the termination of the infringement with an unlimited disgorgement period.

Enforcement of the EU Digital Markets Act (DMA)

As already included in the initial draft bill, the revised draft bill is intended to establish the legal basis for enforcement of the DMA in Germany. The FCO will be able to conduct investigations with regard to violations of the DMA. However, the FCO can only conduct investigations. The results of the investigations shall be forwarded to the European Commission. The FCO has no powers of its own to sanction non-compliance with the DMA.

In addition, private enforcement of the DMA will be facilitated. The civil law enforcement mechanisms are inspired by the enforcement mechanisms of the EC’s cartel damage claim directive. In particular, final decisions of the European Commission finding a violation of the DMA will have binding effect in damages proceedings before German courts.

The revised draft bill does not include any changes compared to the initial draft bill with regard to the provisions relating to the enforcement of the DMA.

Outlook

The revised draft bill has to take another step in the legislative process by passing the German Parliament [Bundestag] and the German Federal Council [Bundesrat]. There also is still no clarity yet as to when the revised draft bill will enter into force, but it is expected to come into force still this year.

As already mentioned in the previous Client Alert (available here), the competent Ministry is already working on a draft 12th amendment of the German Competition Act with a focus on establishing more legal certainty for sustainability cooperation between companies as well as stronger consumer protection.

The following Gibson Dunn lawyers assisted in preparing this client update: Georg Weidenbach, Kai Gesing, Jan Vollkammer, and Elisa Degner.

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 of the following leaders or members of the firm’s Antitrust and Competition practice group:

Kai Gesing – Munich (+49 89 189 33 180, [email protected])
Georg Weidenbach – Frankfurt (+49 69 247 411 550, [email protected])
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, [email protected])
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, [email protected])
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, [email protected])
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, [email protected])

With the rapid proliferation of artificial intelligence across industries and sectors, state legislatures have taken notice.

In the past few months alone, there has been a flurry of action at the state government level, including Connecticut, Illinois and Texas introducing bills to create government task forces to study AI, Massachusetts proposing an act drafted with ChatGPT to regulate generative AI models and at least four proposed bills governing automated-decision-making tools in employment.

While many of these states are only starting to dip their toes into the regulatory ring in this space, California has been steadily building its foundation for over a year and is positioning itself as a key regulator of AI in employment. Indeed, there have been a number of noteworthy proposals in California focused on automated-decision-making tools.

This article focuses on two of California’s recent proposals — regulations from the California Civil Rights Council and Assembly Bill 331 — and five things employers should know about them.

Read More

Reproduced with permission. Originally published by Law360, New York (April 12, 2023).

Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])

Danielle J. Moss – New York (+1 212-351-6338, [email protected])

Emily Maxim Lamm – Washington, D.C. (+1 202-955-8255, [email protected])

On March 29, 2023, Iowa’s Governor, Kim Reynolds, signed Senate File 262 into law, making Iowa—somewhat unexpectedly—the sixth state, following California, Virginia, Colorado, Utah and Connecticut, to enact comprehensive data privacy legislation. Meanwhile, the Colorado Office of the Attorney General filed a final draft of the Colorado Privacy Act Rules (“CPA Rules”) with the Colorado Secretary of State’s Office on March 15, 2023. Additionally, on February 3, 2023, the California Privacy Protection Agency (“CPPA”) Board voted to (1) adopt and approve the CPPA’s California Privacy Rights Act (“CPRA”) regulations and (2) invite pre-rulemaking comments from the public on the topics of cybersecurity audits, risk assessments, and automated decision making. Finally, Utah’s Governor, Spencer Cox, signed two bills that regulate social media companies with respect to children’s use of social media platforms into law on March 23, 2023.

Iowa’s Comprehensive Privacy Law

Iowa’s law will become effective on January 1, 2025, and applies to any person conducting business in the state of Iowa, or producing products or services that are targeted to consumers who are residents of the state, and that processes a certain number of Iowa consumers’ personal data during a calendar year, namely:

100,000 Iowa consumers;[1] or
25,000 Iowa consumers, if the person derives over fifty percent of gross revenue from the sale of personal data.[2]

This definition tracks the non-California laws, though does not additionally have the $25 million incremental requirement like Utah. As a result, small businesses that process a large number of Iowa consumers’ data might be covered. Further, like Virginia’s, Colorado’s, Utah’s and Connecticut’s laws, Iowa’s law defines “consumer” as a natural person acting only in an individual or household context, thereby excluding employee and business-to-business (B2B) data from the law’s applicability.[3]

Iowa’s law draws heavily from its predecessors elsewhere as well, and is most similar to, and even more business-friendly in many ways than, Utah’s privacy law. Like Utah’s law, Iowa’s does not grant consumers the right to correct their personal data or opt out of the processing of their personal data for purposes of profiling, and grants consumers the right to opt out of (as opposed to opt in to) the processing of their sensitive personal data.[4] Additionally, Iowa’s law does not explicitly grant consumers the right to opt out of the processing of their personal data for purposes of targeted advertising or cross-context behavioral advertising, making it the only comprehensive state privacy law that does not do so.[5] However, Iowa’s law does specify that a controller that engages in targeted advertising “shall clearly and conspicuously disclose such activity, as well as the manner in which a consumer may exercise the right to opt out of such activity”, suggesting that not including the right to opt out of the processing of personal data for purposes of targeted advertising under consumer data rights may have been a drafting error.[6] Iowa’s law allows controllers 90 days to respond to consumer requests, which period may be extended by an additional 45 days upon notice to the consumer, along with a reason for the extension;[7] by contrast, all of the other state laws require controllers to respond within 45 days and allow them to extend such period by an additional 45 days upon notice and explanation to the consumer. Unlike Utah’s law, and like Virginia’s, Colorado’s, and Connecticut’s laws, Iowa’s affords consumers the right to appeal a controller’s denial of a consumer request.[8] Like Utah’s law, and unlike the others, Iowa’s law does not require controllers respond to opt-out preference signals or conduct data protection assessments. Additionally, Iowa’s law does not require controllers to practice purpose limitation or data minimization.

Iowa’s law grants the state attorney general exclusive enforcement authority, subject to a (longer-than-others) 90-day cure period.[9] The attorney general may seek injunctive relief and civil penalties of up to $7,500 per violation.[10]

Colorado Privacy Act Rules

On March 15, 2023, the Colorado Office of the Attorney General filed a final draft of the CPA Rules, which will be published in the Colorado Register later this month and will go into effect July 1, 2023. The draft regulations – finalized after a review of 137 written comments, five virtual and in-person public input sessions, and a rulemaking hearing – clarify language around consumers’ rights, consent, universal opt-out mechanisms, duties of controllers, and data protection assessments. Below, we’ve highlighted what we believe to be some of the most interesting and potentially impactful rules.

Right to Delete. While the Colorado Privacy Act (the “CPA”) affords Colorado consumers the right to delete personal data concerning them,[11] the CPA Rules clarify that if the controller has obtained personal data concerning the consumer from a source other than the consumer, the controller may comply with a consumer’s deletion request with respect to such personal data by opting the consumer out of the processing of such personal data.[12] This brings Colorado’s rules in line with Virginia’s law, leaving Connecticut as the only state that truly affords consumers the right to delete personal data obtained about them.

Universal Opt-Out Mechanisms. The CPA allows consumers to exercise their right to opt out of certain processing through a universal opt-out mechanism.[13] The CPA Rules specify the required technical specifications for such mechanisms and create standards governing the way that opt-out mechanism requirements must be implemented. Specifically, the CPA Rules indicate that the mechanism must (1) allow consumers to automatically communicate their opt-out choice with multiple controllers; (2) allow consumers to clearly communicate one or more opt-out rights; (3) store, process, and transmit consumers’ personal data using reasonable data security measures; (4) not prevent controllers from determining (a) whether a consumer is a Colorado resident or (b) that the mechanism represents a legitimate request to opt out of the processing of personal data; and (5) not unfairly disadvantage any controller.[14] The CPA Rules also specify that universal opt-out mechanisms may not be the default setting for a tool that comes pre-installed.[15] Additionally, the CPA Rules require the Colorado Department of Law to maintain a public list of universal opt-out mechanisms that have been recognized to meet the foregoing standards, with an initial list to be released no later than January 1, 2024.[16] The Global Privacy Control (GPC), which is recognized by the California Attorney General, is likely to be included on such list. By July 1, 2024, controllers must respond to opt-out requests received through universal opt-out mechanisms included on such list, provided that the controller has had at least six months’ notice of the addition of new mechanisms; the controller may (but is not required to) recognize universal opt-out mechanisms that are not included in such list.[17] Finally, a controller may not interpret the absence of a universal opt-out mechanism after the consumer previously used one as a consent to opt back in.

