Publications Archives

On February 28, 2023, the UK’s Competition & Markets Authority (“CMA”) released draft Guidance on the application of the UK’s antitrust laws to environmental sustainability agreements between competitors.[1]

The Guidance recognizes that “environmental sustainability is a major public concern” and that antitrust law enforcement should not “unnecessarily or erroneously deter[]” businesses from collaborating to address the challenges posed by climate change.[2] To that end, the Guidance provides a framework for applying competition rules to “environmental sustainability agreements,” defined as “agreements or concerted practices between competitors and potential competitors which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on environmental sustainability or assessing the impact of their activities on environmental sustainability.”[3]

The Guidance outlines three standards for assessing environmental sustainability agreements under UK antitrust laws. First, the Guidance provides examples of agreements that are unlikely to raise antitrust concerns. These include agreements to:

Further environmental sustainability goals that require complementary skills or resources from multiple firms to achieve;
Create sustainability-related industry standards;
Share information about “the environmental sustainability credentials of suppliers … or customers”; and
Withdraw or phase out non-sustainable products or processes.[4]

Second, the Guidance describes agreements that could violate antitrust laws because they have the “object” of restricting competition.[5] An agreement has the “object” of restricting competition when, for example, it involves price fixing, market or consumer allocation, or limitations on output, quality, or innovation. Such agreements are subject to increased scrutiny because they “are assumed by their very nature to be harmful to the proper functioning of normal competition.”[6]

Where an environmental sustainability agreement does not restrict competition by object, it will raise antitrust concerns only “if it has an appreciable negative effect on competition.”[7] The Guidance provides a non-exhaustive list of factors to consider when determining if an agreement has such an effect on competition, including the market coverage of the agreement and market power of the participating companies; the extent to which the agreement limits the freedom of action of the parties; whether non-parties may participate in agreed-upon conduct; whether the agreement involves the sharing of competitively sensitive information; and whether the agreement is likely to lead to an appreciable increase in price or reduction in output, product variety, quality, or innovation.[8]

Third, the Guidance recognizes an exemption for agreements that would otherwise violate the antitrust laws when “the benefits of the agreement outweigh the competitive harm.”[9] To qualify under this exemption, participants will need to demonstrate that the agreement meets the following four conditions:

The agreement must contribute certain benefits, namely improving production or distribution or promoting technical or economic progress;
The agreement and any restrictions on competition within the agreement must be indispensable to the achievement of those benefits;
Consumers must receive a fair share of the benefits; and
The agreement must not eliminate competition in respect to a substantial part of the products concerned.[10]

The CMA’s draft Guidance follows in the wake of the Japan Fair Trade Commission’s announcement of similar draft guidance in January.[11] Last year, the European Commission (“EC”) for the European Union also announced that it would develop new guidelines for potential antitrust exemptions for environmental sustainability collaborations within agricultural production markets.[12] The EC’s new Horizontal Guidelines, set to replace its prior Guidelines later this year, devote a chapter to outlining the EC’s regulatory approach to environmental sustainability agreements.[13] As with the CMA’s draft Guidance, the EC’s Horizontal Guidelines are not limited to a particular industry and detail the standards for evaluating environmental sustainability collaborations, including whether they restrict competition by object or have appreciable negative effects on competition.[14] These developments reflect a growing recognition that “collaboration is needed to battle climate change,” particularly because “[f]irst movers may find themselves at a competitive disadvantage.”[15]

The guidance has inspired debate about how to approach similar environmental collaborations under U.S. antitrust laws. For example, last year, nineteen state Attorneys General issued a letter to the CEO of Blackrock, Inc. raising antitrust concerns about the firm’s commitment to ESG initiatives in its investment decisions.[16] In response, the Attorneys General of sixteen other states and the District of Columbia issued their own letter to Congress touting the benefits of ESG and criticizing the efforts of their peers to frame ESG collaborations as antitrust violations.[17] Although the Federal Trade Commission (“FTC”) and DOJ Antitrust Division have not issued guidance on the subject, the Chair of the FTC recently indicated “there is no such thing” as an ESG “exemption” from U.S. antitrust laws.[18]

Given the uncertain landscape in the United States and the promulgation of new guidance on environmental collaboration abroad, multinational companies should seek legal advice on how to minimize potential antitrust risks before entering into similar environmental sustainability agreements.

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[1] U.K. CMA, Draft Guidance on the Application of the Chapter I Prohibition in the Competition Act 1998 to Environmental Sustainability Agreements (Feb. 28, 2023), available here.

[2] Id. ¶¶ 1.1-1.2, 1.5.

[3] Id. ¶¶ 1.5, 2.1.

[4] Id. ¶ 3.4, 3.9, 3.11, 3.15.

[5] Id. ¶ 4.3.

[6] Id. ¶ 4.4-4.6.

[7] Id. ¶ 4.12.

[8] Id. ¶ 4.14.

[9] Id. ¶ 5.1.

[10] Id. ¶ 5.2.

[11] See Charles McConnell, JFTC Consults on Draft Sustainability Guidelines, Global Competition Rev. (Jan. 17, 2023), available at https://globalcompetitionreview.com/article/jftc-consults-draft-sustainability-guidelines.

[12] See European Commission, Sustainability Agreements in Agriculture – Guidelines on Antitrust Derogation, available at https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13305-Sustainability-agreements-in-agriculture-guidelines-on-antitrust-derogation_en. The EU’s new guidelines are expected to be released in late 2023. See id.

[13] See European Commission, Chapter 9: Sustainability Agreements, Draft Revised Horizontal Guidelines, available here.

[14] See id. ¶¶ 548, 551-54, 555-60.

[15] Matteo Gasparini, Knut Haanes, and Peter Tufano, When Climate Collaboration Is Treated as an Antitrust Violation, Harvard Bus. Rev. (Oct. 17, 2022), available at https://hbr.org/2022/10/when-climate-collaboration-is-treated-as-an-antitrust-violation.

[16] See Ltr. from Nineteen Attorneys General to Laurence D. Fink, CEO, BlackRock, Inc. (Aug. 4, 2022), available here.

[17] See Ltr. from Seventeen Attorneys General to Sen. Sherrod Brown, et al. (Nov. 21, 2022), available here.

[18] Senate Judiciary Committee, Subcommittee on Competition Policy, Antitrust, and Consumer Rights, Hearing, “Oversight of Federal Enforcement of the Antitrust Laws” (September 20, 2022), available at https://www.judiciary.senate.gov/meetings/oversight-of-federal-enforcement-of-the-antitrust-laws.

The following Gibson Dunn lawyers prepared this client alert: Scott Hammond, Mike Murphy, Ali Nikpay, Christian Riis-Madsen, Perlette Jura, Jeremy Robison, Rachel Levick, Stéphane Frank, Sarah Akhtar, and Nicholas Fuenzalida.

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

Antitrust and Competition Group:
Scott D. Hammond – Washington, D.C. (+1 202-887-3684, [email protected])
Jeremy Robison – Washington, D.C. (+1 202-955-8518, [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])
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, [email protected])
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, [email protected])

Environmental, Social and Governance (ESG) Group:
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213-229-7121, [email protected])
Ronald Kirk – Dallas (+1 214-698-3295, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, [email protected])
Selina S. Sagayam – London (+44 (0) 20 7071 4263, [email protected])

Environmental Litigation and Mass Tort Group:
Stacie B. Fletcher – Washington, D.C. (+1 202-887-3627, [email protected])
Daniel W. Nelson – Washington, D.C. (+1 202-887-3687, [email protected])
Rachel Levick – Washington, D.C. (+1 202-887-3574, [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.

This past year marked an important turning point for the Court, with Judges Anthony Cannataro, Madeline Singas, and Shirley Troutman joining as new members on the seven-member bench. Then, in Summer 2022, Chief Judge Janet DiFiore abruptly resigned, leaving a surprising, additional vacancy. The Court designated Judge Cannataro to be acting Chief Judge until the vacancy could be filled.

To fill the seat, Democratic Governor Kathy Hochul nominated Justice Hector LaSalle, the Presiding Justice of the Appellate Division, Second Department (the busiest state appellate court in the nation). His nomination was quickly opposed by some in light of his prosecutorial background and a perception that his judicial rulings were overly conservative. The State Senate rejected his nomination in a largely party-line vote, with Democrats opposing his nomination—the first time New York legislators have rejected a governor’s nomination for chief judge. The vacancy remains to be filled.

The Court’s jurisprudence nonetheless continued along previous trends during this period. Judges Cannataro and Singas (like their predecessors) often voted with Judges DiFiore and Garcia to form a majority, while Judges Wilson and Rivera continued to author numerous, lengthy dissents. Judge Troutman (like her predecessor, Judge Fahey) appears poised to emerge as a potential swing vote. Although the Court in previous years was not perceived as particularly ideological, its rulings have been increasingly fractured along often-predictable voting lines. It remains to be seen if this trend will continue after a new chief judge is confirmed.

The Court also continued its trend of reviewing a reduced number of cases. The Court nevertheless issued significant opinions on a wide array of issues, from fantasy sports to electoral redistricting, insurance, mortgage-backed securities, and tort law.

The New York Court of Appeals Round-Up & Preview summarizes key opinions, primarily in civil cases, issued by the Court over the past year and highlights a number of cases of potentially broad significance that the Court will hear during the coming year. The cases are organized by subject.

To view the Round-Up, click here.

Gibson Dunn’s New York office is home to a team of top appellate specialists and litigators who regularly represent clients in appellate matters involving an array of constitutional, statutory, regulatory, and common-law issues, including securities, antitrust, commercial, intellectual property, insurance, First Amendment, class action, and complex contract disputes. In addition to our expertise in New York’s appellate courts, we regularly brief and argue some of the firm’s most important appeals, file amicus briefs, participate in motion practice, develop policy arguments, and preserve critical arguments for appeal. That is nowhere more critical than in New York—the epicenter of domestic and global commerce—where appellate procedure is complex, the state political system is arcane, and interlocutory appeals are permitted from the vast majority of trial-court rulings.

Our lawyers are available to assist in addressing any questions you may have regarding developments at the New York Court of Appeals, or any other state or federal appellate courts in New York. Please feel free to contact any member of the firm’s Appellate and Constitutional Law practice group, or the following lawyers in New York:

Mylan L. Denerstein (+1 212-351-3850, [email protected])
Akiva Shapiro (+1 212-351-3830, [email protected])
Seth M. Rokosky (+1 212-351-6389, [email protected])

Please also feel free to contact the following practice group leaders:

Thomas H. Dupree Jr. – Washington, D.C. (+1 202-955-8547, [email protected])
Allyson N. Ho – Dallas (+1 214-698-3233, [email protected])
Julian W. Poon – Los Angeles (+ 213-229-7758, [email protected])

Given the rapidly evolving events, we have established a Distressed Banks Resource Center to provide resources and regular updates to our clients. The latest developments are available below and at the Resource Center.

A New Paradigm. Silicon Valley Bridge Bank, N.A. – the successor-in-interest to Silicon Valley Bank – posted a website notice on Tuesday stating that it has “fully stepped into the shoes of the former Silicon Valley Bank”. The notice further advised that all loans will now be administered by the new Silicon Valley Bridge Bank, N.A. and existing credit commitments will be honored. The website also contained a link to a 75 page “Transfer Agreement” between the FDIC, as receiver for Silicon Valley Bank (the state chartered now-defunct bank) and Silicon Valley Bridge Bank, N.A. (the federally-chartered new bank) that appears to transfer various assets and liabilities to the bridge bank to enable it to operate in the ordinary course in a manner similar to the predecessor bank for domestic operations. Additionally, Silicon Valley Bridge Bank CEO Tim Mayopoulos issued a statement asking depositors to return to SVB, affirming that depositors have full access to their money and that all new and existing deposits are fully protected by the FDIC (even beyond the typical $250,000 limit).[1] The website clarified that Silicon Valley Bridge Bank is not under FDIC receivership.

All of this implements a new paradigm that replaces the receivership model from the past weekend with a “fully functioning” bank that seeks to continue operations in the ordinary course. The Deposit Insurance Bank of Santa Clara that was established Friday, and the other trappings of FDIC receivership, are gone.

While Signature Bridge Bank, N.A.’s website does not contain similar documentation, its operations on Monday and Tuesday appeared to be in the ordinary course, with Signature Bridge Bank appearing to fund its loan obligations and process loan facility amendments and renewals, and its employees providing standard services.

What About Loan Covenants Regarding Deposits? A top question resulting from the new bridge bank paradigm is whether the bridge banks will enforce covenants under which borrowers promised to hold many or all of their deposits in the lender’s bank. The FDIC issued a Financial Institution Letter FIL -10-2023 emphasizing that it has the ability to enforce all contracts held in receivership[2] and, in a separate letter, stated that the bridge bank intends to enforce such contracts[3]. Notwithstanding such guidance, given the novel issues of public policy, it remains to be seen whether, in fact, SVB borrowers who moved deposits to other institutions will now be expected by the FDIC and Silicon Valley Bridge Bank to move those deposits back to Silicon Valley Bridge Bank, particularly given that it appears that regulators are pursuing the potential sale of SVB loans to third parties, as discussed below.

Will Letters of Credit issued by SVB be honored? The Financial Institution Letter issued by the FDIC states that “The bridge bank is performing under all failed bank contracts and expects all counterparties to similarly fulfill their contractual obligations.” These bank contracts would presumably include the letters of credit issued by SVB and Signature Bank.

What Happens to Derivatives? All Qualified Financial Contracts of each of SVB and Signature Bank have been transferred to the applicable bridge bank established by the FDIC. The definition of “Qualified Financial Contract” includes, but is not limited to derivatives (e.g., swaps, options, forwards, etc.), repurchase, reverse repurchase, and securities lending transactions. As a result, the applicable bridge bank is now the counterparty to derivatives entered into with SVB and Signature Bank. Payments and collateral calls under derivatives contracts should function as normal between the counterparty and the applicable bridge bank entities of SVB and Signature Bank, as noted in the Financial Institution Letter mentioned above.

Given that derivatives contracts are often heavily negotiated, the terms of any derivatives trading documentation and the special provisions in 12 U.S.C. § 1821 should be reviewed to understand your specific rights with respect to your derivatives.

Cayman Islands Depositors. While the UK branch of SVB has been purchased by HSBC, there is no word on the fate of SVB’s Cayman branch, which is outside of the U.S. receivership and treated separately under Cayman law. Those with deposits in SVB’s Cayman branch may be continuing to experience challenges with the transfer of funds out of accounts. There is no indication from the Cayman regulators that they have taken possession of the Cayman branch, though they have the authority to do so. There also is an MOU between the Cayman regulators and the FDIC related to their ongoing cooperation and information sharing for the supervision and resolution of banks with branches in Cayman. Today’s FDIC guidance states that, “All vendors providing services, except for the Cayman Islands Branch, should continue to provide such services.” We note that unless Silicon Valley Bridge Bank is connected to SWIFT, it cannot accept foreign wire transfers.

SVB All or Nothing Sale Off the Table? On the heels of yesterday’s Wall Street Journal report that a second auction round for SVB would be held, several national media outlets reported Tuesday that five top U.S. private equity firms are reviewing SVB books in order to potentially bid for purchasing SVB loans. In addition, SVB Financial Group, the parent company, hired Alvarez & Marsal as restructuring advisor and appointed William Kostouros of Alvarez & Marsal as Chief Restructuring Officer. Mr. Kostrouos previously served in an identical capacity for Washington Mutual. SVB Financial also disclosed that it is exploring strategic alternatives for itself, as well as SVB Securities (the investment bank) and SVB Capital (the investment management arm), with potentially a management buy-out being explored for SVB Securities. Accordingly, it is unclear whether a second auction for SVB will in fact be held, or whether the auction will be for separate businesses and loan portfolios of SVB Financial. Media reports also indicate that a group of creditors is organizing to represent their interests with respect to holdings in SVB Financial’s bonds, which in total have $3.4 billion in face value of which reportedly over $1.5 billion has traded hands since Friday.

Signature Bank Bid Process. Bloomberg reports that the FDIC has opened a virtual data room for third parties to conduct due diligence in anticipation of potential bidding to purchase, presumably in part or all of, Signature Bank.

Capitol Hill Updates. Senate Banking Committee Chairman Sherrod Brown said his committee plans to hold a hearing, though they are still deciding on witnesses. Similarly, House Financial Services Committee Chairman Patrick McHenry said today that his committee would be talking with SVB and regulators to understand what led to the bank’s failure. Separately, Senator Warren and Rep. Katie Porter have introduced companion bills to re-impose heightened regulations on small- and medium-sized banks.[4]

Government Investigations Reportedly Begin. Multiple media sources report that the SEC and Justice Department have opened investigations into events surrounding SVB’s failure, while at least one state regulator (Massachusetts) has announced a formal investigation into stock trading by SVB executives prior to the bank’s failure. The Federal Reserve is also investigating both its internal oversight procedures as well as risk management at SVB, according to media sources. Fed Chairman Jerome Powell stated in a Monday press release, “The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve.”

Public Company Disclosure Issues. Publicly traded companies should be aware that responding to questions from investors about the extent of their exposure to a bank in receivership, or now in a ‘bridge bank,’ could implicate the federal securities laws’ selective disclosure rules, such as Regulation FD, and the administration of their insider trading policies. Any of such companies that have banking relationships with banks that have failed should consider whether a Current Report on Form 8-K is appropriate to address potential exposure risk, and whether an update to the company’s risk factors or other disclosures is appropriate with the company’s next periodic filing.

This document is for informational purposes only and does not, and is not intended to, constitute legal advice or create an attorney-client relationship. You should contact a Gibson Dunn attorney directly to see if they are able to provide legal advice with respect to a particular legal matter.

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[1] https://www.svb.com/news/company-news/update-from-silicon-valley-bridge-bank-ceo

[2] https://www.fdic.gov/news/financial-institution-letters/2023/fil23010.html

[3] https://www.svb.com/globalassets/bridge-bank/fdic-confirmation-that-bridge-bank-open-and-operating-new.pdf

[4] https://www.scribd.com/document/631425862/Warren-Porter-bank-bill#

Gibson Dunn’s multidisciplinary task force members 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, or the following members of the firm’s *** Distressed Bank Working Group:

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

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

Reed Brodsky – Litigation and Securities Enforcement, New York (+1 212-351-5334, [email protected])

Andrew L. Fabens – Capital Markets, New York (+1 212-351-4034, [email protected])

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

Jin Hee Kim – Global Finance, New York (+1 212-351-5371, [email protected])

Jeffrey C. Krause – Business Restructuring, Los Angeles (+1 213-229-7995, [email protected])

David C. Lee – Global Finance, Orange County (+1 949-451-3842, [email protected])

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

Mary Beth Maloney – Securities and Restructuring Litigation, New York (+1 212-351-2315, [email protected])

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

Tina Samanta – Securities Enforcement, New York (+1 212-351-2469, [email protected])

Victoria Shusterman – Real Estate, New York (+1 212-351-5386, [email protected])

Jeffrey L. Steiner – Global Financial Regulatory, Washington, D.C. (+1 202-887-3632, [email protected])

Charles V. Walker – Mergers & Acquisitions, Houston (+1 346-718-6671, [email protected])

Lori Zyskowski – Securities Regulation/Corporate Governance, New York (+1 212-351-2309, [email protected])

The rapid collapse of Silicon Valley Bank, Signature Bank and distress at others, continues to create uncertainty in the global economic economy. Customers and counterparties worldwide—including funds, portfolio companies, and individuals—are facing unique legal and operational challenges as a result. Companies are working to overcome disruptions in their daily business operations and to mitigate short- and long-term risks amidst the bank failures.

These bank failures present a highly fluid and complex situation. In addition, each customer account loan or other relationship is subject to specific contractual arrangements between the customer and the bank that should be individually reviewed. Gibson Dunn is equipped to provide strategic counsel and advise clients on how to best approach many of the key issues. We can assist in addressing specific questions, including by executing a comprehensive approach to guide clients.

Gibson Dunn has created a multidisciplinary task force to assist our clients. To provide real time and accurate information, we are closely monitoring the guidance issued by government finance and banking officials as well aggregating information collected from our cross sector of relationships. Please feel free to reach out to any of the individuals with whom you have an existing relationship at Gibson Dunn with questions or concerns. To receive our ongoing regular communications to our clients and friends addressing issues raised by the banking crises, as they arise, please contact us at [email protected].

Given the rapidly evolving circumstances, we have established a Distressed Banks Resource Center to provide resources and regular updates to our clients. The latest “Atmosphere Situation Report” and “Depositor/Debtor Specific Issues Report” are available at the Resource Center and included below for your convenience.

(A) Atmosphere Situation Report

Government Response (US): The Department of the Treasury, FDIC and Federal Reserve announced multiple actions on Sunday, March 12, 2023 including:

Depositors of Silicon Valley Bank (“SVB”) will be made whole and have access to their funds as of Monday, March 13, 2023, through establishment of a newly created “bridge bank,” Silicon Valley Bank N.A. A bridge bank is a chartered national bank that operates under a board appointed by the FDIC. Former Fannie Mae head Tim Mayopoulos has been named the CEO of the bridge bank.
Depositors of Signature Bank will also be made whole, with access to funds on March 13, 2023. The FDIC established a bridge bank, Signature Bridge Bank, N.A. for this purpose. The former CEO of Fifth Third, Greg Carmichael, has been named the CEO of the bridge bank.
The FDIC issued a second update to its FAQ on Monday for SVB (fdic.gov/resources/resolutions/bank-failures/failed-bank-list/silicon-valley-faq.pdf) and for Signature Bank (www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/signature-ny-faq.html) with more specific details on how these bridge banks would operate. Among other things in the FAQs, the FDIC advises any borrower from either bank to continue making payments and direct any questions to the bridge bank or FDIC loan representatives. Language in a prior update to the FAQs was deleted relating to loan set-offs, presumably since all SVB and Signature Bank deposits have been guaranteed in full by the US Government.
A Bank Term Funding Program (“BTFP”) created by the Federal Reserve will provide loans of up to one year to banks, credit unions and other eligible depository institutions that pledge qualifying assets. Collateral will be valued at par. The Treasury will make up to $25 billion from the Exchange Stabilization Fund available to backstop the BFTP.
Michael Barr, one of the architects of the Dodd-Frank Act, will lead a review of the supervision and regulation of SVB.

Market Updates:

The SVB and Signature bridge banks were open and functioning on Monday, with staff at each bank returning communications. That said, it has been reported that SVB funding transfer completions were episodic, presumably due to the high volume of customer requests. Multiple users have reported long hold times and electronic bank interface delays amid heavy traffic.
No buyer has been announced as of Monday afternoon for the U.S. portion of SVB or for Signature Bank. The Wall Street Journal reported Monday that with the absence of a buyer for SVB after an initial FDIC auction round closed on Sunday, the FDIC intends to re-launch a second auction under which the FDIC will have additional authority for flexibility in negotiating sale terms because SVB’s failure now has been deemed a systemic threat to the financial system. The same report stated that none of the ‘largest U.S. banks’ submitted a bid in the initial auction. CNBC reported earlier on Monday that PNC had submitted an indication of interest to acquire SVB but was not proceeding. It is unknown whether other potential bidders existed in the first auction round. Separately, HSBC purchased Silicon Valley Bank UK Limited (“SVB UK”), the UK affiliate of SVB, for £1. All SVB UK deposits are backed by HSBC.
While it will take time to evaluate the many events of last week, certain details are emerging. Reuters reports that SVB’s Wednesday announcement of the sale of its available for sale (AFS) securities came after Moody’s the prior week informed SVB of an impending credit downgrade. In turn, SVB then liquidated approximately $21 billion of AFS securities, resulting in a $1.8 billion loss. To offset that, SVB concurrently announced a $500 million investment from General Atlantic conditioned upon SVB first raising a planned $1.75 billion, which never came to fruition.

Capitol Hill Updates: House Financial Services Committee Chairman Patrick McHenry released a statement dubbing the failure as “the first Twitter fueled bank run.” He called for calm. Ranking Member Maxine Waters has told the press that the Committee is working on a bipartisan basis to hold a hearing as soon as possible.

Eighteen Democratic House members signed a letter to Treasury Secretary Yellen, FDIC Chair Martin Gruenberg, Federal Reserve Chair Jerome Powell, and Acting Comptroller Michael Hsu urging swift action to protect depositors, calling on Congress to increase the FDIC deposit insurance limit of $250,000, and clarifying that they did not believe regulators should bail out the bank’s shareholders.
Some House Democrats and Senators including Sens. Bernie Sanders and Elizabeth Warren already have started calling for substantial legislative reforms, including reinstatement of some of the Dodd-Frank Act rules rolled back in 2018.
The Biden administration has been providing briefings to Capitol Hill over the last several days. They provided a bipartisan, bicameral briefing Sunday evening and met with Senate Banking Committee Republicans (who said they had not received the invitation to the previous briefing) on Monday.
Senate Majority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries have said they plan to examine the Bank’s failure. They did not say which congressional committees they would tap to lead that investigation.

SEC Response Update: Yesterday (March 12, 2023) SEC Chair Gary Gensler released the following statement, “In times of increased volatility and uncertainty, we at the SEC are particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly. Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws.” Gurbir Grewal, the SEC Director of Enforcement spoke today (Monday, March 13, 2023) at the annual Securities Industry and Financial Markets Association Conference but did not specifically address the bank failures; though he did note the SEC’s focus on enhancing the public trust by focusing on the failures of those parties in gatekeeping functions.

(B) Depositor/Debtor Specific Issues Report

What Happens to Money in Deposit Accounts: Deposit accounts are cash accounts and may be labeled as an “operating account” or a “money market deposit account” (sometimes labeled as an “MMDA account”). Note that the money market deposit account is distinct from the Money Market Mutual Fund Accounts described below. The funds in deposit accounts will be fully paid, even for balances in excess of the standard $250,000 FDIC limit.

What Happens to Money in Cash Sweep Money Market Mutual Fund Accounts: Cash sweep accounts can be structured in a variety of ways. In the case of SVB, it appears that many of their customers are subject to one of their various cash sweep programs. For this category of accounts (the “SVB Cash Sweep Accounts”), the “cash sweep” program involves regular (usually daily or next day) cash sweeps from customer deposit accounts into an SVB ‘Omnibus Account’ which is then used to purchase money market mutual fund securities on behalf of the customers. Companies seeking return of these assets, whether in cash or in kind, may need to submit a proof of claim to the FDIC if it appears that the cash value of such assets are not readily available via the online portal. In addition, Companies desiring to liquidate securities in connection with such return should consider any potential negative tax implications.

What Happens to Money in ‘Asset Management’ Accounts: These are securities brokerage accounts advised by Silicon Asset Management (an affiliate of SVB) where the securities are physically held by US Bank as custodian and segregated by client name on the custodian’s books. These accounts should not be part of the receivership or the bank estate. The custodian of these investment accounts may be contacted directly for more information on how to transfer those accounts from the SAM managed program to another advisor.

What Happens to Money in Intrafi/Promontory Interfinancial Network Accounts: Some SVB customers have an arrangement with Intrafi (formerly known as Promontory Interfinancial Network), where cash held in an SVB deposit account above the $250,000 FDIC insured limit is swept into a syndicate of other banks, each holding less than $250,000 of the customer’s deposits. Cash deposits that were swept into syndicated banks through Intrafi should not be part of the receivership or the bank estate.

Can I Draw on Existing Credit and Loan Facilities?: On Friday, the FDIC suggested it would not be honoring drawdowns on loans and credit facilities loans with Silicon Valley Bank, N.A. (i.e., the bridge bank). However, as of Monday we understand that at least some borrowers have been able to draw on lines of credit at SVB and Signature.

What is the Status of Wires Out of SVB that I Sent Before the Receivership Was in Place?: If you have a pending wire request out of SVB that has not yet been honored, the expectation is that those funds will be honored without further action by the directing party. At this time it does not appear necessary to terminate wires submitted last week but not processed before the receivership and reinitiate new requests.

What Will Happen to Deposits and External Wires Into SVB: External wires that arrive in your SVB account after Friday should be available through the bridge bank. Public statements from financial regulators suggest that 100% protection will apply so long as the bridge bank is accepting deposits.

What Are My Payment Obligations, If Any, on My SVB Loans?: The FDIC has instructed in their FAQs that Debtors to SVB continue to pay on their loans and remain subject to the loan terms. The FDIC appears to be operating the bridge bank in quasi-ordinary course without regard to the more limited receivership arrangements previously announced by the FDIC.

What Do I Do About Loan Defaults or Waiver? For loans with covenants requiring deposit accounts to be maintained at SVB, it is not expected that FDIC will enforce such covenants, but when those loans are sold, it is unknown what the loan acquirer may request of each borrower. For example, a buyer could request that borrower establish its accounts with the buyer or establish deposit account control agreements in connection with secured loans. In addition, as borrowers under loans with SVB consider withdrawing funds, care should be taken to review existing loan arrangements with SVB, as many of them require minimum levels of cash and cash equivalents to be maintained with SVB.

Gibson Dunn’s multidisciplinary task force members are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact the Gibson Dunn lawyer with whom you usually work, or any member of Gibson Dunn’s Accounting Firm Advisory, Business Restructuring/Distressed Investing, Capital Markets, Derivatives, Financial Institutions, Global Financial Regulatory, Global Finance, Investment Funds, Private Equity, Public Policy, Real Estate, Securities Enforcement, Securities Litigation and Tax teams.

Although the number of securities lawsuits filed this year remained steady compared to 2021, we have seen many notable developments in securities law. This year-end update provides an overview of the major developments in federal and state securities litigation since our last update in September 2022:

The Supreme Court is set to hear a blockbuster case that will shape whether and how shareholders can establish standing to bring claims under Sections 11 and 12 of the Securities Act when a company sells its shares in a direct listing. The Supreme Court has also heard, or will hear, administrative law cases that will impact securities litigation. Several cases pending at the circuit court level may have wide-ranging effects on securities litigation as well.
We review a number of significant developments in Delaware corporate law, including the Court of Chancery’s clarification of directors’ oversight duties, and the Delaware General Assembly’s expansion of Section 102(b)(7) of the Delaware General Corporation Law to include exculpation of officers for personal liability arising from breaches of the duty of care. We also provide an update on the status of mandatory federal forum provisions in the Ninth and Seventh Circuits and in the State of California.
We examine developments in federal securities litigation involving special purpose acquisition companies. Although the market for SPAC IPOs has cooled relative to 2021, litigation arising out of SPAC transactions remains active, and courts have started to rule on motions to dismiss in SPAC-related shareholder lawsuits, with several recent decisions finding plaintiffs’ allegations to be sufficient to move forward.
We examine environmental, social, and corporate governance (“ESG”) developments. Although too early to identify definitive trends in this area, we survey the types of ESG allegations that are being filed and report on notable decisions.
We continue to monitor the emergence of a potential circuit split regarding whether the Supreme Court’s 2019 decision in Lorenzo allows scheme liability under Rule 10b-5(a) and (c) without alleging dissemination and based solely on the same conduct as Rule 10b-5(b) misrepresentation claims. As discussed in our 2022 Mid-Year Securities Litigation Update, a number of courts have grappled with the effects of Lorenzo. In particular, the Second Circuit in SEC v. Rio Tinto provided much needed clarity for district courts within the Second Circuit. Since then, district courts in the Southern District of New York have evaluated scheme liability under Rio Tinto, but there have been no further opinions discussing the scope of Lorenzo in the other circuits.
We again survey securities-related litigation arising out of the coronavirus pandemic, including securities class actions alleging that defendants made false claims about the efficacy of their COVID-19 vaccines, treatments, and tests. Although many cases involving false claims about pandemic and post-pandemic prospects are either moving into the motion to dismiss stage or have recently been dismissed, a handful of new cases have also been filed.
We review developments regarding Omnicare’s falsity of opinions standard, as rulings by various circuit and district courts shed light on the boundaries of liability for false or misleading statements of opinion as well as omissions.
Finally, we address several other notable developments in the federal courts, including:
- the Ninth Circuit upholding the dismissal of a securities class action after reaffirming its standard for non-actionable “puffery”;
- the First Circuit’s further guidance as to when statements regarding a product may be materially misleading under the PSLRA; and
- the Ninth Circuit becoming the second circuit court in less than a year to hold that social media posts can count as “soliciting” the purchase of a security under the Securities Act.

I. Filing And Settlement Trends

Data from a recently released NERA Economic Consulting (“NERA”) study shows federal securities litigation filing trends that began in earnest in 2020 continued through 2022. For the third consecutive year, federal class-action filings decreased after a steady upward trend in 2017-2019. As in 2021 and 2020, the decline in the number of merger-objection cases filed (down to eight from the peak of 205 in 2017) drove the decrease in the total number of new federal class actions filed in 2022 (down to 205 from the peak of 431 in 2018). For the second year in a row, the “Electronic Technology and Technology Services” and “Health Technology and Services” sectors represented over half of all filings (54%). In notable contrast to prior years, however, the number of crypto unregistered securities cases increased considerably, from just one in 2021 to 16 in 2022.

After declining to $8 million in 2021, the median settlement value of federal securities class actions in 2022—excluding merger-objection cases, crypto unregistered securities cases, and cases settling for more than $1 billion or $0 to the class—increased to $13 million, which is consistent with the trend seen from 2018-2020 ($13, $12, and $13 million, respectively). Concomitantly, average settlement values—also excluding merger-objection cases, crypto unregistered securities cases, and cases settling for more than $1 billion or $0 to the class—also increased in 2022 (to $38 million, up from $21 million in 2021).

A. Filing Trends

Figure 1 below reflects the federal filing rates in 2022 (all charts courtesy of NERA). 205 federal cases were filed last year, which is less than half the number of federal filings in the each of the peak years (2017-2019). Note, however, that this figure does not include class action suits filed in state court or state court derivative suits, including those in the Delaware Court of Chancery.

