In December 2021, the Securities and Exchange Commission (“SEC”) proposed amendments to Rule 10b5-1 meant to address potential abuses of the current insider trading regime.  As the SEC contemplates the final form of these amendments, it has already begun to crack down on improper reliance on or abuse of Rule 10b5-1 from an enforcement perspective.  In the last few months, both the SEC and Department of Justice (“DOJ”) have reportedly prioritized investigations of Rule 10b5-1 trading plan abuses, and it’s likely that heightened enforcement challenging claims of reliance on Rule 10b5-1 (whether in its current form or as amended) is soon to follow.

Proposed Changes to Rule 10b5-1

Rule 10b5-1(c) under the Securities Exchange Act of 1934 provides an affirmative defense to insider trading for parties, such as corporate executives and directors, that often have access to material nonpublic information about their companies.  Rule 10b5-1(c) provides a means for these parties to sell their company stock without violating Rule 10b-5’s prohibition on insider trading so long as any trades are made pursuant to pre-determined trading plans, known as Rule 10b5-1 plans, that are entered into a time when such parties are not aware of material nonpublic information.[i]

Rule 10b5-1 has long been criticized as allowing opportunistic trading and being subject to manipulation.  Citing the need to “address critical gaps in the SEC’s insider trading regime,” the SEC proposed amendments to Rule 10b5-1 in December 2021.[ii]  The amendments are targeted at enhancing protections against insider trading by making the requirements more restrictive, including by requiring 120-day cooling off periods before an executive officer’s or director’s trades can be executed under new or modified plans, prohibiting overlapping plans for the same class of securities, limiting single-trade plans to one plan per 12-month period, and requiring insiders to certify that they are not aware of material nonpublic information prior to adopting or modifying a new plan.[iii]  The requirement that a 10b5-1 plan be entered into in good faith would be expanded to require that the plan also be operated in good faith.[iv]  The amendments would also introduce multiple new reporting requirements pertinent to insider trading, including with respect to issuer’s insider trading policies and the usage of Rule 10b5-1 plans by insiders.[v]  In its regulatory agenda published in June 2022, the SEC indicated that it planned to adopt the final amendments by April 2023.[vi]

Signs of Heightened Enforcement Activity 

In addition to proposing amendments aimed at curbing alleged abuses of Rule 10b5-1, the SEC—together with the DOJ—has also recently demonstrated an increased interest in investigating and enforcing potential abuses of the rule.  Historically, trades made in reliance on Rule 10b5-1 have only been infrequently investigated by U.S. authorities.  However, according to recent reports, the DOJ’s Fraud Section and SEC enforcement attorneys are now using computer algorithms to identify potential manipulations of Rule 10b5-1 plans, and there are some indicators in the market that these investigations have been fruitful.[vii]  In September, the SEC reached a settlement with the CEO and the former President of Cheetah Mobile Inc. based on allegations that the two executives sold stock pursuant to a 10b5-1 plan that they entered into while they were aware of material nonpublic information that the company’s second quarter revenue would be lower than expected.[viii]  By selling shares before the public disclosure of the negative revenue report, the executives avoided losses of approximately $300,000.[ix]  Not only does this settlement indicate that insider trading enforcement is likely on the rise, it also demonstrates that the SEC will investigate and punish infractions that result in relatively small benefits for insiders.  In addition, the SEC’s order stipulated that for a period of five years following the order, the CEO would include a 120-day cooling off period for trading under any new or modified Rule 10b5-1 plan, and would not maintain overlapping plans, with respect to Cheetah Mobile securities.[x]  The inclusion of these restrictions in the order suggests that the SEC remains supportive of including these restrictions in the final Rule 10b5-1 amendments, as proposed.

Other signs of robust investigations suggest that increased enforcement activity is on the horizon.  In October, a breast-implant company disclosed that it had received subpoenas from DOJ and the SEC seeking materials related to its former CEO’s trading activities.[xi]  And, while other companies have yet to publicly disclose similar requests, we are aware that other market participants have also noticed a sudden increase in inquiries from the SEC and DOJ regarding 10b5-1 plans.  In light of these indicators, companies and corporate insiders should be particularly scrupulous when adopting Rule 10b5-1 plans, remain mindful of actions or provisions that could attract scrutiny or that underlie concerns prompting the proposed SEC amendments, and consult with counsel to reduce the risk of potential investigation and enforcement.

____________________________

[i] See 17 CFR § 240.10b5-1.

[ii] U.S. Sec. & Exch. Comm’n, SEC Proposes Amendments Regarding Rule 10b5-1 Insider Trading Plans and Related Disclosures (Dec. 15, 2021), https://www.sec.gov/news/press-release/2021-256.

[iii] See Gibson Dunn Client Alert, SEC Proposes Rules on Insider Trading, Rule 10b5-1 and Share Repurchases (Dec. 23, 2021).

[iv] Id.

[v] Id.

[vi] U.S. Sec. & Exch. Comm’n, Rule 10b5-1 and Insider Trading (2022), https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202204&RIN=3235-AM86.

[vii] Bloomberg, US Probes Insider Trading in Prearranged Executive Stock Sales (Nov. 3, 2022).

[viii] U.S. Sec. & Exch. Comm’n, Order in the Matter of Sheng Fu and Ming Xu (Sep. 21, 2022).

[ix] Id.

[x] Id.

[xi] Bloomberg, US Probes Insider Trading in Prearranged Executive Stock Sales (Nov. 3, 2022).

New York partner Akiva Shapiro and of counsel William Moccia are the authors of “Lessons From Justices’ Evolving Approach To COVID Rulings” [PDF] published by Law360 on November 28, 2022.

Following a recent interpretation of a long-standing rule, Rule 15c2-11 (the “Rule”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by the Staff of the Securities and Exchange Commission (the “Commission”), issuers of fixed income (e.g., debt) securities, including such securities initially offered and sold to investors in reliance on available exemptions from registration under the Securities Act of 1933, as amended (the “Securities Act”) (most notably Rule 144A under the Securities Act (“Rule 144A”)), will be required to publicly disclose specified current financial and other information in order to allow US-regulated broker-dealers (“US broker-dealers”) to publish quotations on such securities. For example, this rule will impact private companies that issue high yield or other bonds under Rule 144A and who wish to ensure that there is sufficient liquidity for their investors. Securities of issuers that do not choose to publicly disclose the information required under the Rule could suffer significant limitations in liquidity, as discussed below.

Background

The Rule, first adopted in 1971, while not directly applicable to issuers, requires US broker-dealers to collect and review certain issuer information before publishing quotes on the issuer’s securities in the Over the Counter (“OTC”) markets.[1]  In 2020, the Commission adopted amendments to that Rule, substantially limiting the exceptions to such requirements and requiring that specified issuer information be current and publicly available in order for US broker-dealers to publish quotes on that issuer’s securities.  As these amendments were set to come into effect in September of 2021, the Division of Trading and Markets, in a no-action letter, confirmed a new and surprising interpretation of the Rule, stating that the rule applies to all securities, including fixed income securities, despite never having been applied or enforced in fixed income securities markets.[2]  Following that initial letter, the Division of Trading and Markets issued an additional no-action letter a few months later, providing for a phased-in approach to its enforcement of the amended Rule with respect to fixed income securities markets (the “No-Action Letter”).[3]

Impact on Markets for Unregistered Securities

The implications of the new interpretation of the Rule are likely to be most keenly felt in the Rule 144A market in relation to fixed income securities issued by companies (“Private Companies”) which are not registrants under the Exchange Act[4] nor otherwise required to publicly provide current financial and other information in the manner contemplated in that Rule.[5]  In addition, Private Companies which issue fixed income securities in reliance on certain other exemptions, such as Section 3(a)(9) (exempting exchanges of one security previously issued by an issuer for another security of the same issuer, for no further consideration), Section 3(a)(10) (exempting exchanges of securities for existing securities or other claims pursuant to a governmental hearing) or Section 1145 of the U.S. Bankruptcy Code (exempting issuances of securities by a debtor in exchange for claims against it or an affiliate pursuant to a plan of bankruptcy under Chapter 11 of the U.S. Bankruptcy Code), will also be similarly affected.

Securities offered and resold pursuant to Rule 144A are, by their nature, restricted to qualified institutional buyers (“QIBs”) and are generally subject to highly negotiated and detailed financial reporting covenants.  In addition, for Private Company issuers, Rule 144A has, since its adoption in 1990, required that QIB investors be entitled upon request to receive certain specified information (the “Rule 144A(d)(4) Information”)[6] from the issuer. Typically, such information has been provided by Private Companies only to QIBs through a secure online portal, or direct delivery to the QIB, which allows the information to be disseminated efficiently, without public disclosure.  As a result of the new interpretation of the Rule, Private Companies that issue Rule 144A fixed income securities and wish to ensure that US broker-dealers may publish quotations for such securities will no longer be able to rely solely on such private dissemination methods of Rule 144A(d)(4) Information.[7]

Requirements of the Rule

Below we summarize the key requirements for Private Company issuers of fixed income securities under the Rule (as recently amended) which, for Rule 144A fixed income securities, will take effect on January 4, 2023, absent any further action by the Commission.

Current Information Required by the Rule

For US broker-dealers to be permitted to provide quotations for fixed income securities of Private Companies, the Rule requires the following issuer information, as of a date within 12 months of the date of the quotation (unless otherwise indicated), be publicly available[8]:

1. identifying information about the issuer and the relevant security (including the name, address, title, class, etc.) and the total amount of the securities outstanding as of the end of the issuer’s most recent fiscal year;
2. information about the issuer’s business (e., a description of the business, the products and services offered, names and titles of all insiders, etc.); and
3. the issuer’s most recent balance sheet (as of a date less than 16 months) and profit and loss and retained earnings statements for the 12 months preceding the date of the most recent balance sheet, and similar financial information for such part of the two preceding fiscal years as the issuer or its predecessors have been in existence.

The information described above is substantially similar to the Rule 144A(d)(4) Information requirement of Rule 144A for a company that is neither subject to the reporting requirements of the Exchange Act nor a foreign private issuer exempt from such reporting requirements pursuant to Rule 12g3-2(b) thereunder.  However, unlike those requirements under Rule 144A, the Rule will require that the Private Company issuer make such information publicly available if they wish to permit US broker-dealers to publish quotations on the issuer’s OTC securities.

Meaning of “Publicly Available”

Under Rule 15c2-1, as amended, the relevant current information will only be deemed “publicly available” if it is “available on EDGAR; on the website of a state or federal agency, a qualified interdealer quotation system, a registered national securities association, a registered broker or dealer or an issuer; or through an electronic information delivery system that is generally available to the public in the primary trading market of a foreign private issuer…”.[9]  Notably, the definition in the Rule explicitly excludes information to which access is restricted by user name, password, fees, or other restraints, which issuers of Rule 144A securities have historically used to protect information disclosed to QIBs in accordance with highly-negotiated financial reporting covenants.

Phased Implementation

The Rule is now in effect for fixed income securities.  However, in response to requests from industry representatives seeking additional time to implement the operational and systems changes necessary to comply with the Rule in respect of fixed income securities, the Division of Trading and Markets issued the No-Action Letter, providing a phased-in approach to application of the amended Rule to fixed income securities markets in limited circumstances.[10]  Pursuant to the No-Action Letter, the Commission confirmed that, during the period from January 3, 2022 until January 3, 2023 (“Phase 1”), it would not recommend enforcement against a US broker-dealer that provides a quotation for a fixed income security where that security or its issuer meets one of a limited number of criteria[11], including, most notably for Private Company issuers, that such securities are being offered pursuant to Rule 144A (provided the US broker-dealer reasonably believes the issuer will provide the Rule 144A(d)(4) Information to investors upon request).  Under the No-Action Letter, from January 4, 2023, “Phase 2” described in the No-Action Letter will begin and run from such date, there will no longer be an exemption available for quotations relating to fixed income securities sold pursuant to Rule 144A.

Accordingly, from and after January 4, 2023, US broker-dealers will no longer be permitted to provide quotations for securities sold pursuant to Rule 144A unless there is current and publicly available financial information about the issuer meeting the requirements of the Rule.

Next Steps and Considerations

Industry groups such as the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI) continue to engage with the Commission regarding the application of the Rule to fixed income securities.[12]  These groups are also advocating publicly against the application of the Rule to fixed income securities generally[13] and, especially, Rule 144A securities.[14]  Nonetheless, a change in policy by the Commission in advance of the expiration of the current phase of the No-Action Letter regulatory regime on January 4, 2023 remains uncertain.

In the absence of any further relief from the Commission, Private Company issuers and all other market participants in these fixed income securities should now be considering the effects of the Rule (including the obligation of Private Company issuers to make certain information publicly available and the consequences of not doing so within the time-frame required by the SEC).  For US broker-dealers this will mean screening for fixed income issuers that do not publicly provide current financial and other information required by Rule 15c2-11 and refraining from quoting securities from such issuers until such financial information is publicly available.  Investors, similarly, will need to consider the liquidity of potential investments in the fixed income securities (including Rule 144A securities) of Private Company issuers that do not publicly provide current financial and other information required by Rule 15c2-11.  Private Company issuers of fixed income securities (including Rule 144A securities) that are not otherwise required to publicly disclose current financial information must determine whether they will begin providing such information publicly in order to allow US broker-dealers to quote their securities. Failure to do so could impact the liquidity (and trading value) of such securities. For those issuers who decide to make such information publicly available in accordance with the Rule, they should be implementing proper infrastructure and controls to be ready for publication before January 4th. In addition, future Private Company issuers may also consider whether they would prefer to rely on other sources of capital raising, such as bank debt or debt securities offerings into other markets (especially for foreign private issuers), if available to them.

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[1]  The Rule does not (and the prohibition on US broker-dealers discussed herein does not), however, apply to publications or submissions by a US broker-dealer, solely on behalf of a customer, of certain quotations for an OTC security that represent customers’ unsolicited indications of interest. See Rule 15c2-11(f)(2).

[2]  Letter from Josephine Tao, Assistant Director, Office of Trading Practices, Division of Trading and Markets to Racquel Russell, Senior Vice President and Director of Capital Markets Policy, Office of the General Counsel, FINRA (Sept. 24, 2021) (Temporary Staff No-action Letter Regarding Rule 15c2-11 and Fixed Income Securities), available here.

[3] Letter from Josephine Tao, Assistant Director, Office of Trading Practices, Division of Trading and Markets to Racquel Russell, Senior Vice President and Director of Capital Markets Policy, Office of the General Counsel, FINRA (Dec. 16, 2021) (Temporary Staff No-action Letter 2 Regarding Rule 15c2-11 and Fixed Income Securities), available here.

[4] Issuers that offer fixed income or other securities in public offerings registered under the Securities Act, and/or which otherwise register a class of securities under Section 12 of the Exchange Act, are require to file annual and interim reports with the Commission pursuant to Sections 15(d) and/or 13 of the Exchange Act until such time, if any, that the issuer validly suspends or terminates such reporting requirements.  The issuer’s annual and interim reports timely filed with the Commission in accordance with Sections 15(d) or 13 of the Exchange Act will also satisfy the publicly available current information requirement of Rule 15c2-11.  However, notwithstanding any valid suspension and/or termination of its Exchange Act reporting requirements, for so long as any of the issuer’s OTC securities (including fixed income securities) remain outstanding thereafter, Rule 15c2-11 will require that issuer publicly disclose the required current information in accordance with the Rule if it wishes for US broker-dealers to be able to provide quotations for such securities.

[5] See below under “Meaning of Publicly Available.”

[6] 17 CFR § 230.144A(d)(4).

[7]  In contrast to Rule 144A issuers, issuers of fixed income securities under certain other exemptions from registration under the Securities Act, such as Sections 3(a)(9) and 3(a)(10) under the Securities Act and Section 1145 of the Bankruptcy Code, are not required, by the terms of those exemptions, to provide or otherwise make public any information on an ongoing basis after issuance.  Following this new interpretation of the Rule, however, such Private Company issuers that wish to ensure that US broker-dealers may provide quotations in such securities will similarly be required to publicly provide the financial and other information required by the Rule.

[8] For companies that are not Private Companies, such current information requirement alternatively may, if sufficiently current for purposes of the Rule, be met, for example, by any of the following (i) a prospectus or offering circular filed by the issuer as part of a registered public offering or offering under Regulation A under the Securities Act, (ii) an annual report or statement filed pursuant to Sections 15(d) and/or 13 of the Exchange Act, or pursuant to Regulation A or Regulation Crowd Funding under the Securities Act, or (iii) a copy of the information that, since the first day or its most fiscal year that a foreign private issuer has published in order to establish or maintain its exemption from registration under Section 12(g) of the Exchange Act provided by Rule 12g3-2(b) thereunder.

[9]  Additionally, note that the Rule does not provide any limitation on liability or safe harbor for issuers who make the financial and other information publicly available in order to permit US broker-dealers to provide quotations for such issuer’s securities pursuant to the Rule.

[10] See supra note 4.

[11] In Phase 1, these criteria include fixed income securities (i) issued by an issuer that is not a Private Company, (ii) issued by certain foreign private issuers, which are foreign sovereign debt or are guaranteed by a foreign government, (iii) for which current and publicly available information about the issuer, (iv) issued by a by a bank, a bank holding company or a credit union with certain reporting requirements, and (v) offered and sold in accordance with Rule 144A (see Appendix A of the No-Action Letter).  Phase 2 covers the same list, with the exception of fixed income securities offered and sold in accordance with Rule 144A, which will no longer be exempted (see Appendix B of the No-Action Letter).  In Phase 3, a US broker-dealer will need to have determined that the security or its issuer satisfies the requirements of Phase 2 and either (i) the fixed income security is foreign sovereign debt or a debt security guaranteed by a foreign government; or (ii) there is a link on the quotation medium to the on which the security is being quoted, directly to the current and publicly available information about the issuer.

[12] See ICI Joint Letter to SEC on Application of Rule 15c2-11 to Fixed Income (Sept. 23, 2021), available here; see also
ICI Follow-Up Letter to SEC on Rule 15c2-11 and Rule 144A Debt Securities (Oct. 25, 2022), available here.

[13] See The Detriment of Rule 15c2-11’s Application to Fixed Income Markets (Sept. 12, 2022), available here.

[14] See The Collision of Rule 15c2-11 and Rule 144A (Sept. 19, 2022), available here.

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The following Gibson Dunn lawyers prepared this client update: Alan Bannister and Thomas Canny*.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Capital Markets or Securities Regulation and Corporate Governance practice groups:

Capital Markets Group:
J. Alan Bannister – New York (+1 212-351-2310, [email protected])
Andrew L. Fabens – New York (+1 212-351-4034, [email protected])
Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])
Douglas S. Horowitz – New York (+1 212-351-3817, [email protected])
Stewart L. McDowell – San Francisco (+1 415-393-8322, [email protected])
Peter W. Wardle – Los Angeles (+1 213-229-7242, [email protected])

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
James J. Moloney – Orange County (+1 949-451-4343, [email protected])
Lori Zyskowski – New York (+1 212-351-2309, [email protected])

*Mr. Canny is an associate working in the firm’s New York office who is admitted only in Texas.

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

First published on Thomson Reuters Regulatory Intelligence on 14th November 2022

Transitioning the world to “net zero” is one of the greatest global challenges that all – governments, corporates, investors and individuals – are called to rise up to and commit to deliver. To this end, we are seeing the move globally, across  different regulatory regimes, towards increased transparency on the steps being taken by organisations to deliver on efforts to reduce green-house gas emissions coupled with a move from voluntary to mandatory climate-related disclosure requirements.

As organisations enhance their efforts to grapple with the challenge of setting and delivering upon their climate related action plans (whether to achieve net zero or carbon neutrality), we have also seen mounting frustration of investors and other stakeholders with the quality of climate-related disclosures being published by issuers resulting, in some cases, in activist actions and litigation. Regulatory bodies are addressing these concerns and now, having set their regulatory expectations, are moving sharply into substantive scrutiny of disclosures and initiating enforcement actions for “greenwashing”.

The UK regulator, the Financial Reporting Council (FRC), whose ambit includes setting the UK’s corporate governance code and supporting (through enhancing the transparency and integrity of corporate reporting) investors and others who rely on company reports, published in October 2022 a Net Zero Disclosures Report. The FRC recognises the desire of many investors and other stakeholders to understand the commitments being made by companies and their abilities to deliver against targets and through this lens has set out in this report guidance for organisations when setting and disclosing their plans to deliver upon their climate related commitments. Selina Sagayam discusses with Thomson Reuters insights from the Report and the key takeaways for organisations who are looking to enhance the quality and breath of their disclosures of ‘net zero’ commitments.

TRRI’s OpenWeb pages https://regintel-content.thomsonreuters.com/document/I5CEB5A905F6F11EDAD8A97919921B9B4.