Loyalty Programs. The CPA Rules contain extensive disclosure requirements for controllers maintaining a “bona fide loyalty program”, which it defines as “a loyalty, rewards, premium feature, discount, or club card program established for the genuine purpose of providing [an offer of superior price, rate, level, quality, or selection of goods or services] to [c]onsumers that voluntarily participate in that program, such that the primary purpose of [p]rocessing [p]ersonal [d]ata through the program is solely to provide [such benefits] to participating [c]onsumers.”[18] Specifically, the CPA Rules require controllers disclose: (1) the categories of personal data collected through the bona fide loyalty program that will be sold or processed for targeted advertising; (2) the categories of third parties that will receive the consumer’s personal data; (3) a list of any bona fide loyalty program partners, and the benefits provided by each such partner; (4) an explanation of why the deletion of personal data makes it impossible to provide a bona fide loyalty program benefit (if the controller claims that is the case); and (5) an explanation of why sensitive data is required for the bona fide loyalty program benefit (if the controller claims that is the case).[19]

Changes to a Privacy Notice. The CPA Rules require controllers to notify consumers of material changes to their privacy notices, and specify that material changes may include changes to: (1) categories of personal data processed; (2) processing purposes; (3) a controller’s identity; (4) the act of sharing personal data with third parties; (5) categories of third parties personal data is shared with; or (6) methods by which consumers can exercise their data rights request.[20]

Purpose Specification, Data Minimization, and Secondary Use. The CPA Rules clarify the CPA’s purpose specification, data minimization, and secondary use provisions.[21] Notably, the CPA Rules require controllers set specific time limits for erasure or conduct a periodic review to ensure compliance with data minimization principles, and specify that biometric identifiers, photographs, audio or voice recordings and any personal data generated from photographs or audio or video recordings should be reviewed at least annually.[22] The CPA Rules require controllers obtain consent before processing personal data for purposes that are not “reasonably necessary to or compatible with specified [p]rocessing purpose(s)”, and enumerate factors that controllers may consider to determine whether the new purpose is “reasonably necessary to or compatible with” the original specified purpose.[23]

Sensitive Data. The CPA prohibits controllers from processing a consumer’s sensitive data without first obtaining consent.[24] Among other clarifications (including that biometric data must be used or intended for identification), the CPA Rules create a new category of sensitive data called sensitive data inferences, which are defined as “inferences made by a [c]ontroller based on [p]ersonal [d]ata, alone or in combination with other data, which indicate an individual’s racial or ethnic origin; religious beliefs; mental or physical health condition or diagnosis; sex life or sexual orientation; or citizenship or citizenship status”, and specify that controllers must obtain consent in order to process sensitive data inferences unless such inferences are (1) from consumers over the age of thirteen, (2) the processing purposes are obvious, (3) such inferences are permanently deleted within 24 hours, (4) such inferences are not transferred, sold, or shared with any processor, affiliates, or third parties, and (5) the personal data and sensitive data inferences are not processed for any purpose other than the express purpose disclosed to the consumer.[25]

Consent. The CPA Rules contain detailed requirements for what constitutes and how to obtain valid consent, as well as a significant discussion of user interface design, choice architecture, and dark patterns.[26] Specifically, consent must be informed, specific, freely given, obtained through clear and affirmative action, and reflect the consumer’s unambiguous agreement, and the CPA Rules provide additional guidance on each of these elements.[27] The CPA Rules require that controllers refresh consent to continue processing sensitive data or personal data for a secondary use that involves profiling in furtherance of decisions that produce legal or similarly significant effects when a consumer has not interacted with the controller in the prior 24 months; however, controllers are not required to refresh consent when the consumer has access and ability to update their opt-out preferences at any time through a user-controlled interface.[28] The CPA Rules indicate that controllers need to obtain consent before January 1, 2024 in order to continue processing sensitive data collected prior to July 1, 2023.[29] The CPA Rules also specify that if a controller has collected personal data prior to July 1, 2023 and the processing purposes change after July 1, 2023 such that it is considered a secondary use, the controller must obtain consent at the time the processing purpose changes.[30]

Data Protection Assessments. The CPA requires controllers to conduct and document a data protection assessment before conducting a processing activity that presents a heightened risk of harm to a consumer.[31] The CPA Rules clarify the scope and requirements of such data protection assessments, making Colorado the first state to provide regulations governing data protection assessments conducted under a comprehensive state privacy law. The CPA Rules specify thirteen topics that must be included in a data protection assessment, including a short summary of the processing activity, the categories of personal data processed, the sources and nature of risks to consumers associated with the processing activity, measures and safeguards the controller will employ to reduce such risks, and a description of how the benefits of the processing outweigh such risks. The CPA Rules indicate that if a controller conducts a data protection assessment for the purpose of complying with another jurisdiction’s law or regulation, such assessment shall satisfy the requirements set forth in the CPA Rules if such assessment is “reasonably similar in scope and effect” to the assessment that would otherwise be conducted pursuant to the CPA Rules.[32] If the assessment is not reasonably similar, a controller may still submit that assessment, along with a supplement that contains any additional information required by Colorado.[33] The CPA Rules also clarify that data protection assessments are required for activities created or generated after July 1, 2023; the requirement is not retroactive.[34]

Profiling. Colorado is also the first state to enact regulations governing profiling in the context of a comprehensive state privacy law. With respect to the right of access, the CPA Rules clarify that “specific pieces of personal data” include profiling decisions, inferences, derivative data, marketing profiles, and other personal data created by the controller that is linked or reasonably linkable to an identified or identifiable individual.[35] With respect to the right to opt out of the processing of personal data for purposes of profiling in furtherance of decisions that produce legal or similarly significant effects, the CPA Rules clarify that a controller may decide not to take action on such a request if the profiling is based on “human involved automated processing” (i.e., “the automated processing of [p]ersonal [d]ata where a human (1) engages in a meaningful consideration of available data used in the [p]rocessing or any output of the [p]rocessing and (2) has the authority to change or influence the outcome of the [p]rocessing”), provided that certain information is provided to the consumer.[36]

California Privacy Rights Act Regulations

On February 3, 2023, the CPPA Board voted to adopt and approve the CPPA’s CPRA regulations promulgated and revised to date, and to direct staff to take all steps necessary to complete the rulemaking process, including the filing of the final rulemaking package with the Office of Administrative Law (“OAL”).[37] On February 14, 2023, the CPPA submitted the rulemaking package to the OAL for final review.[38] The OAL has 30 days from the date of submission to review the proposed regulations; while the 30 days have passed, an update has not explicitly been released. The details of the regulations have been detailed in prior Gibson Dunn alerts.[40]

The Board also voted to invite pre-rulemaking comments from the public on cybersecurity audits, risk assessments, and automated decision making, for which there have not been any regulations drafted.[41] Following the vote, on February 10, 2023, the CPPA issued an Invitation for Preliminary Comments on Proposed Rulemaking on these topics.[42] Interested parties were required to submit comments by 5:00 p.m. PT on Monday, March 27, 2023. A copy of the invitation that was issued is available here.

Utah Social Media Regulation Act

On March 23, 2023, Utah’s Governor, Spencer Cox, signed two bills into law that regulate social media companies with respect to children’s use of social media platforms. Both will take effect on March 1, 2024.