Figure 1:

B. Mix Of Cases Filed In 2022

1. Filings By Industry Sector

As shown in Figure 2 below, the distribution of non-merger objection and non-crypto unregistered securities filings in 2022 was largely consistent with 2021. For the second year in a row, the “Electronic Technology and Technology Services” and “Health Technology and Services” sectors accounted for more than 50% of all filings. And after declining in 2021, “Finance” filings declined again (down to 8%), reaching a low watermark in recent years. Conversely, “Retail Trade” filings increased from 4% to 9%, the high watermark in recent years.

Figure 2:

2. Merger Cases

As shown in Figure 3 below, eight merger-objection cases were filed in federal court in 2022. This represents a 47% year-over-year decrease from 2021, and a 92% year-over-year decrease from 2020. This figure is significantly lower than in 2016, when the Delaware Court of Chancery effectively put an end to the practice of disclosure-only settlements in In re Trulia Inc. Stockholder Litigation, 29 A.3d 884 (Del. Ch. 2016), which helped drive the increase in merger-objection filings between 2015 and 2017.

Figure 3:

C. Settlement Trends

As reflected in Figure 4 below, the average settlement value—excluding merger-objection cases, crypto unregistered securities cases, and cases settling for more than $1 billion or $0 to the class—nearly doubled from 2021 to 2022, reaching $38 million. $38 million is also the highest average settlement value since 2016.

Figure 4:

Turning to median settlement value, Figure 5 shows an increase from $8 million in 2021 to $13 million in 2022. This marks a return to the consistency of 2018 to 2020, when median settlement value remained $12-13 million. (Note that median settlement value excludes settlements over $1 billion, merger objection cases, crypto unregistered securities cases, and zero-dollar settlements.)

Figure 5:

Finally, as shown in Figure 6, Median NERA-Defined Investor Losses increased in 2022, rising to $972 million from $731 million in 2021. Although Median NERA-Defined Investor Losses reached their highest level in a decade, the Median Ratio of Settlement to Investor Losses held steady for the third straight year at 1.8%.

Figure 6:

II. What To Watch For In The Supreme Court

The Supreme Court is set to hear a blockbuster case that is expected to shape whether and how shareholders can establish standing to bring claims under Sections 11 and 12 of the Securities Act when a company sells its shares in a direct listing. The Supreme Court has also heard, or will hear, administrative law cases that will impact different aspects of securities litigation. Several cases pending at the circuit court level may have wide-ranging effects on securities litigation as well.

A. The Supreme Court Takes On Slack v. Pirani

The case arises out of the New York Stock Exchange’s (“NYSE”) rule, introduced in 2018, that allows companies to go public through a direct listing. Id. at 944. In a traditional initial public offering (“IPO”), all of the shares initially sold to the public during the contractual lock-up are newly issued shares that are registered under a single registration statement. Id. at 943. In a direct listing, however, the company does not typically issue new shares. Id. at 944. Instead, only those shares that do not qualify for an exemption are registered for resale under the registration statement; existing shareholders may publicly sell unregistered shares pursuant to an exemption from registration. Id. So, while an investor who purchases shares during the contractual lock-up period following an IPO generally knows that the purchased shares were registered under the registration statement, an investor who purchases shares following a direct listing may not know if the purchased shares were registered or unregistered. Id.

In June 2019, Slack was one of the first companies to go public through a direct listing. Id. Over half of the shares that were available for resale to the public were unregistered shares held by existing shareholders. Id. Plaintiff bought shares on the day of the direct listing as well as on later dates. Id. He subsequently brought claims under Sections 11 and 12 of the Securities Act, alleging that the registration statement and prospectus Slack issued in connection with the direct listing omitted material information that rendered Slack’s required disclosures misleading. Id. at 944–45.

Sections 11 and 12 of the Securities Act provide a private right of action for alleged misstatements in a registration statement or prospectus by plaintiffs who purchased “such security.” 15 U.S.C. §77k(a) (Section 11); 15 U.S.C. §77l(a)(2) (Section 12). Under well-settled precedent, including from the Ninth Circuit, plaintiffs must be able to plead and prove that the shares they purchased were registered under the registration statement being challenged. Courts have long recognized that in cases with multiple registration statements (such as when a company issues a secondary offering), it is often impossible for plaintiffs to plead and prove their shares were registered under a specific registration statement because of the difficulty of determining the origin of the shares they purchased. Pirani, 13 F.4th at 946. Based on this well-established precedent, Slack argued plaintiff lacked standing because he admitted that he could not plead and prove that the shares he bought after Slack’s direct listing were registered. Id. at 948.

In a split decision, the Ninth Circuit held that “Slack’s unregistered shares sold in a direct listing are ‘such securities’ within the meaning of Section 11 because [by virtue of NYSE rules] their public sale cannot occur without the only operative registration in existence,” and thus “[a]ny person who acquired Slack shares through its direct listing could do so only because of the effectiveness of its registration statement.” Id. at 947. The court further noted that “[b]ecause this case involves only one registration statement,” it “does not present the traceability problem identified by [the Ninth Circuit] in cases with successive registrations.” Id. Judge Miller dissented, arguing that the majority improperly based its holding on the text of NYSE rules instead of the text of the statutes at issue; that there was no principled distinction between successive-registration cases and this one; and that the majority’s reliance on policy arguments was improper. Id. at 952–53 (Miller, J., dissenting).

In its petition for certiorari before the Supreme Court, Slack argued that all seven circuits to have considered the issue have uniformly held that “such security” means a share registered under the registration statement that is challenged by the plaintiff as misleading. Petition for Writ of Certiorari at 3–4. Slack also explained how this interpretation of the statutory language reflects the balancing of policy objectives that Congress implemented in the statutory scheme—namely, that while “Sections 11 and 12 impose ‘virtually absolute’ liability, ‘even for innocent misstatements,’” these statutes “are ‘limited in scope’ because they severely curtail the class of shareholders who may sue.” Id. at 28 (quoting Herman & MacLean v. Huddleston, 459 U.S. 375, 381–82 (1983)). And “Section 10 of the Exchange Act, by contrast, ‘is a “catchall” antifraud provision’ that permits any shareholder to sue, but ‘requires a plaintiff to carry a heavier burden to establish a cause of action.’” Id. Slack also warned that following the Ninth Circuit’s policy-based reasoning would mark a significant departure from precedent and undermine the stability of the securities markets and the efficiency of the capital-formation process.

The Supreme Court granted the petition for a writ of certiorari. Gibson Dunn represents Slack in this litigation. The case will be argued on April 17, 2023, by Thomas Hungar, a Gibson Dunn partner in the Washington, D.C. office.

B. Potential Circuit Split After Lee v. Fisher

On December 12, 2022, the Ninth Circuit heard oral argument en banc in Lee v. Fisher, No. 21-15923, a case that could create a circuit split between the Ninth and Seventh Circuits. The issue is whether investors can file derivative suits in federal court when a company has a forum-selection clause in its bylaws that mandates such cases be filed in Delaware state court. Prior to granting en banc review, the original Ninth Circuit panel affirmed the district court’s ruling that the forum-selection clause was enforceable, precluding a claim under Section 14(a) of the Exchange Act. See Lee v. Fisher, 34 F.4th 777, 782 (9th Cir. 2022). That decision created a circuit split, as the Seventh Circuit had recently held that a similar forum-selection clause was not enforceable. Seafarers Pension Plan v. Bradway, 23 F.4th 714, 724 (7th Cir. 2022).

In Lee, plaintiff brought a derivative action against The Gap, Inc. 34 F.4th at 779. Although Gap’s bylaws contained a forum-selection clause that required any derivative action to be brought in the Delaware Court of Chancery, plaintiff brought a derivative suit in a federal district court in California, alleging a Section 14(a) violation. Id.

The three-judge panel held that the forum-selection clause was enforceable. First, it did so because Supreme Court precedent favors enforcement of such clauses absent “extraordinary circumstances.” Id. at 780 (quoting Atl. Marine Constr. Co. v. U.S. Dist. Ct. for W. Dist. of Tex., 571 U.S. 49, 52 (2013)). Second, in considering whether the forum-selection clause would contravene strong public policy, the court held that neither the Exchange Act’s anti-waiver provision, 15 U.S.C. § 78cc(a), nor its exclusive federal jurisdiction provision, 15 U.S.C. § 78aa, was reason enough to overcome the strong federal policy in favor of enforcing forum-selection clauses. Id. at 781.

Gibson Dunn will continue to monitor developments on this issue.

C. Update On Arkansas Teachers Retirement System v. Goldman Sachs

Continuing our coverage of Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, 141 S. Ct. 1951 (2021), which dealt with the standard for considering evidence of price impact, we have a brief update on the case.

In our 2021 Year-End Securities Litigation Update, we covered In re Goldman Sachs, No. 16-250, when the case was heard on remand to the Second Circuit. There, the Second Circuit in turn remanded the case to the Southern District of New York with instructions on how to assess price impact, and the district court certified the class for the third time. Defendants appealed the class certification decision, setting up another showdown in the Second Circuit. Over several months in 2022, the parties and over 50 amici filed briefs. Oral argument was held on September 21, 2022 before Judges Sullivan, Chen, and Wesley. The Second Circuit has yet to issue a decision, but one is expected soon.

We will continue to follow the case and other developments in this area. We anticipate that the Second Circuit’s upcoming opinion will address the extent to which a mismatch between the challenged statement and corrective disclosure can undermine the evidence of price impact in cases based on the inflation-maintenance theory, and we will report on significant matters in future updates.

D. The Supreme Court Is Again Being Asked To Decide On The Constitutionality Of The CFPB

On October 19, 2022, the Fifth Circuit decided Community Financial Services Association of America v. Consumer Financial Protection Bureau, 51 F.4th 616 (5th Cir. 2022) (“CFSA”), which does not deal with securities litigation directly, but is an interesting challenge in the administrative law space and could be consequential to agencies who have faced or currently face structural challenges, like the Securities and Exchange Commission.

In CFSA, trade associations representing payday lenders sought to block the CFPB from implementing a “Payday Lending Rule.” Id. at 623. The rule would limit lenders’ ability to withdraw payments from a borrower’s account without first obtaining permission in cases where two attempts to withdraw payments from the account had already failed due to lack of sufficient funds. Id. at 625. The trade associations challenged the rule on two grounds: first, that the CFPB acted arbitrarily and capriciously and so exceeded its statutory authority; and second, that the rule is invalid because the CFPB’s funding structure is unconstitutional. Id. at 623.

The CFPB’s funding structure is considered unique among the federal agencies. In response to the 2008 financial crisis, Congress sought to ensure that the CFPB would be independent and insulated from partisanship. Instead of periodic congressional appropriations, the Bureau “receives funding directly from the Federal Reserve, which is itself funded outside the appropriations process.” Id. at 624. The Fifth Circuit held that the CFPB’s funding structure is unconstitutional because it violates the separation of powers and the Appropriations Clause. Id. at 635. The court held that Congress does not just cede direct control over the CFPB’s budget by insulating it from annual appropriations, it also ceded indirect control by providing it with self-determined funding from a source that is itself outside the appropriations process. This “double insulation from Congress’s purse strings [] is ‘unprecedented’ across the government.” Id. at 639. The court also held that the agency’s funding structure also violated the Appropriations Clause, which requires money to be drawn “from the Treasury … in Consequences of Appropriations made by law.” Id. at 640. Because the agency is not funded through an appropriation of Congress, it violates the Appropriations Clause.

On the issue of remedy, the Fifth Circuit used the dichotomy established in Collins v. Yellen, 141 S. Ct. 1761 (2021), as the framework. There, the Supreme Court clarified the difference between agency actions that involve a Government actor’s exercise of lawfully possessed powers and those that do not. CFSA, 51 F.4th at 642. For actions that fall into the latter group, a plaintiff must prove that the challenged action actually inflicted harm. The Fifth Circuit found that the unconstitutional funding scheme fell into the latter half of Collins; it also found that Plaintiff-Appellants succeeded in showing a linear nexus between the challenged funding scheme and the rule. Id. at 643. It reasoned, “without [the agency’s] unconstitutional funding, the Bureau lacked any other means to promulgate the rule.” Id. Accordingly, the court held that the Bureau’s Payday Lending Rule was to be vacated as the product of an unconstitutional funding scheme. Id.

The CFPB appealed the Fifth Circuit’s decision to the Supreme Court. We will report on further developments in future Updates.

E. Update On Securities And Exchange Commission v. Cochran

As previewed in our 2022 Mid-Year Securities Litigation Update, on November 7, 2022, the Supreme Court heard oral argument in Securities and Exchange Commission v. Cochran, No. 22-448. The case involves the question of whether requiring plaintiffs to bring constitutional challenges to an agency’s structure through that agency’s administrative proceedings prior to any such challenge in federal court violates due process. After nearly three hours of argument in Cochran and its companion case, the Supreme Court seemed receptive to opening up federal courts to Constitutional challenges of agencies outside of their internal process.

This case could have significant implications for defendants in enforcement proceedings before these types of agencies in part because it could permit defendants to pause enforcement proceedings to adjudicate their constitutional challenge separately in court.

In Cochran, attorneys from Gibson Dunn submitted amicus briefs supporting Cochran in the Supreme Court on behalf of Raymond J. Lucia, Sr., George R. Jarkesy, Jr., and Christopher M. Gibson, and in the Fifth Circuit on behalf of the Texas Public Policy Foundation. Attorneys from Gibson Dunn represented petitioners Lucia and Raymond J. Lucia Companies, Inc. in their successful challenge to the constitutionality of the SEC’s administrative law judge appointments.

III. Delaware Developments

A. Case Law Surrounding Corporate Oversight Duties Continues To Develop

In recent years, there have been several developments regarding duty of oversight claims—often called Caremark claims. As we reported in our 2017 Year-End Securities Litigation Update and 2019 Mid-Year Securities Litigation Update, a Caremark claim generally seeks to hold directors personally accountable for damages to a company arising from their failure to properly monitor or oversee the company’s major business activities and compliance programs. See In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 968 (Del. Ch. 1996). There are generally two types of Caremark claims: (1) that the directors utterly failed to implement any reporting or information systems or controls; and (2) having implemented such a system or controls, the directors consciously failed to monitor or oversee its operations, thus preventing themselves from being informed of risks or issues (a “red-flags” claim).

In a recent case, the Delaware Court of Chancery once again reaffirmed that plaintiffs must clear a high bar to adequately plead Caremark claims. On June 30, 2022, the Delaware Court of Chancery dismissed Caremark claims because it found that the board had implemented a reporting system for a “mission critical” risk and made good faith efforts to monitor risk. City of Detroit Police & Fire Ret. Sys. ex rel. NiSource, Inc. v. Hamrock, 2022 WL 2387653 (Del. Ch. June 30, 2022). Plaintiffs had asserted claims under both prongs of Caremark after a company experienced pipeline explosions. Id. at *1. The court dispensed with the prong-one Caremark claim, determining that the board had made good-faith efforts to establish a committee to oversee and report on safety policies. Id. at *15–17. The court noted that the committee met “five times a year, receiv[ed] extensive reports from senior executives, and regularly report[ed] on safety risks to the full [b]oard.” Id. at *15.

The court also rejected plaintiffs’ theories advanced under Caremark’s second prong. To that end, the court rejected plaintiffs’ argument that the board’s “regrettable” timeline to achieve regulatory compliance was a violation of positive law, reasoning instead that determining how to comply with regulations is “a legitimate business decision for the [b]oard to make.” Id. at *18–19. The court also rejected plaintiffs’ theory that the board ignored red flags related to violations of pipeline safety laws because the alleged red flags were either “too attenuated” from the explosions or the board did not know about the red flags. Id. at *26. For example, the court noted that it was not reasonable to infer that record-keeping violations at one company subsidiary put the board on notice of record-keeping violations at another subsidiary, which allegedly contributed to the pipeline explosion. Id. at *25.

The duty of oversight continues to be an active area of development in Delaware courts. In particular, as we discuss in a client alert dated February 3, 2023, the Delaware Court of Chancery held for the first time that corporate officers owe a duty of oversight.

We will report on further developments in this space in our next Update.

B. Delaware General Assembly Permits Officer Exculpation For Duty Of Care Claims

Since the Delaware General Assembly adopted Section 102(b)(7) of the Delaware General Corporation Law in 1986, corporations have been permitted to eliminate personal liability of directors for monetary damages arising out of breaches of the fiduciary duty of care. Following a recent amendment to Section 102(b)(7), corporations may now limit personal liability of a range of corporate officers specifically identified in the statute. Like director exculpation, Section 102(b)(7) allows corporations to eliminate officer liability arising from direct stockholder claims for duty of care breaches, and it does not allow corporations to eliminate officer liability arising from duty of loyalty claims. Unlike director exculpation, officers may still be personally liable for derivative claims brought on behalf of the corporation.

Although the statutory amendment was effective August 1, 2022, officer exculpation under Section 102(b)(7) is not self-executing. Thus, to eliminate officer liability, a corporation must amend its certificate of incorporation, which requires approval from both the board of directors and the corporation’s stockholders. Once adopted, an exculpation provision only eliminates personal liability for conduct occurring after it is approved by stockholders and the amended certificate of incorporation is filed and accepted by the Delaware Secretary of State.

C. Non-Delaware Courts Contend With The Application Of Forum Selection Bylaws To Federal Securities Claims

State and federal courts around the country continue to grapple with the enforceability of mandatory forum selection bylaws adopted by Delaware corporations. Readers will recall that, in Salzberg v. Sciabacucchi, 227 A.3d 102, 133-34 (Del. 2020), the Delaware Supreme Court held that mandatory federal forum provisions were prima facie valid under Delaware law, but indicated that fact-specific enforceability of such provisions would likely be decided by courts in other jurisdictions. A growing number of courts across the country have done just that.

As discussed above, the Ninth Circuit at least temporarily eliminated a potential circuit split by granting en banc review in Lee, 34 F.4th 777. In April 2022, the California Court of Appeal, First Appellate District, issued its decision in Wong v. Restoration Robotics, Inc., 78 Cal. App. 5th 48, 80 (2022), affirming the trial court’s dismissal of Securities Act claims for inconvenient forum and finding that defendant’s federal forum provision was valid and enforceable. Following the Delaware Supreme Court’s decision in Salzberg, the California trial court dismissed the case on forum non conveniens grounds pursuant to the federal forum provision, concluding that plaintiff failed to show the provision was unenforceable, unconscionable, unjust, or unreasonable. Wong, 78 Cal. App. 5th at 60. The Court of Appeal affirmed, finding that Salzberg had settled the question of validity and that enforcement of the provision would not be “outside reasonable expectations” of the company’s stockholders. Id at 76-80. The decision in Wong is the first California Court of Appeal decision enforcing the federal forum provision of a Delaware corporation.

D. Court Of Chancery Confirms De-SPAC Mergers Are Subject To Entire Fairness

In January 2022, the Delaware Court of Chancery issued a decision that called into question (at least at the pleadings phase of the case) the fairness of a de-SPAC transaction. See In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 812 (Del. Ch. 2022). One year later, on January 4, 2023, the court did so again, this time emphasizing its view that “[t]he duties owed by the fiduciaries of a SPAC organized as a Delaware corporation are no different” from other corporations. Delman v. GigAcquisitions3, LLC, — A.3d —, 2023 WL 29325, at *16 (Del. Ch. Jan. 4, 2023). Although these decisions arise in the context of a particular (and relatively new) form of transaction, they draw on traditional principles of fiduciary duty to reach the result.

The dispute in Delman unfolded against the backdrop of the court’s opinion in Multiplan, where the court relied on “well-worn fiduciary principles” to hold that the entire fairness standard applies to a de-SPAC transaction. In re MultiPlan., 268 A.3d at 792. The court reasoned that the sponsor was conflicted because it would lose its investment in the SPAC if it did not consummate a merger before its deadline, meaning its preference for a value-decreasing merger over no merger was not shared with public stockholders. Id. at 813.

In Delman, the court applied the same principles and reached the same conclusion. 2023 WL 29325, at *16. Pursuant to the transaction at issue in Delman, as in many SPAC transactions, stockholders received a three-quarters warrant and one post-IPO share, with the option to redeem the share for $10.10 regardless of whether they voted for or against a proposed merger. Id. at *3, *6. After the de-SPAC closed and the price of the surviving company’s stock dropped to $6.57 per share, plaintiff alleged, among other things, that the SPAC had interfered with stockholders’ redemption rights by misstating the proposed merger consideration that stockholders would receive. Id. at *16 n.170, *21.

Echoing its decision in Multiplan, the court denied the company’s motion to dismiss, reasoning that the SPAC structure created a conflict between the sponsor and shareholders. Id. at *1. As before, the court found it conceivable that the sponsor was conflicted because it would receive a large return—20% of the post-IPO equity—even if the merger was bad for stockholders. Id. at *16. It further found the sponsor had an incentive to encourage stockholders not to redeem, because redemptions would decrease the merger’s likelihood of success and value to the sponsor. Id. Finally, the court rejected defendants’ argument that the stockholders’ favorable vote ratified the transaction, reasoning that their “voting interests were decoupled from their economic interests,” as the warrants would be worthless if no merger went through. Id. at *19.

After Delman, Delaware courts may review stockholder challenges to de-SPAC transactions under corporate law’s most onerous standard, entire fairness, which increases the chances that stockholder plaintiffs in such disputes will be entitled to discovery and potentially trial over the fairness of the transaction to the SPAC stockholders.

In a slightly different fact pattern, plaintiff in Laidlaw v. GigAcquisitions2, LLC, No. 2021-0821 (Del. Ch.) (“Gig2”), alleged that the failure to disclose was in relation to the financing structure of the de-SPAC transaction. The Gig2 plaintiff contended that defendants breached their fiduciary duty by omitting or intentionally burying in the proxy statement key details of the purported dilutive effect of the de-SPAC transaction on public stockholders’ shares. ECF No. 1 at 10. This omission and obfuscation, plaintiff alleged, impaired the public stockholders’ ability to make an informed decision on whether or not to exercise their redemption rights. Id. at 31. In this way, the plaintiff tried to analogize to In re Multiplan, asking the court to apply entire fairness. The Gig2 defendants countered that all the necessary disclosures regarding the dilutive effects of the transaction either could be found in the proxy statement or else could be gleaned by other information contained in the proxy. ECF No. 14 at 25. The defendants accused the plaintiff of making vague claims regarding the inadequacy of the disclosures in order to benefit from the In re MultiPlan decision. Id. at 2. In this way, the defendants attempted to distinguish this case from In re MultiPlan. The court’s decision on the defendants’ motion to dismiss is pending.

E. Delaware Supreme Court Cross-Designates Superior Court Judges To Help Reduce Court Of Chancery’s Workload

As the Court of Chancery’s workload has ballooned in recent years due to an expansion of its jurisdiction in 2016, Chief Justice Collins J. Seitz, Jr. sought to lighten the load by cross-designating certain Superior Court judges to preside over some Court of Chancery cases.

In February, the Chief Justice issued an order cross-designating five judges from the Superior Court’s sophisticated Complex Commercial Litigation Division (CCLD) to hear breach-of-contract cases filed in the Court of Chancery under Section 111 of the Delaware General Corporation Law. See In re Designation of Actions Filed Pursuant to 8 Del. C. § 111 (Feb. 23, 2023). Section 111 previously gave the Court of Chancery jurisdiction over stock sales by corporations, but in 2016, the Delaware General Assembly expanded that jurisdiction to include a broader range of transactions involving stock. H.B. 371, 148th Gen. Assemb. (Del. 2016).

Noting that “the Court[ of Chancery’s] ever-increasing caseload poses continued challenges,” the Chief Justice’s order will allow CCLD judges to hear Section 111 cases “for a trial period of one year.” Per the order, the Superior Court judges may sit in these cases when assigned by the Chancellor and President Judge of the Superior Court.

IV. Federal SPAC Litigation

In 2022, there were 102 closed de-SPAC transactions, a number that is almost half the 199 de-SPACs that closed in 2021. While the market for SPAC offerings has cooled relative to 2021, litigation arising out of SPAC transactions remains active.

Plaintiffs in In re CCIV/Lucid Motors Sec. Litig., 2023 WL 325251, at *4 (N.D. Cal. Jan. 11, 2023), are common stockholders of a SPAC called Churchill Capital Corporation IV (“CCIV”) who sued CCIV for alleged misrepresentations made by Lucid Motors—the company with which CCIV merged—prior to the de-SPAC transaction. Defendants filed a motion to dismiss on several grounds, including that plaintiffs lacked Section 10(b) standing. To that end, defendants asserted “that to have Section 10(b) standing, plaintiffs must allege the defendant made misrepresentations about the security actually purchased or sold by the plaintiffs.” Id. Defendants’ rule rested on “four bases:” “(i) consistency with Blue Chip [Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)], (ii) precedence set by the Second Circuit, (iii) other supporting caselaw, and (iv) the need to construe the statute narrowly.” Id.

The courted rejected defendants’ standing rule but ultimately dismissed the complaint on materiality grounds. See id. at *11. With respect to defendants’ standing arguments, the court first concluded that Blue Chip did not “limit standing beyond the purchaser-seller rule”—i.e., that a party must be one or the other to have standing. See id. at *6. Next, the court distinguished the Second Circuit’s “two key decisions,” Ontario Public Service Employees Union Pension Trust Fund v. Nortel Networks Corporation, 369 F.3d 27 (2d Cir. 2004), and Menora Mivtachim Insurance Ltd. v. Frutarom Industries Ltd., 54 F.4th 82 (2d Cir. 2022), and declined defendants’ invitation to adopt the Second Circuit’s approach. See id. at *7 (noting the Second Circuit is “the only circuit court to address the standing issue at bar”). It found Blue Chip more instructive than Nortel and Nortel more “compelling” than Menora. Id. at *7-8. At bottom, the court concluded that although it could “appreciate the simplicity of the Nortel and Menora rule regarding standing,” the rule was “inconsistent with Supreme Court precedent and the policy considerations with respect to standing.” Id. at *9. The court also distinguished the cases defendants cited from outside the Second Circuit, noting, among other things, that several “appl[ied] Nortel with little or no commentary on the Second Circuit’s reasoning.” Id. at *8. Finally, the court disagreed that defendants’ rule was needed to comport with the requirement that Section 10(b) standing be construed “narrowly.” Id. at *9. Nonetheless, the court dismissed plaintiffs’ pleading on materiality grounds but gave plaintiffs an opportunity to amend. See Id. at *11.

V. ESG Civil Litigation

For the past several years, a growing number of lawsuits have been filed against public companies or their boards related to the companies’ environmental, social, and governance (“ESG”) disclosures and policies. These lawsuits can target a number of different ESG-related issues, and have had varying levels of success surviving past the pleading stage. While it may be too early to identify definitive trends in this area, this section surveys the types of ESG claims that are being filed and reports on notable decisions.

A. Greenwashing/Climate Change

Fagen v. Enviva Inc., No. 8:22-cv-02844 (D. Md. Nov. 3, 2022): In this action, plaintiffs alleged that Enviva misled investors by claiming to be an environmentally sustainable producer of wood pellets, while actually engaging in clear-cutting (which is a cheaper, but less sustainable, method of production). ECF No. 1 at 2–3. The complaint claims that Enviva made a number of statements about its sustainability performance in press releases, filings, and earnings calls, including that “sustainability remains the foundation of our business.” Id. at 5–21. In October 2022, an analyst published a report purporting to use geodata from Enviva disclosures to tie Enviva to clear-cutting. Id. at 22–23. The stock allegedly fell 13% on this news. Id. at 25. On February 2, 2023, the court approved the parties’ stipulated schedule, which provides that any motion to dismiss is due by June 2, 2023. ECF Nos. 28-29.

In re Danimer Scientific, Inc. Securities Litigation, No. 21-cv-02708 (E.D.N.Y. May 14, 2021): In this action, plaintiffs alleged that Danimer Scientific, Inc., a bioplastics company, misled investors by stating that its primary product was 100% biodegradable. ECF No. 44 at 2–3. When an article published in The Wall Street Journal claimed that the product’s ability to biodegrade was exaggerated, the company’s stock price allegedly dropped. Id. at 11–13. The motion to dismiss is fully briefed and pending before the court.

B. #MeToo/Workplace Harassment

Construction Laborers Pension Trust for Southern California v. CBS Corp., 433 F. Supp. 3d 515 (S.D.N.Y. 2020): In November 2022, the U.S. District Court for the Southern District of New York approved the settlement of a long-running putative securities fraud class action involving CBS. In this litigation, plaintiff alleged that CBS failed to disclose a “dark history of sexual misconduct,” concealed and fostered by its former CEO and chairman, that rendered statements about its code of ethics misleading. Id. at 525. In January 2020, the district court granted in part and denied in part a motion to dismiss the complaint. Id. at 552. The court recognized that “it is not the case that all statements in a code of conduct are categorically immaterial puffery” but held that the majority of statements contained in CBS’s ethics code were “far too general and aspirational to invite reasonable reliance.” Id. at 532–34. Still, the court held that plaintiff “adequately—though barely” alleged that a statement by CBS’s then-CEO regarding “[#MeToo] [being] a watershed moment” and it being “important that a company’s culture will not allow for this” was a misleading statement of material fact. Id. at 539. The court reasoned that “it is barely plausible that a reasonable investor would construe his statement as implicitly representing that he was just learning of problems with workplace sexual harassment . . . . even though, in truth, he was at that time actively seeking to conceal his own past sexual misconduct from CBS and the public.” Id. at 539–40. The parties settled the litigation for $14,750,000. ECF No. 226.

Cheng v. Activision Blizzard, Inc., No. 21-cv-6240, 2022 WL 2101919 (C.D. Cal. Apr. 18, 2022): In this action, plaintiffs alleged that Activision Blizzard, Inc. misled investors by making false or misleading statements about its workplace culture and failing to disclose employee misconduct despite two regulatory investigations that allegedly posed material risks to the company. The district court granted defendants’ motion to dismiss the complaint, holding that plaintiffs failed to sufficiently allege falsity and scienter. With respect to falsity, the district court held that Activision Blizzard had no duty to disclose the regulatory investigations prior to the government agency filing a complaint. Id. at *9. The court also held that the complaint’s confidential witness allegations regarding the “toxic” workplace lacked the specificity required under the PSLRA. Id. at *8. The court similarly held that plaintiffs’ allegation of scienter lacked “particularized facts” that defendants knew or should have known that the alleged misconduct was “endemic” at the company. Id. at *12. Although the court provided plaintiffs two opportunities to cure these deficiencies, the court continued to find that plaintiffs had not sufficiently alleged facts to support a finding of falsity or scienter and dismissed the third amended complaint with prejudice. ECF No. 98. Gibson Dunn represented an individual defendant in this matter.

C. Diversity And Inclusion

Ardalan v. Wells Fargo & Co., No. 22-cv-03811 (N.D. Cal. July 28, 2022): In this action, plaintiffs alleged that a bank announced an initiative requiring that fifty percent of interviewees be diverse for most U.S. roles above a certain salary threshold, and then purported to meet that requirement by conducting interviews for positions that had already been filled. ECF No. 1 at 2–3. These practices allegedly made the bank’s statements about its diversity initiatives materially misleading. Id. at 32–33. Plaintiffs alleged that the bank’s stock price fell by more than ten percent after a New York Times article purported to reveal the “fake” interviews. Id. at 6. The court appointed a lead plaintiff and set a schedule leading up to argument on a potential motion to dismiss on August 15, 2023. ECF No. 62 at 1.

EllieMaria Toronto ESA v. NortonLifeLock, No. 20-cv-05410, 2021 WL 3861434 (N.D. Cal. Aug. 30, 2021): In this derivative action, plaintiff alleged that although NortonLifeLock stated in its proxy statement that it was committed to diversity on its board, it never made a good-faith effort to recruit and nominate diverse directors. 2021 WL 3861434 at *1. Evaluating the proxy statements—which included statements like “the Board should reflect the benefits of diversity as to gender, race, and ethnic backgrounds”—the court held that “[c]ourts routinely find similar statements to be non-actionable puffery,” and dismissed the complaint. Id. at *1, *5–6. In October 2022, the Ninth Circuit affirmed the dismissal based on the district court’s alternative ruling that a valid forum-selection clause required the claim to be brought in Delaware. Esa ex rel. NortonLifeLock, Inc. v. NortonLifeLock, Inc., No. 21-16909, 2022 WL 14002189, at *1 (9th Cir. Oct. 24, 2022).

D. Anti-ESG Claims

City of St. Clair Shores Police and Fire Retirement System v. Unilever PLC, No. 22-cv-05011 (S.D.N.Y. June 15, 2022): In at least one action, investors challenged corporate commitments on ESG-related topics. This complaint arose from a Ben & Jerry’s board resolution purporting to end the sale of Ben & Jerry’s products in areas deemed “to be Palestinian territories illegally occupied by Israel.” ECF No. 1 at 6. Plaintiffs alleged that Ben & Jerry’s parent company made misleading statements to investors by failing to adequately disclose the business risks associated with the resolution. Id. at 10-18. Defendants filed a motion to dismiss on December 15, 2022, arguing that the parent company’s SEC filings “are too attenuated from the [r]esolution to impose any duty to disclose.” ECF 31 at 11. The motion to dismiss is pending.

* * * * *

Gibson Dunn will continue to monitor developments in ESG-related securities litigation. Additional resources regarding company disclosure decisions relating to ESG issues can be found on the insights page for Gibson Dunn’s ESG practice group.

**VI. Lorenzo Disseminator Liability**

In Lentell v. Merrill Lynch & Co., 396 F.3d 161, 177 (2d Cir. 2005), the Second Circuit held that “where the sole basis for [scheme liability] claims is alleged misrepresentations or omissions, plaintiffs have not made out a . . . claim under Rule 10b-5(a) and (c).” As discussed in our 2019 Mid-Year Securities Litigation Update, in Lorenzo v. SEC, the Supreme Court expanded scheme liability to encompass “those who do not ‘make’ statements” but nevertheless “disseminate false or misleading statements to potential investors with the intent to defraud.” 139 S. Ct. 1094, 1099 (2019). In the wake of Lorenzo, secondary actors—such as financial advisors and lawyers—could face scheme liability under Rules 10b-5(a) and 10b-5(c) simply for disseminating the alleged misstatement of another if a plaintiff can show that the secondary actor knew the alleged misstatement contained false or misleading information.