For additional information, please contact London partner Selina S. Sagayam –
(+44 (0) 20 7071 4263, [email protected]).

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Originally published in The Hill

The recently released National Security Strategy sets forth the Biden administration’s approach to a changing world at an inflection point providing a roadmap for the administration and for Congress. The administration’s national security priorities largely echo those of past administrations, but they diverge with their focus on a “modern industrial and innovation strategy” that promises deep use of industrial and economic tools to create a bulwark against autocracies like Russia and China. The resulting message is clear: The administration’s national security goals are inherently tied to, and will necessarily impact, a broad swath of American companies.

Five areas of the strategy stand-out for their potential impact on companies.

First, increased investment scrutiny will ensure the Committee on Foreign Investment in the United States (CFIUS), with its expansive authority to review foreign investments, continues to be a prominent national security tool. The strategy also contemplates new outbound investment restrictions, which have been gaining congressional momentum as well. Should “reverse-CFIUS” come into effect, companies will need to transform their outbound investment strategies, planning for increased investment timelines, heightened scrutiny for investments in certain sectors and in certain countries, and potentially restrictions on certain outbound investments deemed to pose national security risk. Further, increased export controls will require companies to reinforce compliance programs and reevaluate offshoring operations. As the Commerce Department’s recent semiconductor restrictions demonstrate, new regulations can quickly reverberate across an industry, in some cases having a material impact.

Second, foreign policy and domestic policy lines blur with the focus on making strategic public investments in strategic sectors and supply chains, especially critical and emerging technologies. New laws, including the CHIPS and Science Act and the Inflation Reduction Act, illustrate the administration’s commitment — and congressional support — for such investments. These investments can be a significant catalyst for technological innovation for the private sector. However, companies will need to be clear on the tradeoffs that such subsidies present, as business decisions may be impacted, such as whether certain operations can be offshored.

Third, the administration’s focus on supply chain integrity and resilience means that companies — especially those in critical technology industries — may leverage this support to further optimize their supply chains and improve resilience. But it also means that in the short-term, as the administration focuses on countering Chinese influence, companies may feel pressure to improve knowledge of their supply chain, identify geographically diverse suppliers, and develop shorter-term, more flexible contracts with suppliers to better adapt to changes in supply chains. Many companies began laying the foundation for improved supply chain resilience with the COVID-19 pandemic. These efforts may need to accelerate, and companies will need to develop a sound business and legal strategy to enable operations relying on complex global supply chains in a fracturing geopolitical environment. The impact of the new semiconductor restrictions underscore supply chain complexity and the need to quickly adapt to changing regulatory requirements to minimize operational impact.

Fourth, securing critical infrastructure and strengthening cybersecurity will significantly impact the private sector, given the common cite that 85 percent of critical infrastructure is in the private sector. We have seen this start to play out with the Cyber Incident Reporting for Critical Infrastructure Act (CIRCIA) giving the Cybersecurity and Infrastructure Security Agency (CISA) an increased mandate to develop critical infrastructure cybersecurity regulations, the setting of minimum security standards for federal software use, and recent White House announcements that communications, water and health care sectors are next on the administration’s cyber priority list. Companies in critical infrastructure must not only prepare for incoming cyber regulations, but ensure they properly invest in cybersecurity, adopting a “shields up” posture to defend against attacks perpetrated by a range of threat actors, including Russia.

Finally, the push to develop an inclusive international technology ecosystem likely means companies will need to navigate an increasingly regulated environment. An important prong of “transformative cooperation“ with Europe will focus on adequate privacy protections, building on the recent executive order on EU-U.S. data transfers. Practically, this means that companies should ensure transfer impact assessments are updated, evaluate the sufficiency of data transfer mechanisms, and adjust their commercial models as appropriate. There is also likely to be renewed focus on regulation of internet operating standards to ensure that standards governing the internet continue to promote core tenets of democracy, such as free speech.

Top Democrats support the administration’s strategy. Republicans have criticized the strategy. The midterm elections will play a key role in determining the likelihood of translating the strategy into legislative action. If the Democrats retain control of Congress, expect to see more legislative activity. However, if either the House or the Senate flips, then the administration’s national security priorities may not materialize in congressional action. Instead, the administration will likely focus more on executive national security authorities to progress the strategy’s objectives. The recent National Biotechnology and Biomanufacturing Initiative could serve as a blueprint. Regulatory agencies have also been assertive in issuing new regulations to achieve national security goals, such as the recent export control restrictions on advanced semiconductors and supercomputing. But, as Republicans are already calling for a congressional review of the handling of export controls should the House flip, there could be greater scrutiny of regulatory agencies should the Republicans gain control.

Regardless of how events play out on Election Day, the strategy’s focus on industrial and economic tools of national power portends significant impact on companies.

Stephenie Gosnell Handler is a partner in Gibson Dunn’s Washington, D.C. office, where she is a member of the International Trade and Privacy, Cybersecurity and Data Innovation practices. She advises clients on complex legal, regulatory and compliance issues relating to international trade, cybersecurity and technology matters. Handler’s legal advice is deeply informed by her operational cybersecurity and in-house legal experience at McKinsey & Company, as well as by her active-duty service in the U.S. Marine Corps.

Roscoe Jones Jr. is a partner in Gibson, Dunn & Crutcher’s Washington, D.C. office and co-chairs the firm’s Public Policy Group and serves as a core member of the Congressional Investigations practice group. Recognized in 2022 as one of Lawdragon’s “500 Leading Lawyers in America,” Jones has represented companies, nonprofits and individuals in legislative and policy matters before the Congress and executive branch. Jones has almost a decade of Capitol Hill experience advising three U.S. senators and a member of Congress and political experience in the executive branch.

Additional contributors include Michael D. Bopp, Daniel P. Smith*, and Apratim Vidyarhi*.

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

Stephenie Gosnell Handler – Partner, International Trade Group, Washington, D.C. (+1 202-955-8510, [email protected])

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

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

*Mr. Smith is admitted only in Illinois and practicing under the supervision of members of the District of Columbia Bar under D.C. App. R. 49. Mr. Vidyarhi is a recent law graduate in the firm’s New York office who is not admitted to practice law.

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

This quarter marked demonstrable progress toward sector-specific approaches to the regulation of artificial intelligence and machine learning (“AI”).  As the EU continues to inch toward finalizing its draft Artificial Intelligence Act—the landmark, cross-sector regulatory framework for AI/ML technologies—the White House published a “Blueprint for an AI Bill of Rights,” a non-binding set of principles memorializing the Biden administration’s approach to algorithmic regulation.  The AI Bill of Rights joins a number of recent U.S. legislative proposals, both at the federal and state levels,[1] and the Federal Trade Commission’s (“FTC”) Advanced Notice of Proposed Rulemaking to solicit input on questions related to potentially harmful data privacy and security practices, including automated decision-making systems.

Our 3Q22 Artificial Intelligence and Automated Systems Legal Update focuses on these regulatory efforts and also examines other policy developments within the U.S. and Europe.

I.  U.S. REGULATORY & POLICY DEVELOPMENTS

A.  AI Bill of Rights

The past several years have seen a number of new algorithmic governance initiatives take shape at the federal level, building on the December 2020 Trustworthy AI Executive Order that outlined nine distinct principles to ensure agencies “design, develop, acquire and use AI in a manner that fosters public trust and confidence while protecting privacy.”[2]

On October 4, 2022—almost a year after announcing its development[3]—the White House Office of Science and Technology Policy (“OSTP”) released a white paper titled “Blueprint for an AI Bill of Rights” intended to guide the design, use, and deployment of automated systems to “protect the American public in the age of artificial intelligence.”[4]  It provides practical guidance to government agencies and a call to action for technology companies, researchers, and civil society to build protections towards human-centric AI that is “designed to proactively protect [people] from harms stemming from unintended, yet foreseeable, uses or impacts of automated systems.”  The Blueprint identifies five non-binding principles to act as a “backstop” in order to minimize potential harms stemming from certain applications of AI:

• Safe and Effective Systems. To protect individuals from unsafe or ineffective systems, the Blueprint recommends proactive and ongoing consultation with the public and experts, risk identification and mitigation (which includes potentially not deploying a system or removing it from use), oversight mechanisms, and “adherence to domain-specific standards.”  The use of inappropriate, low-quality, or irrelevant data should be avoided, and data the AI system derives from other data should be identified and tracked to avoid feedback loops, compounded harms, and inaccurate results.  AI systems should be subject to independent evaluations and reporting.
• Algorithmic Discrimination Protections. AI systems should be designed and used in an equitable way and not discriminate on the basis of a characteristic protected by law.  Systems should be subject to proactive equity and disparity assessments, reflect a representative and robust data set used for the development of AI, ensure accessibility for people with disabilities, and guard against the use of non-representative data or proxies that contribute to algorithmic discrimination.  There should be independent evaluation of potential algorithmic discrimination and reporting, including making assessments public “whenever possible.”
• Data Privacy. Individuals should have agency over how their data is used and should not be subject to surveillance.  To that end, AI systems should process data consistent with data privacy principles, including privacy by design, data minimization, consents for collection, use, access, transfer and deletion of data, and proactively identifying and mitigating privacy risks.  Systems should not use AI for design decisions that “obfuscate user choice or burden users with defaults that are privacy invasive.”  Surveillance and monitoring systems should be subject to heightened oversight, including an assessment of potential harms, and should not be used in contexts such as housing, education, or employment, or where the surveillance would monitor the exercise of democratic rights in a way that limits civil rights and liberties.
• Notice and Explanation. Designers, developers, and deployers of automated systems should provide generally accessible plain language documentation, including clear descriptions of the overall system functionality and the role automation plays, notice that such systems are in use, the individual or organization responsible for the system, and explanations of outcomes that are clear, timely, and accessible.  Individuals should know how and why an outcome impacting them was determined by an automated system, including when the automated system is not the sole input determining the outcome.  Automated systems should provide explanations that are technically valid, meaningful, useful, and calibrated to the level of risk.
• Human Alternatives, Consideration, and Fallback. People should be able to opt out of automated systems in favor of a human alternative, where appropriate, with a focus on ensuring broad accessibility and protecting the public from especially harmful impacts.  There must be access to timely human consideration and remedy by a fallback and escalation process.  Automated systems with an intended use within sensitive domains (e.g., criminal justice, employment, education, and health) should additionally be tailored to the purpose, provide meaningful access for oversight, include training for any people interacting with the system, and incorporate human consideration for adverse or high-risk decisions.

The principles apply broadly to “ automated systems that … have the potential to meaningfully impact the American public’s rights, opportunities, or access to critical resources or services.”  “Automated systems” are themselves defined very broadly, encompassing essentially any system that makes decisions using computation.[5]  The Blueprint is intended to further the ongoing discussion regarding privacy among federal government stakeholders and the public, but its impact on the private sector is likely to be limited because—unlike the wide-ranging EU AI Act, which is inching towards an implementation date—it lacks prohibitions on AI deployments and details or mechanisms for enforcement.  The Blueprint is accompanied by supporting documentation, including a set of real-life examples and a high-level articulation of how the five principles can “move into practice.”[6]

B.  FTC Rulemaking on “Harmful Commercial Surveillance and Lax Data Security”

On August 11, 2022, the FTC announced an Advance Notice of Proposed Rulemaking (“ANPRM”) to seek public comment on data privacy and security practices (“commercial surveillance”) that harm consumers.[7]  Specifically, the FTC invites comment on “whether it should implement new trade regulation rules or other regulatory alternatives concerning the ways in which companies collect, aggregate, protect, use, analyze, and retain consumer data, as well as transfer, share, sell, or otherwise monetize that data in ways that are unfair or deceptive.”[8]

Notably, the ANPRM also solicits public input on algorithmic decision-making, including the prevalence of algorithmic error, discrimination based on protected categories facilitated by algorithmic decision-making systems, and how the FTC should address algorithmic discrimination through the use of proxies.[9]  On September 27, the FTC continued the rulemaking process by hosting a virtual “Commercial Surveillance and Data Security Public Forum (the “Public Forum”)” to gather public feedback on the proposed rulemaking.[10]

The FTC is undertaking this rulemaking under Section 18 of the FTC Act (also known as “Magnuson-Moss”),[11] a lengthy and complicated hybrid rulemaking process that goes beyond the Administrative Procedure Act’s standard notice-and-comment procedures.[12]  In light of these procedural hurdles, any new proposed rules likely will take considerable time to develop.  The ANPRM notes that, if new rules are not forthcoming, the record developed in response to the ANPRM nevertheless will “help to sharpen the Commission’s enforcement work and may inform reform by Congress or other policymakers.”  The inclusion of algorithmic decision-making in the scope of the potential rulemaking underscores the FTC’s continued focus on taking the lead in the regulation of automated systems at federal level.[13]

C.  National Institute of Standards and Technology (“NIST”)

On August 18, 2022, NIST published and sought comments on a second draft of the NIST Artificial Intelligence Risk Management Framework (“AI RMF”).[14]  The AI RMF, as mandated by Congress, is intended for voluntary use to help incorporate trustworthiness considerations into the design, development, use, and evaluation of AI products, services, and systems.[15]  NIST plans to publish AI RMF in January 2023.  NIST also sought comments on the draft NIST AI RMF Playbook, an online resource providing recommended actions on how to implement the AI RMF.

D.  New York City Artificial Intelligence Law

On September 19, 2022, the New York City Department of Consumer and Worker Protection (“DCWP”) proposed rules in an attempt to clarify numerous ambiguities in New York City’s AI law, which takes effect on January 1, 2023.[16]

New York City’s law will restrict employers from using AEDT in hiring and promotion decisions unless it has been the subject of a bias audit by an “independent auditor” no more than one year prior to use.[17]  The law also imposes certain posting and notice requirements to applicants and employees.  The DCWP’s proposed rules are currently under consideration and may well invite more questions than answers as uncertainty about the requirements lingers.  The proposed rules attempt to clarify certain key terms, specify the requirements for and provide examples of bias audits, and outline several different ways by which, if passed, employers may provide the advance notice to candidates and employees regarding the use of an AEDT.[18]

A public hearing was held on November 4, 2022, and the record for comments is now closed, but DCWP has not provided a firm date on which the proposed rules will be finalized.  We will continue to monitor further guidance that will emerge as the January 1, 2023 effective date nears.

II.  INTELLECTUAL PROPERTY

A.  Federal Circuit Rules Inventors Must Be Natural Human Beings

On August 11, 2022, The U.S. Court of Appeals for the Federal Circuit affirmed a lower court’s ruling in Thaler v. Vidal that the plain text of the Patent Act requires that inventors must be human beings.[19]  Attorneys for Steven Thaler, the creator of the AI system “DABUS” (Device for the Autonomous Bootstrapping of Unified Sentience), argued that an AI system that has “created” several inventions should be granted a patent application, and that inventorship requirements should not be a bar to patentability.  The argument followed the U.S. Patent and Trademark Office’s rejection of two DABUS patent applications.  A Virginia federal court affirmed that ruling last year, finding AI cannot be an inventor under U.S. patent law.[20]  The DABUS project has also lodged several unsuccessful test cases in Australia, the EU, and the UK.[21]

III.  EU REGULATORY & POLICY DEVELOPMENTS

A.  AI Act Developments

Following the agreement on a common European AI strategy in 2018, the establishment of a high-level expert group in 2019, and various other publications, including a 2020 White Paper, on April 21, 2021, the EU Commission published its proposal for “the world’s first legal framework on AI”—the EU Artificial Intelligence Act (“AI Act”).[22]  In September 2022, the Czech Presidency of the Council of the European Union published a new proposal and may be on the cusp of finalizing the text for the proposed AI Act.[23]  The recent proposed changes to the draft legislation were relatively minor but notably included narrowing the definition of AI to focus on an AI system’s degree of autonomy and adding a chapter on General Purpose AI (“GPAI”)—large, multipurpose data models—indicating that obligations for these systems will likely be imposed through an implementing act.

The Committee of the Permanent Representatives of the Governments of the Member States to the European Union is expected to approve the final version on November 18, 2022, before ministers in the Transport, Telecommunications and Energy Council sign off on December 6, 2022.[24]

B.  Draft AI Liability Directive and New Draft Product Liability Directive

On September 28, 2022, the European Commission (“EC”) published a set of proposals aiming to modernize the EU’s existing liability regime and adapt it to AI systems, give businesses legal certainty, and harmonize member states’ national liability rules for AI.  The EC had previewed the draft rules in its February 2020 Report on Safety and Liability, emphasizing the specific challenges posed by AI products’ complex, opaque, and autonomous characteristics.[25]  The draft EU AI Act, the AI Liability Directive (“ALD”) [26] and the updated Product Liability Directive (“PLD”)[27] are intended to be complementary[28] and, together, are set to significantly change liability risks for developers, manufacturers and suppliers who place AI-related products on the EU market.[29]

The draft Product Liability Directive (“PLD”) establishes a framework for strict liability for defective products across the EU—including AI systems—meaning claimants need only show that harm resulted from the use of a defective product.  Notably, the mandatory safety requirements set out in the draft AI Act can be taken into account by a court for the purpose of determining whether a product is defective.

The AI Liability Directive (ALD”), which would apply to fault-based liability regimes in the EU, would create a rebuttable “presumption of causality” against any AI system’s developer, provider, or user, and would make it easier for potential claimants to access information about specific “High-Risk” AI Systems—as defined by the draft EU AI Act.  Of particular significance to companies developing and deploying AI-related products is the new disclosure obligation related to “High-Risk” AI systems, which could potentially require companies to disclose technical documentation, testing data, and risk assessments—subject to safeguards to protect sensitive information, such as trade secrets.  Failure to produce such evidence in response to a court order would permit a court to invoke a presumption of breach of duty.

The PLD and ALD will be subject to review and approval by the European Council and Parliament before taking effect.  Once implemented, Member States will have two years to implement the requirements into local law.  We are monitoring developments closely and stand ready to assist clients with preparing for compliance with the emerging EU AI regulatory framework.

IV.  UK REGULATORY AND POLICY DEVELOPMENTS

A.  UK Unveils Data Reform Bill, Proposes Approach to AI Regulation

On July 18, 2022, the UK government introduced several data reform initiatives aimed at guiding responsible use of data while promoting innovation, and regulating the use of AI.

The Data Protection and Digital Information Bill (“DPDI”),[30] which includes measures to “use AI responsibly while reducing compliance burdens on businesses to boost the economy,” is now facing delays[31] and a new public consultation, but would, if enacted, amend the current rules on data protection and privacy, including AI.  As introduced, DPDI clarifies the circumstances in which organizations can use automated decision-making.  If a decision produces a legal or similarly significant effect for an individual and involves the processing of sensitive
“special category” data, it cannot (other than in very specific circumstances) be taken solely on an “automated decision basis” with no “meaningful” human involvement.  Otherwise, automated decision-making systems can be used, subject to safeguards intended to “protect the rights and freedoms of the individual.”  These safeguards include requirements that the organization deploying the automated decision-making system can provide information about the decisions and provide individuals about whom a decision is being made with an opportunity to make representations about the decision, escalate to human intervention, and contest any decisions.

In parallel with the new legislation, the government also released a set of policy initiatives outlining the government’s approach to regulating AI in the UK, reiterating a commitment to sector-specific regulation and a “less centralized approach than the EU.”[32]  Its “AI Action Plan” highlights the UK government’s “focus on supporting growth and avoiding unnecessary barriers being placed on businesses,” emphasizing that the proposal will “allow different regulators to take a tailored approach to the use of AI in a range of settings . . . [which] better reflects the growing use of AI in a range of sectors.”[33]  The guidance sets out six core principles, which require developers and users to: (1) ensure that AI is used safely; (2) ensure that AI is technically secure and functions as designed; (3) make sure that AI is appropriately transparent and explainable; (4) consider fairness; (5) identify a legal person to be responsible for AI; and (6) clarify routes to redress or contestability.

A range of regulators—Ofcom, the Competition and Markets Authority, the Information Commissioner’s Office, the Financial Conduct Authority, and the Medicine and Healthcare Products Regulatory Agency—will be asked to interpret and implement the principles and encouraged to consider “lighter touch options which could include guidance and voluntary measures or creating sandboxes.”[34]

B.  UK ICO Publishes Guidance on Privacy Enhancing Technologies

On September 7, 2022, the UK Information Commissioner’s Office (“ICO”) published draft guidance on privacy-enhancing technologies (“PETs”) intended to “help organisations unlock the potential of data by putting a data protection by design approach into practice.”[35]  PETs are technologies that are intended to help organizations share and use people’s data responsibly, lawfully, and securely, including by minimizing the amount of data used and by encrypting or anonymizing personal information.