S.B. 152 requires “social media companies”, which it defines as “a person or entity that: (a) provides a social media platform that has at least 5,000,000 account holders worldwide; and (b) is an interactive computer service”, to verify the age of Utah residents seeking to maintain or open an account, obtain parental consent before allowing a Utah resident under the age of 18 to open or maintain an account, and implement specific restrictions for Utah residents under 18.[43] Specifically, S.B. 152 prohibits social media companies from (1) showing minors’ accounts in search results, (2) displaying advertising to minors’ accounts, (3) targeting or suggesting groups, services, products, posts, accounts or users to minors’ accounts or (4) collecting, sharing, or using personal information from minors’ accounts (with certain exceptions).[44] Additionally, S.B. 152 requires social media companies to (1) prohibit minors’ accounts from direct messaging “any other user that is not linked to the [minor’s] account through friending”, (2) limit hours of access (subject to parental or guardian direction), and (3) provide parents with a password or other means of accessing the minor’s account.[45]

H.B. 311 prohibits social media companies from using a practice, design or feature that it knows (or should know through the exercise of reasonable care) causes a Utah resident under the age of 18 to “have an addiction to” the social media platform.[46] H.B. 311 defines “addiction” as “use of a social media platform that: (a) indicates the user’s substantial preoccupation or obsession with, or the user’s substantial difficulty to cease or reduce use of, the social media platform; and (b) causes physical, mental, emotional, developmental, or material harms to the user.”[47]

The laws grant authority to administer and enforce their requirements to the Division of Consumer Protection.[48] S.B. 152 also delegates certain rulemaking authority to the Division of Consumer Protection.[49] Violations of S.B. 152 are punishable by an administrative fine of up to $2,500 for each violation, subject to a 30-day cure period.[50] Violations of H.B. 311 are punishable by (1) a civil penalty of $250,000 for each practice, design, or feature shown to have caused addiction and (2) a civil penalty of up to $2,500 for each Utah minor account holder who is shown to have been exposed to such practice, design or feature.[51] Additionally, the laws provide for private rights of action and specify that the person who brings action is entitled to (a) an award of reasonable attorney fees and court costs and (b) an amount equal to the greater of (i) $2,500 per violation or (ii) actual damages for financial, physical, and emotional harm incurred by the person bringing the action.[52]

In a previous client alert, we discuss the California Age-Appropriate Design Code Act, which is also aimed at protecting the wellbeing, data, and privacy of children under the age of 18 using online platforms. However, Utah’s laws go much further. Together, these laws evidence the increased attention children’s privacy is receiving from lawmakers and regulators, as they are more targeted in scope—and incremental—as compared to each state’s previous, comprehensive privacy law.

Other States

State legislative activity regarding data privacy appears to be at an all-time high. Proposed data privacy legislation has passed a legislative chamber in Hawaii, Indiana, Kentucky, Montana, New Hampshire, and Oklahoma. Numerous other states are also actively considering data privacy legislation, with drafting and negotiations at various phases.

We will continue to monitor developments in this area, and are available to discuss these issues as applied to your particular business.

___________________________

[1] This is a fairly significant threshold to meet, as it is about 3% of the state’s population.

[2] S.F. 262, 90th Gen. Assemb., Reg. Sess. §§ 2(1), 10 (Iowa 2023).

[3] Id. § 1(7).

[4] See id. § 3.

[5] See id.

[6] See id. § 4(6).

[7] Id. § 3(2)(a).

[8] Id. § 3(3).

[9] Id. §§ 8(1)-(2).

[10] Id. § 8(3).

[11] Colorado Privacy Act (“CPA”), S.B. 21-190, 73rd Gen. Assemb., Reg. Sess., § 6-1-1306(1)(d) (Colo. 2021) (to be codified in Colo. Rev. Stat. Title 6).

[12] Colo. Dep’t of Law, Colorado Privacy Act Rules (“CPA Rules”), to be codified at 4 Colo. Code Regs. § 904-3, r. 4.06(D), available at https://coag.gov/app/uploads/2023/03/FINAL-CLEAN-2023.03.15-Official-CPA-Rules.pdf.

[13] CPA, § 6-1-1306(1)(a)(IV).

[14] CPA Rules, r. 5.06.

[15] Id., r. 5.04(A).

[16] Id., r. 5.07(A).

[17] Id., r. 5.08(A)-(B).

[18] Id., r. 2.02.

[19] Id., r. 6.05(F).

[20] Id., r. 6.04(A).

[21] Id., r. 6.06-.08

[22] Id., r. 6.07(B).

[23] Id., r. 6.08(B)-(C).

[24] CPA, § 6-1-1308(7).

[25] CPA Rules, r. 2.01(A), 6.10(A)-(B).

[26] Id., pt. 7

[27] Id., r. 7.03

[28] Id., r. 7.08(A)-(B).

[29] Id., r. 7.02(B)(1).

[30] Id., r. 7.02(B)(2).

[31] CPA, § 6-1-1309(1).

[32] CPA Rules, r. 8.02(B).

[33] Id.

[34] Id., r. 8.05(F).

[35] Id., r. 4.04(A)(1).

[36] Id., r. 2.02, 9.04(C)

[37] Cal. Priv. Prot. Agency, News & Announcements, CPPA Board Unanimously Votes to Advance Regulations (Feb. 3, 2023), available at https://cppa.ca.gov/announcements/.

[38] Cal. Priv. Prot. Agency, News & Announcements, CPPA Files Proposed Regulations with the Office of Administrative Law (OAL) (Feb. 14, 2023), available at https://cppa.ca.gov/announcements/.

[39] Id.

[40] See, e.g., U.S. Cybersecurity and Data Privacy Outlook and Review – 2023 (January 30, 2023), available at https://www.gibsondunn.com/us-cybersecurity-and-data-privacy-outlook-and-review-2023/#_ednref2; Insights on New California Privacy Law Draft Regulations, Gibson Dunn (June 15, 2022), available at https://www.gibsondunn.com/insights-on-new-california-privacy-law-draft-regulations/.

[41] Cal. Priv. Prot. Agency, News & Announcements, CPPA Board Unanimously Votes to Advance Regulations (Feb. 3, 2023), available at https://cppa.ca.gov/announcements/.

[42] Cal. Priv. Prot. Agency, News & Announcements, CPPA Issues Invitation for Preliminary Comments on Cybersecurity Audits, Risk Assessments, and Automated Decision Making (Feb. 10, 2023), available at https://cppa.ca.gov/announcements/.

[43] S.B. 152, 2023 Gen. Sess., §§ 13-63-101(8), 13-63-102(1),(3) (Utah 2023).

[44] Id., § 13-63-103.

[45] Id., §§ 13-63-103(1), 13-63-104, 13-63-105.

[46] H.B. 311, 2023 Gen. Sess., § 13-63-201(2) (Utah 2023).

[47] Id., § 13-63-101(2).

[48] S.B. 152, § 13-63-202(1); H.B. 311, § 13-63-201(1)(a).

[49] S.B. 152, § 13-63-102(4).

[50] S.B. 152, §§ 13-63-202(3)(a)(i), (4).

[51] H.B. 311, § 13-63-201(3)(a).

[52] S.B. 152, § 13-63-301; H.B. 311, § 13-63-301.

The following Gibson Dunn lawyers assisted in preparing this alert: Cassandra Gaedt-Sheckter, Ryan T. Bergsieker, and Sarah Scharf.

Asia
Connell O’Neill – Hong Kong (+852 2214 3812, [email protected])
Jai S. Pathak – Singapore (+65 6507 3683, [email protected])

Since the CHIPS and Science Act (“CHIPS Act”) was enacted into law in August 2022, the Biden Administration has been busy implementing its mandate to “incentivize investment in facilities and equipment in the United States for the fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment.”[1] As discussed in our previous client alert, the administration published the first of three expected Notices of Funding Opportunities (“NOFO”) on February 28, 2023, and the U.S. Department of Commerce (the “Department”) began evaluating pre-applications and applications from leading-edge facilities last month.[2]

In an April 11, 2023 webcast, the CHIPS Program Office (“CPO”) discussed the application process for this first funding opportunity and critical elements of a successful pre-application. This alert highlights key details from that webcast that will assist clients preparing funding pre-applications.