As we reported in a Client Alert, the Second Circuit ruled in SEC v. Rio Tinto that “Lentell remains vital” after Lorenzo, 41 F.4th 47, 53 (2d Cir. 2022), meaning that scheme liability still “requires something beyond misstatements and omissions.” Id. at 49. The Second Circuit emphasized that “misstatements or omissions were not the sole basis for scheme liability in Lorenzo. The dissemination of those misstatements was key.” Id. at 16 (emphasis added). Since our 2022 Mid-Year Securities Litigation Update, the reasoning of Rio Tinto has been applied a handful of times by district courts in the Second Circuit to dismiss scheme liability claims. Gibson Dunn represents Rio Tinto in this litigation and other litigation.

For example, in In re Turquoise Hill Resources Limited Securities Litigation, 2022 WL 4085677, at *7 (S.D.N.Y. Sept. 2, 2022), investors filed a putative class action alleging that Turquoise Hill, a majority-owned subsidiary of Rio Tinto, made false statements and omissions concerning the schedule and budget of a mining project. The district court held, in light of Rio Tinto, that plaintiffs could not establish scheme liability against Rio Tinto and its executives solely on the basis of Turquoise Hill’s misstatements or omissions where the investors did not allege that “anyone but Turquoise Hill itself published or distributed its own allegedly false and misleading statements.” Id. at *57. Further, the court concluded that the investors failed to allege other “underlying deceptive devices or frauds” by Rio Tinto that were distinct from the alleged false statements. Id. (quoting Rio Tinto, 41 F.4th at 55).

In SEC v. Stubos, 2022 WL 6776741, at *15-16 (S.D.N.Y. Oct. 11, 2022), the district court denied a motion to dismiss the SEC’s scheme liability claims after emphasizing that Rio Tinto did not hold that “dissemination” of a false statement is the only way to prove such claims. Rather, “dissemination is one example of something extra that makes a violation a scheme.” Id. (emphasis in original) (quoting Rio Tinto, 41 F.4th at 54). Accordingly, the district court held that the SEC’s scheme liability claims were adequately pleaded because the allegedly misleading disclosures made by stock promoters funded by defendant were “only one part of the many alleged deceptive actions” that defendant took, which allowed him to sell shares to unsuspecting investors in a purported pump-and-dump fraud scheme. Id.

These developments suggest that through the application of Lorenzo and now Rio Tinto, disseminator liability theory will continue to evolve. We will continue to monitor the changing applications of Lorenzo and provide a further update in our 2023 Mid-Year Securities Litigation Update.

VII. Survey Of Coronavirus-Related Securities Litigation

While governments around the U.S. and the world have largely lifted COVID-19 restrictions, coronavirus-related securities litigation continues to make its way through the U.S. courts. As we discussed in our 2022 Mid-Year Securities Litigation Update, many cases remain focused on misstatements concerning the efficacy of COVID-19 diagnostic tests, vaccinations, and treatments. We have also observed a growing number of cases involving false claims about pandemic and post-pandemic prospects. Many such cases are either moving into the motion-to-dismiss stage or have recently been dismissed, although a handful of new cases have also been filed.

Although the SEC was active in the beginning of 2022 in filing COVID-related actions (see below), we have seen a slowdown in the number of SEC-related COVID actions in the second half of last year.

Additional resources related to the impact of COVID-19 can be found in the Gibson Dunn Coronavirus (COVID-19) Resource Center.

A. Securities Class Actions

1. False Claims About COVID-19 Vaccinations, Treatments, And Testing

McDermid v. Inovio Pharms., Inc., No. 20-cv-01402, 2023 WL 227355 (E.D. Pa. Jan. 18, 2023): In our 2020 Mid-Year Securities Litigation Update, we reported that investors sued the biotechnology firm Inovio Pharmaceuticals in March 2020, alleging that the company and its executives made false and misleading statements regarding the progress of a COVID-19 vaccine, which artificially inflated Inovio’s stock. Id. at *1. After nearly three years of litigation, the case settled earlier this year, with Inovio agreeing to pay at least $44 million to the settlement class. Id. at *2.

Sanchez v. Decision Diagnostics Corp., No. 21-cv-00418, 2022 WL 18142518 (C.D. Cal. Dec. 5, 2022): In January 2021, plaintiffs filed suit against Decision Diagnostics Corp., alleging that the company “issued over one dozen materially false and/or misleading statements” regarding its purported newly developed COVID-19 testing device, including that it was on the verge of FDA approval. Id. at *1–4. In the spring of 2022, plaintiffs filed a motion for default judgment, seeking a total of $338,045 in damages. See id. at *5, 18. Decision Diagnostics filed an untimely answer in June 2022, and plaintiffs proffered their reply in July. Id. at *5; ECF Nos. 55-56. In December 2022, the court granted plaintiffs’ motion, awarding plaintiffs a total of $338,045 in damages. Sanchez v. Decision Diagnostics Corp., 2022 WL 18142518, at *18–19.

Sinnathurai v. Novavax, Inc., No. 21-cv-02910 (D. Md. Apr. 25, 2022): We first reported on this case in our 2021 Year End Securities Litigation Update. In this case, plaintiffs alleged that representatives of defendant Novavax made false and misleading statements by overstating the regulatory and commercial prospects for its vaccine, including by overstating its manufacturing capabilities and downplaying manufacturing issues that would impact the company when its COVID vaccine received regulatory approval. Id. at *13–16. On April 25, 2022, Novavax moved to dismiss the complaint, arguing that the alleged misstatements constituted nonactionable puffery and mere statements of opinion. See ECF No. 64-1 at 11–14. Novavax also argued that the PSLRA’s safe harbor—which immunizes from liability statements regarding “the plans and objectives of management for future operations” or “the assumptions underlying or relating” to those plans and objectives—insulates Novavax from liability as to certain challenged statements about the vaccine’s launch. Id. at 14. In addition, Novavax contended that the complaint does not adequately plead that certain statements about clinical trials and manufacturing issues were false or misleading. Id. at 17–23. In response, plaintiffs argued that the statements are actionable because Novavax touted its business (with statements such as “nearly all major challenges” had been overcome, and “all of the serious hurdles” were eliminated), but failed to disclose known facts contradicting those representations. ECF No. 65 at 11–12. Plaintiffs also disputed that certain statements were mere opinion, arguing that they were “virtually all flat assertions of fact that falsely assured investors that Novavax was ready to file its [emergency use authorization] quickly” and “had overcome the regulatory and manufacturing hurdles that had delayed that filing.” Id. at 19–20.

On December 12, 2022, the court granted in part and denied in part Novavax’s motion to dismiss. ECF No. 75. The court granted the motion with respect to eight of the ten at-issue statements and omissions. Id. The court denied the motion with respect to two statements in which the company’s CEO or CFO stated that the company had resolved its substantial production and supply chain issues, despite allegedly knowing that the company continued to face severe production obstacles, including a complete shutdown of one of its two manufacturing plants. Id. at 32–33. With respect to satisfying the scienter requirement for their claims, plaintiffs pointed to: (1) reports from confidential witnesses that the company was aware of facts rendering its statements false or misleading; (2) the FDA’s multiple warnings to the company that its manufacturing facilities and processes were not compliant with regulatory requirements; (3) the fact that the at-issue COVID-19 vaccine was critical to the company’s operations; and (4) defendants’ stock sales in advance of the relevant public disclosures. Id. at 38. The court conducted a holistic analysis of these factors and determined that they were sufficient to support an inference of scienter. Id. at 47–48.

2. Failure To Disclose Specific Risks

In re Talis Biomedical Corp. Sec. Litig., No. 22-cv-00105, 2022 WL 17551984 (N.D. Cal. Dec. 9, 2022): In this joint putative class action, plaintiffs alleged that Talis misled investors about the company’s COVID-19 test platform (“Talis One”) in its IPO and post-IPO filings, as well as during investor calls. Id. at *1. Among other things, plaintiffs challenged Talis’s statements regarding testing data submitted to the FDA and its manufacturing capability, as well as other statements related to the product’s purported reliability and safety. Id. at *9. The court dismissed the action in December, concluding that none of the statements were actionable, with most statements amounting to “vague corporate optimism and opinions.” Id. at *27–28. With regard to the alleged misstatement about Talis’s manufacturing capability (i.e., “we expect [to] scale to full capacity through 2021”), the court noted that plaintiffs failed “to sufficiently allege that the statements were false or misleading when made, and that absent any such allegations, the challenged statements would be protected by the bespeaks caution doctrine.” Id. at *14–15. The court further noted that such statements are protected by the PSLRA’s safe harbor provision as forward-looking statements, as defendants proffered cautionary language warning that “manufacturing lines ‘are not complete and could incur substantial delays . . . and may not perform as anticipated.’” Id. at *25. The court granted leave to amend the complaint, and plaintiffs filed a new amended complaint in January 2023. ECF No. 104.

Sharma v. Rent the Runway Inc. et al., No. 22-cv-6935, 2022 WL 16948257 (E.D.N.Y. Nov. 14, 2022): On November 14, 2022, plaintiffs filed a putative class action alleging that the e-commerce platform Rent the Runway made materially false and misleading statements and omissions in its October 2021 IPO offering documents. ECF No. 1 at 1, 6. While the company registration statement stated that COVID-19 had only minimal impact on its financial performance, even stating that the “COVID-19 pandemic has accelerated our consumer tailwinds,” plaintiffs alleged that Rent the Runway’s financials were significantly impacted by the pandemic. Id. at 5–6, 7.

Gutman v. Lizhi Inc., No. 21-cv-317, 2022 WL 4646471 (E.D.N.Y. Oct. 1, 2022): In January 2021, a putative class action was brought against the Chinese corporation Lizhi. ECF No. 1. The complaint alleged that Lizhi’s IPO registration statement and prospectus of January and April 2020, which stated that the company faced risks related to health epidemics, were materially false and misleading in light of the “direct and escalating exposure to the devasting coronavirus epidemic [] proliferating through China.” Id. at 9–10. The court granted Lizhi’s motion to dismiss, noting that plaintiffs failed to allege that COVID-19 was a known trend or uncertainty for Lizhi’s business. Gutman v. Lizhi Inc., 2022 WL 4646471, at *7. The court concluded that although plaintiffs’ allegations suggest that Lizhi might have known that COVID-19 existed, it did not know that the disease would spiral into a long-lasting global pandemic. Id. at *6–7.

3. False Claims About Pandemic And Post-Pandemic Prospects

City of Hollywood Police Officers’ Ret. Sys. v. Citrix Sys., Inc., No. 21-cv-62380 (S.D. Fla. Jan. 3, 2023): Citrix is a software company that provides digital workspaces to businesses. ECF No. 62 at 7. Plaintiffs in this case claimed that during the pandemic, Citrix hid numerous corporate problems and sold heavily discounted, short-term licenses that boosted its sales. Id. at 2–3. Plaintiffs alleged that the company’s transition to subscription licenses was not as successful as the company had disclosed, as customers failed to make the transition, instead preferring short-term on-premise licensing due to the COVID-19 pandemic. Id. Defendants moved to dismiss, claiming that the operative complaint inadequately alleged scienter and that the statements at issue were forward-looking statements, opinion, or puffery. ECF No. 68 at 2–3.

On January 3, 2023, the court granted defendants’ motion to dismiss in its entirety, relying on plaintiffs’ failure to sufficiently allege scienter on the part of any defendant. ECF No. 62 at 27. First, the court analyzed the individual defendants’ stock trades during the class period and determined that, on the whole, they did not give rise to an inference of scienter. Id. at 10–11. Specifically, the court agreed with defendants’ argument that stock sold during the class period pursuant to a Rule 10b5-1 trading plan cuts against any inference of scienter that could arise from defendants’ stock trades. Id. at 11. Furthermore, several defendants actually increased their net holdings of company stock during the class period, further negating any inference of scienter based on trading activity. Id. at 10. Second, the court determined that plaintiffs failed to allege that any defendants acted recklessly when making the at-issue statements; instead, these were general discussions of a business model transition that, with the benefit of hindsight, turned out to be inaccurate. Id. at 20–22.

In re Progenity, Inc., No. 20-cv-1683 (S.D. Cal. Jan. 13, 2023): We first reported on this case in our 2021 Year-End Securities Litigation Update. In this case, plaintiffs alleged that Progenity, a biotechnology company that develops testing products, made misleading statements and omitted material facts in its registration statement, including that Progenity failed to disclose that it had overbilled government payors and that it was experiencing negative trends in its testing volumes, selling prices, and revenues as a result of the COVID-19 pandemic. ECF No. 63 at 9. On September 1, 2021, the court dismissed the case with leave to file a second amended complaint, finding no actionable false or misleading statements. ECF No. 48. Plaintiffs then filed a second amended complaint on September 22, 2021. ECF No. 49. The company filed a second motion to dismiss on November 15, 2021, ECF No. 52, and the parties participated in a settlement conference in May 2022, ECF No. 58.

On January 13, 2023, the court granted defendants’ motion to dismiss the second amended complaint. ECF 63. The court determined that plaintiffs’ second amended complaint failed to sufficiently allege any material omission. See id. at 10–26. Several of the statements at-issue concerned the company’s sales decline as a result of the COVID-19 pandemic. See id. at 15, 21. The court determined that defendants’ statements regarding the impact of the pandemic on its sales volume were largely consistent with the reports of the confidential witnesses on which plaintiffs relied to inform their allegations. Id. at 19. Furthermore, the company was not obligated to disclose real-time sales volume data for periods after the company’s IPO but before its first 10-Q was due; instead, the company’s disclosures about a decline in sales at the time of the IPO were sufficient. See id. at 22. Gibson Dunn represents the company and its directors and officers in this litigation.

Weston v. DocuSign, Inc., No. 22-cv-00824 (N.D. Cal. July 8, 2022): Plaintiffs in this case alleged that DocuSign, a software company that enables users to electronically sign documents, made false and misleading statements that the “massive surge in customer demand” brought on by the pandemic was “sustained” and “not a short term thing.” ECF No. 59 at 2. Plaintiffs alleged that defendants knew that the demand was unsustainable after the pandemic subsided, and that defendants made corrective disclosures revealing that the company had missed billings-growth expectations after the initial surge of demand dissipated. Id. The court appointed a lead plaintiff on April 18, 2022, ECF No. 42, and plaintiffs filed the amended complaint on July 8, 2022, ECF No. 59. Defendants filed a motion to dismiss the complaint, arguing that the allegedly misleading statements are covered by the PSLRA’s safe harbor for forward-looking statements or are non-actionable statements of belief. ECF 68 at 11–16. Defendants also argued that plaintiffs failed to adequately allege scienter because the confidential witnesses on which plaintiffs rely to allege the individual defendants’ knowledge lack personal knowledge of the matter. Id. at 18. Defendants also objected to plaintiffs’ offer to provide the confidential witnesses’ employment details to the court in camera, as “plaintiffs may not sidestep [the PSLRA’s pleading standard] by providing necessary details to the court in camera.” Id. (citing Kipling v. Flex Ltd., 2020 WL 2793463, at *15 (N.D. Cal. May 29, 2020)). The court heard oral arguments on the motion on January 25, 2023. ECF 78.

4. Insider Trading And “Pump and Dump” Schemes

In re Eastman Kodak Co. Sec. Litig., No. 21-cv-6418, 2021 WL 3361162 (W.D.N.Y. Aug. 2, 2021): We have been following the consolidated cases captioned under the heading In re Eastman Kodak Company Securities Litigation since our 2020 Year-End Securities Litigation Update. Plaintiffs in this putative class action allege that Eastman Kodak and certain of its current and former directors and select current officers violated securities laws by failing to disclose that its officers were granted stock options prior to the company’s public announcement that it had received a loan from the United States International Development Finance Corporation (“DFC”) to produce drugs to treat COVID-19. ECF No. 116 at 2. On September 27, 2022, the court granted defendants’ motion to dismiss the complaint in its entirety. ECF 202. Analyzing the allegations in the complaint, the court determined that plaintiffs failed to adequately allege that defendants made misstatements or omissions of material fact in connection with the DFC loan. See id. at 29. In particular, the court determined that, as alleged, the several at-issue statements attributable to the company and its officers were nonactionable puffery and corporate optimism. Id. at 16. More specifically, plaintiffs failed to allege any facts indicating that Kodak’s CEO had actual knowledge that the DFC would ultimately decline to make the loan when he made public statements about his expectations for the company’s accomplishments with the DFC loan. Id. at 20–21. Furthermore, the court found that plaintiffs’ allegations regarding the improper grant of stock options to officers were purely conclusory and failed to provide an explanation for how the issuance of those options violated company policy. Id. at 28. Plaintiffs filed an appeal of the dismissal to the Second Circuit on October 27, 2022. ECF 204.

B. SEC Cases

SEC v. Berman, No. 20-cv-10658, 2021 WL 2895148 (S.D.N.Y. June 8, 2021): As previously reported, a federal grand jury indicted the CEO of Decision Diagnostics Corp. in December 2020 for allegedly attempting to defraud investors by making false and misleading statements about the development of a new COVID-19 rapid test. ECF No. 1 at 6–7. The CEO allegedly claimed the test was on the verge of FDA approval even though the test had not been developed beyond the conceptual stage. Id. at 6–7, 9. Shortly after the indictment in the criminal case, the SEC filed a civil enforcement action based on the same underlying facts against both Decision Diagnostics Corp. and its CEO. SEC v. Berman, 2021 WL 2895148, at *1. The SEC claims that defendants violated Section 10(b) of the Exchange Act and Rule 10b-5. SEC v. Berman, 2021 WL 2895148, at *1. The court stayed discovery in the civil case in June 2021 given the parallel criminal case against the CEO. Id. Discovery remains stayed, and the criminal trial is set for this coming July. See SEC v. Berman, No. 20-cv-10658 (S.D.N.Y. Nov. 28, 2022), ECF No. 32.

SEC v. SCWorx Corp., No. 22-cv-03287 (D.N.J. May 31, 2022): In the first half of 2022, the SEC filed a securities enforcement action against hospital supply chain SCWorx and its CEO, alleging that defendants falsely claimed in a press release to have a “committed purchase order” from a telehealth company for “two million COVID-19 tests” amounting to $840 million when the “committed purchase order” was, in reality, only a “preliminary summary draft.” ECF No. 1 at 2–3. In June 2022, SCWorx agreed to pay a penalty of $125,000 in addition to disgorgement of approximately $500,000. ECF No. 4 at 3. As reported in our 2022 Mid-Year Securities Litigation Update, SCWorx’s CEO was also indicted in a parallel criminal fraud case arising from the same allegations. ECF Nos. 20-21. With the CEO’s trial set for June 2023, the court stayed the SEC’s enforcement action until the conclusion of the criminal case. Id.

SEC v. Sure, No. 22-cv-01967 (N.D. Cal. Mar. 28, 2022): In March 2022, the SEC filed this civil enforcement action against a group of employees, as well as their friends and family members, at the cloud computing company Twilio. ECF No. 1. The SEC alleged that defendants violated Section 10(b) and Rule 10b-5 by engaging in insider trading in May 2020. Id. at 2. Specifically, the complaint states that certain defendant-employees informed other defendants about Twilio’s anticipated performance in advance of its May 6, 2020, earnings announcement, and that they unlawfully traded on that information. Id. at 8–9. As parallel criminal charges were also announced against one defendant, the court has stayed the case until July 31, 2023. ECF No. 31.

**VIII. Falsity Of Opinions – Omnicare Update**

In the nearly eight years since the Supreme Court issued its seminal decision concerning opinion statements in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, courts have regularly wrestled with “opinion” liability under the federal securities laws. That predictable trend continued in the second half of 2022. In Omnicare, the Supreme Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless [of] whether an investor can ultimately prove the belief wrong,” but that an opinion statement can form the basis for liability in three different situations: (1) the speaker did not actually hold the belief professed; (2) the opinion contained embedded statements of untrue facts; or (3) the speaker omitted information whose omission made the statement misleading to a reasonable investor. 575 U.S. 175, 184–89 (2015). The second half of 2022 featured notable decisions by federal circuit courts, as well as further developments at the federal district court level.

A. Circuit Court Developments

**1. Applications Of Omnicare Outside Of Section 11**

As noted in prior updates, courts have regularly applied Omnicare, which was decided in the context of a Section 11 claim, to claims brought under the Exchange Act. Two recent decisions applying Omnicare provide additional examples. In Boykin v. K12, Inc., 54 F.4th 175 (4th Cir. 2022), the Fourth Circuit examined allegations that an educational technology company, K12, violated Section 10(b) and Rule 10b-5. Id. at 181. In affirming the district court’s dismissal, the Fourth Circuit explained that several of the at-issue statements “amount[ed] to opinions.” Id. at 183. Taking one example—”We believe we have attained distinctive core competencies that allow us to meet the varied needs of our school customers and students”—the court highlighted the fact that the statement included “the language ‘we believe’” and reflected an “individual perspective.” Id. at 184. Further, the court noted that plaintiffs had neither “seriously” challenged the truth of the “embedded assertion” of fact in the opinion nor denied that K12 actually believed it. Id. Finally, the court pointed to the context of the opinion statement, which—as highlighted in our 2021 Year-End Securities Litigation Update—is an additional factor courts consider in an Omnicare analysis. Id. In Boykin, the statement at issue was made in K12’s Form 10-K, a context that offered investors an opportunity to “parse[] the ample disclosures at their fingertips before succumbing to K12’s stated view.” Id.

In In re Finjan Holdings, Inc., — F.4th —, 2023 WL 329413 (9th Cir. Jan. 20, 2023), the Ninth Circuit examined allegations that a patent licensing and enforcement company and certain if its directors violated Section 14(e) of the Exchange Act in issuing revenue projections and share-value estimations to the company’s stockholders. The Ninth Circuit ultimately disagreed with the lower court’s analysis of scienter, but upheld the dismissal of the lawsuit based on its Omnicare analysis. The parties agreed that the challenged opinion statements could be actionable only “under a theory of subjective falsity.” Id. at *6. Thus, the court explained that plaintiff would need to “attack[] the basic factual assertion that underlies all statements of opinion: the assertion that the author holds and believes the stated opinion.” Id. However, the court continued, under Supreme Court and Ninth Circuit precedent, alleging subjective falsity alone would “not [be] enough to impose liability.” Id. Instead, plaintiff must also allege objective falsity. Id. at *6–7. After considering ten separate facts Plaintiff alleged to show subjective falsity, the Ninth Circuit concluded plaintiff’s complaint failed at the first step—i.e., it failed to plausibly allege subjective falsity because, for example, the price per share the company ultimately accepted was “the best final offer” the company received. Id. at *10–13.

2. Omnicare’s Intersection With Defamation Law And The First Amendment

The First Circuit recently confronted—but sidestepped—the question of whether its defamation caselaw applies in the securities fraud context. Defendant in SEC v. Lemelson, 57 F.4th 17, 22–23 (1st Cir. 2023) was tried by a jury and found liable for making false statements in violation of Section 10(b) and Rule 10b-5. After the verdict, Lemelson moved for judgment as a matter of law, arguing in relevant part that certain of the statements he made were non-actionable statements of opinion protected by the First Amendment. Id. at 23–25. Because the court concluded the at-issue statements were “statements of fact” rather than opinion, however, it declined Lemelson’s invitation to “decide whether the cases [he] cited . . . reach[ed] beyond defamation law.” Id. at 25. Nevertheless, the court continued, even if the cited cases did apply, Lemelson’s argument was unavailing because he was “claiming to be in possession of objectively verifiable facts,” and the at-issue statements “reasonably would be understood to declare or imply provable assertions of fact.” Id. at 24–25 (quoting McKee v. Cosby, 874 F.3d 54, 61 (1st Cir. 2017)). Although the Lemelson court declined to decide whether its defamation precedent applies in the securities fraud context, this remains a viable defense in certain situations, and we will continue to monitor developments in this area for other cases presenting better vehicles for federal court analysis and resolution.

B. District Court Developments

1. Fact v. Opinion: Categorical Approach

As noted in recent updates, federal courts in the wake of Omnicare have tended to accord certain categories of statements opinion status. See, e.g., 2021 Year-End Securities Litigation Update (“goodwill determinations”), 2020 Year-End Securities Litigation Update (“future predictions”), 2020 Mid-Year Securities Litigation Update (“statements of goals and belief”). Several cases in the back half of 2022 provide further examples of the types of statements that federal courts generally consider nonactionable opinions. For example, in Shash v. Biogen Inc., No. 21-cv-10479, 2022 WL 4134479, at *1 (D. Mass. Sept. 12, 2022), plaintiffs alleged that defendants made false or misleading statement concerning the efficacy of a potential Alzheimer’s drug, aducanumab. The court, however, concluded that the at-issue statements were nonactionable, in part, because they were opinions. Id. at *8, *15. The court explained that the Biogen “acknowledged that its conclusions” regarding the efficacy of aducanumab were “drawn from unprescribed post hoc analyses.” Id. at *8. And because “it is widely understood that unbounded post hoc analyses produce less reliable results,” Biogen’s conclusions were “more akin to opinions than conclusive findings.” Id. Indeed, the court noted, “[s]everal circuits have made explicit that ‘[i]nterpretations of clinical trial data are considered opinions’ and that disagreements with the scientific conclusions drawn from those opinions are not actionable.” Id. (quoting City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 170–71 (3d Cir. 2014)); see also Paxton v. Provention Bio, Inc., No. 21-cv-11613, 2022 WL 3098236, at *11–12 (D.N.J. Aug. 4, 2022) (concluding pharmaceutical company’s interpretation of a bridging study was a nonactionable opinion).

In In re Turquoise Hill Resources Limited Securities Litigation, No. 20-cv-08585, 2022 WL 4085677, at *30 (S.D.N.Y. Sept. 2, 2022), plaintiffs alleged that defendants’ statement that “these types of delays are certainly not atypical in the mining industry for projects of this scale and complexity” was false or misleading. In plaintiffs’ view, Omnicare held that a “statement is an opinion only when it is expressly stated as such,” and defendants’ statement was therefore one of fact. Id. at *31. The court rejected plaintiffs’ “simplistic[]” view of Omnicare and explained the case said no such thing. Id. In fact, the court continued, “[e]stimates, in particular, constitute a well-established species of opinion.” Id. (quoting Martin v. Quartermain, 732 F. App’x 37, 40 & n.1 (2d Cir. 2018)). Thus, the court concluded, “[f]or the same reasons that estimates are well-established species of opinion, the statement in isolation that delays were ‘not atypical’ is one of opinion”—”[i]t cannot be decided as a ‘matter[ ] of objective fact.’” Id. (quoting Fait v. Regions Fin. Corp., 655 F.3d 105, 110 (2d Cir. 2011)).

2. Possession Of Contrary Facts

In addition to addressing categories of generally nonactionable statements in the second half of 2022, federal district courts also analyzed circumstances in which defendants allegedly possessed facts that undermined the bases for the their opinions. For example, in In re Boston Scientific Corporation Securities Litigation, No. 20-cv-12225, 2022 WL 17823837, at *21 (D. Mass. Dec. 20, 2022), a medical device manufacturer allegedly represented that a medical device “was driving growth” and that a “dual-valve strategy made sense for the company.” The court rejected defendants’ argument that the statements were nonactionable opinions because the “statements ‘could be reasonably construed in context as a statement of fact,’ such that ‘it would be false as compared to the complaint’s contention that’” the company’s “leadership had either already decided [the device] was unsalvageable or was on the cusp of doing so in a matter of weeks.” Id. (quoting Constr. Indus. and Laborers Joint Pension Tr. v. Carbonite, Inc., 22 F.4th 1, 7 (1st Cir. 2021)). Similarly, in Kusnier v. Virgin Galactic Holdings, Inc., No. 21-cv-03070, 2022 WL 16745512, at *9 (E.D.N.Y. Nov. 7, 2022), plaintiffs asserted that a space flight company’s statements were misleading given the information known to the company at the time. Over defendants’ objection that the statements were nonactionable opinions, the court held the statements were actionable and explained that “even an ‘optimistic projection[ ] of future performance’ may be actionable’” “[w]here an ‘opinion [is] without a basis in fact or the speakers [are] aware of facts undermining the positive statements.’” Id. (quoting In re Nokia Oyj (Nokia Corp.) Sec. Litig., 423 F. Supp. 2d 364, 397 (S.D.N.Y. 2006)).

Not all omitted facts are material, however, and a statement is not actionable just because it leaves out “some fact cutting the other way.” Omnicare, 575 U.S. at 189. Context can be key. For example, in Shash v. Biogen Inc., 2022 WL 4134479, at *8, discussed above, the court considered the fact that a reasonable investor would know a post‑hoc analysis is less reliable when concluding certain statements were nonactionable. See also Del. Cnty. Emps. Ret. Sys. v. Cabot Oil & Gas Corp., No. CV H-21-2045, 2022 WL 3227584, at *12–13 (S.D. Tex. Aug. 10, 2022) (concluding a reasonable investor would understand that 13% noncompliance—or 87% compliance—falls within the meaning of “substantial compliance”). And in Paxton v. Provention Bio, Inc., 2022 WL 3098236, at *12, also discussed above, the court concluded defendants’ stated opinions were nonactionable, despite allegedly omitting certain information, in part because of cautionary caveats that accompanied them.

IX. Other Notable Developments

A. Ninth Circuit Reaffirms Standard For Non-Actionable Corporate “Puffery”

In July, the Ninth Circuit in Macomb County Employees’ Retirement System. v. Align Technology, Inc.,39 F.4th 1092, 1099 (9th Cir. 2022), affirmed another dismissal of a Rule 10b-5 claim on the basis that the alleged misstatements were too general or vague to be actionable—i.e., so-called “puffery.”

Plaintiff in Align alleged that Align Technology, a medical device manufacturer known for selling “Invisalign” braces, made false and misleading statements about the company’s growth in China. Id. at 1095–96. Several of these statements were made by officers of Align at a series of healthcare conferences in the second quarter of 2019; the statements described China as a “huge market opportunity” where the company was “seeing tremendous growth.” Id. at 1099. Plaintiff alleged that these statements were false or misleading because, by the time they were made in the Spring of 2019, Align’s growth in China “had slowed significantly.” Id. at 1096.

On appeal, the Ninth Circuit affirmed the district court’s ruling that the statements were too general and vague to be actionable. The Ninth Circuit explained that the statements “use[d] vague, generically positive terms, describing China as . . . ‘a market that’s growing significantly for us,’ . . . and describing Align’s performance there as ‘tremendous’ and ‘great.’” Id. at 1099. In short, the court reasoned, none of the “statements present the kind of precise information on which investors rely,” id., and were instead merely instances of “corporate braggadocio,” id. at 1095.

B. First Circuit Holds That Statements Regarding Development Of Biopharmaceutical Drug Are Not Misleading Under PSLRA

In August, the First Circuit in Thant v. Karyopharm Therapeutics Inc., 43 F.4th 214, 223 (1st Cir. 2022), upheld the dismissal of a securities class action against a biopharmaceutical company after holding that statements by the company regarding one of its drugs in development were not materially misleading.

Specifically, the case concerned several public statements by Karopharm regarding a clinical trial for the developmental drug selinexor that the company had completed in the Spring of 2018. Id. at 219. In a press release, the biopharmaceutical company described the safety profile of selinexor as “predictable and manageable,” id., and in a subsequent conference call the company called the recently-completed clinical trial “an important milestone for Karyopharm . . . [and] a significant step in establishing the efficacy and safety of selinexor . . .”, id. at 219-20. Plaintiff alleged that these statements were materially misleading because selinexor was “in fact . . . extremely toxic,” and the clinical trial had not “consistently yielded positive data.” Id. at 220.

On appeal, the First Circuit held that Karyopharm’s description of selinexor’s safety profile was not materially misleading, reasoning that “no reasonable investor would interpret [Karyopharm’s] statement that selinexor’s safety profile was ‘predictable’ and ‘manageable’ to mean the drug was benign.” Id. at 223. The First Circuit also held that the company’s positive descriptions of the clinical trial as an “important milestone” were expressions of “vague optimism” about selinexor’s future and thus non-actionable “puffery.” Id.

C. Ninth Circuit Holds That Social Media Posts Constitute “Solicitations” Under The Securities Act

In December, the Ninth Circuit in Pino v. Cardone Capital, LLC, 55 F.4th 1253 (9th Cir. 2022), became the second circuit court to hold that social media posts and other mass online communications can constitute ‘solicitations’ for purposes of liability under the Securities Act.

As we discussed in our 2022 Mid-Year Securities Litigation Update, in February 2022, the Eleventh Circuit in Wildes v. BitConnect International PLC, 25 F.4th 1341, 1345 (11th Cir. 2022), held that YouTube videos and other social media posts constituted solicitations of the purchase of a cryptocurrency security under Section 12 of the Securities Act. In Pino, the Ninth Circuit explicitly followed the Eleventh Circuit’s reasoning, holding that Instagram posts and a YouTube video advertising several real estate investment funds constituted solicitations of interests in those funds for purposes of Section 12. 55 F.4th at 1260. As the Ninth Circuit explained, “§ 12 contains no requirement that a solicitation be directed or targeted to a particular plaintiff.” Id.