The ICO’s draft PETs guidance explains the benefits and different types of PETs currently available, as well as how they can help organizations comply with data protection law.  For example, the guidance contains information on the benefits and risks of using synthetic data to train large models.  This guidance forms part of the ICO’s draft guidance on anonymization and pseudonymization, and the ICO is seeking feedback to help refine and improve the final guidance.

_________________________

[1] See, e.g., the American Data Privacy Protection Act (“ADPPA”), which would require certain types of businesses developing and operating AI to undertake risk assessments.  For more details, please see our Artificial Intelligence and Automated Systems Legal Update (2Q22).

[2] For more details, please see President Trump Issues Executive Order on “Maintaining American Leadership in Artificial Intelligence.”

[3] White House, Join the Effort to Create a Bill of Rights for an Automated Society (Nov. 10, 2021), available at https://www.whitehouse.gov/ostp/news-updates/2021/11/10/join-the-effort-to-create-a-bill-of-rights-for-an-automated-society/.

[4] White House, Office for Science and Technology, available at https://www.whitehouse.gov/ostp/ai-bill-of-rights/.

[5] “An “automated system” is any system, software, or process that uses computation as whole or part of a system to determine outcomes, make or aid decisions, inform policy implementation, collect data or observations, or otherwise interact with individuals and/or communities.  Automated systems include, but are not limited to, systems derived from machine learning, statistics, or other data processing or artificial intelligence techniques, and exclude passive computing infrastructure.  “Passive computing infrastructure” is any intermediary technology that does not influence or determine the outcome of decision, make or aid in decisions, inform policy implementation, or collect data or observations, including web hosting, domain registration, networking, caching, data storage, or cybersecurity.  Throughout this framework, automated systems that are considered in scope are only those that have the potential to meaningfully impact individuals’ or communities’ rights, opportunities, or access.”  See The White House, OSTP, Blueprint for an AI Bill of Rights, Definitions, https://www.whitehouse.gov/ostp/ai-bill-of-rights/definitions/.

[6] The White House, OSTP, Blueprint for an AI Bill of Rights, From Principles to Practice, https://www.whitehouse.gov/ostp/ai-bill-of-rights/safe-and-effective-systems-3/.

[7] Federal Register, Trade Regulation Rule on Commercial Surveillance and Data Security, https://www.federalregister.gov/documents/2022/08/22/2022-17752/trade-regulation-rule-on-commercial-surveillance-and-data-security.

[8] Id.

[9] Public comments are available at https://www.federalregister.gov/documents/2022/08/22/2022-17752/trade-regulation-rule-on-commercial-surveillance-and-data-security.

[10] For more details, please see FTC Launches Commercial Surveillance and Data Security Rulemaking, Holds a Public Forum, and Seeks Public Input.

[11] Magnuson-Moss Warranty Federal Trade Commission Improvement Act, 15 U.S.C. § 57a(a)(1)(B).

[12] The FTC may promulgate a trade regulation rule to define acts or practices as unfair or deceptive “only where it has reason to believe that the unfair or deceptive acts or practices which are the subject of the proposed rulemaking are prevalent.”  The FTC may make a determination that unfair or deceptive acts or practices are prevalent only if: “(A) it has issued cease and desist orders regarding such acts or practices, or (B) any other information available to the Commission indicates a widespread pattern of unfair or deceptive acts or practices.”  That means that the agency must show (1) the prevalence of the practices, (2) how they are unfair or deceptive, and (3) the economic effect of the rule, including on small businesses and consumers.

[13] For more detail on the FTC’s activities in this space, please see our 2021 Artificial Intelligence and Automated Systems Annual Legal Review.

[14] NIST Seeks Comments on AI Risk Management Framework Guidance, Workshop Date Set, https://www.nist.gov/news-events/news/2022/08/nist-seeks-comments-ai-risk-management-framework-guidance-workshop-date-set; NIST, AI Risk Management Framework: Second Draft, https://www.nist.gov/system/files/documents/2022/08/18/AI_RMF_2nd_draft.pdf.

[15] NIST Risk Management Framework, https://www.nist.gov/itl/ai-risk-management-framework.

[16] NYC Dep’t Consumer & Worker Prot., Notice of Public Hearing and Opportunity to Comment on Proposed Rules, https://rules.cityofnewyork.us/wp-content/uploads/2022/09/DCWP-NOH-AEDTs-1.pdf.

[17] For more details, please see Gibson Dunn’s New York City Enacts Law Restricting Use of Artificial Intelligence in Employment Decisions.

[18] For more details regarding the proposed rules, please see Gibson Dunn’s New York City Proposes Rules to Clarify Upcoming Artificial Intelligence Law for Employers.

[19] Thaler v. Vidal, 43 F.4th 1207 (Fed. Cir. 2022).

[20] Thaler v. Hirshfeld, 558 F. Supp. 3d 238 (E.D. Va. 2021).

[21] See, e.g., 2021 Artificial Intelligence and Automated Systems Annual Legal Review.

[22] For more details, please see 2021 Artificial Intelligence and Automated Systems Annual Legal Review.

[23] EURActiv, AI Act: Czech EU presidency makes final tweaks ahead of ambassadors’ approval (Nov. 4, 2022), https://www.euractiv.com/section/digital/news/ai-act-czech-eu-presidency-makes-final-tweaks-ahead-of-ambassadors-approval/.

[24] Euractiv, Last-minute changes to EU Council’s AI Act text ahead of general approach (Nov. 14, 2022), available at https://www.euractiv.com/section/digital/news/last-minute-changes-to-eu-councils-ai-act-text-ahead-of-general-approach/.

[25] EC, Report on the safety and liability implications of Artificial Intelligence, the Internet of Things and robotics, COM(2020) 64 (Feb. 19, 2020), available at https://ec.europa.eu/info/files/commission-report-safety-and-liability-implications-ai-internet-things-and-robotics_en; see also European Commission, Questions & Answers: AI Liability Directive, available at https://ec.europa.eu/commission/presscorner/detail/en/QANDA_22_5793 (“Current national liability rules are not equipped to handle claims for damage caused by AI-enabled products and services. In fault-based liability claims, the victim has to identify whom to sue, and explain in detail the fault, the damage, and the causal link between the two. This is not always easy to do, particularly when AI is involved. Systems can oftentimes be complex, opaque and autonomous, making it excessively difficult, if not impossible, for the victim to meet this burden of proof.”)

[26] European Commission, Proposal for a Directive on adapting non contractual civil liability rules to artificial intelligence (Sept. 28, 2022), available at https://ec.europa.eu/info/files/proposal-directive-adapting-non-contractual-civil-liability-rules-artificial-intelligence_en.

[27] European Commission, Proposal for a directive of the European Parliament and of the Council on liability for defective products (Sept. 28, 2022), available at https://single-market-economy.ec.europa.eu/document/3193da9a-cecb-44ad-9a9c-7b6b23220bcd_en.

[28] The AI Liability Directive uses the same definitions as the AI Act, keeps the distinction between high-risk/non-high risk AI, recognizes the documentation and transparency requirements of the AI Act by making them operational for liability through the right to disclosure of information, and incentivizes providers/users of AI-systems to comply with their obligations under the AI Act.

[29] European Commission, Questions & Answers: AI Liability Directive, available at https://ec.europa.eu/commission/presscorner/detail/en/qanda_22_5793 (“Together with the revised Product Liability Directive, the new rules will promote trust in AI by ensuring that victims are effectively compensated if damage occurs, despite the preventive requirements of the AI Act and other safety rules.”).

[30] Data Protection and Digital Information Bill, available at https://publications.parliament.uk/pa/bills/cbill/58-03/0143/220143.pdf.

[31] Spencer, M. (2022, September 5). Business Statement [Hansard]. (Vol. 719), available at https://hansard.parliament.uk/commons/2022-09-05/debates/FB4997E6-14A2-4F25-9472-E2EE7F00778A/BusinessStatement (“the Government will not move the Second Reading and other motions relating to the Data Protection and Digital Information Bill today to allow Ministers to consider the legislation further”).

[32] Gov.UK, Press Release, UK sets out proposals for new AI rulebook to unleash innovation and boost public trust in the technology, available at https://www.gov.uk/government/news/uk-sets-out-proposals-for-new-ai-rulebook-to-unleash-innovation-and-boost-public-trust-in-the-technology.

[33] Id.

[34] Id.

[35] ICO, ICO publishes guidance on privacy enhancing technologies (Sept. 7, 2022), available at https://ico.org.uk/about-the-ico/media-centre/news-and-blogs/2022/09/ico-publishes-guidance-on-privacy-enhancing-technologies/.  See also https://ico.org.uk/media/about-the-ico/consultations/4021464/chapter-5-anonymisation-pets.pdf.

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The following Gibson Dunn lawyers prepared this client update: H. Mark Lyon, Frances Waldmann, and Emily Lamm.

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

H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Frances A. Waldmann – Los Angeles (+1 213-229-7914,[email protected])

Please also feel free to contact any of the following practice group leaders and members:

Artificial Intelligence and Automated Systems Group:
J. Alan Bannister – New York (+1 212-351-2310, [email protected])
Patrick Doris – London (+44 (0)20 7071 4276, [email protected])
Cassandra L. Gaedt-Sheckter – Co-Chair, Palo Alto (+1 650-849-5203, [email protected])
Kai Gesing – Munich (+49 89 189 33 180, [email protected])
Joel Harrison – London (+44(0) 20 7071 4289, [email protected])
Ari Lanin – Los Angeles (+1 310-552-8581, [email protected])
Carrie M. LeRoy – Palo Alto (+1 650-849-5337, [email protected])
H. Mark Lyon – Co-Chair, Palo Alto (+1 650-849-5307, [email protected])
Vivek Mohan – Co-Chair, Palo Alto (+1 650-849-5345, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Michael Walther – Munich (+49 89 189 33 180, [email protected])

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Los Angeles partner Daniel Swanson is the author of “The DOJ’s Section 2 Enforcement Agenda” [PDF] published by the Daily Journal on November 16, 2022.

A proposed rule published in the Federal Register on November 14, 2022 would amend the Federal Acquisition Regulation (FAR) to require certain Federal contractors to provide data regarding their greenhouse gas (GHG) emissions and climate-based financial risks, and to establish “science-based targets” for reducing their GHG emissions.[1] The proposed rule implements President Biden’s May 20, 2021 Executive Order (EO) 14030, Climate-Related Financial Risk, which directed the FAR Council to consider amending the FAR to “require major Federal suppliers to publicly disclose greenhouse gas emissions and climate-related financial risk and to set science-based reduction targets.”[2]  The comment period for the proposed rule is open until January 13, 2023.

The FAR Council’s proposed rule would significantly expand the GHG reporting obligations for federal contractors, and reflects the Biden Administration’s “whole of government” approach to addressing climate change. The preamble to the proposed rule notes, for example, similarities the proposal bears to the Securities and Exchange Commission’s March 21, 2022 proposal to impose climate-related disclosure requirements on U.S. public companies and foreign private issuers.[3]  Like the SEC’s proposed rule, which has been controversial, the proposed amendment to the FAR aims to standardize the disclosure of climate-related financial risks and leverage existing standards, such as those of the Task Force on Climate-Related Financial Disclosures (TCFD).[4] Unlike the  SEC’s proposed rule, the proposed FAR amendment requires certain companies to establish emissions reduction targets, although the SEC did propose that registrants disclose such targets if they have them.[5]

The FAR Council’s proposed GHG reporting rule would apply to “significant contractors,” defined as contractors that receive at least $7.5 million, but less than $50 million, in Federal contract obligations during the prior fiscal year, and “major contractors,” defined as contractors that received more than $50 million in Federal contract obligations during the prior fiscal year.[6] The proposed rule articulates baseline compliance requirements that would apply to both significant contractors and major contractors, as well as additional compliance requirements that would apply to major contractors only.[7] The baseline compliance requirements would begin one year after the publication of a final rule, while major contractors would have two years from the publication of a final rule to come into compliance with their additional reporting obligations.[8] Overall, the FAR Council’s proposed rule would (1) create a new FAR subpart at 23.XX, “Public Disclosure of Climate Information,” that would outline annual climate-related inventory and disclosure requirements for certain contractors, (2) amend existing annual climate-related representations in certain FAR solicitation clauses, and (3) amend the standard of responsibility for prospective significant and major contractors such that they are presumed to be nonresponsible if they have not complied with the new GHG disclosure requirements described in subpart 23.XX, unless “the noncompliance resulted from circumstances properly beyond the prospective contractor’s control,” they have “provided documentation sufficient for purposes of award that demonstrates substantial efforts taken to comply” with the requirements, they have “made a public commitment to comply as soon as possible (within [one] calendar year) on a publicly accessible website,” or a valid exception, exemption, or waiver applies.[9]

The disclosure scheme outlined in the FAR Council’s proposed rule represents a substantial expansion of the FAR’s current GHG-related provisions. Promulgated in 2016, FAR 23.802(d) currently requires only that contractors that receive $7.5 million or more in Federal contract obligations in a fiscal year represent whether they publicly disclose their GHG emissions and quantitative GHG emissions reduction goals.[10] While the current GHG-related provisions were promulgated to “assist agencies in developing strategies to engage with offerors to reduce supply chain emissions,”[11] the FAR Council now appears prepared to make affirmative use of the information it collects from contractors regarding their GHG emissions, stating in the preamble to the proposed rule that its purpose is to “ensure major Federal suppliers make the required disclosures and set targets to reduce their GHG emissions.”[12] As outlined in Section 23.XX03, the proposed rule would require a significant or major contractor, itself or through its immediate owner or highest-level owner, to complete an annual GHG inventory of its Scope 1 emissions, which are “emissions from sources that are owned or controlled” by the contractor, and its Scope 2 emissions, which “include GHG emissions associated with the generation of electricity, heating and cooling, or steam” purchased by the contractor but produced elsewhere.[13] The proposed rule also directs a significant contractor or major contractor to disclose its total Scope 1 and Scope 2 emissions in the Federal Government’s System for Award Management (SAM) each year.[14]

In addition to the requirements that apply to both significant and major contractors, the FAR Council’s proposed rule would require a major contractor to complete an “annual climate disclosure,” which is “a set of disclosures by an entity that aligns with recommendations of the TCFD,” and to publish the disclosure on a publicly accessible website.[15] The proposal states that the TCFD annual climate disclosure “includes a GHG inventory of not only Scope 1 and Scope 2 emissions, but also relevant Scope 3 emissions, which are emissions [(other than Scope 2 emissions)] that are a consequence of the operations of the reporting entity but occur at sources other than those owned or controlled by the entity.”[16] Additionally, the TCFD framework calls for the annual climate disclosure to  “describe[] the entity’s climate risk assessment process and any risks identified.”[17]

The proposed rule would also require major contractors to develop “science-based targets” for GHG emission reductions.[18] A “science-based target” is an emissions reduction target that is consistent with the goals of the 2015 Paris Agreement, namely, “to limit global warming to well below 2^oC above pre-industrial levels and pursue efforts to limit warming to 1.5^oC.”[19] Under the proposed rule, the science-based targets developed by major contractors must have been validated by the Science-Based Targets Initiative (SBTi) within the last five calendar years, and the major contractors must publish the targets on publicly accessible websites.[20]

The proposed rule indicates that the Government would enforce these new requirements by instructing contracting offerors “to treat a prospective contractor that is a significant or major contractor as nonresponsible under [FAR] 9.104-3(e),” unless the prospective contractor satisfies its GHG inventory and reporting obligations.[21] Only contractors deemed responsible are eligible to receive Federal Government contracts or subcontracts.[22] However, the proposed rule also provides for the issuance of exemptions from, and waivers to, the procedures for determining a contractor’s responsibility, outlined at Section 23.XX05, and the corresponding new responsibility standards at FAR 9.104-3(e), under certain circumstances.[23]

The FAR Council’s proposed rule is representative of the Biden Administration’s willingness to use the federal procurement process to address cross-cutting policy issues like climate change. For example, we have previously written about the Biden Administration’s mandate that federal contractor employees be vaccinated against COVID-19,[24] an initiative that was first announced in EO 14042 of September 9, 2021 to “promote[] economy and efficiency in Federal procurement.”[25]  That mandate drew a number of legal challenges, including one that resulted in a decision by the U.S. Court of Appeals for the Eleventh Circuit that upheld a district court preliminary injunction blocking the implementation of the contractor vaccine mandate, but that narrowed the injunction’s scope to limit it to contracts with the specific plaintiffs in that case (Georgia, Alabama, Idaho, Kansas, South Carolina, Utah, West Virginia, and a construction trade group).[26] It remains to be seen how the federal contractor community will respond to the FAR Council’s GHG reporting rule in the notice and comment process, and whether the final rule will spark litigation.

As noted, the comment period for the FAR Council’s proposed rule runs through January 13, 2023.

_____________________________

[1] See generally Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, 87 Fed. Reg. 68312 (Nov. 14, 2022) (to be codified at 48 C.F.R. pts. 1, 4, 9, 23, and 52).

[2] Executive Order 14030 of May 20, 2021: Climate-Related Financial Risk, 86 Fed. Reg. 27967 (May 25, 2021).

[3] Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, 87 Fed. Reg. at 68312; see also The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Fed. Reg. 21334 (Apr. 11, 2022) (to be codified at 17 C.F.R. pts. 210, 229, 232, 239, and 249).

[4] Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, 87 Fed. Reg. at 68312.

[5] Id.

[6] Id. at 68313.

[7] Id. at 68329.

[8] Id. at 68316.

[9] Id. at 68327.

[10] 48 C.F.R. § 23.802(d).

[11] Federal Acquisition Regulation: Public Disclosure of Greenhouse Gas Emissions and Reduction Goals—Representation, 81 Fed. Reg. 83092 (Nov. 18, 2016) (to be codified at 48 C.F.R. pts. 1, 4, 23, and 52).

[12] Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, 87 Fed. Reg. at 68312.

[13] Id. at 68313, 68329.

[14] Id. at 68329.

[15] Id. at 68313-14, 68329.

[16] Id. at 68314.

[17] Id.

[18] Id.

[19] Id.

[20] Id. at 68329.

[21] Id.

[22] 48 C.F.R. § 9.103(a) (“Purchases shall be made from, and contracts shall be awarded to, responsible prospective contractors only.”)

[23] Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, 87 Fed. Reg. at 68316.

[24] Eugene Scalia et al., President Biden Announces COVID-19 Vaccine Mandates, with Legal Challenges Likely to Follow, Gibson Dunn (Sept. 10, 2021), https://www.gibsondunn.com/president-biden-announces-covid-19-vaccine-mandates-with-legal-challenges-likely-to-follow/.

[25] Executive Order 14042 of September 9, 2021: Ensuring Adequate Safety Protocols for Federal Contractors, 86 Fed. Reg. 50985 (Sept. 14, 2021).

[26] Georgia v. Pres. of the U.S., 46 F.4th 1283 (11th Cir. 2022).

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The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Lindsay M. Paulin, Rachel Levick, and Nick Perry.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Administrative Law and Regulatory, Environmental Litigation and Mass Tort, or Government Contracts practice groups:

Government Contracts Group:
Dhananjay S. Manthripragada – Los Angeles (+1 213-229-366, [email protected])
Lindsay M. Paulin – Washington, D.C. (+1 202-887-3701, [email protected])
Joseph D. West – Washington, D.C. (+1 202-955-8658, [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])

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

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

This course covers the rise of nationwide injunctions and their effect on public perception of the judicial system. We discuss the differentiation between nationwide injunctions in private law cases and public law cases, and take a deeper look into the arguments both for and against nationwide injunctions. Finally, we address the increase in appellate skepticism and proposals for reform.

Topics discussed:

• The rise of nationwide injunctions
• Nationwide injunctions in private law cases
• Nationwide injunctions in public law cases
• Arguments for and against nationwide injunctions
• Increased appellate skepticism and proposals for reform

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PANELISTS:

Gregg Costa is a partner in the Houston office of Gibson, Dunn & Crutcher and co-chair of the firm’s Global Trial Practice Group. Mr. Costa previously served on the U.S. Court of Appeals for the Fifth Circuit from 2014 to 2022, following his nomination by President Obama and confirmation by the U.S. Senate with a vote of 97-0. His broad experience – having handled complex civil and criminal matters, at trial and on appeal, as advocate and judge – allows him to offer invaluable skills and strategic insights.

Collin Cox is a partner in the Houston office of Gibson, Dunn & Crutcher, where he represents plaintiffs and defendants in high-stakes commercial cases. He has been a lead trial lawyer in computer software trade secrets cases, several actions related to the Bernard L. Madoff fraud, royalty disputes, patent litigation, and other business crisis situations. He continues to be one of the youngest trial lawyers in Texas to receive band ranking recognition in commercial litigation from Chambers USA.