I. Who Can Apply, and When?

The CPO emphasized that currently the pre-application guidance in this alert applies only to covered entities applying for funding under the first NOFO, and it is unclear whether future NOFOs will follow a similar pre-application process.[3] The first NOFO encompasses funding for the principle fabrication aspects of semiconductors: fabrication facilities themselves, as well as assembly, testing, and advanced packaging. The first NOFO covers in general the full spectrum of fabrication technology, including: leading-edge, current-generation, and mature-node facilities, as well as back-end production facilities.[4] In its April 11 webinar, however, the CPO indicated that all potential applicants for CHIPS funding—even those not eligible for funding under the first NOFO—are encouraged to submit a Statement of Interest at this time.[5] These Statements of Interest, which include applicant information and a brief description of the planned application, allow the Department to gauge interest and prepare for the review of applications and pre-applications.[6] Official instructions for submitting a Statement of Interest have been published online.

After filing the Statement of Interest, applicants must wait a minimum of twenty-one days before submitting an application or pre-application for funding.[7] Once this twenty-one day period has passed, potential applicants eligible for funding may submit a pre-application (or application), according to the following schedule:

March 31, 2023: Earliest submission date for applicants for leading-edge project funding to submit an optional pre-application or mandatory full application.
May 1, 2023: Earliest date for applicants for current-generation, mature-node, and back-end project funding to submit an optional pre-application.
June 26, 2023: Earliest date for applicants for current-generation, mature-node, and back-end project funding to submit a mandatory full application.

II. Benefits of Submitting a Pre-Application

The Department of Commerce does not require a pre-application to award CHIPS Act funds under the first NOFO.[8] Submitting a pre-application, however, creates an opportunity for dialogue with the CPO. While this dialogue is useful for all applicants, the CPO has indicated that areas other than leading-edge fabrication—specifically, current-generation, mature-node, and back-end production applicants are especially encouraged to submit a pre-application, presumably as the CPO will need to more closely evaluate the merits of funding current or legacy technology as opposed to cutting-edge nodes.[9]

After reviewing a pre-application, the Department will provide potential applicants with a written assessment of the pre-application’s strengths and weaknesses, along with recommendations for improvement. This written assessment will include a “recommendation for next steps,” ranging from submitting a revised pre-application or full application to not submitting any further application materials.[10] Moreover, the CPO will use the pre-application to assess the project’s likely level of review under the National Environmental Policy Act (“NEPA”), allowing applicants to avoid delays down the line.[11]

For current-generation, mature-node, and back-end production applicants, the Department has indicated that the choice to submit a pre-application—or not—will not affect the timeline of the full application’s review.[12] The Department will initially screen applications and pre-applications for eligibility in order of receipt. The subsequent comprehensive review order, however, will be determined based on the program priorities discussed in Section IV of this alert. The Department has thus far been reluctant to provide any estimated turnaround time for applications until it has a clearer picture of the volume of potential applications.[13]

III. Elements of the Pre-Application

The pre-application consists of six main sections, including a mix of narrative responses, data uploads, and web form responses. The form of the pre-application largely mirrors that of the final application, to allow the Department to provide as thorough of an assessment of the application’s strengths and weaknesses as possible.[14] Guides and templates for these pre-application elements are available on the CHIPS for America website.

Cover Page: The pre-application’s cover page is created by populating a number of required fields in a web-based form on the CHIPS Incentives Program Application Portal. These fields include the applicant’s organization and a descriptive name for the project, as well as whether the applicant is part of a consortium.[15]As part of this cover page, applicants must indicate whether they have registered for an account with the federal government’s System for Award Management (“SAM.gov”). CPO staff advised that all potential applicants apply for an account on SAM.gov as soon as possible to avoid delays and to receive a Unique Entity Identifier number, which should be included on the cover page when possible.[16]The pre-application cover page should also, if applicable, provide information about any other entities with which the applicant anticipates partnering for purposes of their project. Such partners may include, but are not limited to, customers, suppliers, investors, bankers, or advisors. The Department has emphasized that, so long as these partners are meaningfully involved in the proposed project, applicants should be as inclusive as possible when listing potential partners in their cover page.[17]

Project Plan

The Project Plan provides a space for applicants to describe each project expected to be included in the future full application and explain how these projects satisfy the evaluation criteria discussed in Section IV of this alert. The Project Plan should consist of:[18]

Description of Projects: Applicants must provide a detailed description of the proposed project(s) for each facility included in the application.This description should include, among other things: the products that each facility produces or will produce, these products’ end market application, the top ten customers for each major product, and key suppliers.

Estimated Project Timeline: This timeline should include an estimated schedule for capital expenditures, key construction and operations milestones, and an estimate of when the applicant may be ready to submit the full application.

Applicant Profile: Applicants should identify their headquarters, primary officers, ownership, main business lines, countries of operation, and, if applicable, the identity of any corporate parent.

Consortium Description (if applicable): If applying as one participating entity in a larger consortium, an applicant must identify all individual entities that are members of the consortium, along with the role of each entity and the governance structure of the consortium.

Cluster Profile: Applicants should describe how their project(s) will attract supplier, workforce, and other related investments.

CHIPS Incentive Justification: A narrative summary should describe how CHIPS Act funding will incentive investments in facilities and equipment in the U.S. that would not occur in the absence of this funding.

Summary Narrative Addressing the Evaluation Criteria: This narrative response should address each evaluation criteria discussed in Section IV and indicate how the proposed project would support these program priorities.

Financial Information

The Financial Information section of the pre-application aims to ascertain the financial strength of the applicant (including any parent entities) and the project, as well as the existence of any third-party investments and the reasonableness of the CHIPS Act funding request.

The Financial Information submission should include:

Summary Financials for Each Project: For each project described in the pre-application, applicants must submit the expected revenues, costs, and cashflows for the project, including key income statements, cash flow statements, and balance sheet information.[19]
The Department has created an example financial model that can guide applicants’ submissions for these summary financials.[20]

Company Financials: Applicants must provide audited financial statements, key performance metrics, and details on leverage and related debt coverage for both the applicant and, if relevant, its corporate parent.

Facility Ownership Structure: Though not relevant in all cases, the Department has indicated that a detailed ownership map will generally be helpful for their review.[21]

Sources and Uses of Funds: Working from a template, applicants must describe the proposed project’s costs—including capital investment, operating losses and cash outflows, and workforce development costs—as well as a detailed description of project capital sources. When calculating project capital sources, applicants should factor in the estimated value the benefit is expected to be eligible to receive from the Investment Tax Credit, if applicable, and other state and local tax incentives.[22]

CHIPS Incentives Request: Applicants must submit a summary of requested dollar amounts for CHIPS Direct Funding.

Environmental Questionnaire

Companies may not have complete information regarding potential environmental impacts of their proposals at the pre-application stage. However, applicants should provide as thorough responses as possible to the environmental questionnaire in order to prevent delays at later stages.

In particular, the CPO has emphasized that comprehensive pre-application questionnaires enable its Environmental Division to more effectively assess an applicant’s likely level of NEPA review. The CPO Office has indicated that it plans to work with applicants and their third-party contractors to facilitate the environmental review under NEPA, including working with applicants at the pre-application stage to ensure that all required environmental information is collected as early as possible.[23] Specifically, they noted they will provide resources such as webinars, templates, and consultation in preparing for environmental reviews.[24]

Workforce Development Information

As a key program priority of the CHIPS Act, applicants must provide detailed information about their planned efforts to recruit, train, and retain a “diverse and skilled” set of workers.[25] In addition to forward-looking goals, the CPO stressed its interest in understanding any early actions applicants have already taken to support workforce development efforts.[26]

This workforce development section must provide an estimated number of jobs that an applicant’s projects will create, proposed strategy to meet these workforce needs, proposed training and education strategies, and an applicant’s strategy to comply with the Good Jobs Principles published by the Departments of Commerce and Labor.

In its April 11 webcast, the CPO repeatedly stressed its focus on creating “opportunities to reflect America’s diversity.”[27] Therefore, all submissions should include proposed equity strategies to promote the hiring and retention of employees from historically underserved communities.