The following Gibson Dunn attorneys assisted in preparing this client update: Monica K. Loseman, Brian M. Lutz, Craig Varnen, Jefferson E. Bell, Christopher D. Belelieu, Michael D. Celio, Johnathan D. Fortney, Jessica Valenzuela, Allison Kostecka, Lissa Percopo, Mark H. Mixon, Jr., Timothy Deal, Luke Dougherty, Dana E. Sherman, Marc Aaron Takagaki, Mari Vila, Chase Weidner, Kevin J. White, Lindsey Young, Rameez Anwar, Eitan Arom, Chase Beauclair, Ezra Brown, Mason Gauch, Nathalie Gunasekera, Timothy Kolesk, Ina Kosova, Andrea Lattanzio*, Tin Le, Michelle Lou, Lydia Lulkin, Riley Majeune, Adrian Melendez-Cooper, Megan R. Murphy, Kate Oh, Katharine Pincus, Beshoy Shokralla*, Hazel Verdin, Nicholas Whetstone, Sophie White*.

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 and members of the firm’s Securities Litigation practice group:

Securities Litigation Group:
Christopher D. Belelieu – New York (+1 212-351-3801, [email protected])
Jefferson Bell – New York (+1 212-351-2395, [email protected])
Michael D. Celio – Palo Alto (+1 650-849-5326, [email protected])
Monica K. Loseman – Co-Chair, Denver (+1 303-298-5784, [email protected])
Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, [email protected])
Mary Beth Maloney – New York (+1 212-351-2315, [email protected])
Jason J. Mendro – Washington, D.C. (+1 202-887-3726, [email protected])
Alex Mircheff – Los Angeles (+1 213-229-7307, [email protected])
Jessica Valenzuela – Palo Alto (+1 650-849-5282, [email protected])
Craig Varnen – Co-Chair, Los Angeles (+1 213-229-7922, [email protected])

*Andrea Lattanzio, Beshoy Shokralla, and Sophie White are associates working in the firm’s New York office who are not yet admitted to practice law.

The U.S. Department of Justice (DOJ) recently announced a series of updates to its guidance related to corporate compliance programs, including revisions to the Evaluation of Corporate Compliance Programs (the 2023 Evaluation Guidance), the Revised Memorandum on Selection of Monitors in Criminal Division Matters (the Monitor Memo), and The Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks (the Pilot Program). The updated guidance, in many ways, expands on or mirrors the messages in the September 15, 2022 Memorandum from Deputy Attorney General (DAG) Lisa Monaco (Monaco Memo). Two key takeaways from the latest suite of updates are DOJ’s continued emphasis on: (1) clawback or recoupment of compensation from employees in appropriate cases; and (2) appropriate compliance policies and procedures related to the use of personal devices and communication platforms, including ephemeral messaging applications.

The 2023 Evaluation Guidance: Setting DOJ’s Standards for Assessing Program Effectiveness

The 2023 Evaluation Guidance provides DOJ Criminal Division prosecutors a set of factors they should consider while evaluating the compliance programs of corporations facing a criminal resolution, such as a non-prosecution agreement (NPA), deferred prosecution agreement (DPA), or a plea agreement. As in the past, companies are not required to adopt the program elements described in the 2023 Evaluation Guidance. But the document serves as a valuable resource for companies as they design, implement, and test their corporate compliance programs. As with prior guidance, companies can benchmark their existing compliance programs against the 2023 Evaluation Guidance and the other recently issued guidance.

The 2023 Evaluation Guidance echoes the Monaco Memorandum in emphasizing the importance of adequate discipline for misconduct (and the necessity of appropriate internal processes related to disciplinary actions), as well as leveraging corporate compensation structures and clawbacks to promote a culture of compliance.

Application, Communication, and Monitoring of Disciplinary Actions. The 2023 Evaluation Guidance’s most significant changes are in the section titled “Compensation Structures and Consequence Management,” which underscores that corporations should develop and maintain a positive compliance culture by establishing incentives for compliance and disincentives for compliance failures. Under the 2023 Evaluation Guidance, federal prosecutors handling corporate criminal matters will consider whether a company’s compliance program appropriately “identif[ies], investigate[s], discipline[s], and remediate[s] violations of law, regulation, or policy.” Factors for consideration include:

- Transparent communication regarding disciplinary processes and actions; and
- Tracking data on disciplinary actions to monitor the effectiveness of the compliance program.
Compensation Structure and Clawbacks. The 2023 Evaluation Guidance reflects DOJ’s view that the design and implementation of compensation schemes can foster a positive compliance culture and reduce the financial burden on shareholders and investors when misconduct results in monetary consequences for the corporation. The 2023 Evaluation Guidance instructs prosecutors to consider, for example, whether a company has:
- Incentivized compliance by designing compensation systems that defer or escrow certain compensation tied to conduct standards;
- Attempted to recoup compensation previously awarded to individuals who are responsible for corporate wrongdoing; or
- Made working in compliance a means of career advancement by, for example, offering opportunities in compliance-related roles or setting compliance as a significant metric for management bonuses.

The Pilot Program: Promoting Compliance through Compensation Clawbacks

In connection with the 2023 Evaluation Guidance, DOJ launched the Pilot Program, effective on March 15, 2023, a three-year initiative applicable to all corporate Criminal Division matters. Under the Program, the Criminal Division will require that every corporate resolution require the defendant company to implement compliance-promoting criteria in its compensation and bonus systems. In addition, a company entering into a criminal resolution may receive a reduction in fines if it has in good faith initiated the process to recoup compensation from individual wrongdoers before the resolution.

Mandatory Compliance-Related Compensation Criteria for Corporate Criminal Matters. During the Pilot Program’s duration, companies entering into criminal resolutions must now implement compliance-related criteria in their compensation and bonus systems. In addition, companies must report to the Criminal Division annually about their implementation of this requirement during the term of their criminal resolutions. The compliance-related compensation criteria may include provisions such as:

- A prohibition on bonuses for employees who do not satisfy compliance performance requirements;
- Disciplinary measures for employees who violate applicable law and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct, and (b) knew of, or were willfully blind to, the misconduct; and
- Incentives for employees who demonstrate full commitment to compliance processes.

Deferred Reduction of Criminal Fines. Under the Pilot Program, a company may be eligible for a deferred reduction of fines if it fully cooperates, timely and appropriately remediates, and demonstrates that it has implemented a program to recoup compensation from employees who engaged in or were otherwise meaningfully implicated in misconduct related to the investigation. A company eligible for a reduced fine must pay the full amount of the applicable fine, less the amount of compensation the company is attempting to recoup or claw back. If the company has not recouped that amount by the end of its resolution’s term, the company must pay back any amount it has not recouped. If the company has in good faith tried to recoup compensation from employees but failed, the prosecutors may, in their discretion, nevertheless reduce the amount the company must pay back to DOJ by 25% of the amount of compensation that the company attempted to claw back.

Unfortunately, neither the 2023 Evaluation Guidance nor the Pilot Program includes a carve-out for circumstances where other applicable laws, such as local labor and employment laws, conflict with DOJ policies. It is unclear how DOJ would handle matters where the employees subject to the clawback requirement are from jurisdictions that bar recouping incentives such as bonuses or limit the circumstances under which employers may recoup such compensation (e.g., China, France, or Singapore). Even in jurisdictions where clawback provisions are enforceable, enforcing them may expose companies to employment disputes and litigation. The latest guidance on compensation clawbacks and the Pilot Program will leave companies to sort through these additional layers of legal complications. In doing so, companies also will need to factor in prior regulatory efforts to mandate clawback policies. For example, as covered in our previous update, in October 2022, the U.S. Securities and Exchange Commission directed U.S. stock exchanges and securities associations to promulgate listing standards that will (in the future) require their listed companies to adopt, implement, and adhere to a written clawback policy. The final rule implementing this requirement sets forth several granular requirements for the clawback policy that should inform companies’ consideration of how to address the 2023 Evaluation Guidance.

The Use of Personal Devices, Communications Platforms, and Messaging Applications

The 2023 Evaluation Guidance adds extensive direction regarding communication platforms and channels, tracking the Monaco Memo and the DAG’s speech at the 39th American Conference Institute International Conference on the FCPA, in which DAG Monaco admonished that “all corporations with robust compliance programs should have effective policies governing the use of personal devices and third-party messaging platforms.” Assistant Attorney General (AAG) Kenneth Polite likewise stated at a March 3, 2023 American Bar Association (ABA) conference that DOJ is “looking to reward companies who are being already thoughtful” about these communications. AAG Polite warned companies that Criminal Division prosecutors “aren’t going to accept a company’s explanation at face value” if companies do not produce these communications to the government upon request, and that such failures to produce communications may result in an unfavorable resolution.

Consistent with DOJ’s core theme that compliance programs should be company-specific, the 2023 Evaluation Guidance states that policies governing the use of communication applications should also be tailored to the company’s risk profile and specific business needs. The 2023 Evaluation Guidance instructs Criminal Division prosecutors to consider how a company has informed its employees of its communication-platform-related policies and procedures, and whether the company has enforced the policies and procedures regularly and consistently in practice. In evaluating the communication-platform policies, prosecutors must assess:

The types of communication channels company personnel use;
The policies and procedures governing the use of communication platforms and channels; and
The company’s risk management measures, such as the consequences for employees who refuse the company access to company communications, the impact of the use of ephemeral messaging applications on the company’s evaluation of employees’ compliance with company policies and procedures, and related disciplinary actions.

Notably, DOJ’s admonishments on communication policies do not delve into the complexities of various local data privacy laws that may apply, particularly when employees use their own mobile devices. AAG Polite noted in his ABA speech that, in the event companies decline to provide data from ephemeral messaging applications or other communication platforms, DOJ prosecutors will “ask about the company’s ability to access such communications, whether they are stored on corporate devices or servers, as well as applicable privacy and local laws,” and that such responses (or lack of responses) “may very well affect the offer it receives to resolve criminal liability.”

The reality is that the execution of a consistent policy across multiple jurisdictions in this respect may be difficult, and companies will confront many complications as they try to implement the 2023 Evaluation Guidance. To satisfy DOJ’s expectations, multinational corporations will now have to navigate applicable local data privacy laws, blocking statutes, and legal or securities-related requirements that may be at odds with DOJ’s position regarding messaging applications and communication platforms. In light of AAG Polite’s remarks, companies should review existing data privacy and communication policies to see whether they need to be, and can be, updated to reflect DOJ’s guidance, as well as identify potential conflicts between local data privacy laws and DOJ guidance and take mitigating steps as appropriate.

Updated Guidance on Corporate Monitorships

On March 1, 2023, AAG Polite issued the Monitor Memo, which codifies the policies announced in the Monaco Memo. Under the Monitor Memo, when determining whether to impose a monitorship, prosecutors should consider ten non-exhaustive factors to assess the need for, and potential benefits of, a monitor. As a general matter, prosecutors should consider a monitorship where a corporation’s compliance program and controls are “untested, ineffective, inadequately resourced, or not fully implemented at the time of a resolution.” On the other hand, where a corporation’s compliance program and controls are “demonstrated to be tested, effective, adequately resourced, and fully implemented at the time of a resolution,” a monitor may not be necessary. The Monitor Memo also clarifies that (1) consistent with the Criminal Division’s practice since at least 2018, many of the requirements for monitors apply to monitor teams, in addition to the named monitor; (2) monitor selections are and will be made in keeping with DOJ’s commitment to diversity, equity, and inclusion; and (3) the cooling-off period for monitors is now not less than three years, rather than two years, from the date of the termination of the monitorship.

Conclusion

The recent announcements and guidance signal DOJ’s focus on incentivizing corporations with strong compliance programs that are tested, effective, adequately resourced, and fully implemented. Companies should assess their existing compliance policies and procedures to see what, if any, changes should be made (and what changes can be made under applicable laws), particularly with respect to the policies related to communication channels and platforms, employee evaluation and disciplinary actions, and compensation clawback in light of the new DOJ guidance.

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Join us for a 30-minute briefing covering several M&A practice topics. The program is the second in a series of quarterly webcasts designed to provide quick insights into emerging issues and practical advice on how to manage common M&A problems. Robert Little, co-chair of the firm’s Global M&A Practice Group, acts as moderator:

Topics discussed:

Joe Orien discusses how to prepare for and manage cross-border M&A transactions
Kristen Poole and Marshall King discuss the attorney-client privilege issues that arise in M&A transactions
Krista Hanvey and Jamie France discuss the state of the art in M&A-related covenants not to compete, as well as the implications of the FTC’s proposed rule governing restrictive covenants

PANELISTS:

Krista P. Hanvey is a partner in Gibson, Dunn & Crutcher’s Dallas office. She is a Co-Chair of Gibson Dunn’s Employee Benefits and Executive Compensation Practice Group and Co-Partner-In-Charge in the firm’s Dallas office. She counsels clients of all sizes across all industries, both public and private, using a multi-disciplinary approach to compensation and benefits matters that crosses tax, securities, labor, accounting and traditional employee benefits legal requirements. Ms. Hanvey has significant experience with all aspects of executive compensation, health and welfare benefit plan compliance, and retirement plan compliance, planning, and transactional support. She also routinely advises clients with respect to general corporate and non-profit governance matters.

Marshall R. King is a partner in Gibson Dunn & Crutcher’s New York office and is a member of the firm’s Class Actions and Securities Litigation Practice Groups. He has extensive experience in commercial and business litigation matters, with particular focus on securities litigation, bankruptcy litigation, and disputes arising out of acquisitions. He often represents buyers or sellers in disputes arising out of acquisitions and has advised companies in disputes concerning their rights under bond indentures.

Robert B. Little is a partner in Gibson, Dunn & Crutcher’s Dallas office, and he is a Global Co-Chair of the Mergers and Acquisitions Practice Group. Mr. Little has consistently been named among the nation’s top M&A lawyers every year since 2013 by Chambers USA. His practice focuses on corporate transactions, including mergers and acquisitions, securities offerings, joint ventures, investments in public and private entities, and commercial transactions. Mr. Little has represented clients in a variety of industries, including energy, retail, technology, infrastructure, transportation, manufacturing, and financial services.

Joe Orien is a partner in Gibson, Dunn & Crutcher’s Dallas office. His practice focuses on complex business transactions, including mergers and acquisitions, joint ventures, growth and venture investments, minority investments, leveraged acquisitions, exits, complex strategic and commercial agreements, operating agreements and equity incentive structures, and advising on general corporate matters. He has represented a variety of public and private companies, investment funds and high-net-worth individuals and family offices in various industries, including financial services, marketing, infrastructure, retail and consumer products, energy, entertainment and technology, in transactions ranging in size from several millions to billions of dollars.

Kristen P. Poole is a partner in Gibson, Dunn & Crutcher’s New York office, where her practice focuses on mergers and acquisitions and private equity. Ms. Poole represents both public and private companies, as well as financial sponsors, in connection with mergers, acquisitions, divestitures, minority investments, restructurings, and other complex corporate transactions. She also advises clients with respect to general corporate governance matters and shareholder activism matters.

Jamie E. France is of counsel in Gibson, Dunn & Crutcher’s Washington, D.C. office. She is a member of the firm’s Antitrust and Competition Practice Group. Ms. France represents clients in merger and non-merger investigations before the Federal Trade Commission and the U.S. Department of Justice as well as in complex private and government antitrust litigation. She also counsels clients on antitrust merger and conduct matters and has been involved in representing targets of antitrust-related grand jury investigations by the DOJ. Ms. France’s experience encompasses a broad range of industries, including healthcare, consumer goods, retail, gaming, pharmaceuticals, wood products, and chemicals.

MCLE CREDIT INFORMATION:

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Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

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Orange County partner Michael Titera and associate Meghan Sherley are the authors of “How S&P 100 Cos.’ Human Capital Disclosures Are Evolving” [PDF] published by Law360 on March 8, 2023.

Dallas partner David Woodcock, Denver of counsel Timothy Zimmerman and Los Angeles associate Eitan Arom are the authors of “How To Keep Up With The SEC’s Breakneck Rulemaking Pace” [PDF] published by Law360 on March 7, 2023.

Washington, D.C. associate Brian Richman contributed to the article.

On 1 July 2023, the North American Free Trade Agreement (“NAFTA”)—which has helped to facilitate trade among the United States, Canada, and Mexico for over 25 years—is set to expire. NAFTA was terminated and replaced by a new treaty, the United States-Mexico-Canada Agreement (“USMCA”), on 1 July 2020. However, the USMCA provides for a three-year “sunset period” following the termination of NAFTA, during which North American investors could still obtain certain investment protections under NAFTA for their “legacy claims” (i.e., claims relating to investments that were established or acquired prior to 1 July 2020).[1] That sunset period will end on 1 July 2023, following which investors will only be able to resort to the USMCA’s more limited protections. As described below, North American investors are strongly encouraged to consider whether they have any legacy claims under NAFTA in connection with their investment in Canada and the United States, and especially in Mexico (in view of the far-reaching regulatory changes in Mexico discussed below) and file their formal notices no later than 1 April 2023.

I. NAFTA’s Sunset Period

NAFTA entered into force on 1 January 1994, and expired on 1 July 2020, upon the entry into force of the USMCA.[2] Under Annex 14-C of the USMCA, investors can bring NAFTA “legacy investment claims” for a period of three years after the termination of NAFTA, or until 1 July 2023.[3] These claims are limited to investments “established or acquired between January 1, 1994, and the date of termination of NAFTA,” “and in existence on the date of entry into force of” the USMCA.[4] Arbitrations already initiated under NAFTA will not be affected by the expiration of the sunset period.[5]

While the sunset period will end on 1 July 2023, investors must notify the respondent State at least 90 days before the claim is submitted, i.e., by 1 April 2023, to comply with NAFTA’s requirements.[6] As the notice period is even longer for claims arising from taxation measures (six months), any legacy claims relating to taxation matters have now since expired.[7]

A. Implications for Investment Disputes Involving Canada or Canadian Investors

Canada did not sign the USMCA’s investor-state dispute mechanism (Chapter 14). This means that investment arbitration is no longer available for claims by U.S. and Mexican investors against Canada under Chapter 14—nor to Canadian investors in the other two USMCA States.

However, other investment treaty protections would apply to Canadian investors in Mexico and Mexican investors in Canada. For example, both Canadian and Mexican investors may submit their disputes to arbitration under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”).[8]

U.S. investors, on the other hand, would have no recourse to arbitration under the CPTPP because the United States is not a signatory. NAFTA therefore provides the last opportunity for Canadian investors in the U.S. or U.S. investors in Canada to arbitrate their claims.

B. Implications for Investment Disputes Involving Mexico or Mexican Investors

As noted above, Mexican investors in the United States and U.S. investors in Mexico may still submit claims to arbitration under Chapter 14 of the USMCA (which is modelled after Chapter 11 of NAFTA). However, the new investment treaty regime contains important procedural and substantive differences relative to NAFTA. As described below, for many U.S. and Mexican investors, a legacy claim under NAFTA will offer higher substantive protections and simpler procedural requirements and may be more advantageous than filing under the USMCA.[9]

II. Potential Procedural Limitations

Under NAFTA, an investor can bring an arbitration claim directly before a NAFTA investment panel assuming basic procedural requirements are met.[10] Under Chapter 14 of the USMCA, by contrast, an aggrieved investor must first exhaust local remedies in the national courts of the host State before resorting to international arbitration.[11] To exhaust local remedies, an investor must either “obtain a final decision from a court of last resort of the respondent” or wait 30 months from the date on which proceedings were initiated.[12] These provisions do not apply to the extent recourse to domestic remedies was “obviously futile.”[13]

The exhaustion requirement does not apply, however, to investors with a “covered government contract” (“a written agreement between a national authority” of the United States or Mexico, “and a covered investment or investor” of the other Party).[14] It likewise does not apply to investors engaged in a “covered sector,” which includes oil and natural gas, power generation, telecommunications, transportation, and transportation infrastructure.[15]

III. Potential Substantive Limitations

Under NAFTA’s Chapter 11, an investor can bring a range of investment treaty claims against the host State, including that the host State (directly or indirectly) expropriated its investment, failed to afford the investor or its investment the minimum standard of treatment, national treatment, and most-favored-nation treatment.[16]

Under the USMCA, however, many investors can no longer bring claims for indirect expropriation, and they may not submit to arbitration claims for violations of the minimum standard of treatment.[17]

Again, investors with covered government contracts or in covered sectors enjoy greater substantive protections under the USMCA. They may arbitrate claims for violations of all of Chapter 14’s substantive provisions, including indirect expropriation.[18] However, it remains to be seen whether in practice the scope of those rights may be more limited than under NAFTA.[19]

IV. Why Are NAFTA Legacy Claims Important in the Current Investment Context in Mexico?

In the North American context, a disproportionate number of NAFTA claims has been filed or announced against Mexico in recent years. Mexico is the respondent in 12 of the 16 publicly known pending or announced NAFTA arbitrations involving legacy claims—or 75%.[20] By comparison, there are two pending NAFTA arbitrations against the United States[21] and two against Canada.[22] Mexico has faced numerous investment treaty claims outside of the NAFTA context as well and has been the respondent in approximately 40 arbitrations, including 8 disputes that are currently pending before the International Centre for Settlement of Investment Disputes (“ICSID”) in Washington, D.C.

Figure 1. Number of NAFTA Legacy Disputes Filed or Announced Against the NAFTA States (as of March 2023)

A number of these claims relate to the Mexican Government’s regulatory and legislative measures to transform how the country’s energy, electricity, and mining sectors are governed:

As discussed in our previous client alert, recent amendments to Mexico’s Hydrocarbon Law and Electricity Industry Law have accorded preferential treatment to State-owned companies and granted the Mexican Government broad discretion to suspend or refuse operating permits to private companies.[23] The changes to the electricity legislation were subsequently upheld by the Mexican Supreme Court.[24] Mexico’s President, Andres Manuel Lopez Obrador, has argued that such reforms are necessary to rebalance the economy away from private actors and in favor of the public sector.[25] Some of the concerns involving certain Canadian investors were reportedly resolved in January 2023.[26]
The Mexican Government has also sought to solidify State control of the energy sector in the Mexican Constitution. Earlier this year, for example, Mexico’s lower house of congress defeated a proposed constitutional amendment that would have allowed Mexico’s State-owned electricity company to produce at least 54% of the country’s electricity, limited private participation in the market, and consolidated independent energy regulators into the federal government.[27]
In April 2022, the Government also passed a bill nationalizing the country’s lithium mining sector and allowing the Government to take over “other minerals declared strategic.”[28] Mexico has indicated that it will review all contracts held by foreign companies to explore for lithium deposits in the country.[29] In January 2023, Mexico announced that the first concessions to a State-owned company would be awarded in February 2023.[30]

Some of these developments led the United States and Canada to invoke in July 2022 the State-to-State dispute settlement provisions under Chapter 31[31] of the USMCA over Mexico’s energy policies.[32] The discussions among the three countries are still ongoing.[33]

These inter-State consultations, however, are limited to the specific concerns surrounding Mexico’s energy policies. They would not address other sectors, or even necessarily solve the specific concerns or losses of Canadian or U.S. investors in the energy sector. NAFTA investors with legacy investment claims would therefore be well advised to carefully assess the status, operation, and viability of their investments in Mexico in this evolving investment climate and whether they need to seek investment protections under NAFTA by 1 April 2023.

V. Conclusion

Under the USMCA’s three-year sunset period, investors have until 1 July 2023, to submit claims involving investments created or acquired during NAFTA’s existence to arbitration. Because investor-state arbitration will no longer be available to Canadian investors or for investments in Canada, this category of investors should carefully consider whether they have a viable claim under NAFTA. As between Canada and the United States, NAFTA provides the last resort to international investment arbitration. Similarly, due to the USMCA’s generally less favorable two-tiered dispute resolution regime, U.S. and Mexican investors with legacy claims under NAFTA would be well advised to consider whether to avail themselves of the soon-to-expire treaty protections.

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[1] United States-Mexico-Canada Agreement (hereinafter “USMCA”), Annex 14-C.

[2] USMCA Protocol; see also Press Release, Office of the U.S. Trade Rep., USMCA To Enter Into Force July 1 After United States Takes Final Procedural Steps For Implementation (Apr. 24, 2020).

[3] USMCA Annex 14-C, (1)–(3).

[4] Id., Annex 14-C, (4), 6(a).

[5] Id., Annex 14-C, para. 5.

[6] North American Free Trade Agreement (hereinafter “NAFTA”) Art. 1119.

[7] Id., Art. 2102.

[8] Comprehensive and Progressive Agreement for Trans Pacific Partnership Agreement, Annex 1-A. The CPTPP entered into force for both Canada and Mexico on December 30, 2018. See About the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Gov’t of Canada.

[9] The USMCA also excludes specific types of claimants, such as investors that are “owned or controlled by a person of a non-Annex Party that the other Annex Party considers to be a non-market economy, that is a party to a qualifying investment dispute.” See USMCA, Annex 14-D, para. 1.

[10] See NAFTA Arts. 1116–1117, 1121 (setting out the procedural requirements for the submission of claims to arbitration).

[11] No claim may be submitted to arbitration unless “the claimant or the enterprise . . . first initiated a proceeding before a competent court or administrative tribunal of the respondent with respect to the measures alleged to constitute a breach.” USMCA Art. 14.D.5(1)(a).

[12] Id., Art. 14.D.5(1)(b).

[13] Id., Art. 14.D.5(1)(b), footnote 25.

[14] Id., Annex 14-E, (6)(a).

[15] Id., Annex 14-E, (6)(b).

[16] Pursuant to NAFTA Art. 1116(1)(a) and 1117(1)(a), an investor may submit a claim to arbitration on its own behalf or on behalf of an enterprise, respectively, for a violation of Chapter 11, Section A of NAFTA. See NAFTA Arts. 1116(1)(a) and 1117(1)(a). Section A includes NAFTA’s provisions regarding national treatment (Art. 1102), most-favored-nation treatment (Art. 1103), and minimum standard of treatment (Art. 1105).

[17] Compare NAFTA Arts. 1105, 1116–1117, 1110 (permitting claims for violations of minimum standard of treatment and direct and indirect expropriation) with USMCA Art. 14.D.3(1)(a), (b) (permitting claims for breach of provisions regarding national treatment, most-favored-nation treatment, and direct expropriation).

[18] See USMCA Annex 14-E, (2).

[19] For example, interpretation questions may arise with respect to the minimum standard of treatment (USMCA, Art. 14.6.4) and the scope of indirect expropriation (Annex 14-B, 3(a)(i)–(iii)), especially in relation to measures “designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment” (USMCA Annex 14-B, 3(b)).

[20] See Silver Bull, Press Release, Silver Bull Announces Commencement of Legacy NAFTA Claim Against Mexico (Mar. 2, 2023); Goldgroup Resources, Inc. v. United Mexican States, ICSID Case No. ARB/23/4; Monterra Energy, Press Release, Monterra Energy Takes Legal Action Against Closure of its Tuxpan Facility by Submitting to the Government of Mexico a Notice of Intent Under NAFTA (Feb. 22, 2022); Access Business Group LLC v. United Mexican States, Notice of Intent to Submit a Claim to Arbitration, Oct. 11, 2022; Finley Resources Inc., MWS Management Inc., and Prize Permanent Holdings, LLC v. United Mexican States, ICSID Case No. ARB/21/25; First Majestic Silver Corp. v. United Mexican States, ICSID Case No. ARB/21/14; Doups Holdings LLC v. United Mexican States, ICSID Case No. ARB/22/24; Coeur Mining v. United Mexican States, IA Reporter; Sepadeve International LLC v. United Mexican States, Notice of Intent (Sept. 4, 2020); AMERRA Capital Management, LLC, AMERRA Agri Fund, LP, AMERAA Agri Opportunity Fund, LP, and JPMorgan Chase Bank, N.A. v. United Mexican States, Notice of Intent (Dec. 3, 2020); L1bero Partners LP and Fabio M. Covarrubias Piffer v. United Mexican States, Notice of Intent (Dec. 30, 2020); Margarita Jenkins, Maria Elodia Jenkins, and Juan Carlos Jenkins v. United Mexican States, Notice of Intent (July 19, 2021).

[21] See TC Energy Corp. and TransCanada PipeLines Ltd. v. United States of America, ICSID Case No. ARB/21/63; Alberta Petroleum Marketing Commission v. United States of America, Notice of Intent to Submit a Claim to Arbitration, Feb. 9, 2022.

[22] See Koch Industries Inc. and Koch Supply & Trading, LP v. Canada, ICSID Case No. ARB/20/52; Windstream Energy LLC v. Canada, PCA Case No. 2021-26.

[23] Mexico’s Reforms to Hydrocarbon Law and Electricity Industry Law May Violate Investment Treaty Protections, Gibson, Dunn & Crutcher LLP (June 1, 2021).

[24] Mexico’s Top Court Upholds Changes to Power Law in Win for President, Reuters (Apr. 7, 2022).

[25] Id.

[26] Mexico’s President announced that he had met with representatives from four Canadian companies, including Canada’s second-largest pension fund, and successfully resolved the companies’ concerns regarding Mexico’s electricity sector policies (including issues over self-supply electricity contracts and permits allowing energy connections for new projects). See Mathieu Dion & Maya Averbuch, Mexico’s AMLO Met with Canada Pension Giant Amid Energy Feud, Bloomberg (Jan. 18, 2023).

[27] Max de Haldevang & Michael O’Boyle, Mexico President’s Electricity Bill Fails to Pass Lower House, Bloomberg (Apr. 18, 2022).

[28] Mexico Nationalizes Lithium, Plans Review of Contracts, Reuters (Apr. 19, 2022).

[29] Mexico Creates State-Run Lithium Company, To Go Live Within 6 Months, Reuters (Aug. 24, 2022).

[30] Cody Copeland, US Urges Mexico to Open Up Lithium Production to Private Sector, Courthouse News Serv. (Jan. 17, 2023).

[31] Pursuant to Article 31.4 of the USMCA, the USCMA State Parties must engage in consultations within 30 days of the date of delivery of a request for consultations. See USMCA, Art. 31. If the issue that is the subject of consultations is not resolved within 75 days of delivery of the request, a State Party may request the establishment of a panel to rule on the dispute. Id. Art. 31.6. If a State Party refuses to comply with a decision rendered by a panel, the other State Parties may implement retaliatory measures. Id. Art. 31.19.

[32] Press Release, Office of the U.S. Trade Rep., United States Requests Consultations Under the USMCA Over Mexico’s Energy Policies (July 20, 2022); Press Release, Global Affairs Canada, Statement by Minister Ng on Canada Launching Canada-United States-Mexico Agreement Consultations on Mexico’s New Energy Policies (July 21, 2022).

[33] Mexico Invites U.S. Trade Team to Third Round of Energy Consultations, Reuters (Dec. 1, 2022).

The following Gibson Dunn lawyers prepared this client alert: Lindsey D. Schmidt, Maria L. Banda, and Brian Yeh.

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

Lindsey D. Schmidt – New York (+1 212-351-5395, [email protected])
Maria L. Banda – Washington, D.C. (+1 202-887-3678, [email protected])

Please also feel free to contact the following practice group leaders:

International Arbitration Group:
Cyrus Benson – London (+44 (0) 20 7071 4239, [email protected])
Penny Madden KC – London (+44 (0) 20 7071 4226, [email protected])
Rahim Moloo – New York (+1 212-351-2413, [email protected])

This edition of Gibson Dunn’s Federal Circuit Update summarizes the current status of several petitions pending before the Supreme Court. We address the Federal Circuit’s adoption of amendments to its Rules of Practice. And we also discuss recent Federal Circuit decisions concerning tortious interference with prospective business relations, the public use bar under pre-AIA 35 U.S.C. § 102(b), delisting patents from the Orange Book, and ineligibility under 35 U.S.C. § 101.

In case you missed it, on February 2, 2023, Gibson Dunn published the 2021/2022 Federal Circuit Year in Review, providing a statistical overview and substantive summaries of the precedential patent opinions issued by the Federal Circuit between August 1, 2021 and July 31, 2022.

Federal Circuit News

Supreme Court:

As we summarized in our December 2022 update, the Supreme Court has granted certiorari in Amgen Inc. v. Sanofi (U.S. No. 21-757). Oral argument has been scheduled for March 27, 2023.

Noteworthy Petitions for a Writ of Certiorari:

This month, no new petitions were filed before the Supreme Court that originated from the Federal Circuit by parties represented by counsel.

As we summarized in our January 2023 update, the Court is considering petitions in Novartis Pharmaceuticals Corp. v. HEC Pharm Co., Ltd. (US No. 22-671) and Arthrex, Inc. v. Smith & Nephew, Inc. (US No. 22-639). A response was filed in Novartis on March 3, 2023. Gibson Dunn partners Thomas G. Hungar, Jacob T. Spencer, Jane M. Love, and Robert Trenchard are counsel for Novartis. The Court granted an extension for the response in Arthrex until April 12, 2023.

The petitions in Interactive Wearables, LLC v. Polar Electro Oy (US No. 21-1281) and Tropp v. Travel Sentry, Inc. (US No. 22-22) are still pending the views of the Solicitor General. After requesting a response, the Court denied Jump Rope’s petition in Jump Rope Systems, LLC v. Coulter Ventures, LLC (US No. 22-298).

Other Federal Circuit News:

Appointment of New Circuit Executive and Clerk of Court. On February 24, 2023, the Federal Circuit announced that Jarrett B. Perlow has been selected as the next Circuit Executive and Clerk of Court and will officially assume the responsibilities on July 1, 2023. Mr. Perlow will succeed Peter R. Marksteiner, who is retiring as of June 30, 2023.

Federal Circuit Practice Update

Amendments to the Federal Circuit Rules of Practice. In our January 2023 update, we discussed the Federal Circuit’s proposed amendments to the Federal Circuit Rules of Practice. The amendments have now been adopted and went into effect on March 1, 2023. The final version of the Federal Circuit Rules of Practice are available here.