Miguel A. Estrada is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where he represents clients before federal and state courts on a broad range of matters and has also argued 24 cases before the United States Supreme Court. Mr. Estrada is the lead appellate counsel in two securities-fraud appeals from jury verdicts that are currently pending in the Second Circuit. From 2014-2022, Chambers & Partners has named him as one of a handful of attorneys that it ranked in the top tier among the nation’s leading appellate lawyers.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1 credit hour, of which 1 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

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.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1 hour.

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 November 9, 2022, the New York Department of Financial Services (“DFS”) announced proposed amendments (“Proposed Amendments”) to DFS’ Part 500 Cybersecurity Rules (the “Cybersecurity Rules”).  The Proposed Amendments reflect a revised set of amendments based on the draft Part 500 amendments released on July 29, 2022 (“Draft Amendments”).  The initial Draft Amendments were covered in our prior alert.  The Proposed Amendments continue to reinforce DFS’ forward-leaning, “catalytic” role in strengthening cybersecurity practices, but reflect that DFS did consider the comments received in response to the Draft Amendments as they clarify certain security requirements, strengthen some requirements to protect consumers and covered entities, and soften others to make them more closely aligned with industry standards and better account for public concerns.

We highlight seven key takeaways of the Proposed Amendments:

• Continue the Draft Amendments’ stringent 72-hour and 24-hour notification requirements—and add new provisions that would require covered entities to (i) notify DFS within 72 hours if affected by a third-party service provider cybersecurity event, and (ii) respond within 90 days to any requests by DFS in connection with DFS’ investigation of the cybersecurity event;
• Modify the definition of Class A companies, likely reducing the scope of those subject to heightened requirements;
• Soften some of the increased requirements on boards and senior management;
• Ease the heightened requirements for incident preparedness and operational resilience;
• Adjust certain technical requirements and their implementation timelines to be less aggressive;
• Expand requirements for risk assessments; and
• Reinforce new enforcement considerations.

We discuss each in turn below.

1. Even More Stringent Notification Obligations

The Draft Amendments previously proposed new, more stringent, cybersecurity event notification obligations, including:

• Requiring notification to DFS within 72 hours of unauthorized access to privileged accounts or the deployment of ransomware within a material part of a covered entity’s information systems; and
• Imposing a new 24-hour notification obligation in the event a ransom payment is made and a 30-day requirement to provide a written description of why the payment was necessary, alternatives considered, and sanctions diligence conducted.

The Proposed Amendments maintain these tight timetables, as well as add other obligations for incident notification, which reinforces DFS’ desire to be promptly kept informed about cybersecurity events at covered entities.  These additional obligations include:

• Requiring covered entities to provide DFS with any information requested regarding the investigation of the notified cybersecurity event within 90 days; and
• Requiring covered entities affected by a cybersecurity event at a third-party service provider to notify DFS within 72 hours from the time the covered entity becomes aware of the event.

2. Revised Definition of “Class A” Companies with Heightened Requirements

The Draft Amendments increased cybersecurity obligations for a newly defined group of larger DFS covered entities, termed “Class A companies.”  Although some requirements were removed or altered under the Proposed Amendments, the heightened requirements on this class of covered entities under the Draft Amendments included to:

• Conduct weekly systematic scans or reviews reasonably designed to identify publicly known cybersecurity vulnerabilities and document and report any material gaps in testing to the board and senior management;
• Implement an endpoint detection and response solution to monitor anomalous activity and a solution that centralizes logging and security event alerting;
• Monitor privileged access activity and implement a password vaulting solution for privileged accounts and an automated method of blocking commonly used passwords;
• Conduct an annual, independent audit of their cybersecurity programs; and
• Use external experts to conduct a risk assessment at least once every three years.

After considering public comments, DFS modified its proposed scope for the new category of “Class A companies,” likely reducing the number of covered entities that would fall within this definition.  The new definition for Class A companies under the Proposed Amendments include covered entities with:

• In-state gross annual revenue of $20 million in each of the last two fiscal years from business operations of the covered entity and its affiliates, and that have:
  
  • averaged over 2,000 employees over the last two fiscal years; or
  • over $1 billion in gross annual revenue in each of the last two fiscal years.

While this is a broad definition that will still cover a large number of entities, it is a material narrowing of the Draft Amendments, which would have covered any entity with over 2,000 employees or companies with a three-year average of over $1 billion in gross annual revenue.  Notably, the changes in the Proposed Amendments may result in excluding from the Class A definition certain covered entities that have a small presence in New York, and also shifts the Draft Amendments’ focus on gross annual revenues averaged over three years.

Under the Draft Amendments, Class A companies were required to conduct weekly systematic scans or reviews with respect to vulnerability assessments.  The Proposed Amendments remove this requirement, instead requiring covered entities more broadly to have a monitoring process that ensures prompt notification of any new security vulnerabilities.  The Proposed Amendments also revise certain technical and audit requirements included in the Draft Amendments for Class A companies, requiring:

• A privileged access management solution along with an automated method of blocking commonly used passwords, or a reasonable equivalent of such blocking if approved annually by the CISO and if there is a reasonably equivalent or more secure compensating control; and
• Independent audits to be conducted by external auditors, modifying the initial proposal that an internal auditor would suffice, and thereby reducing flexibility on how such audits should be conducted.

3. Softened Increased Obligations on Company Governing Bodies

Under the Proposed Amendments, DFS re-commits to its focus on the accountability of boards and senior management, but softens and removes some of the previously proposed obligations. These revised obligations:

• Continue to require that the CISO has adequate authority and now also the “ability to direct sufficient resources to implement and maintain a cybersecurity program” (notably, the Proposed Amendments remove the Draft Amendments’ requirement for adequate “independence”);
• Only require that the CISO’s annual board reports consider certain factors (i.e., the confidentiality of nonpublic information and the integrity and security of the covered entity’s information systems, the covered entity’s cybersecurity policies and procedures, plans for remediating material inadequacies, etc.) in the report, but no longer require those factors be expressly addressed;
• Remove the obligation included in the Draft Amendments that the CISO review the feasibility of encryption of nonpublic information at rest and the effectiveness of compensating controls annually;
• Change the obligation that both the CEO and CISO sign an annual certification or acknowledgement of noncompliance to a requirement that the “highest-ranking executive” and the CISO sign—the Proposed Amendments now also require that such certification or acknowledgement include remediation plans and a timeline for their implementation; and
• Clarify that the role of the board (or its equivalent or the appropriate committee) shall also include exercising oversight of and providing direction to management on cybersecurity risk management.

These changes in the Proposed Amendments help clarify some ambiguities. For example, changing the obligation for signing certifications or acknowledgements of noncompliance to the CISO and the “highest-ranking executive” clarifies that all companies, even those without a CEO, are required to have and sign annual certifications or acknowledgements of noncompliance.

4. Eased Expanded Requirements for Incident Response and Operational Resilience

The Draft Amendments expanded measures requiring covered entities to have written plans for business continuity and disaster recovery (“BCDR”), including requiring certain measures to mitigate disruptive events.  DFS also increased its requirements for incident response plans (“IRPs”) in the Draft Amendments, requiring certain additional content requirements for IRPs, such as clearly defined roles.  These requirements for BCDR and IRPs have remained largely the same in the Proposed Amendments, with a few practical changes.  Specifically, the Proposed Amendments:

• Remove the Draft Amendments’ requirement that covered entities provide relevant personnel with copies of the IRPs and BCDR plans and maintain these plans “offsite,” instead requiring only that these plans be distributed to or otherwise accessible to relevant personnel; and
• Replace the requirement that backups be “isolated from network connections” with a requirement that backups be “adequately protected from unauthorized alterations or destruction.”

Practically implemented, there may not be a significant difference concerning the changes to distribution of the IRPs and BCDR plans, as the Proposed Amendments require that the plans be accessible during a cybersecurity event, but the revised requirement will afford more flexibility for covered entities to develop an approach most effective for them.  Further, in the Proposed Amendments, training is still required for personnel involved in implementing the plans, as are incident response and BCDR exercises, which are required at least annually.  However, the changes to the requirement concerning backups is a significant technical change that will reduce the burden of compliance for many covered entities who do not have backups fully isolated from network connections.

5. Modified Enhanced Technology and Policy Requirements

The Proposed Amendments make significant changes to the strengthened technical and written policy requirements proposed by the Draft Amendments. Changes to technical requirements—focused on penetration testing, vulnerability management, and access controls—include:

• Requiring user access privileges for privileged accounts be reviewed at least annually and terminated upon employee departures, supplementing the Draft Amendments’ requirements (i.e., that privileged accounts have multi-factor authentication and be limited to only users who need it to perform their job and when performing functions requiring such access);
• Clarifying that penetration testing should be conducted both inside and outside the covered entity’s information systems’ boundaries and can be conducted by a qualified internal or external independent party;
• Replacing the Draft Amendments’ exception to multi-factor authentication for service accounts with an exception where the CISO approves a reasonably equivalent or more secure control, and otherwise requiring multi-factor authentication for: (i) remote access to the covered entity’s information systems, (ii) remote access to third-party applications from which nonpublic information is accessible, and (iii) all privileged accounts; and
• Replacing the Draft Amendments’ requirement for “strong, unique passwords” with a requirement to implement a “written password policy that meets industry standards.”

Many of these revisions, such as allowing the CISO to approve reasonably equivalent controls to replace multi-factor authentication, provide covered entities with more flexibility in achieving compliance with these regulations.

Amendments focused on covered entities’ written policies include:

• Replacing the Draft Amendments’ requirement for “strong, unique passwords” with a requirement to implement a “written password policy that meets industry standards”;
• Removing the requirement that covered entities’ written policies and procedures include all information systems and their components, such as such as hardware, operating systems, applications, infrastructure devices, APIs, and cloud services;
• Requiring that the covered entity’s cybersecurity policies, based on its risk assessment, additionally cover data retention, systems and network monitoring, security awareness and training, systems and application security, and incident notification;
• Requiring that incident responses plans include measures to investigate, in addition to mitigate, disruptive events;
• Requiring that cybersecurity awareness training be conducted annually, at a minimum, and cover social engineering exercises rather than just “phishing training”; and
• Requiring that the senior officers and the “highest-ranking executive,” rather than the CEO, of the covered entity revise the incident response plan as necessary.

These measures provide important clarification for covered entities.  Certain measures, such as allowing for a written password policy that meets industry standards, also demonstrate DFS’ consideration of industry best practices in revising these regulations.

6. Additional Requirements for Risk Assessments

The Draft Amendments expanded the requirements for and definition of “risk assessments.”  These changes have been maintained in the Proposed Amendments.  The Draft Amendments required that covered entities review and update risk assessments annually and conduct impact assessments whenever a change in the business or technology causes a material change to the covered entity’s cyber risk.  The requirement for impact assessments has since been removed, so covered entities now only have to review and update risk assessments annually and whenever such a change in business or technology occurs.

The Proposed Amendments also add a requirement that covered entities’ written policies and procedures for vulnerability management mandate automated scans of information systems and a manual review of systems not covered by such scans to identify vulnerabilities.  The frequency of these scans and reviews is to be determined by the risk assessment and where there are any major system changes.

7. Reinforced New Enforcement Considerations

The Draft Amendments contained two significant provisions regarding the enforcement of the Cybersecurity Rules, specifically that:

• Violations occur when a covered entity commits any act prohibited by the regulations or fails to satisfy a required obligation, which includes failing to: (i) comply for more than 24 hours with any part of the regulations, or (ii) prevent unauthorized access to nonpublic information due to noncompliance with the regulations; and
• DFS may consider certain aggravating and mitigating factors when assessing the severity of penalties, for example: cooperation, prior violations, provision of false or misleading information, harm to customers, etc.

The Proposed Amendments do not materially change these requirements.

Next Steps

The Proposed Amendments illustrate DFS’ stated commitment to ensuring the Cybersecurity Rules continue to “keep[] pace with new threats and technology purpose-built to steal data or inflict harm,” as Superintendent Adrienne Harris stated in announcing the Proposed Amendments.  The publication of the Proposed Amendments triggered a 60-day comment period that will end on January 9, 2023.  Covered entities who have views on the proposed changes to the DFS Cybersecurity Rules should consider submitting comments.  The Proposed Amendments demonstrate that DFS took into account prior comments as part of their “data-driven approach to amending the regulation to ensure that regulated entities address new and increasing cybersecurity threats with the most effective controls and best practices to protect consumers and businesses.”  Following this comment period, DFS will review submitted comments and decide whether to re-propose revised amendments or adopt the Proposed Amendments as final regulations.

Covered entities should assess their cybersecurity practices to ensure they have adequate controls in place to comply with these anticipated regulatory changes.  We are available to assist in those efforts and will continue to monitor and report on developments during and after the comment period.

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This alert was prepared by Alexander Southwell, Stephenie Gosnell Handler, Vivek Mohan, Amanda Aycock, Snezhana Stadnik Tapia, Terry Wong, and Ruby Lang.

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

United States
Matthew Benjamin – New York (+1 212-351-4079, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, [email protected])
David P. Burns – Washington, D.C. (+1 202-887-3786, [email protected])
Gustav W. Eyler – Washington, D.C. (+1 202-955-8610, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])
Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, [email protected])
Lauren R. Goldman– New York (+1 212-351-2375, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Robert K. Hur – Washington, D.C. (+1 202-887-3674, [email protected])
Kristin A. Linsley – San Francisco (+1 415-393-8395, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Vivek Mohan – Palo Alto (+1 650-849-5345, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Rosemarie T. Ring – San Francisco (+1 415-393-8247, [email protected])
Ashley Rogers – Dallas (+1 214-698-3316, [email protected])
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, [email protected])
Deborah L. Stein – Los Angeles (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, [email protected])
Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])

Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0) 1 56 43 13 00, [email protected])
James A. Cox – London (+44 (0) 20 7071 4250, [email protected])
Patrick Doris – London (+44 (0) 20 7071 4276, [email protected])
Kai Gesing – Munich (+49 89 189 33-180, [email protected])
Bernard Grinspan – Paris (+33 (0) 1 56 43 13 00, [email protected])
Joel Harrison – London (+44(0) 20 7071 4289, [email protected])
Vera Lukic – Paris (+33 (0) 1 56 43 13 00, [email protected])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])

Asia
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Connell O’Neill – Hong Kong (+852 2214 3812, [email protected])
Jai S. Pathak – Singapore (+65 6507 3683, [email protected])

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Against the backdrop of increased geopolitical tensions and broader decoupling trends, the United States has implemented sweeping new export controls designed to make it extremely difficult for Chinese companies to develop cutting-edge technologies that might have military applications. The restrictions will make it increasingly difficult for Chinese companies to obtain or manufacture advanced semiconductors and integrated circuits, which are critical for the development of artificial intelligence. The new rules also bar U.S. individuals and companies from providing direct or indirect support for the development or production of such chips in China and will make it harder for Chinese companies to develop supercomputers with potential military applications.

Taken together, these new restrictions impose an effective embargo against China in these technology sectors. In imposing the restrictions, the U.S. government explained that it developed this sweeping set of new regulations to curtail China’s use of these items in the development of weapons of mass destruction, artificial intelligence and supercomputing-enhanced war fighting, and in technologies that enable violations of human rights.

These new changes have already proven to be disruptive. U.S. suppliers have already reportedly cut ties to Chinese chipmakers, and there are reports of “mass resignations” of U.S. employees in China’s semiconductor industry.

Hear from our experienced export controls attorneys in the U.S. and Hong Kong about these new restrictions and their potential impact. We discuss:

• This development in the context of a series of efforts by both the U.S. and China to “decouple” in the technology sector
• How these new restrictions are affecting Chinese companies as well as U.S. companies with operations in China
• The potential impact on the broader semiconductor global supply chain
• The outlook for enforcement and new restrictions

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PANELISTS:

Fang Xue is a partner and Chief Representative in the Beijing office of Gibson, Dunn & Crutcher. Ms. Xue has represented Chinese and international corporations and private equity funds in cross-border acquisitions, private equity transactions, stock and asset transactions, joint ventures, going private transactions, tender offers and venture capital transactions, including many landmark deals among those. She also advises clients on corporate, compliance, export control and international trade related matters.

Judith Alison Lee is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and Co-Chair of the firm’s International Trade Practice Group. Ms. Lee practices in the areas of international trade regulation, including USA Patriot Act compliance, Foreign Corrupt Practices Act, economic sanctions and embargoes and export controls. Ms. Lee also advises on issues relating to virtual and digital currencies, blockchain technologies and distributed cryptoledgers.

Stephenie Gosnell Handler is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where she advises clients on complex legal, regulatory, and compliance issues relating to international trade, cybersecurity and technology matters. Ms. Handler has prior experience advising clients on diverse global cybersecurity and technology matters, including strategic legal issues, data localization, regulatory compliance, risk management, governance, preparedness and data and export control and sanctions requirements.

David A. Wolber is a Registered Foreign Lawyer (New York) in Hong Kong and of counsel in the Hong Kong office of Gibson, Dunn & Crutcher. Mr. Wolber’s practice focuses on navigating complex legal, compliance, reputational, political and other risks arising out of various international trade, national security and financial crime laws and regulations. He advises clients on economic and trade sanctions, export controls, foreign direct investment controls/CFIUS, anti-money laundering and anti-bribery and anti-corruption laws and regulations.

Chris R. Mullen is an associate in the Washington, D.C. office of Gibson, Dunn & Crutcher. Mr. Mullen’s practice focuses on international trade and investment. He has experience on a range of matters, including navigating export controls under the ITAR and EAR, global economic sanctions, anti-money laundering regulations, CFIUS review and FCPA compliance. He has also advised companies on international trade matters related to corporate mergers and acquisitions and compliance with anti-money laundering obligations at the state and federal levels.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1 credit hour, of which 1 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

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.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1 hour.

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.

The New York Attorney General’s Office (the “NYAG” or the “Office”) continues to serve as a leader for other state attorneys general, having a profound impact on corporations, nonprofits, and individuals in New York and beyond.  This round-up summarizes the major cases and initiatives pursued by New York State’s 67th Attorney General, Letitia James, and her team since August 2021.  AG James was just re-elected to another four-year term beginning January 2023.

The NYAG’s priorities include a mix of local and national issues, including data privacy, cybersecurity, and data breaches; employee rights; investor protection; environmental and animal protection; protecting consumers, including homeowners, taxpayers, and seniors; and cracking down on Medicare fraud.  There is certainly overlap in the NYAG’s priorities and those of federal regulators, and, like attorneys general around the country, increasingly the NYAG investigates and brings high-profile actions alongside federal regulators—including in cases where she may not have jurisdiction.

One new trend is that AG James is issuing reports that provide information about the NYAG’s investigative findings.  Although these reports are not “legal proceedings” and often do not have any legal significance, the reports can have important public relations and reputational impact, and potentially spawn other regulatory investigations.  Recently, for example, the Office has issued reports on the Nursing Home Response to the COVID-19 Pandemic, fake comments submitted in response to an FTC rulemaking on net neutrality, the sexual harassment allegations against Governor Andrew Cuomo, and the mass shooting in Buffalo, NY.

In terms of litigation, in recent years, the Office has made headlines for bringing large-scale suits in healthcare, including e-cigarette use among youth, the opioid crisis, and access to health care.  That said, the Office initiates litigation in very few cases, resolving most through settlements.  Like many AGs offices around the country, the Office is focused on enforcement against what it calls “Big Tech,” based on various legal theories, and in the past year has initiated several high-profile investigations into technology companies and other businesses.  AG James continues to advocate for legislation in various key areas, including health care and the environment.

The Office’s biggest headline-grabber this year has been the September 2022 lawsuit against Donald Trump, the Trump Organization, senior management, and other entities.  The case alleges that the Trump defendants engaged in years of financial fraud by falsely inflating Trump’s worth by billions of dollars in order to induce banks to lend money to the Trump Organization on more favorable terms, satisfy continuing loan covenants, induce insurers to provide insurance coverage for higher limits and at lower premiums, and gain tax benefits.[1]  On November 4, AG James won a motion that granted a preliminary injunction freezing certain assets, appointed an independent monitor to oversee the submission of financial information to certain third parties, and scheduled a preliminary conference for November 22 to set an expedited trial schedule.[2]

In this Round-Up, we discuss in further detail numerous of AG James’s key cases and initiatives over the past year, including her support for antitrust legislation and efforts to enforce antitrust laws; her continued focus on data privacy rights of New Yorkers as reliance on consumer technology has increased as a result of the COVID-19 pandemic; her new efforts to in investor protection; her ongoing focus on health care, including abortion access; and her attention on the environment and labor and employment rights of New Yorkers.