The Department has also emphasized the importance of strategic partnerships to help attract talent, increase awareness of employment opportunities within a community, provide wraparound support for employees, and retain and grow a company’s workforce.[28] These partners may include community-based organizations, labor unions, educational institutions, and local housing organizations. Applicants cannot merely gesture to these community groups: the CPO indicated that applicants must secure commitments from these strategic partners and are expected to engage with them on an ongoing basis.[29]

Applicants seeking more than $150 million in direct funding will be required at the final application stage to provide a plan for how they will provide childcare for their workers. Although it is encouraged if possible, applicants are not required to submit this childcare plan at the pre-application stage.[30]

Attestation and Submission

After a pre-application is submitted through the CHIPS Incentives Program Application Portal, the CPO will send an email confirming receipt of the application. Once the pre-application has been screened for eligibility, the Department will begin a comprehensive review of the application and may reach out to the applicant for additional information or for clarification before providing its written assessment and next steps.

IV. Confidentiality

Some elements of the pre-application may require applicants to reveal trade secrets or other confidential business information. The CHIPS Act expressly provides that “any information derived from records or necessary information disclosed by a covered entity to the Secretary” with respect to CHIPS funding is exempt from disclosure under the Freedom of Information Act (“FOIA”) and “shall not be made public.”[31] Applicants’ trade secrets and privileged commercial or financial information is also protected from disclosure by FOIA.[32] Additionally, CPO staff emphasized that the Office is in the process of “instituting robust protocols, technology solutions, and organizational practices” to keep applicants’ data safe. They noted that application materials will only be available to federal officials and contractors on a need-to-know basis.[33]

To ensure that all confidential business information is properly protected from disclosure, the Department provides detailed instructions for marking this information in Section III(C)(2) of the NOFO.[34]

V. Project Evaluation Criteria

All applications and pre-applications for funding under the first NOFO are evaluated based on their ability to satisfy six main criteria, based on CHIPS program priorities. These criteria are:

Economic & National Security Objectives

Because “[a]dvancing U.S. economic and national security is the principal objective of the CHIPS Incentives Program,”[35] the Department has indicated that projects’ ability to support these goals will receive the greatest weight in its review.[36] Strong applications must therefore explain how their projects will support U.S. economic and national security by, for example, mitigating against supply chain shocks associated with the current geographic concentration of semiconductor manufacturers or meeting the government’s need for safe and secure chips for modern defense systems.

Moreover, because the CHIPS Act aims to support the “next wave of U.S.-based production” of semiconductors, the Department will consider “the extent to which the applicant makes credible commitments of ongoing private investment” in the United States as part of its economic security analysis.[37]

Projects that remain vulnerable to cybersecurity risks or supply chain disruption may pose risks to U.S. national security. Therefore, applicants should address their risk management strategies designed to avoid supply chain exploitation, loss of intellectual property, and data security.[38]

Commercial Viability

The Department of Commerce has indicated that projects funded under the CHIPS Act should eventually be capable of “providing reliable cash flows that are sufficient to maintain continuity of operations and continued investment as necessary in the facility.”[39] Applications and pre-applications should therefore demonstrate a reasonable market environment and demand—including an assessment of the size and diversity of the expected customer base—for the types of semiconductor technology the projects will produce.

In its April 11 webcast, CPO staff indicated that evidence of existing customer demand can be particularly persuasive.[40] However, applications should address the commercial viability for the “entire estimated useful life” of the project, including by addressing any technology obsolescence risk.[41]

Financial Strength

As discussed in Section III, the Department will assess any application on the financial strength not just of the applicant, but also of its corporate parent and key intermediate entities.

When assessing the financial strength of any given project, the Department will consider all alternative sources of financing that an applicant has pursued, including through private equity and external debt financing. CPO staff indicated that applicants that have minimized the size of their CHIPS funding request by pursuing alternative funding sources will generally be preferred.[42]

Technical Feasibility & Readiness

The CHIPS Act’s success depends, in part, on the timely and effective construction and operation of funded facilities. Therefore, applicants must demonstrate not only that their projects are technically feasible, but also that the applicant has a clear project execution plan including construction and operational deadlines. Applicants who can demonstrate, for example, existing infrastructure and contractual arrangements for their projects may be more successful in securing funding.

Workforce Development

As discussed in Section III, a key priority of the CHIPS Act is the development of a highly skilled and diverse workforce, including both the construction workforce necessary to complete funded projects and the semiconductor workforce that will ultimately operate these facilities. Applicants must detail their plans to recruit, train, and retain these construction and facility workers on an equitable basis and in line with the Good Jobs Principles.

The Department of Commerce has published a detailed Workforce Development Planning Guide to assist applicants in developing these strategies.

Broader Impacts of the Project

The Department of Commerce has emphasized its interest in funding projects that will contribute to “community vitality” by supporting small businesses, engaging in appropriate environmental stewardship, and more.[43] Applicants should demonstrate that they will maximize benefits to taxpayers by supporting a wide variety of tangential impacts, such as:

Commitments to future investment in the U.S. semiconductor industry;

Support for CHIPS research and development programs;

Creating inclusive opportunities for businesses, including small businesses and minority-owned, women-owned, and veteran-owned businesses;

Demonstrated climate and environmental responsibility;

Community investments, including affordable housing, education, and transportation opportunities; and

Use of domestic manufacturing and raw materials in construction and operation of projects.

VI. How Gibson Dunn Can Assist

Gibson Dunn has an expert team tracking implementation of the CHIPS Act closely, including semiconductor industry subject matter experts and public policy professionals. Our team is available to assist eligible clients to secure funds throughout the CHIPS Act application process, including the pre-application process. We also can engage with our extensive political-appointee and career officials contacts at the Department of Commerce and other federal agencies to facilitate dialogue with our clients and discuss the structure of future CHIPS Act programs being developed.

__________________________

[1]      Pub. Law No. 117–167 Sec. 102(a) (funding the authorization of the semiconductor incentive program established under the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (15 U.S.C. §§ 4652, 4654, 4656, Pub. Law No. 116-283)).

[2]      5 U.S.C. § 4651(2); U.S. Dep’t of Commerce Nat’l Institute of Standards and Technology Notice of Funding Opportunity, CHIPS Incentives Program—Commercial Fabrication Facilities, https://www.nist.gov/system/files/documents/2023/02/28/CHIPS-Commercial_Fabrication_Facilities_NOFO_0.pdf [hereinafter, NOFO].

[3]      Department of Commerce Webcast (Apr. 11, 2023). During this webcast, the CPO reiterated that two additional NOFOs are expected to be published in the coming months: one focused on material suppliers and equipment manufactures in late spring 2023 and one for the construction of semiconductor research and development facilities in fall 2023. Id.

[4]      NOFO at 5.

[5]      Id.

[6]      NOFO at 11.

[7]      Id. at 1.

[8]      NOFO at 11.

[9]      Department of Commerce Webcast (Apr. 11, 2023).

[10]    Id.

[11]    NOFO at 11.

[12]    Department of Commerce Webcast (Apr. 11, 2023).

[13]    Id.

[14]    See NOFO at 38–39. The full application submission is made up of the following components, which include information captured in large part in the pre-application: Cover Page, Covered Incentive, Description of Project(s), Applicant Profile, Alignment with Economic and National Security Objectives, Commercial Strategy, Financial Information, Project Technical Feasibility, Organization Information, Workforce Development Plan, Broader Impacts, and Standard Forms.

[15]    CHIPS for America Guide: Instruction for Pre-Application Forms and Templates (Mar. 27, 2023), https://www.nist.gov/system/files/documents/2023/03/27/Pre-App-Instruction-Guide.pdf.

[16]    Department of Commerce Webcast (Apr. 11, 2023).

[17]    Id.

[18]    NOFO at 34–35.

[19]    NOFO at 36.