Upcoming Oral Argument Calendar

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

Key Case Summaries (February 2023)

CyWee Group Ltd. v. Google LLC, Nos. 20-1565, 20-1567 (Fed. Cir. Feb. 8, 2023): In United States v. Arthrex, Inc., 141 S. Ct. 197 (2021), the Supreme Court held that an administrative patent judge’s power to render final patentability decisions unreviewable by an accountable principal officer violated the Appointments Clause. Subsequently, CyWee requested rehearing on two final written decisions issued by the Patent Trial and Appeal Board (“Board”). The requests were referred to the Commissioner for Patents, who was performing the duties of the Director and Deputy Director, as those offices were vacant at the time, and he denied the rehearing requests. As CyWee’s current appeal was pending, the Federal Circuit rejected challenges to the Commissioner’s authority to review the Board’s decisions under Arthrex. CyWee acknowledged that the decision foreclosed its challenges to the Commissioner’s authority, but appealed on grounds that the Director’s review was untimely as it occurred outside the time window for institution decisions and final written decisions.

The Federal Circuit (Prost, J., joined by Taranto and Chen, JJ.) affirmed, rejecting CyWee’s timeliness arguments. The Court reasoned that there is nothing in the statute that required Director review of Board decisions to occur within the same timeframe as that required of the Board.

SSI Technologies, LLC v. Dongguan Zhengyang Electronic Mechanical Ltd., Nos. 21-2345, 22-1039 (Fed. Cir. Feb. 13, 2023): SSI sued DZEM for patent infringement and DZEM asserted counterclaims for a declaration for tortious interference with prospective business relations. SSI had sent letters to several companies advising them of SSI’s lawsuit against DZEM. The district court granted summary judgment to SSI because DZEM did not “adduce evidence that it had prospective contracts with those companies.”

The Federal Circuit (Bryson, J., joined by Reyna and Cunningham, JJ.) affirmed-in-part, reversed-in-part, vacated-in-part, and remanded. The Federal Circuit held that the district court properly granted summary judgment on the tortious interference counterclaim because DZEM had failed to introduce any evidence showing that SSI’s communications with DZEM customers were “objectively unreasonable” and therefore constituted wrongful conduct sufficient to sustain a state-law tort claim.

ChromaDex, Inc. v. Elysium Health, Inc., No. 22-1116 (Fed. Cir. Feb. 13, 2023): The district court granted summary judgment that the asserted claims were ineligible under 35 U.S.C. § 101 because they were directed to a natural phenomenon—compositions comprising isolated nicotinamide riboside (“NR”), a naturally occurring vitamin present in cow’s milk. The district court rejected ChromaDex’s argument that isolated NR was different from naturally occurring NR.

The Federal Circuit (Prost, J., joined by Chen and Stoll, JJ.) affirmed. The Court reasoned that the isolated NR did not have characteristics markedly different from the naturally occurring version found in milk. The Court relied on pre-Alice precedent (Chakrabarty, Myriad), commenting that the inquiry could end there. The Court nevertheless moved on to step two in light of Alice/Mayo, and determined that recognizing the utility of NR, which is synonymous to recognizing a natural phenomenon, was not inventive.

Minerva Surgical, Inc. v. Hologic, Inc., No. 21-2246 (Fed. Cir. Feb. 15, 2023): Minerva sued Hologic, asserting infringement of its patent directed to surgical devices for “endometrial ablation.” The district court granted summary judgment to Hologic, holding the asserted claims anticipated under the public use bar of pre-AIA 35 U.S.C. § 102(b). More than one year before the asserted patent’s priority date, Minerva had presented fifteen fully functional prototypes of a device disclosing every limitation of the asserted claims at an industry trade show referred to as the “Super Bowl.”

The Federal Circuit (Reyna, J., joined by Prost and Stoll, JJ.) affirmed. The Court agreed with Hologic that both elements of the public use bar were met. First, the patented technology was “in public use” because it had been disclosed at the industry trade show where Minerva had demonstrated the normal operation of its prototypes and permitted members of the industry to closely examine their function. Minerva even revealed the materials used to construct the prototypes, thus disclosing one of the key limitations of the asserted claims. Second, Minerva’s technology was also “ready for patenting” because it was both reduced to practice in the working prototypes and described in internal documents that would have enabled a person of ordinary skill in the art to practice the invention.

Jazz Pharmaceuticals, Inc. v. Avadel CNS Pharmaceuticals, LLC, No. 23-1186 (Fed. Cir. Feb. 24, 2023): Jazz holds a New Drug Application (“NDA”) for a narcolepsy drug, Xyrem. Xyrem’s active ingredient, GHB, is colloquially known as the date-rape drug. Jazz’s patent, which was listed in the Orange Book,[1] relates to a single-pharmacy distribution system that controls access to abuse-prone prescription drugs such as Xyrem. A patent is properly listed in the Orange Book if it claims a drug or a method of use. Jazz sued Avadel for infringing this patent when Avadel submitted an NDA for its own narcolepsy drug. Avadel counterclaimed, arguing that Jazz’s patent was improperly listed in the Orange Book and sought an order to delist the patent.

The Federal Circuit (Lourie, J., joined by Reyna and Taranto, JJ.) affirmed. On appeal, Jazz argued that its system claims essentially recited a method of use. The Court rejected this argument, concluding that the applicable regulation “does not broaden the term ‘method’” to include system claims.

Venue in the Western District of Texas:

In re Google LLC, No. 23-101 (Fed. Cir. Feb. 1, 2023): Google petitioned for writ of mandamus directing the Western District of Texas to transfer the case to the Northern District of California. Jawbone filed suit in Western District of Texas four months after being assigned ownership of the asserted patents and seven months after being incorporated in Texas.

The Federal Circuit (Stark, J., joined by Lourie and Taranto, JJ.) granted the petition, determining that the district court had put too much weight on co-pending litigations in the same district and on the time to trial when the plaintiff was “not engaged in product competition” that “might add urgency to case resolution.” The Federal Circuit also determined that the cost of attendance for willing witnesses, the local interest factor, and relative ease of access to sources of proof all weighed in favor of transfer given the patented technology was invented and prosecuted in Northern California, Google developed the accused products in Northern California, and Jawbone’s connection to Western Texas was “recent and ephemeral.” In sum, because a total of four factors weighed in favor of transfer and four factors were neutral, the Federal Circuit granted the petition and ordered the district court to grant the motion to transfer.

________________________

[1] The U.S. Food and Drug Administration’s Approved Drug Products with Therapeutic Equivalence Evaluations publication is commonly known as the Orange Book.

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])

Washington, D.C. partners Michael Bopp and Thomas Hungar and associate Megan Kiernan are the authors of “118th Congress: Investigative Tools And Potential Defenses” [PDF] published by Law360 on March 3, 2023.

Washington, D.C. partner Roscoe Jones Jr. and of counsel Daniel Smith contributed to the article.

Washington, D.C. partners Michael Bopp and Thomas Hungar and associate Megan Kiernan are the authors of “118th Congress: Investigative Priorities And Rule Changes” [PDF] published by Law360 on March 2, 2023.

Washington, D.C. partner Roscoe Jones Jr. and of counsel Daniel Smith contributed to the article.

2022 marked another year of robust enforcement of the Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws by enforcers in the United States and globally. In particular, the U.S. Department of Justice (“DOJ” or the “Department”) continues to indict, try, and convict individual defendants in FCPA and money laundering cases at a vigorous pace, even as it reworks corporate enforcement policies to rebuild the robust pipeline of corporate cases seen in prior years. Additionally, the network of anti-corruption enforcers at home and abroad continues to expand, leading to a complex decision tree for any general counsel and chief compliance officer facing a serious anti-corruption matter.

This client update provides an overview of the FCPA and other domestic and international anti-corruption enforcement, litigation, and policy developments from 2022 and select developments from early 2023, as well as the trends we see from this activity. Gibson Dunn has the privilege of helping our clients navigate anti-corruption-related challenges every day, and we are honored to have once again been ranked Number 1 in the Global Investigations Review “GIR 30” ranking of the world’s top investigations practices—Gibson Dunn’s fifth consecutive year and seventh in the last eight years to have been so honored in this top spot.

For more analysis on anti-corruption enforcement and related developments over the past year, we invite you to join us for our upcoming complimentary webcast presentation on March 28, 2023: FCPA 2022 Year-End Update.

FCPA OVERVIEW

The FCPA’s anti-bribery provisions make it illegal to corruptly offer or provide money or anything else of value to officials of foreign governments, foreign political parties, or public international organizations with the intent to obtain or retain business. These provisions apply to “issuers,” “domestic concerns,” and those acting on behalf of issuers and domestic concerns, as well as to “any person” who acts while in the territory of the United States. The term “issuer” covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d). In this context, foreign issuers whose American Depositary Receipts (“ADRs”) or American Depositary Shares (“ADSs”) are listed on a U.S. exchange are “issuers” for purposes of the FCPA. The term “domestic concern” is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has its principal place of business in the United States.

In addition to the anti-bribery provisions, the FCPA also has “accounting provisions” that apply to issuers and those acting on their behalf. First, there is the books-and-records provision, which requires issuers to make and keep accurate books, records, and accounts that, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets. Second, the FCPA’s internal accounting controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations. Prosecutors and regulators frequently invoke these latter two sections when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations. Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal accounting controls deficiency.

International corruption also may implicate other U.S. criminal laws. Prosecutors from DOJ’s FCPA Unit also charge non-FCPA crimes such as money laundering, mail and wire fraud, Travel Act violations, tax violations, and false statements, in addition to or instead of FCPA charges. Without question, the most prevalent amongst these “FCPA-related” charges is money laundering—a generic term used as shorthand for statutory provisions that generally criminalize conducting or attempting to conduct a transaction involving proceeds of “specified unlawful activity” or transferring funds to or from the United States, in either case to promote the carrying on of specified unlawful activity, to conceal or disguise the nature, location, source, ownership or control of the proceeds, or to avoid a transaction reporting requirement. “Specified unlawful activity” includes over 200 enumerated U.S. crimes and certain foreign crimes, including the FCPA, fraud, and corruption offenses under the laws of foreign nations. Although this has not always been the case, in recent history, DOJ has frequently deployed the money laundering statutes to charge “foreign officials” who are not themselves subject to the FCPA. It is not unusual for DOJ to charge the alleged provider of a corrupt payment under the FCPA and the alleged recipient with money laundering violations.

FCPA AND FCPA-RELATED ENFORCEMENT STATISTICS

The below table and graph detail the number of FCPA enforcement actions initiated by DOJ and the Securities and Exchange Commission (“SEC”), the statute’s dual enforcers, during the past 10 years.

But as our readers know, the number of FCPA enforcement actions represents only a piece of the robust pipeline of international anti-corruption enforcement efforts by DOJ. Indeed, the increasing proportion of “FCPA-related” charges in the overall enforcement docket of FCPA prosecutors is a trend we have been remarking upon for years. In total, DOJ brought 12 such FCPA-related actions in 2022, bringing the overall count to 30 cases that DOJ’s FCPA unit filed, unsealed, or otherwise joined since the beginning of the year. The past 10 years of FCPA plus FCPA-related enforcement activity is illustrated in the following table and graph.

2022 FCPA-RELATED ENFORCEMENT TRENDS

In each of our year-end FCPA updates, we seek not merely to report on the year’s FCPA enforcement actions, but also to distill the thematic trends we see stemming from these individual events. For 2022, we have identified three key enforcement developments that we believe stand out from the rest, although the first two will likely require more time to see if they develop into longer-term trends:

A rebound in corporate FCPA enforcement actions;
Revitalized interest in corporate monitorships; and
Individual FCPA and FCPA-related enforcement continues apace.

Rebound in Corporate FCPA Enforcement Actions

As we reported in our 2021 Year-End FCPA Update, corporate FCPA enforcement fell off of the proverbial cliff in 2021 with the lowest total of corporate enforcement actions (6) in modern FCPA enforcement history. 2022 saw a rebound back toward normalcy, with a total of 14 corporate enforcement actions—more than a 100% increase over 2021. In addition, the financial significance of these cases increased over those brought in 2021, with three 2022 cases topping the $100 million mark in combined disgorgement and penalties, one of which joined the all-time Corporate FCPA Top Ten list. That was Glencore, with over $700 million in FCPA-related penalties, as discussed in our 2022 Mid-Year FCPA Update. A chart of corporate FCPA enforcement actions for the past decade is set forth below, followed by our updated Corporate FCPA Top 10 List and then a discussion of corporate enforcement cases from the last four months of the year.

* Our figures do not include the 2018 FCPA case against Petróleo Brasileiro S.A. – Petrobras (“Petrobras”), even though some sources have reported the resolution as high as $1.78 billion, because the first-of-its kind resolution negotiated by Gibson Dunn offset the vast majority of payments against a shareholders’ class action lawsuit and foreign regulatory proceeding, leaving only $170.6 million fairly attributable to the DOJ / SEC FCPA resolution.

**       Goldman agreed to pay several billion to authorities in the United States, United Kingdom, Singapore, Hong Kong, and Malaysia.

***     Siemens’s U.S. FCPA resolutions were coordinated with a €395 million ($569 million) anti-corruption settlement with the Munich Public Prosecutor.

****    Glencore negotiated a coordinated resolution of market manipulation charges with the U.S. Commodity Futures Trading Commission and anti-corruption authorities in the UK, Netherlands, and Switzerland, with a total anticipated price tag of approximately $1.5 billion to resolve all matters.

***** Telia agreed to pay a total of $965,603,972 in criminal penalties and disgorgement to authorities in the United States, the Netherlands, and Sweden.

ABB Ltd.

The second-largest corporate FCPA action of 2022 was announced on December 2, 2022, against Swiss-based global technology company and U.S. issuer ABB. According to the charging documents, between 2014 and 2017 ABB paid bribes to a high-ranking official of a state-owned energy company in South Africa to maintain and secure engineering contracts at a power plant in Witbank. It did so by hiring subcontractors associated with the government official, one of which was owned by a member of the official’s family, even though these subcontractors were allegedly unqualified to do the work and more expensive than other options, with the expectation that portions of the subcontractor payments would benefit the government official. In exchange, ABB allegedly received various types of preferential treatment by the government official in the contracting process, including confidential bid information about competitors and inflated purchase orders paid to ABB.

To resolve the matter, ABB entered into coordinated resolutions with DOJ and the SEC in the United States and criminal authorities in South Africa and Switzerland. The DOJ resolution took the form of a deferred prosecution agreement (“DPA”) with parent ABB, as well as guilty pleas by two subsidiaries, involving FCPA bribery and books-and-records charges and a criminal penalty of $315 million, although portions are offset against other resolutions. The SEC brought FCPA bribery and accounting charges and imposed a $75 million civil penalty, plus just over $72.5 million in disgorgement and prejudgment interest that was deemed satisfied by a 2020 civil restitution agreement with the South African government. In addition, ABB reached coordinated criminal resolutions with South African and Swiss authorities, and is reportedly in talks with German authorities. The total 2022 resolutions amounted to over $315 million; including the prior civil settlement with South Africa brings the total price tag to approximately $460 million.

There are several notable aspects of the ABB resolution. First, this is the first coordinated anti-corruption resolution between DOJ, the SEC and South African authorities, which DOJ in particular heralded as it seeks continuously to expand its network of law enforcement partners across the globe.

Second, the settlement papers outline an intriguing (and for others, informative) chain of events leading to the initiation of the investigation. According to the DPA, shortly after becoming aware of the South Africa allegations, ABB contacted DOJ to schedule a meeting at which it planned to disclose the conduct to DOJ, but without describing the content of that disclosure in its initial contact. Between the initial call and the scheduled meeting with DOJ, the media reported on the subject-matter of the investigation, making DOJ aware of it prior to ABB’s disclosure. Accordingly, DOJ did not grant ABB voluntary disclosure credit under the FCPA Corporate Enforcement Policy, although it asserts that it considered ABB’s “demonstrated intent to disclose the misconduct” in fashioning other aspects of the resolution, including by allowing the company to resolve via DPA rather than requiring a guilty plea.

Finally, ABB is now a three-time FCPA offender, having previously resolved separate criminal and civil FCPA enforcement matters with DOJ and the SEC in 2004 and 2010, as reported in our 2010 FCPA Year-End Update. The principal consequence of this recidivism is that the 25% discount DOJ granted to ABB based on its substantial cooperation and remediation was taken not from the bottom of the U.S. Sentencing Guidelines (“Guidelines”) range as is customary, but rather from the mid-point between the middle- and high-ends of the Guidelines. In announcing DOJ’s subsequent Criminal Division Corporate Enforcement Policy on January 17, 2023, covered in more detail below, Criminal Division Assistant Attorney General Kenneth A. Polite cited ABB as the example of DOJ not applying discounts from the bottom of the Guidelines range—but rather higher points in the range—for so-called “recidivists.”

Honeywell International, Inc.

The third-largest FCPA resolution of 2022 came on December 19, 2022, when North Carolina-based manufacturing and technology company Honeywell International, Inc. agreed to pay $202.7 million to resolve parallel anti-corruption investigations by DOJ, the SEC, and Brazilian prosecutors. The DOJ matter was resolved by way of an FCPA bribery conspiracy DPA with Honeywell subsidiary Honeywell UOP—with certain guarantees by the parent company—which alleged that between 2010 and 2014 the subsidiary paid $4 million to an official of Brazilian state oil company Petrobras in exchange for a contract to design and build an oil refinery. The resolution with Brazil’s Office of the Attorney General, Comptroller General, and Federal Prosecution Service concerned the same conduct. The SEC cease-and-desist proceeding also included the Petrobras conduct, but further added allegations that in 2011 and 2012 Honeywell’s Belgian subsidiary paid $75,000 to obtain a contract with Algerian state oil company Sonatrach.

The three-year DPA with DOJ included a $79.2 million criminal penalty, reflecting what was then the maximum 25% discount from the bottom of the Guidelines range for Honeywell’s substantial cooperation and remediation, as well as $105.7 million in forfeiture. But the full forfeiture amount and half the criminal penalty were credited against other resolutions. The SEC resolution included $81.2 million in disgorgement and prejudgment interest, but credited nearly half to payments made in the Brazilian resolutions and did not impose a penalty in light of the DOJ resolution. Finally, the Brazilian resolutions, resolved by way of leniency agreements, added an incremental $42.3 million in additional payments bringing the total to $202.7 million.

Gibson Dunn served as co-counsel to Honeywell in connection with aspects of the investigations.

GOL Linhas Aéreas Inteligentes S.A.

On September 15, 2022, Brazilian airline and U.S. issuer GOL resolved corruption-related charges with DOJ, the SEC, and Brazilian authorities. According to the charging documents, in 2012 and 2013, a member of GOL’s Board of Directors agreed to pay Brazilian officials approximately $3.8 million to secure favorable legislation that reduced payroll and aviation fuel taxes specific to the airline industry. The alleged bribes were paid through consulting companies, using sham contracts, and then recorded in GOL’s books as legitimate advertising or other expenses.

In its DPA with DOJ, GOL received maximum cooperation and remediation credit that reduced its fine to $87 million—25% below the bottom of the Guidelines range—but then DOJ further reduced the fine to $17 million after GOL demonstrated an inability to pay the full amount. A further $1.7 million of this amount was then credited against the $3.4 million paid to Brazilian authorities. The SEC cease-and-desist order, which charged FCPA bribery and accounting violations, imposed $70 million in disgorgement plus prejudgment interest, then waived all but $24.5 million, which will be paid over the next two years, based on the financial condition of GOL.

Oracle Corp.

Two weeks later, on September 27, 2022, Texas-headquartered information technology company Oracle resolved FCPA books-and-records and internal controls charges with the SEC. According to the cease-and-desist order, between 2014 and 2019, Oracle subsidiaries in India, Turkey, and the UAE entered into a variety of schemes with indirect channel resellers to pass along improper benefits to government officials. The schemes generally involved Oracle employees authorizing excess discounts to value-added distributors and resellers, which then pooled portions of these extra discounts and used them to fund customer travel and entertainment that did not meet Oracle policies and even, in certain instances, may have been used to make improper payments.

Without admitting or denying the allegations, Oracle agreed to pay a total of close to $23 million, including a $15 million penalty and $7.9 million in disgorgement plus prejudgment interest. As discussed in our 2012 Year-End FCPA Update, the SEC previously sanctioned Oracle for similar “slush fund”-based FCPA allegations in India in 2012. In this case, the SEC acknowledged Oracle’s full cooperation with the investigation and substantial remedial actions.

Safran S.A.

The final corporate FCPA enforcement event of 2022 was a “declination with disgorgement” issued by DOJ to French defense company Safran on December 21, 2022. According to DOJ’s declination letter, two current subsidiaries of Safran, one based in the U.S. and one in Germany, paid millions of dollars to a consultant in China between 1999 and 2015 while knowing that the consultant was a close relative of a high-ranking Chinese government official who favorably influenced the award of train lavatory contracts to these businesses. Safran did not own these businesses at the time of the misconduct, but subsequently acquired them, identified the conduct during post-acquisition due diligence, and took appropriate remedial action, including voluntarily disclosing the matter to DOJ. As a condition of the declination, Safran agreed to disgorge nearly $17.2 million in allegedly ill-gotten gains from the pre-acquisition misconduct, and also committed to resolving a parallel investigation in Germany.

Rounding Out the 2022 Corporate Enforcement Docket

Other corporate FCPA enforcement events discussed in our 2022 Mid-Year FCPA Update include those involving Jardine Lloyd Thompson Group Holdings Ltd. (DOJ declination with disgorgement), KT Corp. (SEC only), Stericycle, Inc. (DOJ and SEC), and Tenaris, S.A. (SEC only).

Revitalized Interest in Corporate Monitorships

The practice of imposing a compliance monitor as a condition of resolution has ebbed and flowed over the years of corporate FCPA enforcement. Following a two-year hiatus in any FCPA cases involving monitors—likely influenced by the 2018 “Benczkowski Memo,” wherein then-Assistant Attorney General Brian A. Benczkowski stated that monitors should only be used “where there is a demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burden”—2022 saw the return of this practice in two FCPA resolutions. Those two cases are Glencore and Stericycle, both discussed in our 2022 Mid-Year FCPA Update. It is no coincidence that current Deputy Attorney General Lisa O. Monaco retracted any presumption against corporate monitorships that could be read from the Benczkowski Memo in guidance she issued in interim form in October 2021, and then final form in September 2022 (the “Monaco Memorandum”), as discussed below and in our separate client alerts: Deputy Attorney General Announces Important Changes to DOJ’s Corporate Criminal Enforcement Policies and From the Broader Perspective: Deputy Attorney General Announces Additional Revisions to DOJ’s Corporate Criminal Enforcement Policies.

The current guidance according to the latest Monaco Memorandum is that there is no presumption in favor or against corporate monitorships, and that each case is to be weighed on its own merits. However, DOJ prosecutors are not to seek to impose a monitor if a company has implemented and tested an effective compliance program. Consistent with this guidance, the January 2023 Criminal Division Corporate Enforcement Policy discussed below reiterates that generally, monitors will not be necessary in voluntary disclosure cases where, by the time of the resolution, the company “has implemented and tested an effective compliance program and remediated the root cause of the misconduct.”

Against this background, it is too soon to tell whether the two corporate monitorships imposed in 2022 FCPA cases represent a blip or a trend upward. We will continue to monitor these developments and report in future updates. For now, the below chart illustrates the frequency with which monitors (including hybrids, where a monitor is imposed for a shorter period with a self-reporting period thereafter) have been imposed in corporate FCPA enforcement actions over the past seven years:

Individual FCPA and FCPA-related Enforcement Continues Apace

DOJ has for years been stating that “individual accountability” is its top priority. The statistics bear this out, and the current question is whether we have passed beyond “trend” and into the realm of the “new normal.” In the September 2022 Monaco Memorandum, DOJ implemented additional guidance requiring prosecutors to analyze warranted criminal charges against individuals as part of every corporate charging memorandum, with a preference for bringing individual cases first or simultaneously, and later only if supported by a detailed plan.

There were at least 23 FCPA and FCPA-related charges filed or unsealed, or in which DOJ FCPA prosecutors first entered an appearance, in 2022. We note that many charges against individuals are initially filed under seal, and only become publicly known months or even years later after being unsealed, often in connection with an arrest or other enforcement development. We covered 19 of those defendants in our 2022 Mid-Year FCPA Update, and discuss the remaining four from the last four months of the year below.

Cary Yan & Gina Zhou

On September 2, 2022, DOJ unsealed a 2020 indictment charging Yan and Zhou with FCPA and money laundering offenses arising out of alleged bribe payments to officials of the Republic of the Marshall Islands. The indictment alleges that between 2016 and 2020, Yan and Zhou paid tens of thousands of dollars to these officials in exchange for legislation that would create a semi-autonomous region within the Republic of the Marshall Islands to the benefit of Yan and Zhou’s business interests. Illustrating the long tail of these cases, Yan and Zhou were originally charged in August 2020, and the case was unsealed upon their extradition to the United States from Thailand more than two years later.

On December 1, 2022, each of Yan and Zhou pleaded guilty to a single count of conspiracy to violate the FCPA’s anti-bribery provision. Sentencing before the Honorable Naomi Reice Buchwald of the U.S. District Court for the Southern District of New York is currently set for March 2023.

Asante Kwaku Berko

On November 3, 2022, Berko, a dual U.S. and Ghanaian citizen and former executive director of a UK subsidiary of Goldman Sachs, was arrested as he landed at Heathrow Airport and United States authorities unsealed a six-count indictment from 2020. The indictment alleges that between 2014 and 2017 Berko paid more than $700,000 to Ghanaian government officials to assist a Turkish energy company client in securing required approvals to build an electric power plant in Ghana.

What is most interesting about Berko’s case is that, as discussed in our 2020 Mid-Year FCPA Update, the SEC filed a civil complaint against Berko for FCPA violations relating to the same conduct in 2020. Then, in June 2021, without admitting or denying the charges and without appearing physically in court, Berko agreed to resolve the SEC enforcement action via an injunction and the payment of approximately $330,000. Berko is still undergoing extradition proceedings in the United Kingdom.

Nilsen Arias Sandoval

On January 19, 2022, Arias pleaded guilty to a single count of money laundering, though the connection to DOJ’s FCPA Unit was not solidified until the entry of an appearance by a FCPA Unit attorney in October 2022. The information charges that between 2010 and 2021 Arias, a former senior manager of Ecuadorian state oil company Empresa Publica de Hidrocarburos del Ecuador (“Petroecuador”), received millions of dollars in bribe payments from a series of energy, asphalt, and transportation companies in exchange for influencing the award of Petroecuador contracts. This is part of the Petroecuador investigation we have been covering for years, which led to a sprawling array of charges against individuals and companies, as most recently covered in our 2022 Mid-Year FCPA Update.

On December 2, 2022, prosecutors also filed a superseding indictment against Javier Aguilar, a former Vitol Group oil trader whom the government alleges caused approximately $920,000 in bribes to be paid to Arias. We covered the original charges against Aguilar in our 2020 Year-End FCPA Update. Aguilar has pleaded not guilty.

2022 FCPA-RELATED ENFORCEMENT LITIGATION (with an Early 2023 Bonus)

As our readership knows, following the filing of FCPA or FCPA-related charges, criminal and civil enforcement proceedings can take years to wind their way through the courts. The substantial number of enforcement cases from prior years, especially involving contested criminal indictments of individual defendants, has led to an active year in enforcement litigation. In addition to the matters discussed in our 2022 Mid-Year FCPA Update, a selection of 2022 matters that saw material enforcement litigation developments follows (in addition to one matter from early 2023).

Former Venezuelan National Treasurer and Husband Convicted of Money Laundering

On December 13, 2022, a federal jury sitting in the Southern District of Florida found ex-Venezuelan National Treasurer Claudia Patricia Diaz Guillen and her husband Adrian Jose Velasquez Figueroa guilty of conspiracy to commit money laundering, as well as two counts of substantive money laundering for Velasquez Figueroa, and one count for Diaz Guillen (who was acquitted of the other count). We first covered this case in our 2020 Year-End FCPA Update. According to the evidence presented to the jury, the defendants received more than $100 million in bribes from Venezuelan billionaire and media mogul Raul Gorrín Belisario in exchange for Diaz Guillen allowing him access to favorable exchange rates on Venezuelan treasury bonds. Gorrín Belisario remains a fugitive, reportedly living in Venezuela.

Diaz Guillen and Velasquez Figueroa have filed a motion to set aside the verdict, or in the alternative for a new trial, which remains pending before the Honorable William P. Dimitrouleas. Sentencing has been scheduled for March 28, 2023.

Saab Moran’s Motion to Dismiss Indictment Based on Diplomatic Immunity Denied

As we first covered in our 2019 Year-End FCPA Update, joint Colombian and Venezuelan citizen Alex Nain Saab Moran was indicted on money laundering offenses in connection with an alleged $350 million construction-related bribery scheme in Venezuela. After he was detained in the Republic of Cape Verde on an INTERPOL “red notice” request by U.S. authorities, Saab Moran filed a motion to enter a special appearance and challenge the indictment from abroad. The motion was denied by the Honorable Robert N. Scola, Jr. of the U.S. District Court for the Southern District of Florida, as reported in our 2021 Year-End FCPA Update. Saab Moran’s appeal was dismissed as moot by the Eleventh Circuit after he was successfully extradited to the United States, as reported in our 2022 Mid-Year FCPA Update. On December 23, 2022, with both Saab Moran and his motion to dismiss squarely before the Court, Judge Scola denied the motion to dismiss the indictment in a 15-page order.

Saab Moran argued that at the time of his arrest in Cape Verde he was a Venezuelan diplomat with immunity under the Vienna Convention on Diplomatic Relations, incorporated into U.S. law by the Diplomatic Relations Act, such that his arrest and subsequent extradition were improper. Judge Scola rejected the argument that Saab Moran was a “special envoy” sent on a trade mission by Nicholas Maduro, as well as the significance of Saab Moran’s post-arrest appointment as an “Alternative Permanent Representative [] to the African Union,” the timing of which the Court found “only added more cause for suspicion.” In addition to finding that Saab Moran doctored evidence submitted to the Court in a “post hoc [effort] to imprint upon Saab Moran a diplomatic status that he did not factually possess” at the time of his arrest, the Court further held that because the U.S. Government does not recognize the regime of President Maduro, Saab Moran could not be a recognized diplomat. Saab Moran already has filed a notice of appeal with the Eleventh Circuit.

Second Circuit Affirms Money Laundering Convictions of Donville Inniss

As discussed in our 2020 Mid-Year FCPA Update, in January 2020 a federal jury in the Eastern District of New York found Donville Inniss, the one-time Minister of Industry and member of the Parliament of Barbados, guilty of one count of conspiracy to commit money laundering and two counts of substantive money laundering. The charges stemmed from a scheme in which Inniss conspired with Insurance Corporation of Barbados Ltd. (“ICBL”) executives to increase ICBL’s portion of a governmental agency’s business in exchange for $36,000 in bribes. ICBL received a “declination with disgorgement” letter from DOJ, as discussed in our 2018 Year-End FCPA Update. Inniss, for his part, appealed.

On October 5, 2022, the U.S. Court of Appeals for the Second Circuit issued a summary order affirming the convictions. The Court rejected Inniss’s arguments that the evidence was insufficient to support a money laundering conviction because he only received the illicit proceeds, without further laundering them after receipt, as foreclosed by Circuit precedent. The Circuit also held that the District Court properly instructed the jury on various witness issues, as well as on the law on intent and what constitutes a “specified unlawful activity” for purposes of money laundering.

Fifth Circuit Reinstates Venezuelan FCPA / Money Laundering Indictment (2023)

We covered in our 2021 Year-End and 2022 Mid-Year FCPA Updates the dismissal of FCPA and money laundering indictments against Swiss wealth management advisors Daisy Teresa Rafoi Bleuler and Paulo Jorge Da Costa Casqueiro Murta by the Honorable Kenneth M. Hoyt of the U.S. District Court for the Southern District of Texas. Rafoi Bleuler and Casqueiro Murta were charged with setting up accounts used to launder bribes associated with alleged corrupt business dealings with the Venezuela state-owned oil company Petróleos de Venezuela, S.A. (“PDVSA”). Judge Hoyt dismissed both indictments on jurisdictional grounds, finding that the U.S. contact allegations set forth in the indictment were insufficient as a matter of law as to each defendant, and further that for Casqueiro Murta the indictment was untimely. DOJ appealed and the cases were consolidated for argument. Although the opinion came down in 2023, its significance warrants coverage here.

On February 8, 2023, the Fifth Circuit rejected all aspects of Judge Hoyt’s decisions below, reinstated the indictment, and remanded the case back to the Southern District of Texas for further proceedings. (The panel withdrew and reissued its opinion with inconsequential changes on February 28, 2023.) Writing for the unanimous panel, the Honorable Kurt D. Engelhardt first found that it was error to dismiss the indictment for lack of subject-matter jurisdiction because in federal criminal cases the only subject matter needed is for the indictment to state an offense against the United States—the question of extraterritoriality goes to the merits of the case at trial. As to the FCPA counts, the Court held that the indictment sufficiently alleged that both defendants were agents of a domestic concern and that Casqueiro Murta additionally engaged in a corrupt act while within the territory of the United States. The Fifth Circuit panel further held that the “agency” allegations were not unconstitutionally vague on their face because, although the term is not defined in the FCPA, a person of common intelligence can understand its meaning. With respect to the money laundering counts, the Court held that there is “no physical-presence requirement” under the applicable money laundering statutes, and therefore, it is sufficient for the government to allege that the unlawful transactions occurred, in part, in the United States. The Court was clear that its holding was limited to the facial sufficiency of the indictment, and that the defendants may be able to argue as a matter of fact at trial that the evidence is insufficient to establish jurisdiction or agency.

The panel also rejected the District Court’s holding regarding the untimeliness of the indictment as to Casqueiro Murta. The statute of limitations for Casqueiro Murta’s alleged offenses is five years, and Casqueiro Murta argued that his indictment was not handed down until more than five years after his involvement in the conspiracy ended. The government sought to remedy this issue by arguing that the statute was tolled for a sufficient period under 18 U.S.C. § 3292 while DOJ sought evidence located abroad pursuant to Mutual Legal Assistance Treaty (“MLAT”) requests to the Swiss and Portuguese governments. The District Court agreed with Casqueiro Murta, holding that because Casqueiro Murta was not the subject of DOJ’s initial MLAT request or the initial indictment, and because § 3292 refers an application for tolling “filed before return of an indictment,” the return of the first indictment after the first MLAT request ended the tolling period. The Fifth Circuit reversed, holding in a case of first impression that “before return of the indictment” means the indictment in which a defendant is charged, and thus the earlier indictment that did not name Casqueiro Murta did not stop tolling as to him.