I.  Antitrust and Competition

AG James has continued to support efforts seeking to strengthen and modernize the antitrust laws.  In September 2021, AG James co-led a bipartisan coalition of 32 state attorneys general in calling on Congress to fund state antitrust efforts in response to changing technology.[3]

In New York specifically, AG James has continued to be a proponent of enacting the 21st Century Antitrust Act, a bill that its supporters claim would update New York’s antitrust laws to address the modern economy.[4]  The bill passed the New York State Senate on May 25, 2022 but did not pass the Assembly.[5]  The law seeks to expand antitrust liability under New York’s Donnelly Act to, among other things, make it unlawful for a company to “abuse” a “dominant position” in a relevant market—a standard that is adopted from European law.[6]  The bill has been criticized as excessively vague and potentially harmful to the New York economy.

AG James has also continued to aggressively investigate and pursue litigation against technology and pharmaceutical companies for alleged antitrust violations.[7]  In January 2022, a coalition of 48 attorneys general (led by AG James) appealed the D.C. federal district court’s dismissal of their claims against a tech giant for allegedly anticompetitive acquisitions.[8]  Also in January 2022, the Southern District of New York ruled in favor of New York, the FTC, and six other states in finding that Martin Shkreli engaged in illegal and anticompetitive practices while serving as the CEO of a pharmaceutical company.  Shkreli was banned from the pharmaceuticals industry for life and was ordered to pay nearly $65 million.[9]

AG James also launched antitrust investigations into and reached agreements with other businesses.  For example, in November 2021, the Office reached an agreement with two large supermarket chains to divest stores located in New York in connection with the companies’ proposed merger because it would have allegedly eliminated direct competition between local supermarkets.[10]  And on July 28, 2022, AG James announced a lawsuit against a national pharmacy for alleged antitrust violations that allegedly impacted hospitals and clinics that provide care for underserved communities across New York State, by purportedly restricting their ability to take advantage of certain federal subsidies.[11]

II.  Data Privacy, Cybersecurity, and Data Breaches

AG James continued to be active in the data privacy and cybersecurity realms over the past year, announcing several investigations arising from alleged data breaches, focusing on the importance of corporations keeping their customers’ personal data safe.  In fact, according to a list identifying the number of complaints AG James’s Office received in 2021, which AG James published in March of this year, the Office received the greatest number of complaints for “Internet-Related” issues, including “data privacy and security” and “data breaches.”[12]  Notable investigations and settlements, specifically arising from data breaches, include the following:

• In January 2022, the Office reached a $600,000 agreement with a vision care provider, arising from an alleged 2020 data breach compromising the personal information of approximately 2.1 million consumers nationwide, including 98,632 New York State residents.[13]  AG James’s investigation was brought pursuant to the Stop Hacks and Improve Electronic Data Security Act (the “SHIELD” Act), New York’s cybersecurity statute which, effective March 2020, expanded the State’s data breach notification law and imposed cybersecurity requirements on companies that collect or maintain “private information” of New York residents.[14]  In addition to the monetary payment, the company agreed to maintain a comprehensive information security program, regularly report any security risks to its leadership, maintain reasonable account management and authentication systems, encrypt sensitive consumer information, maintain appropriate logging and monitoring of network activity, and permanently delete consumers’ personal information when there is no reasonable business or legal purpose to maintain it.[15]
• In June 2022, the Office, along with 45 other attorneys general, reached a $1.25 million settlement with a cruise line, arising from an alleged 2019 data breach that compromised the personal information of 180,000 employees and customers nationwide, including 6,575 New Yorkers.[16]  Under the agreement, the cruise line will strengthen its email security and breach response practices, including by implementing and maintaining a breach response and notification plan; requiring email security training for employees; instituting multi-factored authentication for remote email addresses; requiring strong, complex passwords, password rotation, and secure password storage; maintaining enhanced behavior analytics tools to log and monitor potential security events; and undergoing an independent information security assessment.[17]
• In June 2022, the Office reached a $400,000 settlement with a grocery store chain based on allegations that the company exposed the personal information of more than three million consumers, including more than 830,000 New Yorkers, due to allegedly unsafe cloud storage practices.[18]  The NYAG alleged that compromised data included usernames and passwords, customers’ names, email addresses, mailing addresses, and data derived from driver’s license numbers.[19]  Under the terms of the settlement, aside from paying $400,000 in penalties, the grocery store will overhaul its security and data management policies, particularly those related to cloud assets.[20]

AG James has also launched several consumer protection investigations into various social media companies in connection with in allegedly harmful activity or prolonged social media engagement by young adult users.[21]

Additionally, on January 5, 2022, AG James released a Business Guide for Credential Stuffing Attacks after an investigation into “credential stuffing”—repeated, automated attempts to access online accounts using usernames and passwords stolen from online services—revealed that over 1.1 million online accounts had allegedly been compromised in cyberattacks at 17 well-known online retailers, restaurant chains, and food delivery services.[22]  According to press reports, this “credential stuffing” allegedly compromised customer accounts at each of the companies.[23]  The Office urged the companies to investigate and protect impacted users, and every company complied.[24]

Given evolving technology and the increase in cyber-attacks against businesses and consumers, we expect data privacy and cybersecurity to remain a high priority for the Office in the next year.

III.  Cryptocurrency and Consumer/Investor Protection

We also expect that AG James will continue to scrutinize actors, investments, and exchanges in the cryptocurrency space, and generally in the consumer financial and investor protection areas.  AG James’s efforts this past year demonstrate continued scrutiny of allegedly misleading statements and practices, including by debt collection agencies and student loan servicing agencies, as well as scrutiny of general consumer financing practices by non-bank retailers and money transmitters.

AG James’s focus on cryptocurrency investment has included an August 1, 2022 “investor alert” that urged “any New Yorker deceived or affected by the cryptocurrency crash to contact her office.”[25]  The alert also “encourage[d] workers in the cryptocurrency industry who may have witnessed misconduct or fraud to file a whistleblower complaint.”[26]  The alert, which is only AG James’s most recent action in the space, came after the cryptocurrency market, in general, lost significant value this summer.  Prior to this most recent notice, in March 2022, AG James issued a “taxpayer notice,” reminding cryptocurrency investors and their tax advisors “to make sure that they accurately declare and pay taxes on their virtual investments” to avoid any violations of tax law.[27]

AG James has also focused on cryptocurrency exchanges.  On October 18, 2021, AG James sent cease and desist letters to two unnamed cryptocurrency platforms and directed three other unnamed platforms to provide information about their activities and products.[28]  According to redacted cease and desist letters made publicly available by the NYAG, the two unnamed exchanges are allegedly “unlawfully selling or offering to sell . . . securit[ies] . . . without having registered as required” under New York’s Martin Act, which requires these exchanges to be registered with the Office as brokers, dealers, or salespersons, unless otherwise exempted.[29]  The letters also came only weeks after AG James won a $3 million judgment against a cryptocurrency trading platform in New York County State Supreme Court.[30]

On September 26, 2022, AG James joined the securities regulators of seven other states in suing related cryptocurrency companies in New York County State Supreme Court for allegedly failing to register with the state as securities and commodities brokers or dealers and for allegedly misrepresenting their registration status to investors.[31]  The defendants have not yet responded to the NYAG’s complaint.

Moreover, on September 13, 2021, AG James settled alleged claims without admission against two related media companies in connection with allegations that they unlawfully sold stock and cryptocurrency without registering them in New York State.[32]  In addition to offering and selling stock beginning in April 2020, the two companies allegedly raised more than $30 million from pre-sales of two digital instruments promoted as cryptocurrencies.[33]  Pursuant to the agreement, the companies will get credit toward the $479.9 million settlement for payments to the Securities and Exchange Commission (“SEC”) in connection with a related SEC investigation.[34]

AG James has also been active in the consumer financial protection space, particularly with respect to debt collectors and student debt services.  Most recently, on August 16, 2022, AG James applauded the U.S. Department of Education for discharging the federal student loan debt of over 4,000 New Yorkers who attended certain for-profit colleges between 2005 and 2016.[35]  Earlier this year, AG James also encouraged students who attended other institutions that allegedly inflated their job placement statistics to apply for federal loan discharges, and led a coalition of eight attorneys general in asking President Biden to fully cancel federal student debt writ large.[36]  In August 2022, President Biden announced that the Department of Education will cancel $10,000 of student debt for borrowers who meet identified income requirements.[37]  The Eighth Circuit Court of Appeals issued an administrative stay pausing the program on October 21.[38]

AG James also secured two agreements earlier this year with federal loan servicers.  In the first, one of the country’s largest student loan servicers agreed to cancel $1.85 billion in private student loan debt nationwide, and to pay $95 million in restitution to students and $142.5 million to states.[39]  The agreement followed an investigation by 39 attorneys general, including AG James, into whether the servicer allegedly improperly caused students to enter into forbearance plans that were ultimately detrimental to borrowers.[40]  In the second, the student loan servicer agreed to automatically review the accounts of approximately 10,000 New Yorkers and credit accounts as appropriate, in order to settle a 2019 lawsuit alleging the servicer mismanaged student debt.[41]  In addition to student loan servicing, AG James has also devoted attention to practices of debt collection agencies.  This year, AG James has settled claims with two debt collection businesses, enjoining these business from acting as debt collectors in the future.[42]  AG James also issued a consumer alert in December aimed at educating consumers about their rights and warning of improper debt collection tactics.[43]

Aside from settling recent cases, AG James has also initiated litigations to enforce consumer protection laws in the financial services area.  For example, in April 2022, AG James and the Consumer Financial Protection Bureau filed a lawsuit against a large money transfer provider, alleging the provider violated consumer protection laws, including by failing to timely transfer funds or refund consumers for delayed transfers.[44]  In August, the money transfer provider filed a motion to transfer the action from the United States District Court for the Southern District of New York to the Northern District of Texas and to dismiss the complaint.[45]  Moreover, in February 2022, state regulators, including AG James, along with the SEC and the U.S. Commodity Futures Trading Commission, brought a lawsuit alleging that a precious metals company and its owner unlawfully solicited nearly $68 million for precious metals and misrepresented fees charged to investors.[46]  These litigations are still pending.

IV.  Health Care

AG James has continued to focus on inadequately managed properties that threaten tenant and worker safety, health products that endanger children and babies, the opioid epidemic, the COVID-19 pandemic, and reproductive health.

AG James has sought to protect the public from inadequately managed properties that threaten tenant health.  For example, in September 2021, AG James and the New York City Department of Investigation indicted four Certified Asbestos Investigators on 19 counts, including felony charges, for allegedly filing false asbestos inspection reports.[47]  And in June 2022, AG James agreed to resolve an October 2021 lawsuit against a landlord in Syracuse for allegedly failing to protect children from lead paint.[48]  This success comes in the wake of a multi-state call on the Environmental Protection Agency (“EPA”)—which AG James led—to strengthen protections against lead poisoning for children living in low-income communities and communities of color.[49]  That same month, AG James reached an agreement with a wireless network operator to help prevent the spread of Legionnaires’ disease, which can be spread by poorly monitored building cooling towers.[50]

AG James has taken other steps involving children’s health.  In October 2021, AG James led a coalition of 23 attorneys general to petition the Food and Drug Administration to accelerate the removal of heavy metals from baby food.[51]  She also issued an alert to protect children from deceptive cannabis products sold in snack packaging, warning New Yorkers to “remain vigilant” against such products.[52]

AG James has devoted significant attention to the opioid epidemic.  In March 2019, AG James filed an extensive lawsuit aiming to hold various manufacturers and distributors accountable for the epidemic.[53]  AG James entered three notable settlements in the suit in the last year, with one manufacturer for $523 million and another for $200 million (most of which are earmarked for opioid abatement) and with a pharmaceutical company for $58.5 million.  She also sought to bring a previously dismissed pharmaceutical company back into the lawsuit, moving to vacate their dismissal for allegedly making “significant and intentional misrepresentations” to her Office regarding the extent of its role in its subsidiary’s opioids business.[54]

AG James has also urged the CDC to adopt stronger opioid prescription guidelines,[55] and in recent months has distributed over $100 million from settlements with opioid manufacturers and distributors to communities across the State impacted by the epidemic.[56]  AG James has also begun to distribute $256 million earmarked for New York City to combat the crisis—the first round of payments from the $1.5 billion that AG James has secured for the State from settlements with opioid manufacturers and distributors.[57]

AG James has also continued to prioritize public health in light of the COVID-19 pandemic.  For example, AG James issued a warning letter to a diagnostics company for allegedly misrepresenting its turnaround times for COVID-19 test results, and she launched an investigation into a clinic over reports that it allegedly wrongfully billed New Yorkers for COVID-19 tests.[58]  AG James has helped consumers recover over $400,000 who paid for expedited COVID-19 tests but received results later than promised.[59]

Finally, after a draft Supreme Court opinion in Dobbs v. Jackson Health Women’s Health Organization was leaked to the press in May 2022, AG James quickly mobilized around women’s reproductive health issues.  AG James and Assembly Member Jessica González-Rojas announced a bill to establish a state program to provide financial resources to abortion providers, which is currently in committee, and offered guidance to protect the privacy of individuals seeking abortions.[60]  Following the publication of the Supreme Court’s decision in Dobbs, AG James vowed to keep New York a “safe haven” for those seeking an abortion.[61] 

V.  Environmental Protection

AG James’s Office continued its environmental activism over the past year, leading other state attorneys general in urging federal agencies to take more aggressive stances on environmental issues, particularly climate change.

The majority of AG James’s actions directed at federal regulations came in the form of letters to various federal actors urging progressive rules and regulations concerning climate and pollution-related topics.  For example, on September 14, 2021, AG James, along with 20 state attorneys general, asked Congress to respond to the climate crisis and support environmental justice by funding programs in budget reconciliation legislation.[62]  In December 2021, AG James and 15 other Democratic state attorneys general also filed comments in support of the Pipeline and Hazardous Materials Safety Administration’s proposal to suspend a Trump-era rule allowing liquefied natural gas to be shipped in rail tank cars, arguing, in part, that the environmental assessment of the rule “did not adequately consider upstream and downstream effects on greenhouse gas emissions.”[63]  On June 30, 2022, in response to the Supreme Court ruling in West Virginia v. EPA, which ruled that the EPA lacked authority to restructure the electric power industry, AG James issued a statement saying that her Office “will continue to be a champion for our environment, our future, and the health of New Yorkers” and “will work to end our nation’s reliance on fossil-fuel power plants that pollute our environment, and move towards clean, renewable, and affordable electricity.”[64]  Most recently, on September 20, 2022, AG James announced an agreement with the U.S. Department of Energy (“DOE”) committing DOE to a new timetable for updating energy efficiency standards for 20 categories of common consumer products and commercial equipment, ranging from residential furnaces to laundry machines to electric motors.[65]  This agreement resolved a complaint against the DOE filed by the NYAG and a coalition of 17 states in 2020 alleging that the DOE failed to comply with certain deadlines for updating energy efficiency standards set by the Energy Policy and Conservation Act of 1975.[66]

In addition to regulatory advocacy, AG James also filed lawsuits related to environmental protection.  On April 28, 2022, AG James and California Attorney General Rob Bonta led a multistate coalition in suing the United States Postal Service for allegedly failing to consider the environmental impact of its new fleet of mail trucks.[67]  The lawsuit is currently pending before the Judicial Panel on Multidistrict Litigation, and oral argument the motion to transfer for coordinated pretrial proceedings was denied on October 7, 2022.[68]  On March 31, 2022, the offices of AG James and Department of Environmental Conservation Commissioner Basil Seggos announced the indictment of a Kentucky-based freight shipping and trucking company and its Vice President for allegedly dumping hazardous materials in Chenango County and creating fake scale tickets to conceal the alleged disposal.[69]

VI.  Labor and Employment

This year, as labor organizing efforts generally have picked up around the state, AG James turned to support local unions.  In August 2021, AG James announced that she, along with 16 other attorneys general, asked the U.S. Senate to pass the Protecting the Right to Organize Act of 2021 (“PRO Act”).[70]  The bill would allow unions to override “right-to-work” laws in more than two-dozen states, curtail employer intervention in union elections, and introduce new monetary penalties for certain retaliatory actions, among several other labor-friendly reforms.[71]  Although unlikely to pass the Senate this year, AG James’s support for the bill indicates her enthusiasm for expanding workers’ rights and union membership.[72]  Throughout the past year, AG James has met with young organizers and made several statements in support of a coffeehouse chain’s employees’ ultimately successful union campaign in Buffalo.[73]  She also expressed support for a health system’s employees’ decision to strike in late 2021.[74]  Looking ahead, AG James has indicated that she plans to work alongside the Service Employees International Union (“SEIU”) to seek stronger protections for nursing home workers in light of staffing, wage, and operations issues that were brought to light during the COVID-19 pandemic.[75]

AG James has been active across the labor and employment area.  These efforts include the following:

• After settling allegations of sexual harassment, unlawful sex discrimination, and retaliation against a celebrity chef in 2021, AG James’s Office has continued to investigate sexual harassment and discrimination in the entertainment and hospitality industries.[76]  Following a 16-month investigation, on July 13, 2022, AG James’s Office announced a $500,000 settlement with the owner of a Manhattan bar on behalf of sixteen former employees.  The settlement also requires the bar to update its training materials, post notices regarding anti-discrimination rights, and submit to periodic monitoring.[77]  This spring, AG James also joined other attorneys general in issuing a warning to NFL Commissioner Roger Goodell that gender discrimination and sexual harassment would not be tolerated in any workplace.[78]
• AG James’s lawsuit against an American multinational technology company over the company’s COVID-19 protocols was dismissed with finality this year when, after the First Department unanimously dismissed all of the Office’s claims in May, the court denied the Office’s motion for re-argument or, in the alternative, for leave to appeal, on September 13, 2022.[79]   The court had previously found that the NYAG’s retaliation claims were federally preempted and that the workplace-safety claims were based on withdrawn guidance and, therefore, moot.[80]
• As COVID-19 restrictions were lifted, AG James broadened her efforts related to workplace health and safety.  Her Office continued to negotiate settlements related to COVID-19 safety issues, including a $400,000 settlement with a healthcare services company related to allegations of improper termination and denials of sick leave during the pandemic.[81]
• The Office’s attention also shifted to a relatively novel employment issue: climate change.  On January 27, 2022, AG James, along with other states attorneys general, asked the Occupational Safety and Health Administration to implement national standards to protect outdoor and indoor workers from occupational exposure to extreme heat.  The suggested regulations would require employers to develop acclimatization plans; offer mandatory hydration and rest breaks in shaded or cool areas; and provide personal protective equipment, heat alert plans, and worker training and monitoring.  The regulations would also require employers to keep records related to heat-related injuries and submit to more frequent workplace inspections.  This new climate-focused regulatory push signals a potential new workplace safety focus for AG James as COVID-19 restrictions lift.[82]

AG James has also focused on the rights of terminated employees.  For example, in October 2021, AG James announced a $2.7 million settlement on behalf of 250 employees of a hotel and conference center after they were allegedly denied wages and terminated without sufficient legal notice under the New York Worker Adjustment and Retraining Notification Act.[83]  In May 2022, AG James announced an agreement with a hotel company that would collectively provide 500 previously terminated workers with $2.95 million in severance pay following allegations that non-unionized workers had been promised, but not provided, the same or better benefits as unionized hotel workers, in violation of Section 63(12) of the Executive Law.[84]  This year, AG James also brought suit against a religious diocese for allegedly depriving more than 1,100 former employees of pensions through various alleged violations of the New York Not-for-Profit Corporations Law and New York Estates, Powers & Trusts Law.[85]  This lawsuit is currently pending.[86]

AG James also settled several wage-and-hour cases this year, including two particularly large settlements in the home healthcare industry:

• First, in November 2021, AG James entered into an $18.8 million-dollar settlement with two home healthcare agencies that allegedly violated the New York Labor Law and NYC Paid Safe and Sick Leave Law.  In addition to the payout to 12,000 former employees, the two companies are also required to update their handbooks and leave processes and submit to monitoring by the Office and the New York City Department of Consumer and Worker Protection.[87]
• Then, in March 2022, AG James announced the largest settlement to date for alleged violations of the Wage Parity Act.  The combined $5.5 million-dollar settlement requires the two subject home healthcare agencies to revise company policies, retrain personnel, and report staff wages to the Office for six years.[88]

This year, AG James also reached several smaller settlements related to alleged unpaid wages for apartment building superintendents ($130,000), restaurant workers ($175,000), and construction workers on certain public works contracts ($930,000).[89]

We expect AG James will continue to advance the rights of and protections for workers in New York, as this has consistently been a primary focus for the Office.

*         *         *

We expect that AG James will continue to pursue an active and progressive agenda in the remainder of 2022.  We also anticipate that AG James will continue to work alongside state attorneys general around the country—forming coalitions with Democrats and Republicans alike—on matters of national import, including antitrust, the environment, consumer protection, data privacy, and financial fraud investigations and litigation.  Gibson Dunn will continue to monitor the actions of the Office.