[20]    CHIPS for America Guides and Templates (last accessed Apr. 11, 2023), https://www.nist.gov/document/chips-nofo-commercial-fabrication-facilities-pre-application-sources-and-uses-template. The Department of Commerce published a white paper explaining the financial models contained within this example, available at: https://www.nist.gov/system/files/documents/2023/03/31/Pre-App-Financial-Model-White-Paper.pdf.

[21]    Department of Commerce Webcast (Apr. 11, 2023).

[22]    NOFO at 36.

[23]    Id.

[24]    Department of Commerce Webcast (Apr. 11, 2023).

[25]    NOFO at 37.

[26]    Department of Commerce Webcast (Apr. 11, 2023).

[27]    Id.

[28]    Id.

[29]    Id.

[30]    Id.

[31]    See 15 U.S.C. § 4652(a)(6)(G).

[32]    See 15 U.S.C. § 4652(a)(6)(G).

[33] Department of Commerce Webcast (Apr. 11, 2023).

[34]    NOFO at 30–31.

[35]    NOFO at 13.

[36]    Department of Commerce Webcast (Apr. 11, 2023).

[37]    NOFO at 14.

[38]    Id. at 15.

[39]    Id. at 16.

[40]    Department of Commerce Webcast (Apr. 11, 2023).

[41]    NOFO at 17.

[42]    Department of Commerce Webcast (Apr. 11, 2023).

[43]    Id.

The following Gibson Dunn lawyers prepared this client alert: Ed Batts, Michael Bopp, Roscoe Jones, Jr., Amanda Neely, Danny Smith, and Sean Brennan.*

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Public Policy practice group, or the following authors:

Michael D. Bopp – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-955-8256, [email protected])

Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-887-3530, [email protected])

Ed Batts – Palo Alto (+1 650-849-5392, [email protected])

Amanda H. Neely – Washington, D.C. (+1 202-777-9566, [email protected])

Daniel P. Smith – Washington, D.C. (+1 202-777-9549, [email protected])

*Sean J. Brennan is an associate working in the firm’s Washington, D.C. office who currently is admitted to practice only in New York.

© 2023 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

On March 23, 2023, the Federal Trade Commission (“FTC”) issued a Notice of Proposed Rulemaking (“NPRM”) to significantly expand legal requirements for sellers that use negative option offers.[1] Negative option offers allow a seller to interpret a consumer’s silence or inaction as acceptance of an offer and include prenotification and continuity plans, automatic renewal plans, and free trial offers that convert into automatic renewal plans unless canceled before the end of the trial period. The NPRM was published in the Federal Register on April 24, 2023, and the comment deadline is June 23, 2023.

The FTC’s stated objective is to create enforceable performance-based requirements for all negative option offers across all media pertaining to: misrepresentations, disclosures, consents, and cancellation methods.[2] But the proposed Rule would extend beyond the offer’s negative option features to “any material fact related to the [offer’s] underlying good or service.”[3] Consequently, negative option sellers could face substantial civil penalties for violations of the proposed Rule for any allegedly deceptive facet of the broader consumer transaction.

The proposed Rule could be finalized by the end of the year. Companies should consider how this Rule might impact their business and consider submitting a comment to the NPRM addressing: (i) the prevalence of the alleged deceptive and unfair conduct relating to negative option features; (ii) empirical evidence concerning compliance costs, and the degree to which they would outweigh anticipated benefits; (iii) negative consequences to consumers that might arise from the Rule; and (iv) potential exemptions to the rules, including for industries subject to billing and notice requirements under separate federal or state legal regimes, such as the telecommunications or energy industries.

The Proposed Rule Would Significantly Broaden Requirements and Risks For Sellers Using Negative Option Features.

The proposed Rule would replace regulations that apply only to prenotification negative option plans for physical goods with more expansive requirements that would be applicable to all media containing any type of negative option feature. The proposed Rule would also incorporate negative option rules contained in other laws and regulations, such as the Restore Online Shoppers’ Confidence Act (“ROSCA”) and the Telemarketing Sales Rule (“TSR”) to “establish a comprehensive scheme for regulation of negative option marketing in a single rule… — [a] one-stop regulatory shop[.]”[4] The FTC asserts that the existing ROSCA and TSR rules are insufficient to protect consumers and serve as a deterrence because misrepresentations concerning negative options continue to be prevalent in the marketplace.[5]

The proposed requirements include the following:

Disclosures of Material Terms: Sellers must disclose clearly and conspicuously all material terms related to both the negative option feature and the underlying good or service prior to collecting billing information from the consumer. Material terms include: (i) the nature and amount of charges to be imposed, including any future increases or recurring payments; (ii) deadline(s) for a consumer to affirmatively object to charges; (iii) the date(s) charges will be submitted for payment; and (iv) information on how to cancel a negative option feature.[6]
Broad Prohibition on Misrepresentations: Sellers must not misrepresent, expressly or by implication, any material fact related to the transaction, including the negative option feature, or those related to the underlying good or service.[7]
Easy Cancellation Methods: Sellers must provide consumers with a cancellation method that is at least as easy as the method used to initiate the negative option feature. For instance, if consumers enter into a negative option feature on a seller’s website, they should be able to cancel the negative option feature through the same or an easier process on the seller’s website. If a consumer consented to the feature in-person, the seller must offer a simple cancellation option by phone and/or on its website in addition to, where practical, a similar in-person cancellation method. Sellers cannot require consumers who signed up via their website to call a phone number in order to cancel their negative option agreement.[8]
Consent to Negative Option Feature: Sellers must obtain consumers’ express, informed consent to a negative option feature separately from any other part of a transaction and prior to charging them. Sellers cannot obtain simultaneous consent to charges for an instant purchase and to accept a negative option feature. Sellers must retain records of these consents for three years, or one year after the negative option ends, whichever is longer.[9]
Requirement for Immediate Cancellation Upon Consumer Request: Sellers must immediately cancel the negative option feature upon request from a consumer, unless the seller obtains the consumer’s unambiguous affirmative consent to receive a save prior to cancellation. Sellers cannot present additional and alternative offers during a cancellation attempt, unless a consumer first expressly consents to receive information about offers. Sellers must retain records of these consents for three years, or one year after the negative option ends, whichever is longer.[10]
Annual Reminders: At least annually, sellers must send consumers reminders describing the product or service, the frequency and amount of charges, and the means to cancel. This provision does not apply to negative option agreements involving the delivery of physical goods.[11]

Noncompliance with any of these requirements would be considered an unfair or deceptive practice in violation of Sections 5 and 19 of the FTC Act, subject to civil penalties, currently up to $50,120 per day for ongoing violations.[12]

Former Commissioner Christine Wilson wrote a five-page dissent stating that the proposed Rule went “far beyond practices for which the rulemaking record supports a prevalence of unfair or deceptive practices.”[13] Among other problems, Commissioner Wilson noted that the proposed Rule “is not confined to negative option marketing” and “covers any misrepresentation made about the underlying good or service sold with a negative option feature,” notwithstanding that the Commission did not include and seek comments about such general misrepresentations in its Advance Notice of Proposed Rulemaking.[14] Because the proposed Rule would allow the FTC to invoke Section 19 of the FTC Act to obtain civil penalties or consumer redress, she explained, marketers could be liable for civil penalties for product-efficacy claims “even if the negative option terms are clearly described, informed consent is obtained, and cancellation is simple.”[15]

Commissioner Wilson also stated that the breadth of the proposed Rule would evade the Supreme Court’s decision limiting the FTC’s authority to seek disgorgement in cases enforcing the general prohibition on unfair or deceptive practices in Section 5 of the FTC Act.[16] In addition, she said that the breadth of the proposed Rule is inconsistent with the FTC’s cases under ROSCA, and “will treat marketers differently for purposes of potential Section 5 violations, depending on whether they sell products or services with or without negative option features.”[17] We anticipate that there will be a significant number of comments submitted that raise similar arguments, potentially among others, in opposition to the proposed rulemaking, and if the rulemaking is finalized, similar legal challenges are likely to be raised in courts.

Gibson Dunn attorneys are closely monitoring these developments and available to discuss these issues as applied to your particular business and assist in preparing a public comment for submission on this proposed Rule.