2022 FCPA-RELATED POLICY DEVELOPMENTS (with a 2023 Bonus)

In addition to enforcement developments, 2022 and early 2023 saw important developments in FCPA-related policy areas.

Monaco Memorandum Update

As discussed in our 2021 Year-End FCPA Update, in October 2021 Deputy Attorney General Lisa O. Monaco made an important announcement modifying certain corporate criminal enforcement policies generally applicable to white collar crime. Those updates were coupled with the creation of a Corporate Crime Advisory Group with the mandate to study and make recommendations for further updates regarding Department policy in this area.

On September 15, 2022, Deputy Attorney General Monaco issued a further memorandum (“Monaco Memorandum”) updating the prior guidance concerning DOJ’s corporate criminal enforcement policies with the benefit of the Corporate Crime Advisory Group’s work. We cover this important update more thoroughly in our separate client alert From the Broader Perspective: Deputy Attorney General Announces Additional Revisions to DOJ’s Corporate Criminal Enforcement Policies, but in brief, the announcement covers six key areas generally relevant to white collar corporate crime: (1) expressing a clear priority for individual prosecutions;
(2) evaluating companies’ history of misconduct; (3) requiring all corporate criminal enforcement components of DOJ to develop voluntary self-disclosure policies; (4) evaluating corporate cooperation; (5) evaluating corporate compliance programs; and (6) evaluating the imposition of corporate compliance monitors.

In some respects, the core thrust of the Monaco Memorandum is to take the best practices developed in FCPA enforcement and expand them Department-wide. For example, Deputy Attorney General Monaco cited the voluntary disclosure and cooperation credit guidance from the FCPA Corporate Enforcement Policy as a model for replication across DOJ’s corporate prosecution components. Further, designating individual accountability as the “number one priority” is nothing new to FCPA enforcers, although FCPA practitioners would do well to note the Monaco Memorandum’s admonitions regarding the focus on timeliness regarding reporting on evidence relating to individual misconduct. What is new across the board, with implementation still an outstanding question, is the novel statement that companies should shift the burden of financial penalties from shareholders to executives via compensation clawbacks, in effect expanding the concept of SOX 404 clawbacks well beyond that provision. We direct our readers to our separate client alert on this important subject for more detailed discussion and analysis.

Criminal Division Corporate Enforcement & Voluntary Self-Disclosure Policy (2023)

In another significant early 2023 development, on January 17, Criminal Division Assistant Attorney General Kenneth A. Polite, Jr. issued a new Criminal Division Corporate Enforcement & Voluntary Self-Disclosure Policy (“Corporate Enforcement Policy”). This is an update that replaces the FCPA Corporate Enforcement Policy discussed in our 2019 Year-End, 2017 Year-End, and (in its pilot form) 2016 Mid-Year FCPA Updates. But importantly, it also expressly applies the guidance throughout the Criminal Division for the first time.

The most significant update to the Corporate Enforcement Policy is to substantially increase the discounts available to companies for voluntary disclosure, cooperation, and remediation. Under the old FCPA Corporate Enforcement Policy, the maximum credit a company could get if prosecution was appropriate in a voluntary disclosure case—where the company disclosed misconduct before DOJ was aware of it, then fully cooperated and remediated—was a 50% discount below the Guidelines range, and in non-voluntary disclosure cases the maximum was 25%. Under the Corporate Enforcement Policy, the presumption in voluntary disclosure cases is still a “declination with disgorgement” if the relevant requirements are met, but now if a case is brought companies are eligible for up to a 75% discount below the Guidelines range. In non-voluntary disclosure cases, companies may now receive up to a 50% discount.

Whereas the overall policy standards are much the same as before, the new watchword for cooperation and remediation is “extraordinary.” In announcing the new policy at his alma mater Georgetown University Law Center, also the alma mater of numerous senior DOJ officials and a number of the authors of this update, Assistant Attorney General Polite made clear that 50% is not “the new norm” that companies can expect for cooperation and remediation. Rather, raising the ceiling to 50% credit in non-voluntary disclosures is meant to provide room to distinguish between cooperation that is merely “full” and that which is “truly extraordinary.” The latter and tougher standard requires companies to go “above and beyond” and deliver evidence that DOJ simply could not have gotten on its own. This may include producing overseas evidence, consensual recordings, or immediate images of electronic devices as the case warrants, with the ultimate standard for prosecutors likely being “I know it when I see it.”

The other key development in the revised Corporate Enforcement Policy is enhanced guidance on the point in the applicable Sentencing Guidelines range from which the cooperation and remediation discount is taken. As FCPA practitioners know, these discounts (like the Guidelines themselves) present a math problem: in addition to knowing the discount, it is important to know the figure to which the discount applies. The Corporate Enforcement Policy makes clear that in most cases involving cooperating companies, it will be appropriate to apply the discount from the bottom of the Guidelines range. But for non-cooperating companies, not only is there no presumption of a discount, but there is also no presumption that DOJ’s sentencing recommendation will be at the bottom of the range. And for cooperating companies that are “recidivists,” the Corporate Enforcement Policy directs prosecutors to consider taking the appropriate discount from a different and higher point within the Guidelines range. As discussed above, this is what happened to three-time FCPA offender ABB—it received a 25% discount (at the time, the maximum in a non-disclosure case), but because of its criminal history the discount was taken from a midpoint between the middle- and high-end of the Guidelines range rather than the bottom. Notably, the term “recidivist” is not defined, and although the application to those with recent prior FCPA convictions may be straightforward, it is less clear how this has and will be applied to companies with prior enforcement actions for non-FCPA conduct.

2022 FCPA SPEAKER’S CORNER

U.S. anti-corruption enforcement personnel stayed active on the speaking circuit in the last months of 2022, offering a glimpse into DOJ and SEC priorities and expectations for the companies that appear before them. In addition to the notable speeches from the first eight months of 2022, covered in our 2022 Mid-Year FCPA Update, we offer the below for our readers’ attention, all of which come from the 39th American Conference Institute International Conference on the FCPA.

Acting Principal Deputy Assistant Attorney General Nicole M. Argentieri

Delivering the Conference’s keynote address, Argentieri emphasized DOJ’s coordination efforts with international anti-corruption partners. She noted that in recent years DOJ has worked closely in FCPA matters with the governments of the United Kingdom, Brazil, Malaysia, Switzerland, Ecuador, France, the Netherlands, Singapore, and others, which, as noted above in our discussion of the ABB matter, now also includes South Africa. Argentieri also highlighted DOJ’s efforts to repatriate the proceeds of international corruption to the people of the country harmed by the bribery, whether by transferring monies forfeited in criminal resolutions or allowing companies to offset penalties owed to DOJ against those paid to the foreign governments in coordinated settlements pursuant to the “Anti-Piling On” Policy.

DOJ Fraud Section Chief Glenn S. Leon

In response to critiques regarding a drop in corporate enforcement, Leon trumpeted the Fraud Section’s record of over 160 individuals prosecuted, as well as 65 trials, in 2022—well above prior-year numbers. As for corporate cases, Leon emphasized that it is important to look not only at the numbers, “but are we doing the right cases, are we bringing the right results, are we having the right impact?” And by that measure, Leon stated that he felt quite confident DOJ’s Fraud Section is doing its job.

SEC FCPA Unit Chief Charles E. Cain

Discussing the knotty challenge of ephemeral messaging, Cain emphasized that if companies implement third-party application messaging policies, they are expected to consistently follow them. “You either prohibit it and actually prohibit it or you don’t. . . . [If you have a policy and do not enforce it] it’s going to have unintended consequences.” According to DOJ officials speaking at the conference, the Criminal Division is preparing additional guidance on ephemeral messaging, which is expected to be released in 2023.

2022 FCPA-RELATED PRIVATE CIVIL LITIGATION

We continue to note that although the FCPA does not provide for a private right of action, civil litigants pursue a variety of causes of action in connection with FCPA-related conduct, with varying degrees of success. In addition to the matters discussed in our 2022 Mid-Year FCPA Update, a selection of noteworthy developments in the last several months of the year follows.

Select Shareholder Lawsuits / Class Actions

Goldman Sachs Group Inc. – On September 16, 2022, the Honorable Vernon S. Broderick of the U.S. District Court for the Southern District of New York issued an order of preliminary approval for a May 2022 settlement agreement between Goldman Sachs and derivative plaintiffs who alleged that bank officers and directors breached their fiduciary duties in connection with the 1Malaysia Development Bhd (“1MDB”) matter leading to a DOJ / SEC FCPA settlement as previously reported in our 2020 Year-End FCPA Update. Pursuant to the agreement, which was finally approved on January 20, 2023, Goldman Sachs agreed to use $79.5 million (minus a 25% attorneys’ fee award) to improve its compliance and governance measures, establish an anonymous hotline for employee tips, and expand the powers of its Chief Compliance Officer.
Cognizant Technology Solutions Corp. – On September 27, 2022, the Honorable Kevin McNulty of the U.S. District Court for the District of New Jersey dismissed derivative claims filed on behalf of shareholders of Cognizant arising from the company’s resolution of an FCPA matter with the SEC (as well as a “declination with disgorgement” from DOJ) as reported in our 2019 Year-End FCPA Update. Judge McNulty granted the motion based on “an unexcused failure to make a demand on the Board,” and also commented that the lawsuit lacked plausible allegations that current or former board members ignored red flags about Cognizant’s overseas business practices. Shareholders have appealed to the U.S. Court of Appeals for the Third Circuit, which appeal remains pending as of publication.

2022 INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS

World Bank

In his foreword to the World Bank Group’s FY 2022 Sanctions System Annual Report, World Bank Group President David Malpass wrote that the World Bank “must be continually vigilant against corruption” in Bank-supported projects, and must work to “send a clear message: corruption has no place in development.” The World Bank’s actions in 2022 did indeed send a clear message, as the Bank sanctioned 35 companies and individuals for corrupt practices and other sanctionable conduct, debarring the vast majority with conditional release—a requirement that the firm or individual sanctioned must satisfy certain conditions in order to be released from debarment and regain eligibility to participate in Bank-funded projects. One notable recent enforcement action from the last months of 2022 is:

On November 16, 2022, the World Bank announced a three-year debarment with conditional release of Spanish national Carlos Barberán Diez and two companies he controls, AC Oil & Gas SL and AC Oil & Gas Emirates LLC, for corrupt practices related to a Bank-funded project to aid in the development of Guyana’s legal framework and institutional capacity to manage its oil and gas sector. The debarment is based on allegations that Barberán Diez solicited four consulting companies for payments in return for offers to give them preferential treatment in the project procurement process. Notably, the Bank reduced the duration of its debarment in recognition of Barberán Diez’s cooperation with the Bank investigation and his agreement to take remedial steps, including “corporate ethics training.”

An important characteristic of interactions between multilateral development banks (“MDBs”) is the cross-debarment agreements between them, whereby sanctions by one MDB are recognized by other MDBs such that sanctioned parties are barred from doing business with multiple MDBs. In Fiscal Year 2022, the World Bank recognized 72 cross-debarments by other MDBs, and 30 World Bank debarments were eligible for recognition by other MDBs. In one particularly interesting example from the second half of 2022:

On August 11, 2022, the Inter-American Development Bank (“IDB”) debarred Brazilian construction company Sociedad Anónima de Obras y Servicios Copasa do Brasil (“Copasa”) for 18 months for corrupt and fraudulent practices related to a Brazilian road construction project. Copasa was sanctioned not for engaging in corrupt conduct itself, but for failing to report suspected bribery it became aware of by a consortium partner when it had a chance to prevent it. Copasa cooperated with the IDB investigation and did not contest its responsibility for failing to act to prevent bribery from occurring. This debarment—as with the July 2022 debarment of the consortium partner directly responsible for the alleged bribes (Construcap)—qualified for cross-debarment by the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the African Development Bank.

Europe

United Kingdom

Glencore Energy UK Limited

On November 3, 2022, Glencore UK was ordered to pay nearly £281 million in fines and costs to resolve the UK portion of the global anti-corruption settlement (also including U.S., Brazilian, and Swiss authorities) reported in our 2022 Mid-Year FCPA Update. The UK resolution involved corrupt payments in Cameroon, Equatorial Guinea, Ivory Coast, Nigeria, and South Sudan, and represents the largest-ever penalty handed out for a corporate criminal conviction in the UK, consisting of a fine of £182.9 million, a confiscation order of £93.5 million for the profits obtained from bribes, and payment of £4.5 million in investigation costs.

This is the first-ever conviction of a company on substantive charges of authorizing bribery, rather than purely a failure to prevent it, obtained by the UK Serious Fraud Office (“SFO”) since the introduction of the UK Bribery Act 2010. In total, Glencore UK admitted to seven bribery counts. According to press reports, as many of 17 individuals, including 11 former Glencore employees, are being investigated by the SFO for their role in this conduct, but as of this writing no charging decisions have been announced.

New Economic Crime Bill Introduced That Could Expand SFO Powers

On September 22, 2022, the UK government introduced a new Economic Crime and Corporate Transparency Bill, which includes provisions that would expand the SFO’s Section 2A pre-investigative powers under the Criminal Justice Act 1987. These powers allow the SFO to compel suspected criminals and financial institutions to share information in relation to a suspected crime. Under the existing legislation, the SFO can only employ Section 2A powers to cases of suspected international bribery and corruption. The new bill would expand the SFO’s Section 2A authority to encompass cases involving allegations of domestic bribery and corruption, as well as fraud. These expanded powers would help expedite the information gathering process, enabling the SFO to reduce its reliance on voluntary cooperation by third parties, open investigations more quickly, and prevent the destruction of relevant evidence of criminal activity. As of this writing, the bill has advanced through the House of Commons and is under consideration by the House of Lords.

Belgium

As 2022 came to a close, the EU was shaken by a scandal involving corruption charges against European Parliament Vice President Eva Kaili, among others. On December 9 and 10, 2022, Belgian authorities raided more than 20 homes and offices across Europe and seized considerable amounts of cash as well as assets such as computers and mobile devices. According to a statement from the Belgian federal prosecutor’s office, a Gulf country has allegedly sought to influence decisions at the European Parliament through paying large sums of money or offering substantial gifts to people with a significant political and/or strategic position. Several media reported that Qatar may be the country said to be involved in providing money and gifts, leading the investigation to be dubbed “Qatargate.”

Kaili recently made positive comments about Qatar’s labor rights record, in tension with reports of harsh labor conditions for construction workers involved in building facilities for the World Cup. On December 1, 2022, Kaili also voted in favor of an EU visa liberalization process for Qatari nationals during a parliamentary committee meeting. On December 15, 2022, the European Public Prosecutor’s Office requested the lifting of parliamentary immunity for Kaili.

France

Idemia

On July 7, 2022, the French National Financial Prosecutor’s Office (“PNF”) announced that it had entered into a deferred prosecution agreement (“CJIP”) with digital security company Idemia, which was ordered to pay just under €8 million ($9.4 million) to resolve charges arising from its alleged improper payment to an official in Bangladesh in order to secure a contract to create identity cards for the Bangladesh Election Commission. Under the CJIP, Idemia is required to undergo audits and verifications conducted by the French Anti-Corruption Agency (“AFA”) and implement certain compliance program enhancements over a three-year period.

Doris Group SA

On the same day, the PNF announced a second, unrelated CJIP with oil and gas engineering company Doris Group. Based on allegations that a subsidiary in Angola had made improper payments to officials of state-oil provider Sonangol, Doris Group was required to pay nearly €3.5 million ($4.1 million) and undergo audits and verifications by the AFA and implement compliance program enhancements over a three-year period.

The Idemia and Doris CJIPs are examples of the increasing cooperation between international enforcement agencies, as the French investigations were commenced after authorities received information from their counterparts in the UK (Idemia) and the United States (Doris).

Airbus SE

On November 30, 2022, the PNF announced a “limited extension” of the wide-ranging 2020 global corruption settlement discussed in our 2020 Mid-Year FCPA Update. The instant charges were resolved by CJIP and involved the use of intermediaries in connection with the sale of jets to the Gaddafi regime in Libya in 2007 and the sale of helicopters and satellites to the Kazakh government in 2009. These matters were reportedly known at the time of the prior resolution, but because of a procedural matter could not be charged at that time. To resolve the 2022 case, Airbus paid an additional €15.9 million ($16.5 million).

Italy

In October 2022, the OECD Working Group on Bribery published its Phase 4 Report on Italy’s implementation and enforcement of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and related instruments. The report concluded that Italy has strengthened its legislative framework to fight foreign bribery since the Phase 3 report in 2011, including by lengthening the statute of limitations for foreign bribery offenses by natural persons, increasing prison terms and disqualification sanctions, and introducing whistleblower protections. Further, the report acknowledged that Italy has shown an increase in enforcement actions since 2011 and complimented Italy for process improvements to its judiciary system to improve the efficiency of case processing, improvements to its mutual legal assistance and extradition framework, and improved cooperation between law enforcement and tax authorities.

Despite these improvements, the report expressed concern about the high number of dismissals of litigated foreign bribery cases with almost all foreign bribery convictions being secured through non-trial resolution. Recommendations by the Working Group instruct Italy to (1) develop a comprehensive national strategy to fight foreign bribery, (2) strengthen its monitoring of Italian and foreign media to identify potential instances of corruption, (3) raise awareness of foreign bribery and the Convention among Italian officials, accountants and auditors, and small- and medium-sized enterprises, (4) encourage companies to adopt anti-corruption compliance programs, and (5) strengthen the sanctions imposed for foreign bribery offenses. Italy has until October 2024 to make a written submission addressing all of the Working Group’s recommendations and providing an update regarding its enforcement efforts.

Russia & Former CIS

Kazakhstan

In September 2022, Kairat Satybaldy, a former high-ranking public official and nephew of Kazakhstan’s former president Nursultan Nazarbayev, was sentenced to six years in prison and banned from holding public office for 10 years for embezzling funds from and causing property damage to state-owned companies Kazakhtelekom and Transport Service Center. Satybaldy admitted to embezzling over $58 million and causing property damage worth over $25 million. The Kazakh Anti-Corruption Agency reports that it has recovered over $700 million in assets as part of its investigation into Satybaldy and four other suspects.

Russia

The state crackdown on all forms of dissent, which has intensified since Russia’s invasion of Ukraine, continues to impact the anti-corruption domain. In August, Russian federal agents arrested a number of Telegram channel administrators engaged in anti-corruption reporting work, on charges that have been widely decried as pretextual. For example, journalist Alexandra Bayazitova has been charged with extortion of an executive at the state-owned Promsvyazbank, but maintains her innocence and attributes her wrongful detention to her publication of evidence that, in fact, Promsvyazbank executives themselves had engaged in embezzlement of state funds.

In early December 2022, Russian Prosecutor General Igor Krasnov estimated that corruption had caused around 37.6 billion rubles (~ $520 million) of damage to the Russian state through the first nine months of 2022. Krasnov asserted, however, that law enforcement authorities had recovered over 62 billion rubles (~ $900 million) worth of property to compensate for the damage. This report followed an earlier announcement by Krasnov, in October, that efforts to investigate and weed out corruption had resulted in the dismissal of 800 malfeasant state officials over the preceding 18 months.

Ukraine

As Russia’s war of aggression shows no signs of abating, Ukraine has sought to shore up support from the West. In June 2022, the European Commission granted Ukraine candidate status for membership in the European Union. To move down the path to full EU membership, Ukraine must implement a list of anti-corruption initiatives. Ukraine has wasted no time in getting its house in order, as reflected by its National Anti-Corruption Bureau’s June 2022 decision to go to trial on charges initially filed in 2020 against the Chairman of the Kyiv District Administrative Court, Pavlo Vovk, two of his deputies, and four judges for soliciting bribes in exchange for favors related to judicial processes. Then, in December, just days after the United States announced sanctions against Vovk, Ukraine’s parliament voted to disband the Kyiv District Administrative Court altogether, noting that it had become a “criminal organization.”

Ukraine has also been working toward implementing the specific reforms required by the European Commission, enacting all of the anti-corruption legislation that the EU had required Ukraine to pass continuing EU membership talks. Among those reforms, the legislature passed a law that met with some controversy related to changes to the selection process for Constitutional Court judges. Additional reforms implemented in recent months have included laws strengthening Ukraine’s anti-corruption measures, harmonizing media regulation with EU standards, and protecting national minorities.

The Americas

Argentina

On December 6, 2022, sitting Vice President of Argentina Cristina Fernández de Kirchner was found guilty of “fraudulent administration” over the awarding of some 51 fraudulent public works contracts to a friend while she served as President (2007 – 2015), and a three-judge panel sentenced her to six years in prison. Prosecutors alleged the kickback scheme had caused the Argentine state a loss of at least $1 billion. Many legal observers note she is unlikely to serve time, in part due to legal immunity she enjoys as head of the Senate in Argentina. Even though Kirchner has been banned for life from holding public office as part of her sentence, she continues to serve as Vice President during the pendency of her appeal, which could take years to resolve.

Brazil

On July 12, 2022, the Brazilian government issued Decree No. 11,129/2022, a new regulation on the Brazilian Clean Company Act that, among other things, establishes procedures regarding the entry of leniency agreements and updates the methods of calculating penalties and consequences for their breach. In addition, the Decree enhances the regulations around corporate integrity programs, including providing further guidance on requirements regarding: (1) tone from the top and the proper allocation of resources to compliance functions; (2) ongoing compliance communications; (3) the need for periodic risk assessments to ensure continuous monitoring and improvement; (4) due diligence of third parties; (5) due diligence for sponsorships and donations; and (6) complaint hotline procedures, among other topics.

On December 19, 2022, Brazil’s Comptroller General and its Attorney General’s Office announced a leniency agreement with Keppel Offshore & Marine, five years after the company reached a resolution on the same facts with U.S. and Singaporean authorities, as well as a different Brazilian authority (the Federal Prosecution Service) as reported in our 2017 Year-End FCPA Update. The 2022 settlement required the payment of an additional $64.9 million payment, but is reported to resolve the matter completely for Keppel.

Canada

On September 21, 2022, the Royal Canadian Mounted Police (“RCMP”) announced that Ultra Electronics Forensic Technology Inc., along with four former executives, are facing charges of bribery and fraud under the Corruption of Foreign Public Officials Act and the Criminal Code. The company and each of the four individuals were charged with two counts of bribery of a foreign public official and one of defrauding the public arising from allegations that the defendants directed local agents in the Philippines to bribe foreign public officials in an effort to influence and expedite the award of a multi-million-dollar contract.

Eight days later, on September 29, Ultra Electronics announced that it had agreed to a remediation agreement—akin to U.S. and UK deferred prosecution agreements—with the Public Prosecution Service of Canada to resolve the claims. Details of the settlement still have not been made public as the agreement is subject to approval by the Quebec Superior Court. The settlement does not resolve the matter for the four former Ultra Electronics executives, whom the company said would be tried separately.

Panama

In June 2022, a Panamanian court provisionally dismissed money laundering charges against more than 40 defendants charged in the long-running Lava Jato (“Operation Car Wash”) cases, including the founders of Mossack Fonseca, the Panamanian law firm at the epicenter of the “Panama Papers” leak in 2016. The court found that prosecutors had not sufficiently established the precise amount of funds the defendants allegedly received from offshore sources. But then in mid-October 2022, Panama’s Superior Court of Settlement of Criminal Cases overturned the provisional dismissal of charges against 32 of those individuals, resetting their cases for trial.

Peru

In October 2022, prosecutors in Peru filed a constitutional complaint against then-President Pedro Castillo, alleging that he was operating a de facto “criminal organization” within the Peruvian government in order to corruptly benefit himself and his allies, also detaining five of his associates. As Peru’s Congress prepared to pursue its third impeachment against Castillo since he assumed office in July 2021, on December 7, 2022, Castillo declared that he was replacing Congress with an “exceptional emergency government.” Hours later, lawmakers called an emergency impeachment session, voting to remove Castillo immediately from the presidency, setting off a wave of protests by his supporters that left more than 20 dead. The same day, Castillo was also arrested and charged with rebellion, and he is being held in pretrial detention while his investigation proceeds. Following Castillo’s ouster, Vice President Dina Boluarte was elevated to the presidency to complete the term through 2026. Given recent corruption scandals, President Boluarte is Peru’s fifth president since 2020. On February 17, 2023, Peru’s Congress passed a constitutional complaint alleging corruption charges against Castillo, allowing the Attorney General’s office to open a formal criminal investigation.

Asia

China

In October 2022, the Twentieth Congress of the Chinese Communist Party (“CCP”) concluded in Beijing with a strong reiteration of the Party’s commitment to combating corruption within its ranks. Subsequently, on December 9, 2022, the Supreme People’s Procuratorate issued its Guiding Opinions on Strengthening the Handling of Bribery Criminal Cases, which emphasize its enforcement focus on both bribe givers and receivers. The Guiding Opinions provide further guidance to the lower-level procuratorates and reiterate some of the key points mentioned in the synopses of five bribery prosecutions reported in our 2022 Mid-Year FCPA Update.

The last year brought an increase in anti-corruption enforcement actions in China’s technology manufacturing and financial sectors. For example, the Central Commission for Discipline Inspection (“CCDI”) investigated a number of high-profile figures of Sino IC Capital, which manages the state-backed China Integrated Circuit Industry Investment Fund, and brought corruption-related charges against senior officials of the Bank of East Asia, China Merchants Bank, and People’s Bank of China.

Hong Kong

On August 19, 2022, the Independent Commission Against Corruption (“ICAC”) indicted Ricky Lee, the principal manager of the Hong Kong Airport Authority, and Ng Kai-on of Carol Engineering for allegedly accepting and offering bribes totaling approximately HKD 3.8 million (~ USD 490,000) in connection with the Hong Kong International Airport third-runway project. According to the ICAC, Carol Engineering was a subcontractor on the project and made payments to Lee in exchange for being awarded works and materials supply contracts, and for assistance in securing the release of payments due to Carol Engineering by the general contractors on the project. On February 15, 2023, the ICAC announced charges against eight additional defendants for their roles in offering, accepting, or handling bribes related to the third-runway project scheme. The new defendants include the former General Manager of the Hong Kong Airport Authority, Ricky Lee’s wife, four individuals related to subcontractors Carol Engineering and Goldwave Steel Structure Engineering, and two operators of a supplier for the third-runway project.

India

In June 2022, India’s Central Bureau of Investigation (“CBI”) arrested an officer of India’s drug regulator (the Central Drugs Standard Control Organization), and an employee of Biocon Biologics (a subsidiary of the well-known Indian biotechnology company Biocon Limited), on allegations of corruption. The CBI alleged that the arrested official accepted a bribe from a middle-man representing Biocon Biologics in exchange for a clinical trial waiver for a new drug being manufactured by the company. The CBI also arrested another public official from the drug regulator and employees of two private firms that were liaising with the drug regulator on behalf of Biocon Biologics.

Also in June 2022, India’s anti-corruption ombudsman (the “Lokpal”) announced that it had received 5,680 corruption-related complaints through its publicly available reporting channels between April 2021 and March 2022. In response to a Right to Information petition, the Lokpal also disclosed that it has yet to commence formal investigations into more than 5,100 of these complaints. Directors of inquiry and prosecution have not yet been appointed and we are not aware of any significant anti-corruption actions undertaken by the Lokpal. Further, two judicial member positions in the eight person Lokpal have remained vacant and unfilled for more than two years.

In a significant court decision issued in August 2022, the High Court of Karnataka quashed a 2016 executive order issued by the state government creating the state’s Anti-Corruption Bureau (“ACB”). The executive order had created the ACB under the supervision of the state’s Chief Minister and had empowered it to probe corruption allegations involving state public officials. In invalidating the executive order, the High Court found that the state government had sought to usurp the powers of the state’s Lokayukta—an anti-corruption watchdog that is empowered to investigate and prosecute corruption cases involving public officials. The court also found that the executive order did not explicitly stipulate the authority that is empowered to investigate corruption cases involving the Chief Minister, other ministers, or members of the state legislature. Historically, the Lokayukta has been responsible for the most significant anti-corruption enforcements in Karnataka and is viewed as less prone to political influence.

Finally, a court of appeal in Delhi recently upheld the right of enforcement agencies to intercept telephone conversations of a person suspected to have violated provisions of India’s Prevention of Corruption Act. The court recognized the right of the Indian Government to approve such “phone tapping” on public security grounds, though the Indian Government did not provide elaborate reasons as to why the interception was required for public security.

Indonesia

On August 15, 2022, Indonesia’s Attorney General’s Office announced that businessman Surya Darmadi voluntarily surrendered after eight years on the run from corruption charges. Indonesia’s Corruption Eradication Commission (known locally as the “KPK”) alleged that Darmadi paid 3 billion rupiah (~ $200,000) in bribes to the then-governor of Riau province, Annas Maamum, to amend a forestry regulation that allowed Darmadi’s Duta Palma Group to convert 91,000 acres of forest into palm oil estates. The corruption allegedly cost the country IDR 78 trillion rupiah (~$5 billion), making it the largest corruption case in the country’s history. On February 23, 2023, a court sentenced Darmadi to fifteen years in prison, in addition to a 39 billion rupiah (~$2.6 million) fine.

On September 25, 2022, the KPK announced that it had detained Supreme Court judge Sudrajad Dimyati, and six other individuals, for involvement in an alleged scheme to pay IDR 2.2 billion
(~ $141,430) in bribes to secure a favorable rulings in an appeal by a lending cooperative facing insolvency.

Japan

In November 2022, the Tokyo District Public Prosecutors Office filed indictments against former 2020 Tokyo Olympic and Paralympic Organizing Committee Executive Board Member Haruyuki Takahashi, Aoki Holdings founder Hironori Aoki, former Aoki executive Katsuhisa Ueda, and twelve other individuals. The indictments alleged that Takahashi accepted a total of ¥196 million (~ $11.2 million) in bribes from five companies, including Aoki Holdings and the Kadowaka publishing firm, in exchange for awarding them sponsorship rights at the Olympics. On December 22, 2022, Takahashi, Aoki, and Ueda all pleaded guilty to the allegations at the same trial. Prosecutors are continuing to investigate the executives of the five companies, as well as former Prime Minister Yoshiro Mori, in relation to the alleged bribery.

Korea

Recent amendments to the Improper Solicitation and Graft Act, also widely known as the Kim Young-Ran Act, went into effect on June 8, 2022. Among other things, the amendments now prohibit providing improper payments and other benefits to persons reviewing scholarship, thesis, and internship applications, such as professors and company employees. Moreover, the amendment enhances protections for those who report violations. For example, individuals may now report anonymously through attorneys to further protect their identities. Furthermore, if the individual making the report has violated the Act, the amendments allow for reduced liability, including potential non-prosecution or exemption from fines, in exchange for information regarding potential violations committed by the reporter or others. Lastly, the amendment allows for compensation of reporters who incur medical expenses in connection with submitting reports, such as mental distress.

On August 12, 2022, South Korea’s President Suk-Yeol Yoon administered National Liberation Day special pardons to nearly 1,700 people, including Samsung Electronics Co.’s Chairman Jae-Yong Lee and Lotte Group’s Chairman Dong-Bin Shin. As previously reported in our 2019 Year-End and 2018 Mid-Year FCPA Updates, respectively, Lee was convicted of bribing former president Geun-Hye Park in exchange for securing government support during a merger between two Samsung affiliates in 2015, and Shin was convicted of bribing the former president in exchange for assistance in securing a license for his duty-free business. Importantly, through the special pardons, Lee and Shin are no longer subject to Korean laws that prohibit employers from re-hiring individuals who committed certain crimes (such as bribery) for five years following a term of imprisonment, making it possible for Lee and Shin to resume leadership positions within their former companies.

2022 also saw the first trial and judgment arising from case brought by Korea’s Corruption Investigation Office for High-Ranking Officials (“CIO”), which we reported on in our 2021 Year-End FCPA Update. On November 9, 2022, the Seoul Central District Court’s 1st Criminal Division acquitted a former chief prosecutor, Hyung-Jun Kim, who was charged with receiving a bribe from a lawyer in exchange for leniency during investigations in 2015 and 2016. In acquitting Kim, the Court found that part of the alleged bribe was a loan from the lawyer, and that there was insufficient evidence to conclude that the remainder of the funds were provided in exchange for favors during the investigations. The CIO has suggested that it may appeal the ruling.

Australia

In September 2022, Australian prosecutors charged Panjak Patel and Sornalingam Ragavan, two former senior managers of engineering firm SMEC International, with conspiring to bribe public officials in Sri Lanka in connection with a bid to win contracts for a pair of infrastructure projects in the country worth a combined AUD 14 million (~ $8.8 million). The pair are alleged to have paid roughly AUD 304,000 (~ $200,000) in bribes to the Sri Lankan officials between 2009 and 2016.

On November 30, 2022, Australia’s parliament passed legislation creating a new National Anti-Corruption Commission (“NACC”) to investigate public corruption and empowering it to act independently of political authorities, with broad jurisdiction to investigate and prosecute corrupt conduct across Australia’s public sector. The legislation also creates strong protections for whistleblowers who report corrupt conduct and exemptions allowing journalists to protect the identity of their sources.

Africa

Democratic Republic of the Congo

On December 5, 2022, Glencore plc announced that it will pay $180 million to the Democratic Republic of the Congo as part of an agreement to resolve alleged corruption between 2007 and 2018. This settlement relates to the same underlying conduct in the Democratic Republic of the Congo that formed part of the FCPA settlement with the company as reported in our 2022 Mid-Year FCPA Update, and illustrates the increasing risk of follow-on claims by local governments after companies resolve FCPA cases.