_______________________________

[1]      Press Release, N.YS. Attorney General, Attorney General James Sues Donald Trump for Years of Financial Fraud (Sept. 21, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-sues-donald-trump-years-financial-fraud.

[2]     Mem. in Supp. of Pl.s’ Mot. for Prelim. Inj. at 6, New York v. Donald J. Trump, Index No. 452564/2022 (Oct. 13, 2022), NYSCEF No. 38; Order, New York v. Donald J. Trump, Index No. 452564/2022 (Nov. 4, 2022), NYSCEF No. 183.

[3]     Press Release, N.Y.S. Attorney General, Attorney General James Leads Bipartisan Coalition in calling on Congress to Modernize Federal Antitrust Laws (Sept. 20, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-leads-bipartisan-coalition-calling-congress-modernize; Bipartisan Coalition Asks Congress to Modernize Federal Antitrust Laws, Competition Policy Int’l (Sept. 20, 2021), https://www.competitionpolicyinternational.com/bipartisan-coalition-asks-congress-to-modernize-federal-antitrust-laws/.

[4]    Winston Bribach, State Case You Need to Know: Analyzing New York’s 21st Century Antitrust Act, Am. Bar Ass’n (Jun. 22, 2022), https://www.americanbar.org/groups/antitrust_law/resources/newsletters/state-case-new-yorks-21st-century-antitrust-act/.

[5]     Id.; Kate Lisa, NY state Senate-passed antitrust reform expected to die in Assembly, State of Politics (May 25, 2022), https://nystateofpolitics.com/state-of-politics/new-york/politics/2022/05/25/senate-passed-anti-trust-bill-expected-to-die-in-assembly.

[6]    Senate Bill S933A § 340(10)(a)(i)-(ii); NYU Law Program on Corporate Compliance and Enforcement, Developments in Antitrust Law: Keep an Eye on New York (Mar. 16, 2021), https://wp.nyu.edu/compliance_enforcement/2021/03/16/developments-in-antitrust-law-keep-an-eye-on-new-york/.

[7]    Tony Romm, States Sue Facebook as an Illegal Monopoly, Setting Stage for Potential Breakup, Wash. Post (Dec. 9, 2020), https://www.washingtonpost.com/technology/2020/12/09/facebook-antitrust-lawsuit/; Press Release, N.Y.S. Attorney General, AG James Investigating Facebook For Possible Antitrust Violations (Sept. 6, 2020), https://ag.ny.gov/press-release/2019/ag-james-investigating-facebook-possible-antitrust-violations; Press Release, N.Y.S. Attorney General, Attorney General James Announces Antitrust Investigation Into Google (Sept. 9, 2020) https://ag.ny.gov/press-release/2019/attorney-general-james-announces-antitrust-investigation-google.

[8]    Cecilia Kang, States appeal a judge’s decision to throw out their Facebook antitrust case, N.Y. Times (Jan. 14, 2022), https://www.nytimes.com/2022/01/14/technology/facebook-antitrust-case-appeal.html; Lauren Feiner, State AGs appeal dismissal of their antitrust suit against Facebook, CNBC (Jan. 14, 2022), https://www.cnbc.com/2022/01/14/state-ags-appeal-dismissal-of-their-antitrust-suit-against-facebook.html; New York v. Facebook, 549 F. Supp. 3d 6, 14 (D.D.C. 2021); Brief for Appellants, New York v. Facebook, Inc., No. 21-7078, D.C. Cir. (Jan. 14, 2022), Doc. No. 1930765.

[9]    Press Release, N.Y.S. Attorney General, Pharma Bro No More’: Attorney General James Scores Court Victory Against Convicted Criminal Martin Shkreli, Banning Him From Pharmaceutical Industry for Life, Ordering Him to Pay Nearly $65 Million (Jan. 14, 2022), https://ag.ny.gov/press-release/2022/pharma-bro-no-more-attorney-general-james-scores-court-victory-against-convicted.

[10]     Press Release, N.Y.S. Attorney General, Attorney General James Protects Supermarket Choices and Competitive Prices for Upstate New York Residents (Nov. 9, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-protects-supermarket-choices-and-competitive-prices; Rick Moriarty, Price Chopper and Tops Markets complete merger, Syracuse.Com (Nov. 9, 2021), https://www.syracuse.com/business/2021/11/price-chopper-and-tops-markets-complete-merger.html.

[11]     Press Release, N.Y.S. Attorney General, Attorney General James Sues CVS for Harming New York Safety Net Hospitals and clinics by Diverting Millions from Underserved Communities (Jul. 28, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-sues-cvs-harming-new-york-safety-net-hospitals-and-clinics.

[12]    Press Release, N.Y.S. Attorney General, Attorney General James Releases Top 10 Consumer Complaints of 2021 (Mar. 7, 2022),  https://ag.ny.gov/press-release/2022/attorney-general-james-releases-top-10-consumer-complaints-2021.

[13]    Press Release, N.Y.S. Attorney General, Attorney General James Announces $600,000 Agreement with EyeMed After 2020 Data Breach (Jan. 24, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-announces-600000-agreement-eyemed-after-2020-data-breach.

[14]  N.Y. Gen. Bus. Law § 899; $600,000 Reasons to Review Your SHIELD Act Compliance Program: NY Attorney General Announces Significant Settlement Stemming From Email Data Breach, Nat’l L. Rev. (Feb. 16, 2022), https://www.natlawreview.com/article/600000-reasons-to-review-your-shield-act-compliance-program-ny-attorney-general.

[15]    Id.

[16]   Press Release, N.Y.S. Attorney General, Attorney General James Recovers $1.25 Million for Consumers Affected by Carnival Cruise Line’s Data Breach (June 23, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-recovers-125-million-consumers-affected-carnival-cruise; see also Michael R. Graif, New York Attorney General: Data Breaches Will Cost You, Mintz Levin: Insights Center (Aug. 1, 2022), https://www.mintz.com/insights-center/viewpoints/2826/2022-08-01-new-york-attorney-general-data-breaches-will-cost-you.

[17]    Id.

[18]    Press Release, N.Y.S. Attorney General, Attorney General James Secures $400,000 From Wegmans After Data Breach Exposed Consumers’ Personal Information (June 30, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-secures-400000-wegmans-after-data-breach-exposed-consumers; see also New York Attorney General: Data Breaches Will Cost You, supra note 12.

[19]   Id.

[20]   Id.; Cozen O’Connor, AG James Recovers $400,000 From Webmans Over Alleged Data Security Lapses, JDSupra (July 8, 2022), https://www.jdsupra.com/legalnews/ag-james-recovers-400-000-from-wegmans-1636011/.

[21]     Press Release, N.Y.S. Attorney General, Attorney General James Investigating Instagram’s Impact on Young People (Nov. 18, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-investigating-instagrams-impact-young-people; Press Release, N.Y.S. Attorney General, Attorney General James Launches Investigations Into Social Media Companies for Role in Buffalo Attack (May 18, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-launches-investigations-social-media-companies-role.

[22]    Press Release, N.Y.S. Attorney General, Attorney General James Alerts 17 Companies to “Credential Stuffing” Cyberattacks Impacting More Than 1.1 Million Consumers (Jan. 5, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-alerts-17-companies-credential-stuffing-cyberattacks; N.Y.S. Attorney General, Bureau of Internet & Tech. Bus. Guide for Credential Stuffing Attacks (Jan. 5, 2022), https://ag.ny.gov/sites/default/files/businessguide-credentialstuffingattacks.pdf.

[23]    Id.

[24]    Id.

[25]    Press Release, N.Y.S. Attorney General, INVESTOR ALERT: Attorney General James Urges New Yorkers Deceived by Crypto Platforms to Report Concerns to OAG (Aug. 1, 2022), https://ag.ny.gov/press-release/2022/investor-alert-attorney-general-james-urges-new-yorkers-deceived-crypto-platforms.

[26]    Id.

[27]    Press Release, N.Y.S. Attorney General, TAXPAYER NOTICE: Attorney General James Reminds Crypto Investors to Pay Taxes on Virtual Investments (Mar. 23, 2022), https://ag.ny.gov/press-release/2022/taxpayer-notice-attorney-general-james-reminds-crypto-investors-pay-taxes-virtual.

[28]    Press Release, N.Y.S. Attorney General, Attorney General James Directs Unregistered Crypto Lending Platforms to Cease Operations In New York, Announces Additional Investigations (May 23, 2022), https://ag.ny.gov/press-release/2021/attorney-general-james-directs-unregistered-crypto-lending-platforms-cease.

[29]    Redacted Letter (October 18, 2021), https://ag.ny.gov/sites/default/files/cease_letter_redacted.pdf.

[30]    Press Release, N.Y.S. Attorney General, Attorney General James Shuts Down Virtual Currency Trading Platform and Stops Cryptocurrency CEO From Continuing Fraudulent Conduct (Sept. 13, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-shuts-down-virtual-currency-trading-platform-and-stops.

[31]    People of the State of New York, by Letitia James, Attorney General of the State of New York v. Nexo Inc. et al, Index No. 452610/2022 , NYSCEF No. 2 (N.Y. Supt. Ct. N. Y. Cnty. Sept. 26, 2022); see also Press Release, Attorney General James Sues Cryptocurrency Platform for Operating Illegally and Defrauding Investors (Sept. 26, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-sues-cryptocurrency-platform-operating-illegally-and.

[32]    Press Release, N.Y.S. Attorney General, Attorney General James Secures Nearly Half a Billion Dollars to Resolve Illegal Stock and Cryptocurrency Sales (Sept. 13, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-secures-nearly-half-billion-dollars-resolve-illegal-stock.

[33]    Id.

[34]    Id.

[35]    Press Release, N.Y.S. Attorney General, Attorney General James Announces Debt Relief for Students who Attended ITT Educational Services For-Profit Colleges (Aug. 16, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-announces-debt-relief-students-who-attended-itt.

[36]    Id.; see also Press Release, N.Y.S. Attorney General, Attorney General James Urges Former Students Deceived by DeVry University to Apply for Federal Loan Discharge (Mar. 31, 2022), available at https://ag.ny.gov/press-release/2022/attorney-general-james-urges-former-students-deceived-devry-university-apply; Press Release, N.Y.S. Attorney General, Attorney General James Calls for Full Cancelation of Federal Student Loan Debt (May 4, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-calls-full-cancelation-federal-student-loan-debt.

[37]    Press Release, The White House, Fact Sheet: President Biden Announces Student Loan Relief for Borrowers Who Need It Most (Aug. 24, 2022), https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most./.

[38] Order, Nebraska v. Biden, No. 22-3179 (8th Cir. Oct. 21, 2022).

[39]    Press Release, N.Y.S. Attorney General, Attorney General James Secures $1.85 Billion From Deceptive Student Loan Servicer Navient (Jan. 13, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-secures-185-billion-deceptive-student-loan-servicer.

[40]    Id.

[41]    Press Release, N.Y.S. Attorney General, Attorney General James Secures Student Debt Relief for Thousands of New Yorkers (Apr. 27, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-secures-student-debt-relief-thousands-new-yorkers; see also Press Release, N.Y.S. Attorney General, AG James Sues Student Loan Servicer For Mismanaging Loan Forgiveness Program (Oct. 3, 2019), available at https://ag.ny.gov/press-release/2019/ag-james-sues-student-loan-servicer-mismanaging-loan-forgiveness-program.

[42]    Press Release, N.Y.S. Attorney General, Attorney General James and CFPB Shut Down Predatory Debt Collection Operation (May 23, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-and-cfpb-shut-down-predatory-debt-collection-operation; Joint Stipulation for Entry of Proposed Stipulated Final Judgment and Order, CFTB v. JPL Recovery Solutions, LLC, No. 20-cv-1217 (W.D.N.Y. May 23, 2022), https://ag.ny.gov/sites/default/files/jpl_stipulation_stipulated_judgment_5.23.2022_combined.pdf; Press Release, N.Y.S. Attorney General, Attorney General James Shuts Down Illegal Debt Collection Businesses, Recovers $1.2 Million (Nov. 23, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-shuts-down-illegal-debt-collection-businesses-recovers-12.

[43]    Press Release, N.Y.S. Attorney General, CONSUMER ALERT: Attorney General James Urges Consumers to Be Aware of Rights when Faced with Attempts to Collect Upon Consumer Debt (Dec. 1, 2021), https://ag.ny.gov/press-release/2021/consumer-alert-attorney-general-james-urges-consumers-be-aware-rights-when-faced.

[44]    Press Release, N.Y.S. Attorney General, Attorney General James and Consumer Financial Protection Bureau Sue Major International Money Transfer Provider for Violating Consumer Protection Laws (Apr. 21, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-and-consumer-financial-protection-bureau-sue-major; see also Stacy Cowley, MoneyGram Sued for Allegedly Delaying Transfers and Witholding Refunds, N.Y. Times (Apr. 21, 2022), https://www.nytimes.com/2022/04/21/business/moneygram-lawsuit-new-york-ag-cfpb.html.

[45]    CFTB v. MoneyGram International, Inc., 22-cv-3256 (S.D.N.Y. Aug. 4, 2022).  AG James and the CFTB’s response to the consolidated motion is due September 19, 2022.

[46]    Press Release, N.Y.S. Attorney General, Attorney General James Sues Precious Metals Company and Owner for Defrauding Seniors Out of $68 Million (Feb. 1, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-sues-precious-metals-company-and-owner-defrauding-seniors; Mark Schoeff Jr., Regulators charge metals dealer with $67 million fraud, Investment News (Feb. 1, 2022) https://www.investmentnews.com/regulators-charge-metals-dealer-with-67-million-fraud-216709.

[47]    Press Release, N.Y.S. Attorney General, Attorney General James and DOI Commissioner Garnett Announce Indictment of Four Asbestos Investigators for Filing Fraudulent Inspection Reports (Sept. 2, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-and-doi-commissioner-garnett-announce-indictment-four.

[48]    Press Release, N.Y.S. Attorney General, Attorney General James Shuts Down Syracuse Landlord That Exposed Children to Lead Poisoning (June 13, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-shuts-down-syracuse-landlord-exposed-children-lead.

[49]    Press Release, N.Y.S. Attorney General, Attorney General James Leads Coalition Urging EPA to Strengthen Protections Against Childhood Lead Poisoning (Mar. 17, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-leads-coalition-urging-epa-strengthen-protections-against.

[50]    Press Release, N.Y.S. Attorney General, Attorney General James Reaches Agreement with Verizon to Prevent Legionnaires’ Disease (June 2, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-reaches-agreement-verizon-prevent-legionnaires-disease.

[51]    Press Release, N.Y.S. Attorney General, Attorney General James Leads Coalition Urging FDA to Accelerate Actions to Protect Children From Toxic Metals in Baby Food (Oct. 21, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-leads-coalition-urging-fda-accelerate-actions-protect.

[52]    Press Release, N.Y.S. Attorney General, CONSUMER ALERT: Attorney General James Issues Alert to Protect Children From Deceptive Cannabis Products Sold in Snack Packaging (Oct. 26, 2021), https://ag.ny.gov/press-release/2021/consumer-alert-attorney-general-james-issues-alert-protect-children-deceptive.

[53]    Press Release, N.Y.S. Attorney General, Attorney General James Concludes New York’s Opioid Trial (Dec. 14, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-concludes-new-yorks-opioid-trial.

[54]    Press Release, N.Y.S. Attorney General, Attorney General James Secures $523 Million from Top Opioid Manufacturer Teva, Bringing Total Funds for New Yorkers to More Than $2 Billion (Nov. 3, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-secures-523-million-top-opioid-manufacturer-teva-bringing; Press Release, N.Y.S. Attorney General, Attorney General James Uncovers Evidence That Teva Pharmaceuticals Lied to Evade Accountability for Opioid Crisis in New York (Jul. 11, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-uncovers-evidence-teva-pharmaceuticals-lied-evade; Press Release, N.Y.S. Attorney General, Attorney General James Secures $58.5 Million from Top Opioid Manufacturer Mallinckrodt for Fueling Opioid Crisis (June 16, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-secures-585-million-top-opioid-manufacturer-mallinckrodt; Press Release, N.Y.S. Attorney General, Attorney General James Delivers Up to $200 Million to Help New York Combat Opioid Crisis, Allergan Agrees Not to Sell Opioids (Dec. 8, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-delivers-200-million-help-new-york-combat-opioid-crisis.

[55]    Press Release, N.Y.S. Attorney General, Attorney General James Urges CDC to Adopt Stronger Opioid Prescription Guidelines (Apr. 14, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-urges-cdc-adopt-stronger-opioid-prescription-guidelines.

[56]    E.g., Press Release, N.Y.S. Attorney General, Attorney General James Distributes First Funds from Historic Opioid Settlements to Finger Lakes Region (Apr. 19, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-distributes-first-funds-historic-opioid-settlements-finger.

[57]    Press Release, N.Y.S. Attorney General, Attorney General James and Mayor Adams Fight Opioid Crisis with First of $256 Million in Payments for New York City (Apr. 21, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-and-mayor-adams-fight-opioid-crisis-first-256-million.

[58]    Press Release, N.Y.S. Attorney General, Attorney General James Issues Warning to LabQ Diagnostics to Stop Misrepresenting Turnaround Times for COVID-19 Test Results (Dec. 21, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-issues-warning-labq-diagnostics-stop-misrepresenting; Press Release, N.Y.S. Attorney General, CONSUMER ALERT: Attorney General James Launches Investigation Into CareCube for Wrongfully Billing New Yorkers for COVID-19 Tests (Jan. 6, 2022), https://ag.ny.gov/press-release/2022/consumer-alert-attorney-general-james-launches-investigation-carecube-wrongfully.

[59]    See Press Release, N.Y.S. Attorney General, Attorney General James Recovers Over $400,000 for Consumers Unfairly Charged for Expedited COVID-19 Tests (Feb. 14, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-recovers-over-400000-consumers-unfairly-charged-expedited; Press Release, N.Y.S. Attorney General, Attorney General James Recoups $122,000 for Consumers Charged for Expedited COVID-19 Tests That Were Late (July 7, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-recoups-122000-consumers-charged-expedited-covid-19-tests.

[60]    Press Release, N.Y.S. Attorney General, Attorney General James Takes Action to Expand Abortion Access (May 9, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-takes-action-expand-abortion-access; Press Release, N.Y.S. Attorney General, CONSUMER ALERT: Attorney General James Provides Guidance to Protect the Digital Privacy of People Seeking Abortion Care (May 13, 2022), https://ag.ny.gov/press-release/2022/consumer-alert-attorney-general-james-provides-guidance-protect-digital-privacy.

[61]    Press Release, N.Y.S. Attorney General, Attorney General James Calls for State Constitutional Amendment for Abortion (May 7, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-calls-state-constitutional-amendment-abortion.

[62]    Press Release, N.Y.S. Attorney General, Attorney General James Calls on Congress to Prioritize Funding for Programs to Address Climate Crisis, Environmental Injustice (Sept. 14, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-calls-congress-prioritize-funding-programs-address-climate.

[63] Notice of Proposed Rulemaking – Hazardous Materials: Suspension of HMR Amendments Authorizing Transportation of Liquefied Natural Gas by Rail, Docket No. PHMSA-2018-0025 (HM-264) (Dec. 23, 2021), https://portal.ct.gov/-/media/AG/Press_Releases/2021/Comments-of-State-Attorneys-General-on-Proposed-Suspension-Rule-12-23-21.pdf.

[64]    Press Release, Attorney General James Issues Statement on SCOTUS Decision Limiting EPA Authority to Regulate Power Plant Emissions (June 30, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-issues-statement-scotus-decision-limiting-epa-authority

[65]    Press Release, Attorney General James Helps Secure New Federal Energy Standards for American Families (Sept. 20, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-helps-secure-new-federal-energy-standards-american.

[66] Id.

[67]    Press Release, N.Y.S. Attorney General, Attorney General James Sues U.S. Postal Service For Failing to Consider Environmental Impact of New Trucks (Apr. 28, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-sues-us-postal-service-failing-consider-environmental.

[68]    In re U.S. Postal Services Next Generation Delivery Vehicle Acquisitions Program Record of Decision Litig., Docket No. 3046 (J.P.M.L. Jul, 22, 2022); Dkt. 54, Order Denying Transfer, MDL No. 3046 (Oct. 7, 2022).

[69]    Press Release, N.Y.S. Attorney General, Attorney General James and DEC Commissioner Seggos Announce Indictment of Kentucky Corporation and its Principal for Illegal Disposal of Hazardous Railroad Ties (Mar. 31, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-and-dec-commissioner-seggos-announce-indictment-kentucky.

[70]    Press Release, N.Y.S. Attorney General, Attorney General James Calls on the U.S. Senate to Strengthen Protections for Working Americans By Passing PRO Act (Aug. 11, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-calls-us-senate-strengthen-protections-working-americans.