_________________________

[1] Negative Option Rule NPRM, Fed. Trade Comm’n (Mar. 23, 2023). The Commission voted 3-1, along party lines, to publish the NPRM. Chair Khan and Commissioners Slaughter and Bedoya released a joint statement in support of the proposed Rule. See Joint Statement, Fed. Trade Comm’n (Mar. 23, 2023). Former Commissioner Wilson dissented. See Dissenting Statement of Commissioner Christine S. Wilson, Fed. Trade Comm’n (Mar. 23, 2023).

[2] Id. at 3.

[3] Id. at 77-78 (the proposed Rule’s requirements pertaining to misrepresentations and disclosures).

[4] Id. at 42.

[5] Id. at 10-12.

[6] Id. at 77-78.

[7] Id. at 77.

[8] Id. at 80-81.

[9] Id. at 78-80.

[10] Id. at 81.

[11] Id. at 82.

[12] FTC Publishes Inflation-Adjusted Civil Penalty Amounts for 2023, Fed. Trade Comm’n (Jan. 6, 2023).

[13] Dissenting Statement of Commissioner Christine S. Wilson, pg. 1, Fed. Trade Comm’n (Mar. 23, 2023).

[14] Id. at 2.

[15] Id.

[16] Id. at 2, 5; see also AMG Capital Mgmt., LLC v. FTC, 141 S. Ct. 1341 (2021).

[17] Id. at 5.

The following Gibson Dunn lawyers prepared this client alert:

Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, [email protected])
Ella Alves Capone – Washington, D.C. (+1 202-887-3511, [email protected])
Victoria Granda – Washington, D.C. (+1 202.955.8249, [email protected])
Natalie Hausknecht – Denver, CO (+1 303.298.5783, [email protected])

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, any member of Gibson Dunn’s Privacy, Cybersecurity and Data Innovation, Public Policy, and Administrative Law and Regulatory teams.

Privacy, Cybersecurity and Data Innovation Group:
S. Ashlie Beringer – Palo Alto (+1 650-849-5327, [email protected])
Jane C. Horvath – Washington, D.C. (+1 202-955-8505, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])

Public Policy Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Roscoe Jones, Jr. – Washington, D.C. (+1 202-887-3530, [email protected])

Administrative Law and Regulatory Group:
Eugene Scalia – Washington, D.C. (+1 202-955-8543, [email protected])
Helgi C. Walker – Washington, D.C. (+1 202-887-3599, [email protected])

On April 4, 2023, the IRS and Treasury issued Notice 2023-29 (the “Notice”) (here), which provides eagerly awaited guidance for developers and investors seeking to qualify energy projects for the energy community bonus credit available under sections 45, 45Y, 48, and 48E.[1] Following the passage of the Inflation Reduction Act of 2022 (the “IRA”),[2] each of these sections provides for a “bonus” credit for certain facilities that are located in an “energy community.” The Notice includes rules for determining (i) what constitutes an “energy community” and (ii) whether a qualified facility, energy project, or any energy storage technology is “located” or “placed in service” within an energy community. The IRS and Treasury ultimately expect to issue regulations addressing these issues, but, until regulations are proposed, taxpayers may rely on the rules described in the Notice.

On April 7, 2023, Treasury and the IRS made material amendments to the Notice as discussed below.

In connection with the release of the Notice, the Interagency Working Group on Coal and Power Plant Communities and Economic Revitalization also released a searchable mapping tool to help identify areas that may be eligible for the energy community bonus credit. The mapping tool is a general aid and reflects only certain categories of energy communities (and, in the case of Statistical Area energy communities (discussed below), is not yet complete). The mapping tool may not be relied upon by taxpayers.

Background

A bonus credit is available to energy community projects (“EC Projects”) under sections 45 and 45Y (the “PTC”) and sections 48 and 48E (the “ITC”), each of which is explained briefly below. For PTC projects, the maximum bonus credit available to EC Projects is 10 percent, and for ITC projects, the maximum bonus credit is 10 percentage points.[3]

Under current law, the PTC is claimed in respect of the production of electricity from qualified energy resources (e.g., wind, solar) at a qualified facility during the 10-year period beginning on the date on which the project was placed in service. For zero-emission energy projects that begin construction after 2024, the IRA will transition to a new PTC under section 45Y, which is based on a technology-neutral framework.

The current ITC is claimable in respect of the basis of certain energy property (e.g., wind, solar, and energy storage property). Like the PTC, for zero-emission energy projects that begin construction after 2024, the IRA will transition to a new technology-neutral ITC under section 48E.

Definition of “Energy Community”

The Notice provides clarification and guidance related to three location-based categories of energy communities described in the IRA: (i) the Brownfield Site category, (ii) the Statistical Area category, and (iii) the Coal Closure category.

Brownfield Site Category

The Notice defines a Brownfield Site as “real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant” or real property that is “mine-scarred land.”[4]

Helpfully, the Notice includes a safe harbor that provides that a site will be a Brownfield Site for purposes of the Notice if that site meets at least one of the following conditions:

the site was previously assessed through federal, state, territory, or federally recognized Indian tribal brownfield resources as meeting the definition of a brownfield site under 42 U.S.C. § 9601(39)(A);[5]
an ASTM E1903 Phase II Environmental Site Assessment has been completed with respect to the site, and assessment confirms the presence on the site of a hazardous substance, pollutant or contaminant; or
for projects with a nameplate capacity of not greater than 5MW (AC), an ASTM E1527 Phase I Environmental Site Assessment has been completed with respect to the site.

However, a site otherwise within one of these prongs is excluded from the safe harbor (and the Brownfield Site category) if it falls within a category of property in 42. U.S.C. § 9601(39)(B) (e.g., such site is already under remediation, on the Superfund National Priorities List, or previously permitted for hazardous waste disposal or treatment).

Statistical Area Category

This category includes a metropolitan statistical area (an “MSA”) or a non-MSA that (i) has (or had at any time after December 31, 2009) 0.17 percent or greater direct employment (the “Fossil Fuel Employment Test”) or 25 percent or greater local tax revenue (the “Fossil Fuel Tax Revenue Test”) related to the extraction, processing, transport, or storage of coal, oil, or natural gas and (ii) has an unemployment rate at or above the national average unemployment rate for the previous year (as determined by the IRS) (the “Unemployment Rate Test”).

The Fossil Fuel Employment Test is calculated by dividing (i) the number of people employed in certain industries identified by certain NAICS codes,[6] by (ii) the total number of people employed in that area. The Unemployment Rate Test is calculated by dividing (i) the total number of unemployed individuals within the MSA or non-MSA by (ii) the total labor force in that MSA or non-MSA, as applicable. Annual unemployment rates are generally released in April of the following calendar year. The Notice also provides detailed definitions for MSAs (which the Notice defines by reference to Office of Management and Budget standards that generally are static for 10 years and were last updated in 2018) and non-MSAs.[7]

The Notice does not provide a methodology for calculating the Fossil Fuel Tax Revenue Test and invites comments to address possible data sources, revenue categories, and procedures to determine whether a MSA or non-MSA qualifies through the Fossil Fuel Tax Revenue Test, noting the potential difficulty of applying the test in light of the substantial number of taxing jurisdictions and absence of a centralized information repository.

The Notice includes an appendix listing all MSAs and non-MSA (by county) that satisfy the Fossil Fuel Employment Test (here). The IRS and Treasury intend to issue in May of each year a list identifying the MSAs and non-MSAs that qualify under the Statistical Area category for the twelve-month period starting in that May and continuing through April of the following year.

Coal Closure Category

This category is defined as a census tract (or a census tract directly adjoining such census tract) in which either (i) a coal mine has closed after December 31, 1999 or (ii) a coal-fired electric generating unit has been retired after December 31, 2009.

The Notice includes an appendix listing all census tracts that are included in the Coal Closure category (here). The Notice makes clear that census tracts are directly adjoining if their boundaries touch at any single point.

A coal mine is treated as having closed if it is a surface or underground mine that has ever had for any period of time, since December 31, 1999, a mine status listed as abandoned or abandoned and sealed (in a list maintained by the Mine Safety and Health Administration).