South Africa

In September 2022, South Africa’s National Prosecuting Agency charged the South African subsidiary of McKinsey & Company in connection with the consulting company’s work for state railway company Transnet. McKinsey’s prosecution is connected to an ongoing criminal case against five former Transnet executives charged with fraud, corruption, and money laundering over a bribery scheme allegedly designed to assist a Chinese state company in winning a contract to supply 1,300 trains for South Africa’s railways. A previous commission had found that Transnet awarded tenders to McKinsey due in part to its connections to the Gupta family, who have drawn scrutiny for using connections to former president Jacob Zuma to embezzle state funds. McKinsey previously agreed to pay back over 870 million rand (~ $63 million) in connection with the fees it received, but did not admit any wrongdoing.

In October 2022, South African President Cyril Ramaphosa announced that the government will establish a permanent and independent agency to combat corruption and fraud. The proposed Permanent Anti-Corruption Commission and Public Procurement Anti-Corruption Agency are consequences of the recommendations of the Commission of Inquiry into State Capture, also known as the Zondo Commission, created in 2018 to investigate widespread corruption allegations against former President Jacob Zuma’s government. Legislation connected to the Commission’s recommendations is set to be finalized in Parliament in March 2023.

The following Gibson Dunn lawyers participated in preparing this client update: F. Joseph Warin, John Chesley, Richard Grime, Patrick Stokes, Kelly Austin, Patrick Doris, Katharina Humphrey, Matthew Nunan, Oleh Vretsona, Oliver Welch, Brian Anderson, Hadhy Ayaz, Anthony Balzofiore, Joerg Biswas-Bartz, Ella Alves Capone, Peter Chau, Josiah Clarke, Rommy Lorena Conklin, Angela Coco, Bobby DeNault, Andreas Dürr, Kate Goldberg, Sarah Hafeez, Kathryn Harris, Michael Kutz, Nicole Lee, Allison Lewis, Ramona Lin, Lora MacDonald, Nikita Malevanny, Andrei Malikov, Jacob McGee, Megan Meagher, Katie Mills, Su Moon, Sandy Moss, Jaclyn Neely, Ning Ning, Bryan Parr, Mariam Pathan, Julian Reichert, Jasmine Robinson, Hayley Smith, Jason Smith, Pedro Soto, Laura Sturges, Karthik Ashwin Thiagarajan, Katie Tomsett, Alyse Ullery-Glod, Tim Velenchuk, Dillon Westfall, Edward Zhang, Yan Zhao, and Caroline Ziser Smith.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 100 attorneys with FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm’s domestic and international offices. Please contact the Gibson Dunn attorney with whom you work, or any of the following:

Washington, D.C.
F. Joseph Warin (+1 202-887-3609, [email protected])
Richard W. Grime (+1 202-955-8219, [email protected])
Patrick F. Stokes (+1 202-955-8504, [email protected])
Judith A. Lee (+1 202-887-3591, [email protected])
David P. Burns (+1 202-887-3786, [email protected])
David Debold (+1 202-955-8551, [email protected])
Michael S. Diamant (+1 202-887-3604, [email protected])
John W.F. Chesley (+1 202-887-3788, [email protected])
Daniel P. Chung (+1 202-887-3729, [email protected])
Stephanie Brooker (+1 202-887-3502, [email protected])
M. Kendall Day (+1 202-955-8220, [email protected])
Adam M. Smith (+1 202-887-3547, [email protected])
Oleh Vretsona (+1 202-887-3779, [email protected])
Courtney M. Brown (+1 202-955-8685, [email protected])
Ella Alves Capone (+1 202-887-3511, [email protected])
Bryan Parr (+1 202-777-9560, [email protected])
Pedro G. Soto (+1 202-955-8661, [email protected])
Jason H. Smith (+1 202-887-3576, [email protected])

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Zainab N. Ahmad (+1 212-351-2609, [email protected])
Lisa A. Alfaro (+55 11 3521 7160, [email protected])
Reed Brodsky (+1 212-351-5334, [email protected])
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Kelly Austin (+1 303-298-5980, [email protected])
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Los Angeles
Debra Wong Yang (+1 213-229-7472, [email protected])
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Michael M. Farhang (+1 213-229-7005, [email protected])
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Nicola T. Hanna (+1 213-229-7269, [email protected])

San Francisco
Winston Y. Chan (+1 415-393-8362, [email protected])
Thad A. Davis (+1 415-393-8251, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
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Palo Alto
Benjamin Wagner (+1 650-849-5395, [email protected])

London
Patrick Doris (+44 20 7071 4276, [email protected])
Charlie Falconer (+44 20 7071 4270, [email protected])
Sacha Harber-Kelly (+44 20 7071 4205, [email protected])
Michelle Kirschner (+44 20 7071 4212, [email protected])
Matthew Nunan (+44 20 7071 4201, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])

Paris
Benoît Fleury (+33 1 56 43 13 00, [email protected])
Bernard Grinspan (+33 1 56 43 13 00, [email protected])

Munich
Katharina Humphrey (+49 89 189 33 155, [email protected])
Benno Schwarz (+49 89 189 33 110, [email protected])
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Hong Kong
Kelly Austin (+852 2214 3788, [email protected])
Oliver D. Welch (+852 2214 3716, [email protected])

In the pursuit of finding more effective and efficient ways to recruit, train, evaluate and retain employees, employers have turned to the use of automated tools.

Some employers use artificial intelligence to sort through high volumes of applications, select applicants for automated interviews or guide candidates through the application process. Meanwhile, others are leveraging AI to ensure employee safety and monitor productivity and performance.

Following a momentous year in 2022, employers must now consider the application of, and potentially prepare to comply with, a series of new transparency, data and auditing requirements imposed by state and local AI and privacy laws affecting such tools, many of which are taking effect in 2023.

For example, beginning in April, New York City employers using automated employment decision-making tools in hiring and promotion will have to navigate new notice and bias auditing requirements.

Meanwhile, California employers will need to be ready for the enforcement of applicant and employee data rights under the California Consumer Privacy Act, as amended by the California Privacy Rights Act, which took effect Jan. 1.

At the same time, we are continuing to see increasing involvement from the U.S. Equal Employment Opportunity Commission in this space, as well as ongoing legislative efforts to regulate the use of automated tools in the workplace.

In this article, we will address the top 10 takeaways for consideration regarding AI and privacy developments for employers already using, or contemplating the use of, automated tools in the employment lifecycle.

Read More

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

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

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

Artificial Intelligence Group:

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

Vivek Mohan – Co-Chair, Palo Alto (+1 650-849-5345, [email protected])

Labor and Employment Group:

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

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

The CHIPS and Science Act (“CHIPS Act”) appropriated $50 billion to spur development of a U.S.-based semiconductor industry and supply chains, including $39 billion 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] On February 28, 2023, the Biden administration issued its first Notice of Funding Opportunity (“NOFO”) under the CHIPS Act to begin distributing that $39 billion through direct investments, loans, and loan guarantees. The Department of Commerce provided key information for potential applicants through a webcast, Vision for Success paper, and online announcement. This alert highlights key details from those sources that will be of use to clients applying for CHIPS Act funding.

Who Should Apply?

The CHIPS Act limits eligibility to “covered entities,” which include non-profit entities, private entities, consortia of private entities, or consortia of non-profit, public, and private entities. They must demonstrate the ability to finance, construct, or expand a facility related to the fabrication, assembly, testing, advanced packaging, or production of semiconductors.[2]

For this first round of funding, the Department is seeking applicants in the following categories:

Leading-Edge Facilities
Current-Generation Facilities
Mature-Node Facilities
Back-End Production Facilities[3]

In all but extraordinary cases, applicants should be domestic U.S. entities.[4]

Application Schedule

The Department of Commerce announced the following schedule for interested parties to follow in applying for this first round funding:

February 28, 2023: First Notice of Funding Opportunity announced. The Statement of Interest (“SOI”) portal is now open. All applicants with proposals “for the construction, expansion, or modernization of commercial facilities for the front-and back-end fabrication of leading-edge, current generation, and mature-node semiconductors” should submit a Statement of Interest as soon as possible. The Statement of Interest must be submitted at least 21 days prior to submitting a pre-application or full application.

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.[5]

The Department noted that it will announce another round of funding in the late spring for material suppliers and equipment manufacturers, and a third round of funding in the fall to support construction of semiconductor research and development facilities.[6]

The Department also indicated that projects should start their environmental permitting processes as soon as possible. While questions exist regarding whether the administration will exempt CHIPS Act projects from the National Environmental Policy Act (“NEPA”) authorization process, and the Department did not comment on that question directly, it did urge applicants not to wait to start the authorization process.[7]

Application Process Key Points

Statement of Interest: The Department of Commerce encouraged parties to submit a statement of interest to help the CHIPS Program Office gauge interest in the program and understand the types of projects that will be applying. The SOI should include applicant information and basic project information such as the nature of the project and its potential scope.

Pre-Application: Applicants are not required to submit a pre-application, but submitting one creates another opportunity for dialogue between the Program Office and applicants. The CHIPS Program Office is willing to provide feedback on pre-applications that will strengthen the full application. Pre-applications should include a more detailed project description and a summary of financial information. The Department strongly recommends pre-applications for current-generation, mature-node, and back-end production facility applications.

Full Application: Applicants must submit a full application, with substantial detailed information on the proposed project, to be considered for an award.

Due Diligence and Award: If the Program Office determines an applicant is likely to receive an award, it will enter into a preliminary memorandum of terms with the applicant. That memorandum will require validation of national security and financial information. The Program Office will engage outside advisers to assist with the due diligence, which the applicant must fund. The Program Office will disburse funds based on meeting project milestones rather than through lump sum payments.[8]

Issues to Emphasize in Applications

The Department of Commerce has underscored that the CHIPS program should advance U.S. economic and national security objectives; demonstrate commercial viability, financial strength, and technical feasibility, and readiness; promote workforce development and diversity; and encourage broader investment in semiconductors. Successful applicants should explain how they will advance each of those priorities, which the Department details in its online Fact Sheet.

Of particular note, the Department is expected to favor projects that support the Department of Defense, other national security objectives, or other government functions. It also intends to fund projects that demonstrate they can be self-sustaining without future subsidies after the initial government investment, as well as those that can improve the semiconductor supply chain. The Department will give preference to companies that commit to growing the semiconductor industry through research and development and workforce training. In addition, the Department seeks projects that:

Promote women-owned and small businesses;
Include “concrete goals” for outreach plans to underserved communities;
Commit to enter project labor agreements with building trade unions;
Develop strategic partnerships with training entities and institutions of higher education to provide workforce training;
Demonstrate how an accounting for weather and climate risks and include a climate and responsibility plan in their applications;
Provide childcare “to the greatest extent feasible” (see further discussion below); and
Are sponsored by companies that commit not to engage in stock buybacks for five years after receiving an award.[9]

Unique Program Requirements

The Department webcast speakers flagged several program requirements detailed in the NOFO worth applicants’ early attention. Funds may not be used to construct or modify facilities outside of the United States or to physically relocate an existing U.S. facility to another U.S. jurisdiction unless it is in the interest of the United States as determined by the Department. They also may not be used for stock buybacks or dividend payments (though there is no detail of compliance as money ultimately is fungible), and project budgets may not include indirect costs.[10]

Two special requirements apply to applicants seeking more than $150 million in direct funding:

Applicants must provide a plan for how they will provide childcare for their workers (the $150 million threshold triggers an actual requirement, rather than the “to the greatest extent feasible” standard); and
Applicants must share a portion of cash flows exceeding the applicants’ projections with the federal government, which will use the funds for CHIPS Act purposes.[11]

How Gibson Dunn Can Assist

Gibson Dunn has an expert team of industry subject matter experts and public policy professionals tracking implementation of the CHIPS Act closely. We are available to assist eligible clients to secure funds throughout the application process. We also can engage with the Department of Commerce and other federal agencies regarding the structure of future CHIPS Act programs as the agencies develop them.

__________________________

[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] 15 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, here [hereinafter, NOFO].

[3] For an in-depth discussion of the types of facilities, see the NOFO at Sec. 1.

[4] U.S. Dep’t of Commerce Nat’l Institute of Standards and Technology CHIPS Frequently Asked Questions, https://www.nist.gov/chips/frequently-asked-questions.

[5] CHIPS for America Guide (Feb. 28, 2023), here.

[6] Department of Commerce Webcast (Feb. 28, 2023).

[7] Id.

[8] Department of Commerce Webcast (Feb. 28, 2023).

[9] Id.; see NOFO.

[10] Id.; Department of Commerce Webcast (Feb. 28, 2023).

[11] NOFO Sec. 6.

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])

Robert C. Blume – Denver (+1 303-298-5758, [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])

Please join us for a discussion about the latest developments and trends in U.S. and international anti-money laundering (AML) and sanctions laws, regulations, and enforcement. In particular, we cover recent updates related to BSA/AML and sanctions rulemaking, legislation, and enforcement actions, and we discuss key areas of focus for enforcers, including digital assets, financial transactions involving Russia, proposed expansions of the BSA/AML regulatory regime, fintech partnerships, online marketplaces, ransomware, and emerging payment models. We also discuss compliance expectations and best practices, and what to expect for BSA/AML and sanctions in 2023 and beyond.

PANELISTS:

F. Joseph Warin is chair of the 250-person Litigation Department of Gibson Dunn’s Washington, D.C. office, and he is co-chair of the firm’s global White Collar Defense and Investigations Practice Group. Mr. Warin’s practice includes representation of corporations in complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. His clients include corporations, officers, directors and professionals in regulatory, investigative and trials involving federal regulatory inquiries, criminal investigations and cross-border inquiries by dozens of international enforcers.

Stephanie L. Brooker is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. She is Co-Chair of the firm’s Global White Collar Defense and Investigations, Financial Institutions, and Anti-Money Laundering Practice Groups. She is a former federal prosecutor and the former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). As a prosecutor, Ms. Brooker investigated and prosecuted a broad range of white collar and other federal criminal matters, briefed and argued criminal appeals, and served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia. Ms. Brooker’s practice focuses on internal investigations, regulatory enforcement defense, white-collar criminal defense, and compliance counseling. She handles a wide range of white collar matters, including representing financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving sanctions; anti-corruption; anti-money laundering (AML)/Bank Secrecy Act (BSA); digital assets and fintech; securities, tax, and wire fraud, foreign influence; sensitive employee issues; and other legal issues. She routinely handles complex cross-border investigations. Ms. Brooker’s practice also includes BSA/AML and FCPA compliance counseling and deal due diligence and significant criminal and civil asset forfeiture matters.

M. Kendall Day is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where he is co-chair of Gibson Dunn’s Financial Institutions Practice Group, co-leads the firm’s Anti-Money Laundering practice, and is a member of the White Collar Defense and Investigations Practice Group. His practice focuses on internal investigations, regulatory enforcement defense, white-collar criminal defense, and compliance counseling. He represents financial institutions; fintech, crypto-currency, and multi-national companies; and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, FCPA and other anti-corruption, securities, tax, wire and mail fraud, unlicensed money transmitter, false claims act, and sensitive employee matters.

Adam M. Smith is a partner in the Washington, D.C., office of Gibson, Dunn & Crutcher. He is an experienced international lawyer with a focus on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, CFIUS, the Foreign Corrupt Practices Act, embargoes, and export controls. Mr. Smith previously served in the Obama Administration as the Senior Advisor to the Director of the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and as the Director for Multilateral Affairs on the National Security Council.

Ella Alves Capone is Of Counsel in the Washington, D.C. office of Gibson, Dunn & Crutcher. She is a member of the White Collar Defense and Investigations, Global Financial Regulatory, and Anti-Money Laundering practice groups. Ms. Capone’s practice focuses on advising multinational corporations and financial institutions on Bank Secrecy Act/anti-money laundering (BSA/AML), anti-corruption, sanctions, securities, and payments regulatory and enforcement matters. She has particularly extensive experience advising major banks, casinos, social media and gaming platforms, marketplaces, fintechs, payment service providers, and cryptocurrency businesses on regulatory compliance.

Chris Jones is a senior associate in the Los Angeles office of Gibson, Dunn & Crutcher and a member of the White Collar Defense and Investigations and Anti-Money Laundering practice groups. Mr. Jones has experience representing clients in a wide range of anti-corruption, anti-money laundering, litigation, sanctions, securities, and tax matters. He has represented various corporations, including a number of financial technology and cryptocurrency companies, in investigations by the DOJ, SEC, FinCEN, and OFAC.

MCLE CREDIT INFORMATION:

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Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

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California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

On February 20, 2023, the Hong Kong Securities and Futures Commission (“SFC”) published its highly-anticipated Consultation Paper on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed by the Securities and Futures Commission (“Consultation Paper”).[1] This follows the passing in December 2022 of significant amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”), which introduce a new licensing regime for virtual asset trading platforms that carry on the business of trading non-security tokens in Hong Kong and/or actively markets such services to Hong Kong investors (“AMLO Licensing Regime”).[2] The AMLO Licensing Regime will come into effect on June 1, 2023. We have previously published client alerts on this topic.[3]

The aim of the Consultation Paper is to obtain feedback from the market on the implementation of the AMLO Licensing Regime. As a first step, the SFC will be focusing on the regulation of virtual asset trading platform operators (“Platform Operators”), e.g. virtual asset exchanges and other types of virtual asset trading entities, under the AMLO Licensing Regime.

The Consultation Paper broadly covers two areas: (i) licensing and conduct requirements concerning Platform Operators and (ii) anti-money laundering and counter-financing of terrorism (“AML/CFT”) requirements applicable to virtual asset service providers (“VASP”). To aid the consultation, the SFC has helpfully included draft texts of the Guidelines for Virtual Asset Trading Platform Operators (“VATP Guidelines”) and the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-Licensed Virtual Asset Service Providers) (“VASP AML/CFT Guidelines”).

The Consultation Paper effectively proposes to align the regulatory requirements applicable to virtual asset service providers (“VASPs “) under the AMLO Licensing Regime with the requirements applicable to current Type 1 (dealing in securities) and Type 7 (automated trading services) licensed virtual asset trading platforms that provide trading services in at least one security token under the Securities and Futures Ordinance (“SFO”) (“SFO Licensing Regime”).[4]

Notably, the VATP Guidelines build on the existing Terms and Conditions for Virtual Asset Trading Platform Operators (“VATP Terms and Conditions”), which are currently applicable to licensed Platform Operators under the SFO Licensing Regime (“SFO-licensed Platform Operators”).[5] Whilst the VATP Guidelines have preserved much of the existing licensing conditions under the VATP Terms and Conditions, significant additions and modifications are also introduced to the existing regulatory requirements set out in the VATP Terms and Conditions. Once the VATP Guidelines come into effect, it will supersede the VATP Terms and Conditions. In this client alert, we focus on these additions or variations. A recap on key aspects of the existing requirements under the VATP Terms and Conditions are summarized in an Appendix.

I. Transitional Arrangements

The AMLO Licensing Regime will become effective on June 1, 2023. This means that any Platform Operator operating or marketing its services to Hong Kong investors without a valid licence will commit a breach unless they qualify for the 12-month transitional period. As such, Platform Operators not operating in Hong Kong immediately before June 1, 2023 should not commence any virtual asset trading platform business in Hong Kong until they are SFC-licensed.

A 12-month transitional period will be introduced for compliance with the requirements in relation to existing clients or virtual assets currently made available by SFO-licensed platform operators. To be eligible for the transitional arrangements, a Platform Operator must be in operation in Hong Kong immediately prior to June 1, 2023 and must have meaningful and substantial presence. Considerations on whether a Platform Operator has meaningful and substantial presence in Hong Kong include whether it is incorporated in Hong Kong, whether it has a physical office in Hong Kong, and whether its key personnel are based in Hong Kong.

The following timeline highlights the key dates and implementation details of the transitional arrangements:

To avoid confusion on whether a Platform Operator is operating legally during the transitional period, the SFC will publish lists on its website to inform the public of the different regulatory statuses of Platform Operators.

Note that the above transitional arrangements are only applicable under the AMLO Licensing Regime. There are no transitional arrangement for compliance with the SFO Licensing Regime. This means that Platform Operators intending to offer trading in security tokens should only commence business upon obtaining the relevant Type 1 and 7 licences from the SFC.

II. Overview of Key Proposals Introduced by The Consultation Paper

The key proposals under the Consultation Paper are summarized below:

Licensing Requirements

All Platform Operators (including existing SFO-licensed Platform Operators) will be subject to the AMLO Licensing Regime.

SFO-licensed Platform Operators engaging in security tokens trading will additionally be subject to the Type 1 and 7 Licensing Regime under the SFO.

The SFC has expressed its view that, considering that terms and features of virtual assets may evolve (which could impact on the classification of a security / non-security token), it encourages all VASPs (including their proposed responsible officers and licensed representatives) to be dual licensed under both the SFO and AMLO Licensing Regimes. However, strictly under the law, it is not be mandatory to be dual licensed under both the SFO and AMLO Licensing Regime (see Section VI “Licensing Requirements and Procedures” for further discussion on this point).

Retail Access

Currently, SFO-licensed Platform Operators can only serve professional investors, and are restricted from providing services to retail investors. Under the VATP Guidelines, the SFC contemplates expanding the scope of licences to allow for retail access. To this end, the SFC has proposed safeguards intended to protect retail investors, for example:

Suitability Assessments: When onboarding clients, a Platform Operator should conduct suitability assessments on the client’s risk tolerance and risk profile. The Platform Operator will have to set a limit for each client to ensure the client’s exposure to virtual assets is reasonable, with reference to the client’s financial situation and personal circumstances. Such limit must be kept up-to-date through regular review (see Section IV “Suitability Obligations” for further discussion on this point).
Marketing: A Platform Operator should not post any advertisement in connection with any specific virtual asset.
Governance: A Platform Operator should set up a token admission and review committee to oversee, amongst others, the implementation of the token admission criteria (see “Token Admission and Review Committee” below).
Token Due Diligence: The SFC has introduced a set of objective criteria for Platform Operators to follow when determining whether to make a specific virtual asset available to retail investors. For example, Platform Operators are prohibited from offering a virtual asset that amounts to “securities” (as defined by the SFO to retail investors)[6] if such an offer may breach the offer of investments regime[7] or the prospectus regime.[8] To this end, before making any virtual assets available for trading by retail investors, a Platform Operator should obtain and submit to the SFC a written legal opinion confirming that each of the virtual assets proposed does not amount to securities (see Section III below, “Token Admission Criteria”).[9]
Token Admission: The VATP Guidelines introduces a set of specific token admission criteria applicable to virtual assets which are intended for retail access. These criteria are in addition to a separate set of general token admission criteria. In particular, a Platform Operator should make sure that virtual assets made available for trading by its retail investors must be an eligible large-cap virtual asset (see Section III “Token Admission Criteria” for further discussion on this point).
Disclosure: A Platform Operator is expected to disclose sufficient product information to enable clients to appraise the position of their investments, for instance, the price and trading volume of the virtual asset on the platform, background information about the management team of the virtual asset, and brief description of the terms and features of the virtual asset.

The SFC notes that there are diverse views on whether retail investors should be granted access to services provided by Platform Operators. On one hand, such access may legitimise the trading of virtual assets, which are prone to high volatility and market manipulation. On the other hand, denying retail access may result in investor harm and push retail investors to trade on unregulated platform.

On this point, the SFC is seeking the public’s view on:

Whether Platform Operators should be allowed to provide their services to retail investors, subject to the proposed robust investor protection measures;
Feedback on the general token admission criteria and specific token admission criteria; and
Suggestions on other requirements that should be implemented from an investor protection perspective if the SFC is minded to allow retail access.

Token Admission and Review Committee

As mentioned above, the SFC has proposed that each relevant Platform Operator set up a token admission and review committee. Although the functions of a token admission and review committee are normally closely associated with virtual asset exchanges, in virtual asset markets, other forms of virtual asset trading entities will have similar committees, and it will be the SFC’s expectation that all Platform Operators shall implement such committees.

The token admission and review committee will have the following functions:

Policy Enforcement: Establishing and implementing (i) the criteria for a virtual asset to be admitted for trading, taking into the token admission criteria; and (ii) the criteria for halting, suspending and withdrawing a virtual asset from trading (see Section III “Token Admission Criteria” for further discussion on this point).
Token Admission and Withdrawal: Making the final decision on whether to admit, halt, suspend, or withdraw a virtual asset for trading with reference to the abovementioned criteria.
Ongoing Monitoring: Ongoing review of the abovementioned criteria to ensure that they remain appropriate, and that the virtual assets admitted for trading continue satisfy the token admission criteria.

At a minimum, the token admission and review committee should consist of members of senior management principally responsible for managing the key business line, compliance, risk management, and information technology. The token admission and review committee will report to the Board of Directors at least monthly.

To comply with the SFC’s regulatory requirements, we anticipate that Platform Operators will implement a virtual asset listing policy which covers all aspects of the token admission and withdrawal process, as well as virtual asset due diligence questionnaire to be completed for each virtual asset prior to its admission to the platform. Many global virtual asset trading platforms will have already implemented such policies and due diligence questionnaires, which can be updated to align with the regulatory requirements for Platform Operators.

Insurance and Compensation Arrangement

Currently, an SFO-licensed Platform Operator must maintain an insurance policy covering the risks involved with client virtual assets held in hot storage and in cold storage. In view of industry feedback on the practical difficulties with complying with these requirements, the SFC has proposed the following modifications:[10]

Compensation Arrangement: A Platform Operator should put in place an SFC-approved compensation arrangement, which provides an appropriate level of coverage for risks associated with the custody of client virtual assets. The arrangement can include a combination of third-party insurance and funds of the Platform Operator (including corporations within the same group as the Platform Operator) which are set aside on trust and designated for such purpose.
Ongoing Monitoring: A Platform Operator is required to monitor the total value of client virtual assets under its custody on a daily basis. A Platform Operator should notify the SFC and take prompt remedial measures if it becomes aware that the total value of client virtual assets under custody exceeds the covered compensation amount.
Segregation of Funds: Any funds that are set aside on trust and designated to go into the compensation arrangement must be segregated from the assets of the Platform Operator, its Associated Entity or any group companies.[11]

The SFC welcomes feedback on this proposal. In particular, the SFC seeks market reactions on the following:

Feedback on the proposal to allow for a combination of third-party insurance and Platform Operator funds to make up the compensation arrangement;
Suggestions on how funds should be set aside by Platform Operators and how these suggestions can provide the same level of comfort as third-party insurance; and
Suggestions on technical solutions which could effectively mitigate risks associated with the custody of client virtual assets, particularly assets hold in hot storage.

Virtual Asset Derivatives

The current SFO Licensing Regime does not allow SFO-licensed Platform Operators to offer, trade or deal in virtual asset futures contracts or related derivatives. This restriction is preserved under the VATP Guidelines.[12] In light of growing market interest in offering virtual asset derivatives (especially to institutional investors), the SFC is keen to understand the market’s views on virtual asset derivatives. The SFC will be conducting a separate review exercise to formulate the policies around virtual asset derivatives trading.

Specifically, the SFC is seeking feedback on the type of business model that Platform Operators plan to adopt; the type of virtual asset derivatives that Platform Operators propose to offer for trading; and the proposed target investors if trading services in virtual asset derivatives are permitted.

Proprietary Trading

The SFO Licensing Regime currently prohibits SFO-licensed Platform Operators from engaging in proprietary trading or market-making activities on a proprietary basis (see Appendix, “Conflict of Interest”). This restriction is adopted under the VATP Guidelines, with a slight modification. The SFC proposes to carve out an exception, such that Platform Operators will be allowed to engage in off-platform back-to-back transactions entered into by the Platform Operator,[13] and any other limited circumstances approved by the SFC on a case-by-case basis.

Corporate Governance

Platform Operators and their responsible officers seeking a licence must demonstrate to the SFC that they are a fit and proper, and that they have the ability to carry out licensed activities competently.[14] The introduction of the fit and proper and competence requirements is modelled on the same requirements for the licensing of regulated activities under the SFO.[15]

The VATP Guidelines also introduce a series of general principles governing the conduct of Platform Operators. Again, these general principles take after the general principles under the SFC’s “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission”.[16].

Further, to align corporate governance standards with those applicable to licensed corporations, the SFC has introduced requirements for Platform Operators to establish independent audit, risk management and compliance functions. The SFC has emphasised that there should be appropriate segregation between compliance and internal audit functions, and operations to preserve independence.

AML/CFT

In light with the Financial Action Task Force’s recommendation on wire transfers (i.e., the travel rule),[17] the SFC has proposed to impose similar requirements on virtual asset transfers (see Section V “Virtual Asset Transfers and Application of the Travel Rule” for further discussion on this point).

The SFC is seeking comments on the requirements for virtual asset transfers or any other AML/CFT requirements proposed.

Disciplinary Fining Guidelines

The SFC has set out a set of guidelines providing insight on its disciplinary powers in relation to breaches of the AMLO Licensing Regime by regulated persons. In short, where a regulated person is guilty of misconduct,[18] or the SFC is of the opinion that a regulated person is or was not a fit and proper, the SFC has the power to impose a fine up to a maximum of HK$10 million or three times of the profit gained or loss avoid as a result of the misconduct, whichever is higher.[19] The SFC can use the number of affected persons as the multiplier in assessing the appropriate level of the fine; by way of an illustration, the SFC may impose a fine not exceeding HK$10 million for each person affected by the misconduct. The appropriate approach will be determined on a case-by-case basis.

The SFC is inviting feedback on the Disciplinary Fining Guidelines.

In the subsequent sections, we will provide discuss some of the significant aspects of the proposals under the Consultation Paper.

III. Token Admission Criteria

The VATP Guidelines require Platform Operators to exercise due skill, care and diligence when selecting virtual assets to be made available for trading, irrespective of whether they are made available to retail investors. The VATP Guidelines introduce general due diligence factors applicable to all token offerings, and specific due diligence factors applicable only to retail investors offerings, as set out below:

General Due Diligence Factors

The VATP Guidelines list out some non-exhaustive factors which a Platform Operator must consider when conducting due diligence on all virtual assets before admitting them for trading. As illustrations:

The supply, demand, maturity, liquidity and track record of a virtual asset;
The technical aspects of a virtual asset, including the risk relating to code defects, breaches and other threats relating to the virtual asset and its supporting blockchain, or the practices and protocols that apply to them;
The market risks of a virtual asset, including concentrations of virtual asset holdings or control by a small number of individual or entities, price manipulation, and fraud, and the impact of the virtual asset’s wider or narrower adoption on market risks;
The legal risks associated with the virtual asset, including any pending or potential civil, regulatory, criminal or enforcement action relation to its issuance, distribution or use; and
Whether the utility offered, the novel use case facilitated, or technical, structural or crypto-economic innovation exhibited by the virtual asset appears to be fraudulent or scandalous.[20]

Due Diligence Factors Applicable to Retail Offerings

In addition to the general due diligence factors explained above, where a Platform Operator intends to make a specific virtual asset available for trading by its retail investors, it should also ensure that the virtual asset is a large-cap virtual asset.

A large-cap virtual asset refers to a specific virtual asset that have been included in at least two accepted indices issued by at least two separate index providers. An acceptable index is an index which has a clearly defined objective to measure the performance of the largest virtual asset. In particular, the index should be objectively calculated and rules-based, the constituent virtual assets of the index should be sufficient liquid, and the methodology and rules of the index should be consistent and transparent.

Among the two indices, a Platform Operator should ensure that at least one of them is issued by an index provider which has experience in publishing indices for the traditional non-virtual asset financial market.

If the virtual asset concerned does not meet the criteria of being a large-cap virtual asset, but meets all of the general due diligence criteria mentioned above, the Platform Operator may submit a detailed proposal on the virtual asset at issue for the SFC’s consideration on a case-by-case basis

A Platform Operator is under a duty to monitor each virtual asset admitted for trading on an ongoing basis, consider whether the virtual asset continues to satisfy all the token admission criteria, and provide regular reports to the token admission and review committee. As an illustration, if an admitted virtual asset falls outside the constituent pool of an acceptable index, a Platform Operator may consider whether there are any material adverse news or underlying liquidity issues surrounding the virtual asset. If the concerns are unlikely to be resolved in the near future, the token admission and review committee should assess whether to halt trading, or restrict retail access. Where this is the case, the Platform Operator should notify affected clients holding the virtual asset at issue, and inform them of the remedial options available.

IV. Suitability Obligations

A Platform Operator is required to ensure the suitability of the recommendation or solicitation for the client is reasonable when making a recommendation or solicitation to retail investors. Whether there has been a recommendation or solicitation is assessed in light of the circumstances leading up to the point of sale or advice, for example, a relevant consideration is the context (such as the presentation) and content of product-specific materials posted on the platform and/or website, assessed against the overall impression created by such content. Generally, posting factual, fair and balanced product-specific materials would not itself amount to solicitation or recommendation, and therefore, would not trigger suitability requirements.

The same suitability assessments must also be conducted in respect of the solicitation and recommendation of complex products, i.e. a virtual asset whose terms, features and risks are not reasonably likely to be understood by a retail investor due to its complex structure.[21] Where a Platform Operator determines a virtual asset to be complex product, it should ensure that there are clear warning statements to warn clients about the complexity of the product prior to and reasonably proximate to the point of sale and advice. Note that these requirements are not triggered in the absence of solicitation and recommendation. As a general market observation, a virtual asset which is assessed to be a complex product is also likely to have features similar to “securities”.