[71]    Actions – H.R.842 – 117th Congress (2021-2022): Protecting the Right to Organize Act of 2021, H.R.842, 117th Cong. (2021); Don Gonyea, House Democrats Pass Bill That Would Protect Worker Organizing Efforts, NPR (Mar. 8, 2021), https://www.npr.org/2021/03/09/975259434/house-democrats-pass-bill-that-would-protect-worker-organizing-efforts.

[72] Levi Sumagaysay, Biden Marks Labor Day with Call for Congress to Pass PRO Act, MarketWatch (Sept. 3, 2022), https://www.marketwatch.com/story/biden-marks-labor-day-with-call-for-congress-to-pass-pro-act-11662148894; Nick Niedzwiadek & Eleanor Miller, Unions’ Post-Reconciliation PRO Act Push, Politico (Aug. 15, 2022), https://www.politico.com/newsletters/weekly-shift/2022/08/15/unions-post-reconciliation-pro-act-push-00051726.

[73]    Press Release, N.Y.S. Attorney General, Attorney General James Applauds Buffalo Starbucks Employees’ for Forming Company’s First Union in the Nation (Dec. 10, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-applauds-buffalo-starbucks-employees-forming-companys; Press Release, N.Y.S. Attorney General, Attorney General James Applauds Buffalo Starbucks Employees’ for Forming Company’s Second Union in the Nation (Jan. 10, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-applauds-buffalo-starbucks-employees-forming-companys.

[74]    Press Release, N.Y.S. Attorney General, Attorney General James Demands Fair Treatment for CWA Workers on Strike in Buffalo (Oct. 8, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-demands-fair-treatment-cwa-workers-strike-buffalo; Press Release, N.Y.S. Attorney General, Attorney General James Visits Starbucks Workers in Buffalo (Apr. 12, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-visits-starbucks-workers-buffalo; Press Release, N.Y.S. Attorney General, Attorney General James Releases Statement on Tentative Agreement Between CWA and Catholic Health System (Nov. 4, 2021) https://ag.ny.gov/press-release/2021/attorney-general-james-releases-statement-tentative-agreement-between-cwa-and.

[75]    Press Release, N.Y.S. Attorney General, Attorney General James, 1199SEIU Call for Stronger Protections for Nursing Home Workers (Mar. 21, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-1199seiu-call-stronger-protections-nursing-home-workers.

[76]    Press Release, N.Y.S. Attorney General, Attorney General James Delivers $600,000 to Survivors of Sexual Harassment and Discrimination at Restaurants Owned by Famed Chef Mario Batali and Joseph Bastianich (Jul. 23, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-delivers-600000-survivors-sexual-harassment-and.

[77]    Press Release, N.Y.S. Attorney General, Attorney General James Secures Settlement for Victims of Sexual Harassment, Discrimination, and Wage Theft at NYC Bar (Jul. 13, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-secures-settlement-victims-sexual-harassment.

[78]    See Rachel Scharf, NY AG Warns NFL of Workplace Harassment Crackdown Law360 (April 6, 2022), https://www.law360.com/employment-authority/articles/1481443/ny-ag-warns-nfl-of-workplace-harassment-crackdown-; Press Release, N.Y.S. Attorney General, Attorney General James Demands NFL Address Gender-Based Discrimination (Apr. 6, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-demands-nfl-address-gender-based-discrimination.

[79]    Press Release, N.Y.S. Attorney General, Attorney General James Files Lawsuit Against Amazon for Failing to Protect Workers During COVID-19 Pandemic (Feb. 17, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-files-lawsuit-against-amazon-failing-protect-workers; People of the State of New York v. Amazon.com, Inc. et al., Index No. 450362/2021, NYSCEF No. 163 (N.Y. Supt. Ct. N. Y. Cnty. Oct. 15, 2021); People of the State of New York v. Amazon.com, Inc. et al., Index No. 450362/2021, NYSCEF No. 171 (N.Y. Supt. Ct. N. Y. Cnty. Oct. 22, 2021); People of the State of New York v. Amazon.com, Inc. et al., No. 2021-03934, NYSCEF No. 37 (1st Dep’t May 10, 2022); People of the State of New York v. Amazon.com, Inc. et al., No. 2021-03934, NYSCEF No. 48 (1st Dep’t Sept. 13, 2022).

[80]    People of the State of New York v. Amazon.com, Inc. et al., No. 2021-03934, NYSCEF No. 37 (1st Dep’t May 10, 2022).

[81]    Press Release, N.Y.S. Attorney General, Attorney General James Protects Long Island Workers Unlawfully Fired During COVID-19 Pandemic (Sept. 22, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-protects-long-island-workers-unlawfully-fired-during-covid.

[82]    See, e.g., Hannah Redmond, Labor Law Lessons In amazon’s NY COVID Suit Win, Law360 (June 17, 2022), https://www.law360.com/employment-authority/articles/1502844/labor-law-lessons-in-amazon-s-ny-covid-suit-win-.

[83]   Press Release, N.Y.S. Attorney General, Attorney General James, State Senator Mayer Deliver $2.7 Million to Westchester Hotel Workers Unlawfully Fired (Oct. 27, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-state-senator-mayer-deliver-27-million-westchester-hotel.

[84]    Press Release, N.Y.S. Attorney General, Attorney General James Recovers More Than $2.9 Million for Hundreds of New York City Marriott Workers Denied Full Severance Pay (May 5, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-recovers-more-29-million-hundreds-new-york-city-marriott.

[85]    Press Release, N.Y.S. Attorney General, Attorney General James Sues to Protect St. Clare’s Hospital Retirees (May 24, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-sues-protect-st-clares-hospital-retirees.

[86]    People of the State of New York, By Letitia James, Attorney General of the State of New York et al., v. Roman Catholic Diocese of Albany, New York et al., Index No. 2022-830 (N.Y. Sup. Ct. Schenectady Cnty. 2022).

[87]    Press Release, N.Y.S. Attorney General, Attorney General James and NYC Department of Consumer and Worker Protection Recover Up to $18.8 Million in Unpaid Wages for 12,000 Home Health Aides (Nov. 16, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-and-nyc-department-consumer-and-worker-protection-recover.

[88]    Press Release, N.Y.S. Attorney General, Attorney General James Secures Nearly $7 Million From Home Health Agencies for Cheating Workers and Medicaid Fraud (Mar. 25, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-secures-nearly-7-million-home-health-agencies-cheating.

[89]    Press Release, N.Y.S. Attorney General, Attorney General James Recovers $130,000 in Stolen Wages for Unpaid Building Superintendents in Queens (Mar. 15, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-recovers-130000-stolen-wages-unpaid-building; Press Release, N.Y.S. Attorney General, Attorney General James Recovers $175,000 in Stolen Wages for Manhattan Pizzeria Workers (Apr. 29, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-recovers-175000-stolen-wages-manhattan-pizzeria-workers; Press Release, Attorney General James and DOI Commissioner Strauber Deliver $900,000 to 200 NYCHA Construction Workers Denied Fair Pay (Apr. 4, 2022), https://ag.ny.gov/press-release/2022/attorney-general-james-and-doi-commissioner-strauber-deliver-900000-200-nycha.

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Mylan Denerstein, Alexander Southwell, Amanda Aycock, Stephanie Silvano, Samantha Weiss, Amanda George, Timothy Deal, Rachel Jackson, Sam Berman, and Julia Ross.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the following authors in New York:

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

Alexander H. Southwell – Co-Chair, Privacy, Cybersecurity & Data Innovation Group, New York (+1 212-351-3981, [email protected])

© 2022 Gibson, Dunn & Crutcher LLP

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Los Angeles partner Dhananjay Manthripragada is the author of “COFC Dismissal of Boeing’s Challenge to the Application of FAR 30.606 to its Contracts Yet Again Leaves Unresolved the Issue of Combining the Cost Impact of Multiple Changes in Cost Accounting Practice” [PDF] published by The Government Contractor on November 9, 2022.

Measure ULA, commonly known as the “mansion tax,” would impose a new “Homelessness and Housing Solutions Tax” on transfers of residential and commercial real property in the city of Los Angeles valued in excess of $5 million.[1]  The revenue raised by the new tax, expected to be between $600 million and $1.1 billion annually, is intended to be used to fund affordable housing and tenant assistance programs.  As of the date of this Client Alert, the measure is ahead in the latest vote count.

Under the measure, sales of residential and commercial real property valued at over $5 million but less than $10 million would be subject to an additional tax at the rate of 4%, while sales of properties valued at $10 million or more would be subject to an additional tax at the rate of 5.5%.  The new tax would apply to the entirety of the sale value, not solely the amount in excess of the $5 million and $10 million thresholds, and regardless of whether the property is sold at a gain or a loss.  The thresholds would be adjusted each year based on inflation.  The tax would apply to property sales occurring on or after April 1, 2023.

The new tax would be in addition to the existing documentary transfer tax imposed on property sales in the city of Los Angeles, which is imposed at a combined city and county rate of 0.56%.

The tax differs in some respects from the existing documentary transfer tax imposed by the city and county of Los Angeles.  For example, while the existing documentary transfer tax is calculated by excluding the value of any liens or encumbrances remaining on the property at the time of the sale, the new tax appears to follow the model of other cities, such as San Francisco, and is imposed on the gross value of the property, i.e., by including the value of liens or encumbrances remaining on the property at the time of the sale.  In addition, there are certain exemptions from the tax that are not applicable to the existing documentary transfer tax, including exemptions for transfers to certain non-profit entities and to certain community land trusts and limited-equity housing cooperatives that, subject to certain exceptions, demonstrate a history of affordable housing development and/or affordable housing property management experience.

Similar to the existing documentary transfer, however, given the language used in Measure ULA, it appears likely that Los Angeles would interpret the tax as applying to a transfer of interests in a legal entity that results in a change in ownership of real property held by the legal entity for property tax purposes.  See our [prior Client Alert[2]] for a more detailed discussion of this topic.[3]   In addition, it appears that the tax would be subject to the same general exceptions set forth in the Los Angeles city ordinance that apply to the exiting city of Los Angeles documentary transfer tax (e.g., mere changes in identity, form, or place of organization).  Somewhat less clear is whether the exceptions set forth in the California state transfer tax statute would apply to the new tax (e.g., foreclosures and deeds in lieu of foreclosures).  In addition, it remains to be seen how certain aspects of the law will be interpreted, including the application of the $5 million and $10 million thresholds to transfers that include separate interests in real property (e.g., land and improvements, commercial condos).

If enacted, the Homelessness and Housing Solutions Tax would represent a significant increase in the transfer taxes applicable to residential and commercial property sales in the city of Los Angeles valued in excess of $5 million and, as such, is expected to have a significant impact on sales of residential and commercial property in the city of Los Angeles going forward.

Please contact any Gibson Dunn tax lawyer for updates on this issue.

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[1] https://clkrep.lacity.org/election/Initiative_Ordinance_ULA.pdf

[2] https://www.gibsondunn.com/california-supreme-court-upholds-los-angeles-countys-interpretation-of-documentary-transfer-tax-act/

[3] Notably, Measure ULA authorizes the Director of Finance to issue rules and regulations further defining the term “realty sold,” which triggers both the existing documentary transfer tax and the new tax, and which other cities have used to clarify that the property tax change in ownership rules apply to the documentary transfer tax.  See, e.g., Section 1114(b) of Article 12-C, San Francisco’s Real Property Transfer Tax Ordinance (“Notwithstanding subsection (a), “realty sold” includes any acquisition of transfer of ownership interests in a legal entity that would be a change of ownership of real property under California Revenue and Tax Code Section 64.”).

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This alert was prepared by Lorna Wilson.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other tax-related developments. If you have any questions, please contact the Gibson Dunn lawyer with whom you usually work, any member of the Tax or Real Estate practice groups, or any of the following:

Tax Group:
Dora Arash – Los Angeles (+1 213-229-7134, [email protected])
Eric B. Sloan – Co-Chair, New York (+1 212-351-2340, [email protected])
Lorna Wilson – Los Angeles (+1 213-229-7547, [email protected])
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])
Brian R. Hamano – Los Angeles (+1 310-551-8805, [email protected])
David W. Horton* – Los Angeles (+1 213-229-7613, [email protected])
George Liang – Los Angeles (+1 213-229-7230, [email protected])

*David W. Horton is an associate working in the firm’s Los Angeles office who is admitted only in New York.

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On November 10, 2022, the Federal Trade Commission released a new policy Statement setting forth its view of its enforcement authority under Section 5 of the FTC Act, 15 U.S.C. § 45, and announcing it will no longer focus on the “rule of reason” framework commonly used in Sherman and Clayton Act enforcement to determine liability.  Instead, the FTC intends to broaden its enforcement of Section 5 to focus “on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions.”[1]  This new Statement reflects a significant departure from the FTC’s previous position and reflects a general trend within the Biden Administration toward broadening the scope of its perceived authority and pursuing novel antitrust enforcement efforts.[2]  While it remains to be seen how aggressively the FTC invokes this new approach to investigate and potentially challenge business practices not otherwise covered by the antitrust laws under Section 5, this development at a minimum adds uncertainty for businesses that heightens the need for vigilance in how they operate.[3]

Background:  Section 5 of the FTC Act

In 1914, Congress passed the FTC Act, establishing the Commission and granting it authority to enforce fair competition law.[4]  The FTC largely derives its enforcement authority from Section 5 of the FTC Act, which has two prongs: the first addresses consumer protection, based on the “unfair or deceptive acts or practices” statutory language, and the second addresses primarily antitrust, based on the “unfair methods of competition” (“UMC”) statutory language.[5]  This new Statement addresses Section 5’s second prong, and explains the FTC’s view on how the scope of Section 5 relates to the FTC’s authority to enforce other antitrust laws, most notably the Sherman and Clayton Acts.

The Evolution of the FTC’s Prior Views on Section 5’s Scope

In 2015, the FTC released a one-page policy statement about principles of its UMC authority, explaining that it would (1) follow the consumer welfare standard, (2) evaluate acts under “a framework similar to the rule of reason,” and (3) align FTC Act Section 5 enforcement with the scope of the Sherman and Clayton Acts.[6]  Under new leadership, on July 1, 2021, the FTC rescinded this 2015 policy statement.[7]  On November 10, 2022, in a sixteen-page statement, the FTC announced its newly broadened view of the scope of Section 5.[8]

The FTC’s New Broader Position on Section 5’s Scope

This new Policy Statement is hardly a model of clarity.  It starts by explaining the FTC’s view that “Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.”[9]  The Statement provides the FTC’s justification of this view from its reading of judicial precedents,[10] the FTC Act’s legislative history,[11] and congressional purpose[12].  Then, it turns to the FTC’s reading of Section 5’s UMC language,[13] its analysis of potential cognizable justifications,[14] and closes with a long list of historical examples of unfair methods of competition.[15]

Analyzing the statutory language, the Statement explains that conduct must be a method of competition, i.e., “conduct undertaken by an actor in the marketplace [that] implicate[s] competition.”[16]  This includes indirectly implicating competition, and the FTC provides an example: “misuse of regulatory processes that can create or exploit impediments to competition (such as those related to licensing, patents, or standard setting).”[17]

Addressing what “unfair” means, the Statement explains that there are two criteria to determine if conduct goes beyond competition on the merits if the conduct is (1) “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature . . . [, or is] otherwise restrictive or exclusionary, depending on the circumstances” and (2) if the conduct “tend[s] to negatively affect competitive conditions.”[18]  The Statement emphasized that because “Section 5 analysis is purposely focused on incipient threats to competitive conditions, this inquiry does not turn to whether the conduct directly caused actual harm in the specific instance at issue.”[19]  Rather, the focus is on “whether the respondent’s conduct has a tendency to generate negative consequences; for instance, raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, or reducing the likelihood of potential or nascent competition.”[20]

In concluding its analysis of the statutory language, the Statement emphasized that Section 5, unlike virtually all other antitrust statutes, “does not require a separate showing of market power or market definition” when evidence indicates a tendency of anticompetitive effects.[21]  Finally, the FTC noted that it would not utilize a rule of reason framework of analysis in its Section 5 enforcement.‎[22]

In all, this newly announced interpretation of Section 5 is much broader than the previous administration’s and is notable for its repetitious emphasis on “stopping unfair methods of competition in their incipiency.”  This perspective means that the FTC may launch investigations of practices before any anticompetitive harm or impact has arisen at all, much less one that causes market-wide injury.  Additionally, the Statement only lightly touches on what may constitute a potential defensive justification, but suggests it intends to circumscribe companies’ abilities to justify their business practices.  For example, the FTC notes that “it would be contrary to the text, meaning, and case law of Section 5 to justify facially unfair conduct on the grounds that the conduct provides the respondent with some pecuniary benefits.”‎[23]  Similarly, the Statement rejects a “numerical cost-benefit analysis” that would show the benefits of a practice outpace any potential harm, noting that the UMC framework “explicitly contemplates a variety of non-quantifiable harms.”[24]  Thus, the FTC contemplates broader liability under Section 5 along with narrower available defenses.

Examples of Unfair Methods of Competition that the FTC Highlighted

The Statement provides a “non-exclusive” list of examples that would constitute a Section 5 violation, including practices that (1) violate the Sherman and Clayton Act, (2) are “incipient violation[s] of the antitrust laws,” and (3) violate “the spirit of the antitrust laws.”‎[25]  The list follows:

1. Practices deemed to violate Sections 1 and 2 of the Sherman Act or the provisions of the Clayton Act, as amended (the antitrust laws).
2. Conduct deemed to be an incipient violation of the antitrust laws.  According to the FTC, incipient violations include conduct by respondents who have not gained full-fledged monopoly or market power, or by conduct that has the tendency to ripen into violations of the antitrust laws.  Past examples of such use of Section 5 of the FTC Act include:

• invitations to collude that have not resulted into an agreement between competitors,
• mergers, acquisitions, or joint ventures that have the tendency to ripen into violations of the antitrust laws,
• “serial” mergers, acquisitions, or joint ventures that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws, and
• loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the tendency to ripen into violations of the antitrust laws by virtue of industry conditions and the respondent’s position within the industry.

3. Conduct that violates “the spirit of the antitrust laws.”  This includes conduct that tends to cause potential harm similar to an antitrust violation, but that may or may not be covered by the literal language of the antitrust laws or that may or may not fall into a “gap” in those laws.  As such, the analysis may depart from prior precedent based on the provisions of the Sherman and Clayton Acts.  Examples of such violations identified in the new Policy, to the extent not covered by the antitrust laws, include:

• practices that facilitate tacit coordination,
• parallel exclusionary conduct that may cause aggregate harm,
• conduct by a respondent that is undertaken with other acts and practices that cumulatively may tend to undermine competitive conditions in the market,
• fraudulent and inequitable practices that undermine the standard-setting process or that interfere with the Patent Office’s full examination of patent applications,
• price discrimination claims such as knowingly inducing and receiving disproportionate promotional allowances against buyers not covered by the Clayton Act,
• de facto tying, bundling, exclusive dealing, or loyalty rebates that use market power in one market to entrench that power or impede competition in the same or a related market,
• a series of mergers or acquisitions that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws,
• mergers or acquisitions of a potential or nascent competitor that may tend to lessen current or future competition,
• using market power in one market to gain a competitive advantage in an adjacent market by, for example, utilizing technological incompatibilities to negatively impact competition in adjacent markets,
• conduct resulting in direct evidence of harm, or likely harm to competition, that does not rely upon market definition,
• interlocking directors and officers of competing firms not covered by the literal language of the Clayton Act,
• commercial bribery and corporate espionage that tends to create or maintain market power,
• false or deceptive advertising or marketing which tends to create or maintain market power, or
• discriminatory refusals to deal which tend to create or maintain market power.[26]

Commissioner Statements and Dissents

The Commission vote to approve the statement was 3-1, along party lines.

Commissioner Wilson, the lone currently seated Republican on the FTC, dissented, arguing that the new Statement “abandons bedrock principles of antitrust that long have been accepted by the Commission, the courts, the business community, and enforcers across the globe.”[27]  In particular, she noted that the Statement did not: (1) provide clear guidance to the business community on how to comply with the law, (2) establish an approach of what “unfair” means “that matches the economic and analytical rigor . . . in the consumer protection context,” (3) provide a framework that will result in credible enforcement, or (4) address the legislative history “that both demands economic content for the term ‘unfair’ and cautions against an expansive approach to enforcing Section 5.”[28]

Takeaways

This new policy statement is part of a larger trend toward more vigorous enforcement by the FTC and thus a broader risk of antitrust enforcement, as we have noted in previous Client Alerts addressing interlocking directorates, no-poach and non-solicit agreements, and criminal monopolization.

In light of this increasingly aggressive and unpredictable regulatory environment, it is important for companies to review their practices for any similar to those flagged by this policy statement.  Gibson Dunn attorneys are closely monitoring these developments and are available to discuss these issues as applied to your particular business.