A coal-fired electric generating unit is treated as having been retired if it has been classified as retired at any time since December 31, 2009 in certain inventories maintained by the U.S. Energy Information Administration and if, at the time of being listed as retired, the generating unit was characterized (under rules set forth in the Notice) as a coal-fired electric generating unit by the U.S. Energy Information Administration. The retirement of a single coal-fired electric generating unit at a plant with multiple units would cause the retired unit’s entire census tract to be a Coal Closure category tract.

Closed coal mines and retired coal-fired electric generating units are excluded from this category if they have irregular location information; however, taxpayers may work with the Mine Safety and Health Administration and the U.S. Energy Information Administration to correct irregular location information.

Beginning Construction and Location Requirements for an “Energy Community”

To qualify for the energy community bonus credit, a PTC project must be “located in” an energy community and an ITC project must be “placed in service” within an energy community. For PTC purposes, the general rule is that a qualified facility must be located in an energy community each year that a PTC is claimed in respect of that facility. For ITC purposes, however, the determination of whether a project is placed in service within an energy community generally is required to be made as of the date the project is placed in service.

The rules described in the preceding paragraph (particularly with respect to the PTC, which is claimed over a multi-year period) could present practical difficulties for the development and financing of projects, usually a capital intensive and multi-year process that relies upon the accuracy of forecasted credit availability, in particular for projects in Statistical Area energy communities (for which status is redetermined annually under the Unemployment Rate Test). Fortunately, the Notice provides a taxpayer-friendly rule that, if a project is located in an energy community on the date that construction begins, that location will, in the case of PTC projects, be deemed an energy community for the entire 10-year credit period and, in the case of ITC projects, be deemed an energy community on the date the project is placed in service.

Update: On Friday, April 7, 2023, Treasury and the IRS amended the Notice to provide that the foregoing taxpayer-friendly rule would apply only to projects that begin construction on or after January 1, 2023.

The determination as to whether construction has begun is made pursuant to well-established guidance (including Notice 2013-29 and its further clarifications and extensions). Nevertheless, there are various practical aspects of the application of this existing guidance to the “energy community” determination that could benefit from further clarification, including the following:

- Given that Notice 2013-29 and its progeny allow for construction to be treated as having begun in a particular year based on off-site physical work of a significant nature or based on incurring a certain percentage of the costs of a project in that year, it would be good to receive confirmation that the relevant year for making these determinations is nonetheless the year when that physical work of a significant nature was done or those expenditures were incurred. In particular, these rules may place further pressure on a particular area of uncertainty that pre-dates the IRA – the extent to which off-site work has been identified and properly associated with a specific project (and location) at the time the off-site work begins.
- Moreover, it would be helpful to receive express confirmation whether the continuity requirements under the existing guidance, which generally require a facility to be placed in service within a certain number of years (i.e., after the year when the relevant activities (or spending) that would otherwise satisfy the “begun construction” requirement under the guidance occurred) in order for construction to actually be deemed to have begun in such year, apply for purposes of determining a project’s eligibility for the “energy community” begun construction rule.
- Finally, given that construction of some projects that potentially qualify for the “energy community” bonus began before publication of the Notice, it would be helpful for the IRS and Treasury to permit taxpayers to apply the begun construction rule using either the year in which construction first began (under Notice 2013-29 and subsequent guidance) or the first taxable year ending after the date of the Notice in which additional physical work is completed (or additional costs are incurred) that independently would satisfy the requirements of Notice 2013-29 and subsequent guidance.

Update: On Friday, April 7, 2023, Treasury and the IRS amended the Notice to provide that the Notice’s special beginning-of-construction rule would apply only to projects that begin construction on or after January 1, 2023. Limiting application of this special rule to projects that begin construction after 2022 is unusually restrictive and may require taxpayers to attempt to “re-commence” construction in energy communities where construction may have already properly begun in order to benefit from the certainty provided by the begun construction rule. Moreover, it seems particularly inequitable to discriminate against projects that began construction in 2022 on or after the date President Biden signed the IRA into law (i.e., August 16, 2022).

In addition to rules specifying when the “energy community” determination is made, the Notice explains which portion of the project needs to be within an “energy community.” A project with “nameplate capacity” is, in general, treated as located in or placed in service within an energy community if 50 percent or more of the project’s nameplate capacity is in an area that qualifies as an energy community. If a project does not have a nameplate capacity, then that project is, in general, treated as located in or placed in service within an energy community if 50 percent or more of the project’s square footage is in an energy community.

However, the Notice also provides a special taxpayer-friendly rule for offshore energy facilities (such as offshore wind farms) that have nameplate capacity but no energy-generating units located in a census tract, an MSA, or non-MSA (which is likely). For these facilities, the entire nameplate capacity of the facility is attributed to the land-based equipment that conditions energy generated by the facility for transmission, distribution, and use. Effectively, this rule provides that taxpayers can gain access to the energy community bonus credit for an offshore facility by locating the power conditioning equipment for that facility in an onshore energy community. Importantly, and what appears to be a trap for the unwary, this guidance takes into account only the power conditioning equipment (e.g., a substation) that is closest to the point of interconnection when testing whether an offshore facility is located in an energy community. Accordingly, if an offshore facility has power conditioning equipment in multiple locations, and if the power conditioning equipment that is closest to the point of interconnection is not located in an energy community, then the offshore facility would not qualify for the energy community bonus credit (even if other power conditioning equipment is located in an energy community). Developers of offshore wind projects will want to be mindful of these rules when determining the location of power-conditioning equipment.[8]

Effective Date

Taxpayers may rely on the rules set forth in Notice 2023-29 until the issuance of the proposed regulations. The proposed regulations are expected to apply to taxable years ending after April 4, 2023.

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[1] All section references are to the Internal Revenue Code of 1986, as amended.

[2] As was the case with the so-called Tax Cuts and Jobs Act, the Senate’s reconciliation rules prevented Senators from changing the Act’s name, and the formal name of the so-called Inflation Reduction Act is actually “An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14.”

[3] Like the base PTC and ITC themselves, the bonus credit also is reduced by 80 percent for certain projects that do not meet prevailing wage or apprenticeship requirements.

[4] The terms are defined by reference to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. § 9601(39)).

[5] Potential site lists may be found under the category of Brownfields Properties on the EPA’s Cleanups in My Community webpage or on similar webpages maintained by states, territories, or for federally recognized Indian tribes. See https://java.epa.gov/acrespub/stvrp/.

[6] These codes are the 2017 North American Industry Classification System codes 211 (Oil and Gas Extraction), 2121 (Coal Mining), 213111 (Drilling Oil and Gas Wells), 213112 (Support Activities for Oil and Gas Operations), 213113 (Support Activities for Coal Mining), 32411 (Petroleum Refineries), 4861 (Pipeline Transportation of Crude Oil), and 4862 (Pipeline Transportation of Natural Gas), each as listed in the annual County Files of the County Business Patterns published by the Census Bureau.

[7] The Notice includes an appendix listing all relevant MSAs and non-MSAs (here) that are used for all purposes of the Notice.

[8] It also would be helpful for the IRS and Treasury to confirm that the relevant measurement date for purposes of determining whether power conditioning equipment is located in an energy community is the date on which construction on the corresponding offshore facility began (and not the date on which construction on the power conditioning equipment began).

This alert was prepared by Josiah Bethards, Emily Brooks, Mike Cannon, Matt Donnelly, and Simon Moskovitz.

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

Tax Group:
Michael Q. Cannon – Dallas (+1 214-698-3232, [email protected])
Matt Donnelly – Washington, D.C. (+1 202-887-3567, [email protected])
Josiah Bethards – Dallas (+1 214-698-3354, [email protected])
Emily Risher Brooks – Dallas (+1 214-698-3104, [email protected])
Simon Moskovitz – Washington, D.C. (+1 202-777-9532 , [email protected])

Power and Renewables Group:
Peter J. Hanlon – New York (+1 212-351-2425, [email protected])
Nicholas H. Politan, Jr. – New York (+1 212-351-2616, [email protected])