V. Virtual Asset Transfers and Application of The Travel Rule

Given that Platform Operators are exposed to money laundering and terrorist financing (“ML/TF”) risks arising from the distinct characteristics of virtual assets, Platform Operators are required to comply with additional virtual-asset specific AML/CFT requirements introduced by the VASP AML/CFT Guidelines. A Platform Operator is allowed to accept virtual asset transfers provided that the following are met (i.e., the ‘Travel Rule’):

When acting as an ordering institution of virtual asset transfers, a Platform Operator must obtain, record and submit the required information of the originator and recipient to the beneficiary institution immediately and securely;
When acting as a beneficiary institution, a Platform Operator must obtain and record information submitted by the ordering institution or intermediary institution;
A Platform Operator must conduct due diligence on a virtual asset transfer counterparty (i.e. the ordering institution, intermediary institution or beneficiary institution) to identify and assess any associated ML/TF risks, and apply risk-based AML/CFT measures as appropriate; and
When conducting virtual asset transfers to or from unhosted wallets,[22] a Platform Operator should obtain and record the required information from its customer who may be the originator or recipient, and take reasonable measures to mitigate and manage the ML/TF risks associated with the transfers.

Separately, AML/CFT provisions on the identification of suspicious transactions and sanctions screening, similar to those imposed on licensed incorporations, are also provided in the VASP AML/CFT Guidelines.[23]

VI. Licensing Requirements and Procedures

As previously explained, the SFO Licensing Regime and the AMLO Licensing Regime will run in tandem. Since the AMLO Licensing Regime is itself a standalone licensing regime, virtual asset trading platforms should be able to choose to either:

be licensed under the AMLO Licensing Regime only, or
be dual licensed under both the SFO Licensing Regime and the AMLO Licensing Regimes.

The decision will depend on the contemplated business plan and the types of virtual assets proposed to be offered. Virtual asset trading platforms planning to offer only non-security tokens may consider only applying for a licence under the AMLO Licensing Regime (and not the SFO Licensing Regime). However these platform operators will need to have robust systems and controls in place (including ongoing monitoring) to ensure that they are aware of and can address situations where a virtual asset’s classification may change from a non-security token to a security token. The potential regulatory risk of not having the dual licence is that, in the event a virtual asset’s classification changes from a non-security token to a security token and the platform operator is unaware of the changes and therefore continues to offer trading in the re-classified security token, then the platform operator could be in breach of the SFO for carrying on unlicensed dealing in securities.

To address the risk of a virtual asset’s classification changing from a non-security token to a security token, the SFC encourages virtual asset trading platforms to apply for approvals under both the SFO Licensing Regime and the AMLO Licensing Regime. The SFC intends to implement a streamlined application process for virtual asset trading platforms applying to be dually licensed (i.e., under both the SFO Licensing Regime and the AMLO Licensing Regime) and approved. However, it is important to note that even if a Platform Operator is dual-licensed, it still cannot offer security tokens to retail investors.

To assist the application process, the SFC will require Platform Operator applicants to engage an external assessor to assess its business going forward, and submit the assessor’s reports to the SFC (i) when submitting the licence application (“Phase One Report”); and (ii) after approval-in-principle is granted (“Phase Two Report”).

The Phase One Report will cover the design effectiveness of the Platform Operator’s proposed structure, governance, operations, systems and controls, with a focus on key areas including token admission, custody of virtual assets, governance, AML/CFT, market surveillance and risk management.

The Phase Two Report will contain the assessor’s assessment of the implementation and effectiveness of the actual adoption of the planned policies, procedures, systems and controls. The SFC will only grant final approval if it is satisfied with the findings of the Phase Two Report.

VII. Conclusion

The Consultation Paper contains substantive and important proposals in relation to the AMLO Licensing Regime. Interested parties are encouraged to respond to the proposals prior to the close of the consultation period on March 31, 2023.

In the meantime, Platform Operators minded to continue or commence operations in Hong Kong are encouraged to review their internal policies and practices to ensure compliance with the AMLO Licensing Regime.

APPENDIX: Overview of Existing Requirements Applicable to SFO-Licensed Platform Operators

The table below summarizes the key requirements currently applicable to SFO-licensed Platform Operators, as contained in the VATP Terms and Conditions, which are also adopted by the VATP Guidelines. Note that once effective, the VATP Guidelines will supersede the VATP Terms and Conditions.

Financial Soundness	A Platform Operator must beneficially own and maintain assets which are sufficiently liquid in Hong Kong at all times. These assets must equal to at least 12 months of a Platform Operator’s actual operating expenses, calculated on a rolling basis. A Platform Operator must maintain a paid-up share capital of not less than HK$5,000,000 at all times. A Platform Operator must abide by the requirements under the Securities and Futures (Financial Resources) Rules, including the rules on the calculations of liquid capital and required liquid capital.[24] A Platform Operator must submit a financial return documenting its liquid capital computation and required liquid capital computer as at the end of the month to the SFC. The submission must be made no later than three weeks after the end of the month concerned. A Platform Operator must notify the SFC as soon as reasonably practicable if it becomes aware of its inability to maintain the paid-up share capital or liquid capital.
Onboarding Requirements	A Platform Operator should perform all reasonable due diligence on all virtual assets before including them on its platform for trading, for example, the Platform Operator should consider the supply, demand, maturity and liquidity of the virtual asset. Except institutional and qualified corporate professional investors, a Platform Operator should access a client’s knowledge of virtual assets (including associated risks) before providing any services to the client, for example, consideration can be given to any prior trading experience in virtual assets.
Custody of Client Assets	A Platform Operator should ensure that client assets are held in a segregated account through an Associated Entity. The Associated Entity should not conduct any business except for the receiving or holding of client assets. Specifically, the Platform Operator and Associated Entity should not deal with or create any liabilities over client virtual assets except for the settlement of transactions, fees and charged in respect of trades executed by the client. A Platform Operator and its Associated Entity should store 98% of client virtual assets in cold storage. A Platform Operator should adopt strong internal controls and governance procedures for private key management to ensure all cryptographic seeds and private keys are securely generated, stored and backed up.
Risk Management	A Platform Operator should establish a sound risk management framework which allows them to identify, measure, monitor and manage the risks arising from their businesses and operations. This includes monitoring both pre-trade and post-trade activities.
Prevention of Market Manipulation and Abusive Activities	A Platform Operator should adopt written policies for the proper surveillance of its trading platform to identify, prevent and report any market manipulative or abusive trading activities. Such controls must include restricting or suspending trading upon discovery of manipulative or abusive acts. For this purpose, a Platform Operator should adopt an effective market surveillance system provided by a reputable and independent provider and provide the SFC with access to this system. A Platform Operator is under an obligation to notify the SFC of any market manipulative or abusive activities, whether actual or potential, as soon as practicable.
Conflict of Interest	A Platform Operator should not engage in proprietary trading or market-making activities on a proprietary basis.[25] A Platform Operator should establish policies governing employees’ dealings in virtual assets to eliminate, avoid, manage or disclose conflicts of interest. This includes policy prohibiting front-running and insider dealing.
Auditing	A Platform Operator should exercise due skill, care and diligence in the selection and appointment of auditors to perform an audit of the financial statements of the Platform Operator and its Associated Entity. A Platform Operator and its Associated Entity are both required to submit an auditor’s report in respect of a financial year containing, amongst others, the auditor’s opinion on compliance with custody of client assets, record keeping and financial soundness requirements.

_________________________

[1] “Consultation Paper on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed by the Securities and Futures Commission”, Securities and Futures Commission (February 20, 2023), available at https://apps.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=23CP1

[2] Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance, available at https://www.legco.gov.hk/yr2022/english/ord/2022ord015-e.pdf; Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), available at https://www.elegislation.gov.hk/hk/cap615

[3] Hong Kong Introduces Licensing Regime for Virtual Asset Service Providers”, Gibson, Dunn & Crutcher (June 30, 2022), available at https://www.gibsondunn.com/hong-kong-introduces-licensing-regime-for-virtual-asset-services-providers/; “Hong Kong Licensing Regime for Virtual Asset Service Providers Passed with Three-Month Delay to Implementation Timelines”, Gibson, Dunn & Crutcher (December 8, 2022), available at https://www.gibsondunn.com/hong-kong-licensing-regime-for-virtual-asset-service-providers-passed-with-three-month-delay-to-implementation-timelines/

[4] Securities and Futures Ordinance (Cap. 571), available at https://www.elegislation.gov.hk/hk/cap571?xpid=ID_1438403467298_001

[5] Terms and Conditions for Virtual Asset Trading Platform Operators, Securities and Futures Commission, available at https://apps.sfc.hk/publicreg/Terms-and-Conditions-for-VATP_10Dec20.pdf

[6] “Securities” is defined under Part 1, Schedule 1 of the SFO.

[7] See Part IV of the SFO.

[8] See Part II and Part XII of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), available at https://www.elegislation.gov.hk/hk/cap32

[9] Under the VATP Guidelines, written legal advice in the form of a legal memorandum or opinion confirming that the virtual asset does not fall within the definition of securities under the SFO is only required for virtual assets to be traded and made available by retail investors. The requirement will not apply to virtual assets only made available to professional investors.

[10] As noted in the Consultation Paper, industry participants have reported on the difficulty of complying with the current insurance requirements as many insurers are unwilling to provide coverage for risks associated with hot storage, and even if they are willing to do so, the insurance premiums meant that maintaining such a policy would not be commercially viable.

[11] “Associated Entity” means a company which (i) has notified the SFC that it has become an “associated entity” of the licensee Platform Operator, (ii) is incorporated in Hong Kong, (iii) holds a “trust or company service provider licence”, and (iv) is a wholly owned subsidiary of the Platform Operator.

[12] See paragraph 7.23 of the VATP Guidelines.

[13] “Back-to-back transactions” refer to those transactions where a Platform Operator, after receiving (i) a purchase order from a client, purchases a virtual asset from a third party and then sell the same virtual asset to the client; or (ii) a sell order from a client, purchases a virtual asset from the client and then sells the same virtual asset to a third party, and no market risk is taken by the Platform Operator.

[14] Under the AMLO Licensing Regime, an applicant wishing to be licensed as a VASP have at least two responsible officers who will assume general responsibility of overseeing the licensed VASP’s operations. Any person who may carry out regulated functions of providing a virtual asset service must also apply to be a licensed representative. Both the responsible officers and licensed representative must be fit and proper, with reference to criteria such as their financial integrity, education, experience, reputation, character, and reliability.

[15] See section 129 of the SFO. See also the “Guidelines on Competence”, Securities and Futures Commission (January 2022), available at https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/guidelines/guidelines-on-competence/Guidelines-on-Competence.pdf?rev=17109ba82b614119a9c463d08e6e344f

[16] “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission”, Securities and Futures Commission (August 2022), available at https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/codes/code-of-conduct-for-persons-licensed-by-or-registered-with-the-securities-and-futures-commission/Code_of_conduct_05082022_Eng.pdf?rev=0fd396c657bc46feb94f3367d7f97a05

[17] See Recommendation 16 of “International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations”, Financial Action Task Force (March 2022), available here.

[18] See section 53ZSR of the AMLO for the definition of “misconduct”. Note that the definition includes an act or omission relating to the provision of any virtual asset service by a regulated person which, in the SFC’s opinion, is or is likely to be prejudicial to the interests of the investing public or to the public interest.

[19] This is consistent with the SFC’s current disciplinary powers in respect of breaches of its code, guidelines and circulars with respect to licensed corporations.

[20] Note that under the existing SFO Licensing Regime, one of the licensing requirements relating to “security tokens” require SFO-licensed Platform Operators to only admit security tokens that are (i) asset-backed; (ii) approved or registered with regulators in comparable jurisdictions; and (iii) with a post-issuance track record of 12 months. The SFC has revisited this provision in the Consultation Paper. Considering the changes in the market landscape and the emergence of tokenised securities, the SFC has decided to remove this requirement, and going forward, the VATP Guidelines and future SFC guidance on distribution of security tokens will apply.

[21] The VATP Guidelines have provided some factors to assist Platform Operators to determine whether a virtual asset constitutes a “complex products”; for instance, whether the virtual asset is a derivative product; whether there is a risk of losing more than the amount invested; whether there are any features of the virtual asset that might render the investment illiquid or difficult to value; and whether any features or terms of the virtual asset could fundamentally alter the nature or risk of the investment or pay-out profile or include multiple variables or complicated formulas to determine the return (such as investments that incorporate a right for the issuer to convert the instrument into a different investment).

[22] “Unhosted wallets” refer to software or hardware that enables a person to store and transfer virtual assets on his/her behalf, with a private key controlled or held by that person.

[23] See paragraphs 12.7.6, 12.8.1 to 12.8.3 in Chapter 12 of the VASP AML/CFT Guidelines.

[24] Securities and Futures (Financial Resources) Rules (Cap. 571N), available at https://www.elegislation.gov.hk/hk/cap571N?xpid=ID_1438403475924_002

[25] Note that the SFC has proposed to introduce an exception to this restriction under the Consultation Paper, such that Platform Operators will be allowed to engage in off-platform back-to-back transactions entered into by the Platform Operator, and any other limited circumstances approved by the SFC on a case-by-case basis. Please refer to Section II of this client alert, under the sub-heading “Proprietary Trading”.

The following Gibson Dunn lawyers prepared this client alert: William Hallatt, Arnold Pun, Becky Chung, and Jane Lu.

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

William R. Hallatt – Hong Kong (+852 2214 3836, [email protected])
Grace Chong – Singapore (+65 6507 3608, [email protected])
Emily Rumble – Hong Kong (+852 2214 3839, [email protected])
Arnold Pun – Hong Kong (+852 2214 3838, [email protected])
Becky Chung – Hong Kong (+852 2214 3837, [email protected])

In a time of highly volatile markets and rising interest rates, convertible notes can be an effective financing or refinancing tool. Gibson Dunn attorneys Stewart McDowell, Eric Scarazzo, Melissa Barshop and Jennifer Sabin provide a 60-minute briefing on some key considerations for issuers considering convertible notes as a financing option.

PANELISTS:

Stewart L. McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher. She is a member of the firm’s Corporate Department and Co-Chair of the Capital Markets Practice Group. Her practice involves the representation of business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She has significant experience representing both underwriters and issuers in a broad range of both debt and equity securities offerings. She also represents both buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments.

Eric M. Scarazzo is a partner in the New York office of Gibson, Dunn & Crutcher, and a member of the firm’s Capital Markets, Securities and Regulation and Corporate Governance, Power and Renewables, Global Finance, and Mergers & Acquisitions Practice Groups. As a key member of the capital markets practice, Mr. Scarazzo is involved in some of the firm’s most complicated and high-profile securities transactions. Additionally, he has been a certified public accountant for over 20 years, and provides critical guidance to clients navigating the intersection of legal and accounting matters, principally as they relate to capital markets financings and M&A disclosure obligations. Mr. Scarazzo’s practice covers both the conduct of securities offerings and service as clients’ outside corporate counsel. He advises in a wide range of areas, such as capital raising transactions, reporting obligations under the Exchange Act (including significant advisory work with respect to acquisition reporting), prospective and remedial stock exchange compliance, and beneficial ownership reporting matters (particularly complex Section 13 and 16 disclosure matters).

Melissa Barshop is Of Counsel in the Century City office of Gibson, Dunn & Crutcher. She is a member of the firm’s Corporate Department and its Global Finance and Business Restructuring and Reorganization Practice Groups. Ms. Barshop’s practice includes acquisition financings, secured and unsecured corporate credit facilities, Rule 144A transactions, private placements, convertible debt offerings, exchange offers, mezzanine transactions and work-outs and debt restructurings.

Jennifer Sabin is of counsel in the New York office of Gibson, Dunn & Crutcher. Ms. Sabin represents clients in a broad range of domestic and international tax matters, including taxable and tax-free mergers and acquisitions (public and private), spin-offs, joint ventures, financings, and restructurings. Her practice also includes formation of, and transactions undertaken by, private equity, hedge funds, and asset managers. In addition, Ms. Sabin advises on various aspects of information reporting, including matters relating to the Foreign Account Tax Compliance Act. Ms. Sabin received her Juris Doctor, cum laude, in 2011 from The University of Pennsylvania Law School. She received her Bachelor of Arts, magna cum laude, in History from Yale University in 2006. Ms. Sabin is admitted to practice in the State of New York.

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In 2022, China has finally amended its Anti-Monopoly Law. This has been more than two years in the making: the State Administration for Market Regulation (“SAMR”) first proposed amendments in early 2020 and a formal draft amendment was submitted to the Standing Committee of the National People’s Congress for a first reading in October 2021. In an effort to support and clarify the amended law, the Government released draft amendments to a number of antitrust regulations and rules for public consultation in June 2022. The Government also published its draft amendments to the Anti-Unfair Competition Law for comment consultation in November 2022.

This client alert provides an overview of China’s major antitrust developments in 2022.

1. Legislative / Regulatory Developments

Amendments to the Anti-Monopoly Law. In 2022, China finally amended the Anti-Monopoly Law (“Amended AML”) for the first time, 14 years after its introduction. The Amended AML came into force on August 1, 2022. It emphasizes the fundamental role of competition in China’s market economy and introduces substantial changes to the country’s merger review process and rules on anticompetitive agreements. It also substantially increases fines for violating the Amended AML and introduced, among other new penalties, liabilities on individuals. Here are some of the key substantive provisions included in the Amended AML:

Review of non-threshold transactions: The Amended AML enables SAMR to require parties to a concentration (where the concentration does not otherwise trigger mandatory reporting obligations) to notify the transaction where “the concentration of undertakings has or may have the effect of eliminating or restricting competition.”
Introduction of the stop-the-clock system: The Amended AML grants SAMR the power to suspend the review period in merger investigations under any of the following scenarios: where the undertaking fails to submit documents and materials leading to a failure of the investigation; where new circumstances and facts that have a major impact on the review of the merger need to be verified; or where additional restrictive conditions on the merger need to be further evaluated and the undertakings concerned agree. The clock resumes once the circumstances leading to the suspension are resolved.
Abandoning per se treatment for resale price maintenance (“RPM”): The Amended AML introduces a provision which states that a monopoly agreement between parties fixing the price or setting a minimum price for resale of goods to a third party “shall not be prohibited if the undertaking can prove that it does not have the effect of eliminating or restricting competition.” This means where a plaintiff alleges breach of the Amended AML by way of an RPM agreement, it is open to a defendant to prove that the RPM agreement does not eliminate or restrict competition and therefore is not unlawful.
Safe harbors for vertical monopoly agreements: The Amended AML introduces a “safe harbor” for vertical monopoly agreements, which presumably include RPM agreements, in circumstances where “undertakings can prove that their market share in the relevant market is lower than the standards set by the anti-monopoly law enforcement agency of the State Council and meet other conditions set by the anti-monopoly law enforcement agency of the State Council shall not be prohibited.” This provision authorizes SAMR to determine the threshold for the safe harbor, which we can expect in due course.
Cartel facilitators: The Amended AML provides that undertakings “may not organize other undertakings to reach a monopoly agreement or provide substantial assistance for other undertakings to reach a monopoly agreement.” This provision fills an arguable gap in the AML, as cartel facilitators e.g., third parties that aid the conclusion of anticompetitive agreements or cartels, may now be found in breach of the Amended AML.
Increased and new penalties: The Amended AML substantially increases fines that could be imposed and creates new fines. These include:
- Penalties on cartel facilitators: SAMR may impose a fine up to RMB 1 million (~USD 147,000) on cartel facilitators.
- Increased penalties for merger-related conduct: Where an undertaking implements a concentration in violation of the Amended AML, SAMR may impose a fine of less than 10% of the undertaking’s sales from the preceding year. Where such concentration does not have the effect of eliminating or restricting competition, the fine will be less than RMB 5 million (~USD 727,000).
- Superfine: Where the violation of the Amended AML is “extremely severe,” its impact “extremely bad” and the consequence “especially serious,” SAMR can multiply the amount of fine by a factor between two and five.
- Penalties for failure to cooperate with investigations: Where an undertaking fails to cooperate in anti-monopoly investigations, SAMR may impose a fine of less than 1% of the undertaking’s sales from the preceding year or, where there are no sales or the data is difficult to be assessed, a maximum fine of RMB 5 million (~USD 727, 000) on enterprises and RMB 500,000 (~USD 72,700) on individuals involved.
- Penalties on individuals: The Amended AML introduces individual liability of a fine up to RMB 1 million (~USD 147,000) for legal representatives, principal person-in-charge or directly responsible persons of an undertaking if that individual is personally responsible for reaching an anticompetitive agreement.
- Public interest lawsuit: Public prosecutors can bring a civil public interest lawsuit against undertakings that have acted against social and public interests by engaging in anticompetitive conduct.

For more detail on the Amended AML, please refer to our client alert, China Amends Its Anti-Monopoly Law, published on June 29, 2022.

Proposed Amendments to six antitrust regulations and rules. On June 27, 2022, SAMR published draft amendments to the following six antitrust regulations and rules for public consultation, which aim to support and clarify the Amended AML (together, the “Proposed Amendments to the Implementing Rules”):

Regulations on Filing Thresholds for Concentrations of Undertakings
Provisions on Prohibition of Monopoly Agreements
Provisions on Prohibition of Abuse of Dominance
Provisions on Prohibition of Elimination and Restriction of Competition Through Intellectual Property Rights
Provisions on Prohibition of Elimination and Restriction of Competition Through Abuse of Administrative Powers
Provisions on Concentration of Undertakings

Among other draft amendments, SAMR proposed to revise the merger filing thresholds through first, increasing the existing thresholds and second, introducing a new threshold that aims at catching so-called “killer acquisitions,” where an established undertaking acquires a nascent competitor to preempt potential future competition. Specifically:

The Proposed Amendments to the Implementing Rules provide that undertakings must obtain merger clearance from SAMR if:
- The undertakings’ combined worldwide turnover is more than RMB 12 billion (~USD 1.78 billion) (an increase from RMB 10 billion (~USD 1.48 billion)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (~USD 118 million) (an increase from RMB 400 million (~USD 59 million)); or
- The undertakings’ combined Chinese turnover is more than RMB 4 billion (~USD 592 million) (an increase from RMB 2 billion (~USD 296 million)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (an increase from RMB 400 million).
If the above thresholds are not met, undertakings are still required to obtain SAMR’s merger clearance if:
- One undertaking’s Chinese turnover is more than RMB 100 billion (~USD 14.8 billion); and
- The other undertaking has a market value (or valuation) of RMB 800 million or more and that it generated more than one third of its worldwide turnover from China.

There is currently no indication on when these Proposed Amendments to the Implementing Rules may come into effect.

Proposed Amendments to the Anti-Unfair Competition Law. On November 22, 2022, SAMR released draft amendments to the Anti-Unfair Competition Law for public consultation (“Proposed Amendments to the AUCL”). The Anti-Unfair Competition Law (the “AUCL”), which came into effect in 1993 and was revised in 2017 and 2019, addresses unfair and anticompetitive practices, such as misappropriation of trade secrets, trademark infringement, commercial bribery and false advertising. Consistent with China’s legislative focus in recent years, the Proposed Amendments to the AUCL expressly bring the digital economy within the ambit of the AUCL by adding a new Article 4 that expressly prohibits undertakings to take advantage of data and algorithms, technologies, capital advantages and platform rules to engage in unfair competitive behavior. The Proposed Amendments to the AUCL also include new types of prohibited conduct that concern the digital economy, such as:

Carrying out malicious transactions that obstruct or undermine another undertaking’s normal operations, including deliberately entering into large volume or high frequency transactions with another undertaking so as to trigger the online transaction platform’s disciplinary actions for countering fake transactions against the latter, maliciously ordering a large volume of goods from another undertaking within a short period of time without paying and maliciously returning or refusing to accept the goods after a bulk purchase from another undertaking (Article 14).
Using technological means or platform rules to improperly exclude or hinder the access to and transaction of goods or services lawfully provided by another undertaking (Article 17).
Improperly obtaining or using another undertaking’s commercial data (Article 18).
Using algorithms (e.g. by analyzing user preferences and transaction behavior) to impose unreasonable differential treatment or other unreasonable trading conditions (Article 19).

Another key feature of the Proposed Amendments to the AUCL is the reintroduction of the concept of a “position of relative advantage,” which was included in previous draft amendments to the AUCL that were released in 2016 but was not adopted in the current version of the law. Under the Proposed Amendments to the AUCL, “position of relative advantage” is defined to include advantage based on technologies, capital, number of users, industry influence or the degree of the transaction counterparty’s reliance on the undertaking in transactions. The Proposed Amendments to the AUCL set out a number of prohibited conduct that effectively extend the Amended AML’s rules governing the abuse of a dominant position to undertakings with a “position of relative advantage,” but without including the defence of procompetitive effects. Thus, an undertaking with a “position of relative advantage” is prohibited from, for example, coercing its transaction counterparty to bundle goods or sign exclusive agreements.

Like the Amended AML, the Proposed Amendments to the AUCL introduce increased and new penalties for violations. For example, undertakings could face penalties of up to 5% of its revenue if the violations are found to involve circumstances or damages deemed particularly serious to fair competition or public interest, and individuals who are found responsible for the violations may be fined up to RMB 1 million (~USD 147,000).

There is currently no indication on when the Proposed Amendments to the AUCL may come into effect.

Pilot Program on the Review of Simplified Procedure Merger Filings. In July 2022, SAMR announced a three-year pilot program to take place from August 1, 2022 to July 31, 2025, during which SAMR would delegate the initial review of certain simplified procedure merger filings to five provincial Administrations for Market Regulation (“provincial AMRs”) in Beijing, Shanghai, Chongqing, Shaanxi and Guangdong. Parties to transactions that require merger clearance would continue to submit the filings to SAMR, but SAMR may delegate cases to the provincial AMRs at its discretion and inform the filing parties of the delegation. While the provincial AMRs would review cases assigned to them, SAMR remains the final decision maker on all merger filings. Given that provincial AMRs are relatively inexperienced in merger control, it is expected that the review of delegated filings may take longer than usual to complete.

2. Merger Control

In 2022, SAMR unconditionally approved more than 99% of approximately 750 deals it reviewed and imposed conditions in only five transactions.

SAMR took on average 18 days to complete its review of cases under the simplified procedure, an increase from 2021’s 14-15 days, and an average of over 450 days to complete its review of conditionally approved cases, an increase from 2021’s 288 days. The delay is likely a result of China’s surge in COVID-19 cases since the first quarter of 2022 and the geopolitical climate that has affected the review of deals involving US tech companies.

Separately, SAMR announced that they penalized parties in 45 transactions for failure to notify, most of which received the maximum fine of RMB 500,000 (~USD 72,700). While this is less than the 107 transactions that SAMR penalized in 2021, over 50% of the cases in 2022 involved internet platforms.

2.1 Conditional Approval Decisions

GlobalWafers Co., Ltd. (“GlobalWafers”) / Siltronic AG (“Siltronic”). In January 2022, SAMR conditionally approved the Taiwanese silicon-wafer manufacturer GlobalWafers’ acquisition of its German rival Siltronic. SAMR raised a number of competition concerns regarding the transaction. Among other findings, SAMR noted that the transaction would likely result in the combined entity holding 55-60% and 30-35% market shares globally and in the Chinese market, respectively, and that the reduced number of competitors would likely increase the risk of coordination. To resolve these competition concerns, SAMR imposed both structural and behavioral remedies on the parties, including: (1) to divest GlobalWafer’s zone melting wafer business within six months; (2) to continue supplying wafer products to Chinese customers on fair, reasonable and nondiscriminatory (“FRAND”) terms; and (3) not to refuse customer requests to renew contracts without reasonable justification and to ensure that the renewal conditions are not inferior to terms in the original contracts.

Advanced Micro Devices (“AMD”) / Xilinx, Inc. (“Xilinx”). In January 2022, US chipmaker AMD received conditional approval from SAMR for its acquisition of its peer, Xilinx. SAMR had competition concerns over the impact that the transaction may have on the global and Chinese markets for central processing units (“CPUs”), graphics processing units (“GPUs”) and programable gate arrays (“FPGAs”), as (1) Xilinx ranked first in the global and domestic markets for FPGAs in 2020 with a market share of 50-55%, such that the combined entity would have a dominant position in the market; (2) CPUs, GPUs and FPGAs are core components that determine the performance of servers in data centers; as such, incompatibility and insufficient interoperability among these components may lead to performance issues for servers; and (3) the combined entity would become the sole supplier in the world capable of providing CPUs, GPUs and FPGAs.

To remedy these concerns, the parties offered a number of commitments, to which SAMR agreed, including the following: (1) to refrain from bundling or imposing unreasonable condition when supplying CPUs, GPUs and FPGAs in China; (2) to continue supplying CPUs, GPUs and FPGAs on FRAND terms; (3) to ensure that the parties’ CPUs, GPUs and FPGAs sold in China are interoperable with those from third-party manufacturers; (4) to ensure the flexibility, programmability and availability of Xilinx’s FPGAs; and (5) to keep third-party manufacturers’ competitive sensitive information strictly confidential.

II-VI Incorporated (“II-VI”) / Coherent, Inc. (“Coherent”). In June 2022, II-VI, an optoelectronic components maker, received conditional approval from SAMR for its acquisition of Coherent, a lasers supplier. SAMR found competition concerns resulting from the vertical relationship between the parties, namely II-VI being in the upstream markets for supplying components and Coherent being in the downstream markets for producing and selling laser devices. To remedy these concerns, SAMR imposed behavioral conditions on the parties, which will expire automatically in five years. These conditions include: (1) to continue performing all existing contracts; (2) to continue supplying CO2 laser optics to Chinese customers on FRAND terms; (3) to continue sourcing glass-based laser optics for excimer lasers from multiple suppliers on a non-discriminatory basis; not to reduce the number of suppliers without reasonable justification or increase II-VI’s current share of supply to Coherent unless other suppliers are unable to fulfil demands in terms of quantity and quality; and (4) to keep third-party manufacturers’ competitive sensitive information strictly confidential.

Shanghai Airport Group (“Avinex”) / Eastern Air Logistics (“EAL”). In September 2022, SAMR conditionally approved the proposed joint venture (“JV”) between Avinex and EAL. This is China’s first merger control remedy case that involves purely domestic entities. Avinex operates two international airports in Shanghai, Pudong Airport and Hongqiao Airport, and provides ground handling, supply chain management and logistics services for air freight. EAL offers air express shipping services and integrated ground handling and logistics solutions. The JV would provide smart airport cargo terminal services at Pudong Airport.

SAMR identified a horizontal overlap as Avinex, EAL and the JV provide air cargo terminal services at Pudong Airport, and a vertical overlap with Avinex and the JV’s upstream air cargo terminal services and EAL’s downstream air freight services. SAMR found that the JV would obtain a dominant position at the upstream air cargo terminal services market at Pudong Airport, in view of Avinex and EAL’s combined market share of over 70% and the market’s high entry barriers. SAMR also expressed concerns that China Eastern Airlines, the ultimate controller of EAL, could strengthen its market power in the downstream air freight services market by leveraging the JV’s dominance in the upstream market for air cargo terminal services. To ease competition concerns, SAMR imposed a range of behavioral remedies, including requiring the parties to provide air cargo terminal services on FRAND terms, keep separate their cargo terminal businesses at Pudong Airport and compete fairly as independent entities.

Korean Air Co., Ltd. (“Korean Air”) / Asiana Airlines, Inc. (“Asiana Airlines”). In December 2022, SAMR conditionally approved Korean Air’s proposed acquisition of Asiana Airlines. SAMR found that the transaction may restrict competition in the market of passenger air-transport services on 15 routes between China and South Korea. The parties offered a number of commitments to ease SAMR’s competition concerns, to which SAMR agreed, including the following: (1) to transfer takeoff and landing slots at specified airports to airlines seeking to commence air services on certain routes; (2) to maintain services of the Seoul-Guangzhou and Seoul-Dalian routes at the 2019 level in terms of flight frequency and number of passenger seats; and (3) to provide passenger ground services at South Korean airports to new Chinese market entrants on FRAND terms.

3. Non-Merger Enforcement

With regard to non-merger enforcement actions, SAMR and its local bureaus continue to target public utilities, healthcare, construction and platform companies. Two of the cases stood out in particular due to the scale of the business and the significant amount of fine:

Geistlich Pharma AG (“Geistlich”) – Resale Price Maintenance (“RPM”). In February 2022, the Beijing Administration for Market Regulation (“Beijing AMR”) fined Geistlich, a Swiss-owned pharmaceutical company specializing in regenerative medical devices, RMB 9.12 million (~USD 1.45 million) for engaging in RPM practices between 2008 and 2020. The fine represented 3% of the company’s revenue in China in 2020. The Beijing AMR found that the company included a resale pricing clause in distribution agreements and explicitly required, through in-person meetings, WeChat and other verbal communications, that distributors sell specified products at a price no lower than a certain percentage of its recommended prices. According to the Beijing AMR, Geistlich monitored the resale prices closely, rewarded distributors that complied with the resale price requirements and penalized those who did not follow the requirements by temporarily raising the purchase price of its products. The Beijing AMR noted that Geistlich’s conduct restricted competition in a market with high entry barriers, highlighting the fact that Geistlich is a global market leader with no local competition and thus creating an imbalance of bargaining power with distributors.

China National Knowledge Infrastructure (“CNKI”) – Abuse of Dominance. In December 2022, SAMR imposed a fine of RMB 87.6 million (~USD 12.6 million) on CNKI, which is China’s most renowned online academic database service provider, for abuse of dominance. The fine represented 5% of CNKI’s revenue in 2021. In concluding that CNKI is in a dominant position, SAMR emphasized CNKI’s market share (over 50% in the market of online database for Chinese-language academic literature), scale and coverage of users (cooperates with over 90% of universities in China) and volume and quality of content (possesses the largest number of high-quality academic journals). SAMR found that between 2014 and 2021, CNKI abused its dominant position by (1) imposing a price hike of over 10% of its average annual fees, which SAMR viewed as unreasonably excessive; and (2) signing exclusive cooperation agreements with academic journals and universities, which restricted the latter from cooperating with other academic databases.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following authors in the firm’s Hong Kong office:

Sébastien Evrard (+852 2214 3798, [email protected])
Bonnie Tong (+852 2214 3762, [email protected])