___________________________________

[1]       Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act, Fed. Trade Comm’n (Nov. 10, 2022) (“UMC Policy Statement” or just the “Statement”).  The Commission vote was 3-1 along party lines.  Chair Khan and Commissioners Slaughter and Bedoya released a joint statement.  See Joint Statement, Fed. Trade Comm’n (Nov. 10, 2022).  Commissioner Wilson dissented.  See Dissenting Statement of Commissioner Christine S. Wilson, Fed. Trade Comm’n (Nov. 10, 2022) (criticizing the new Statement as threatening due process and leaving “businesses in the dark on how to structure their conduct to avoid a challenge by the Commission”).

[2]       The Democratic-appointed Commissioners have recently made public statements about their views that the FTC has broader enforcement authority than it has traditionally purported to have.  See e.g., Chair Lina Khan, Prepared Statement of the Federal Trade Commission Before the United States Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, “Oversight of the Enforcement of the Antitrust Laws,” Sep. 20, 2022, at 1 (noting that the FTC’s focus is on “reactivating the full set of authorities” available to it);  Commissioner Alvaro M. Bedoya, Prepared Remarks Before the Midwest Forum on Fair Markets, “Returning to Fairness,” Sep. 22, 2022, at 8 (outlining Commissioner Bedoya’s desire to see antitrust law move away from a focus on “efficiency” and toward a focus on “fairness”).  As for enforcement priorities, the Statement’s language closely reflects that contained in earlier omnibus resolutions approved by the FTC in a 3-2 vote.  See FTC Authorizes Investigations into Key Enforcement Priorities, Fed. Trade Comm’n (July 1, 2021) (“Specifically, the resolutions direct agency staff to use ‘compulsory process,’ such as subpoenas, to investigate seven specific enforcement priorities.  Priority targets include repeat offenders; technology companies and digital platforms; and healthcare businesses such as pharmaceutical companies, pharmacy benefits managers, and hospitals.”).

[3]       Many states have their own unfair competition laws, and the construction and scope of those laws is typically a matter of individual state law, so the impact of the FTC policy statement will not necessarily alter state unfair competition enforcement.

[4]       FTC Act of 1914, Pub. L. No. 63-203, 38 Stat. 717 (codified as amended at 15 U.S.C. § 41– 58).

[5]       Id.  See A Brief Overview of the Federal Trade Commission’s Investigative, Law Enforcement, and Rulemaking Authority, Fed. Trade Comm’n (last revised May 2021).

[6]       Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, Fed. Trade Comm’n (Aug. 13, 2015).

[7]       Statement on the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, Fed. Trade Comm’n (July 9, 2021).

[8]       UMC Policy Statement.

[9]       Id. at 1.

[10]     Id. at 1 n.3 (citing twelve Supreme Court opinions).

[11]     Id. at 2–6 (“Congress wanted to give the Commission flexibility to adapt to changing circumstances.”)

[12]     Id. at 6–8 (“Congress intended for the FTC to be entitled to deference from the courts as an independent, expert agency.”).

[13]     Id. at 8–10.

[14]     Id. at 10–12 (“In the event that conduct prima facie constitutes an unfair method of competition, liability normally ensues under Section 5 absent additional evidence.  There is limited caselaw on what, if any, justifications may be cognizable in a standalone Section 5 unfair methods of competition case, and some courts have declined to consider justifications altogether.”) (citing Atlantic Refining Co. v. Fed. Trade Comm’n, 381 U.S. 357, 371 (1965) and Fed. Trade Comm’n v. Texaco, 393 U.S. 223, 230 (1968), and L.G. Balfour Co. v. Fed. Trade Comm’n, 442 F.2d 1, 15 (7th Cir. 1971)).

[15]     Id. at 12–16.

[16]     Id. at 8.

[17]     Id. at 8.

[18]     Id. at 9–10.

[19]     Id. at 10.

[20]     Id.

[21]     Id.

[22]     Id.

[23]     Id. at 11.

[24]     Id.

[25]     Id. at 12.

[26]     Id. at 12–15 (edited for clarity) (citing cases).

[27]     See Dissenting Statement of Commissioner Christine S. Wilson, Fed. Trade Comm’n (Nov. 10, 2022).

[28]     Id. at 3.

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The following Gibson Dunn lawyers prepared this client alert: Rachel Brass, Stephen Weissman, Cynthia Richman, Daniel Swanson, Svetlana S. Gans, Chris Wilson, David Reck, and Connor Leydecker*.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition, Privacy, Cybersecurity and Data Innovation, Mergers and Acquisitions, Private Equity, or Securities Regulation and Corporate Governance practice groups, or the following practice leaders and members:

Antitrust and Competition Group:
Rachel S. Brass – San Francisco (+1 415-393-8293, [email protected])
Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, [email protected])
Cynthia Richman – Washington, D.C. (+1 202-955-8234, [email protected])
Daniel G. Swanson – Los Angeles (+1 213-229-7430, [email protected])
Stephen Weissman – Washington, D.C. (+1 202-955-8678, [email protected])
Ali Nikpay – London (+44 (0) 20 7071 4273, [email protected])
Christian Riis-Madsen – Brussels (+32 2 554 72 05, [email protected])

Privacy, Cybersecurity and Data Innovation Group:
Ahmed Baladi – Paris (+33 (0) 1 56 43 13 00, [email protected])
S. Ashlie Beringer – Palo Alto (+1 650-849-5327, [email protected])
Gustav W. Eyler – Washington, D.C. (+1 202-955-8610, [email protected])
Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])

Mergers and Acquisitions Group:
Robert B. Little – Dallas (+1 214-698-3260, [email protected])
Saee Muzumdar – New York (+1 212-351-3966, [email protected])

Private Equity Group:
Richard J. Birns – New York (+1 212-351-4032, [email protected])
Wim De Vlieger – London (+44 (0) 20 7071 4279, [email protected])
Federico Fruhbeck – London (+44 (0) 20 7071 4230, [email protected])
Scott Jalowayski – Hong Kong (+852 2214 3727, [email protected])
Ari Lanin – Los Angeles (+1 310-552-8581, [email protected])
Michael Piazza – Houston (+1 346-718-6670, [email protected])

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
James J. Moloney – Orange County (+1 949-451-4343, [email protected])
Lori Zyskowski – New York (+1 212-351-2309, [email protected])

*Connor Leydecker is a recent law graduate practicing in the firm’s Washington, D.C. office and not yet admitted to practice law.

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

London partner Selina Sagayam is the author of “FRC report: challenge for businesses on net zero” [PDF] published by Thomson Reuters Regulatory Intelligence on November 14, 2022.

Within weeks after the mid-term elections, the 118th Congress-elect will start the process for selecting members to serve in House and Senate leadership and in the top positions on congressional committees—the powerful committee chairs and ranking members.

Congressional leadership sets the agendas in the House and Senate, including determining which bills come to the floor. How the leadership shakes out may also illustrate the power dynamics inside the political parties, including the extent to which the moderate or progressive/conservative wings of the parties will influence the legislative agendas, which could have a profound impact for the next two years on companies and industries.

Just like congressional leadership, committee chairs also enjoy agenda-setting power at the committee level. Members of Congress chairing the committee have their own priorities and projects of interest within the committee’s jurisdiction, which play out in what bills receive committee votes and what hearings a committee holds. Therefore, the assignment of committee chairs often indicates the legislative priorities of key committees in both the House and Senate. The ranking members are important because they speak for their party on the committee and often can influence the legislative agenda as well.

Below we set out how congressional and committee leadership in the Senate and the House are determined. That discussion is followed by our best take on what party and committee leadership will look like in the 118th Congress.

Procedures: Congressional Leadership

Procedurally, here is how the party leaders in Congress are selected:

Senate

• The party leaders, whips, and other positions (e.g., policy committee and campaign committee chairs) of each party are elected by a majority vote of all the senators of their party assembled in a conference or a caucus via secret ballot. The practice has been to choose the leader for a two-year term at the beginning of each Congress.[1]

House of Representatives

• Speaker of the House is elected by the full House on the first day of a new Congress in a roll call vote. Customarily, the caucus or conference of each major party first elects a candidate at early organizational meetings via secret ballot. When the new Congress convenes, each party places the name of its candidate in nomination, and the majority party’s candidate is typically elected on a party line vote.[2]Depending on the margin that the majority party holds in the House, the member running for Speaker may need to come to a compromise with certain members of her own party, especially when the margin is small. Such compromise often manifests as part of the House rule-setting at the beginning of each Congress.

• Majority Leader/Minority Leader is elected by secret ballot of the majority/minority party’s caucus or conference in organizational meetings prior to the start of a new Congress.[3]

• Party Whips are elected by each party caucus at early organizational meetings in a secret ballot.[4]

Procedures: Committee Leadership Assignment

Senate[5]

• Seniority generally dictates the selection of committee leadership.

• Once committee ratios have been determined (based on the ratio of each party in the full Senate), Senators provide committee preferences to their leadership. Leadership then makes committee assignments and generally attempts to accommodate preferences to the extent possible.

• Generally, with exceptions, a Senator may serve as chair or ranking member for no more than one committee at a time. Therefore, when a Senator has seniority in two committees, she may choose one committee to lead.

• The Republican Conference limits service as the chair or ranking member of a committee to three terms, or six years in each position. The Democratic Caucus does not impose term limits on committee leadership.

House of Representatives[6]

• House rules provide that each party caucus or conference determines its members’ committee assignments.[7]

• For House Republicans, a steering committee composed of allies of Republican leadership determines the assignment of committee chairs and ranking members.

• Committee leadership for Democrats is generally secured by active campaigns amongst colleagues.

• The congressional Democratic Caucus allows elections when two or more members compete for the chair or ranking member position, the outcome of which is determined by the entire House Democratic Caucus via secret ballot.

• The congressional Republican Caucus does not allow elections. When two or more Members compete for the top Republican spot on a committee, a steering committee under the tight control of party leaders decides who takes the position.

• The Republican Conference limits service as the chair or ranking minority member of a committee to three terms, or six years (the same limitation adopted by Senate Republicans). Also, like the Senate, the Democratic Conference does not impose leadership term limits.

• Both House Democrats and Republicans have steering committees that help guide the legislative process and assign caucus members to committees.

• For House Democrats, membership on the steering committee is governed by the Rules of the Democratic Caucus. Such Rules for the 117th Congress provides that the committee shall include high-ranking members of the Democratic Caucus (i.e. the Speaker and the party leaders), certain powerful committee chairs (e.g. Chair of the Committee on Ways and Means), and regional and other representatives of the Democratic Caucus.[8]

• For House Republicans, membership on the steering committee is smaller in size but constituted by similar ranks, including high-ranking members of the Republican Caucus (i.e. the Speaker and the party leaders), the chair of a standing committee when the steering committee is considering members for election to or removal from such standing committee, and regional or other representatives of the Republican Caucus.[9]

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[1] See The First Day of a New Congress: A Guide to Proceedings on the Senate Floor, Congressional Research Service (December 22, 2020), at 3 https://crsreports.congress.gov/product/pdf/RS/RS20722.

[2] See Electing the Speaker of the House of Representatives: Frequently Asked Questions, Congressional Research Service (September 22, 2022), at 1-3 https://sgp.fas.org/crs/misc/R44243.pdf.

[3] See Party Leaders in the House: Election, Duties, and Responsibilities, Congressional Research Service (November 5, 2018), at 2 https://sgp.fas.org/crs/misc/RS20881.pdf.

[4] See Id. at 3.

[5] See Rules Governing Senate Committee and Subcommittee Assignment Procedures, Congressional Research Service (June 3, 2021), at 1-2 https://crsreports.congress.gov/product/pdf/R/R46806/3.

[6] Unless otherwise noted, for the source of the content under this title, see Party Leaders in the House: Election, Duties, and Responsibilities (November 5, 2018) at 1-3 https://sgp.fas.org/crs/misc/RS20881.pdf.

[7] Rules of the House of Representatives, 117^th Congress, R. 10, cl. 5.

[8] See Rules of the Democratic Caucus House Democrats, House Democrats, https://www.dems.gov/rules-of-the-democratic-caucus.

[9] See Conference Rules of the 117th Congress, House GOP, https://www.gop.gov/conference-rules-of-the-117th-congress/.

_____________________________

CONGRESSIONAL COMMITTEE CHAIRS AND RANKING MEMBERS

U.S. HOUSE OF REPRESENTATIVES: LEADERSHIP
HOUSE WITH REPUBLICAN MAJORITY
GOP Leadership Election	11/15/2022 (tentative)
Title	118th Congress Leadership		Position Held at 117th Congress		Notes
Speaker of the House	Kevin McCarthy (R-CA)		House Minority Leader		We expect McCarthy to become Speaker if GOP wins House Majority
Majority Leader	Steve Scalise (R-LA)		House Minority Whip		We expect Scalise to become Majority Leader if GOP wins House Majority
Majority Whip Open Race	Candidate #1 Tom Emmer (R-MN)		National Republican Congressional Committee Chair		Reported to have expressed interests in running, likely a toss-up between him and Banks
	Candidate #2 Jim Banks (R-IN)		Republican Study Committee Chair		Reported to have expressed interests in running, likely a toss-up between him and Emmer
	Candidate #3 Drew Ferguson (R-GA)		Chief Deputy Whip		to have expressed interests in running; least possible as McCarthy has signaled that he doesn’t support Ferguson
Dem Leadership Election	After Thanksgiving (tentative)
Minority Leader Open Race	Candidate #1 Hakeem Jeffries (D-NY)		House Democratic Caucus Chair		Assuming House Majority Leader Steny Hoyer (D-MD) and House Majority Whip Jim Clyburn (D-SC) do not seek re-election in the House Leadership, Jeffries is the top contender
	Candidate #2 Adam Schiff (D-NY)		House Intelligence Committee Chair		Schiff is reported to have expressed interests in Dem leadership but trailing Jeffries
Minority Whip Open Race	Candidate #1 Katherine Clark (D-MA)		Assistant Speaker		Reported to have expressed interests in running for Minority Whip
	Candidate #2 Pramila Jayapal (D-WA)		Chair of the Congressional Progressive Caucus		Reported to have expressed interests in running for Minority Whip
HOUSE WITH DEMOCRATIC MAJORITY
Dem Leadership Election	After Thanksgiving (tentative)
Title	118th Congress Leadership		Position Held at 117th Congress		Notes
Speaker of the House	Candidate #1 Hakeem Jeffries (D-NY)		House Democratic Caucus Chair		Assuming House Majority Leader Steny Hoyer (D-MD) and House Majority Whip Jim Clyburn (D-SC) do not seek re-election in the House Leadership, Jeffries is the top contender
	Candidate #2 Adam Schiff (D-NY)		House Intelligence Committee Chair		Schiff is reported to have expressed interests in Dem leadership but trailing Jeffries
Majority Leader Open Race	Candidate #1 Katherine Clark (D-MA)		Assistant Speaker		Reported to have expressed interests in running for the #2 job at House Democratic Caucus
	Candidate #2 Pramila Jayapal (D-WA)		Chair of the Congressional Progressive Caucus		Reported to have expressed interests in running for the #2 job at House Democratic Caucus
Majority Whip Open Race	OPEN		N/A		Dems have little chance to keep the majority in the House so unclear who will be the contender
GOP Leadership Election	11/15/22 (tentative)
Minority Leader	Kevin McCarthy (R-CA)		House Minority Leader		We expect McCarthy to stay as the #1 Republican in the House
Minority Whip	Steve Scalise (R-LA)		House Minority Whip		We expect Scalise to stay as the #2 Republican in the House
U.S. SENATE: LEADERSHIP
SENATE WITH REPUBLICAN MAJORITY
Title	118th Congress Leadership		Position Held at 117th Congress		Notes
Majority Leader	Mitchell McConnell (R-KY)		Senate Minority Leader		We expect McConnell to stay as the #1 Republican in the Senate
Majority Whip	John Thune (R-SD)		Senate Minority Whip		We expect Thune to stay as the #2 Republican in the Senate
Minority Leader	Chuck Schumer (D-NY)		Senate Majority Leader		We expect Schumer to stay as the #1 Democrat in the Senate
Minority Whip	Dick Durbin (D-IL)		Senate Majority Whip		We expect Durbin to stay as the #2 Democrat in the Senate
SENATE WITH DEMOCRATIC MAJORITY
Title	118th Congress Leadership		Position Held at 117th Congress		Notes
Majority Leader	Chuck Schumer (D-NY)		Senate Majority Leader		We expect Schumer to stay as the #1 Democrat in the Senate
Majority Whip	Dick Durbin (D-IL)		Senate Majority Whip		We expect Durbin to stay as the #2 Democrat in the Senate
Minority Leader	Mitchell McConnell (R-KY)		Senate Minority Leader		We expect McConnell to stay as the #1 Republican in the Senate
Minority Whip	John Thune (R-SD)		Senate Minority Whip		We expect Thune to stay as the #2 Republican in the Senate
SENATE CHAIR / RANKING MEMBER IF REPUBLICAN MAJORITY
Committee	118th Congress Chair		117th Congress Ranking Member		Notes
Aging	Mike Braun (R-IN)		Tim Scott (R-SC)		Tim Scott is expected to Chair Banking; Braun has seniority
Agriculture	John Boozman (R-AR)		John Boozman (R-AR)
Appropriations	Susan Collins (R-ME)		Richard Shelby (R-AL)		Shelby not seeking re-election; Collins has seniority
Armed Services	Roger Wicker (R-MS)		Jim Inhofe (R-OK)		Inhofe not seeking re-election; Wicker has seniority
Banking, Housing and Urban Affairs	Tim Scott (R-SC)		Pat Toomey (R-PA)		Toomey not seeking re-election; Scott has seniority and is expected to Chair Banking in lieu of Aging, where he was Ranking Member in the 117th Congress
Budget	Lindsey Graham (R-SC)		Lindsey Graham (R-SC)
Commerce	Ted Cruz (R-TX)		Roger Wicker (R-MS)		Wicker to Chair Armed Services; Thune is expected to be Whip; Blunt not seeking re-election; Cruz is next in line
Energy and Natural Resources	John Barrasso (R-WY)		John Barrasso (R-WY)
Environment and Public Works	Shelley Moore Capito (R-WV)		Shelley Moore Capito (R-WV)
Ethics	James Lankford (R-OK)		James Lankford (R-OK)		If Paul chooses HELP and Lankford is Chair of Homeland Security, then McConnell would appoint a new Ethics Chair
Finance	Mike Crapo (R-ID)		Mike Crapo (R-ID)
Foreign Relations	James Risch (R-ID)		Jim Risch (R-ID)
HELP	*Rand Paul (R-KY), Bill Cassidy (R-LA)		Richard Burr (R-NC)		Burr not seeking re-election; if Paul chooses Homeland Security and assuming Collins chooses Appropriations, Cassidy is next in line
Homeland Security	*Rand Paul (R-KY), *James Lankford (R-OK)		Rob Portman (R-OH)		Portman not seeking re-election; if Paul chooses HELP, Lankford gets Homeland
Indian Affairs	Lisa Murkowski (R-AK)		Lisa Murkowski (R-AK)
Intelligence	Marco Rubio (R-FL)		Marco Rubio (R-FL)
International Narcotics Control	John Cornyn (R-TX)		John Cornyn (R-TX)
Judiciary	Chuck Grassley (R-IA)		Chuck Grassley (R-IA)
Rules and Administration	Deb Fischer (R-NE)		Roy Blunt (R-MO)		Blunt not seeking re-election; Fischer has seniority.
Small Business	Joni Ernst (R-IA)		Rand Paul (R-KY)
Veterans’ Affairs	Jerry Moran (R-KS)		Jerry Moran (R-KS)
Committee	118th Congress Ranking Member		117th Congress Chair		Notes
Aging	Bob Casey (D-PA)		Bob Casey (D-PA)
Agriculture	Debbie Stabenow (D-MI)		Debbie Stabenow (D-MI)
Appropriations	Patty Murray (D-WA)		Patrick Leahy (D-VT)		Leahy not seeking re-election; Murray has seniority
Armed Services	Jack Reed (D-RI)		Jack Reed (D-RI)
Banking, Housing and Urban Affairs	Sherrod Brown (D-OH)		Sherrod Brown (D-OH)
Budget	Sheldon Whitehouse (D-RI)		Bernie Sanders (I-VT)		Sanders has seniority in both HELP and Budget but seems to prefer HELP; Whitehouse is next in line
Commerce	Maria Cantwell (D-WA)		Maria Cantwell (D-WA)
Energy and Natural Resources	Joe Manchin (D-WV)		Joe Manchin (D-WV)
Environment and Public Works	Tom Carper (D-DE)		Tom Carper (D-DE)
Ethics	Chris Coons (D-DE)		Chris Coons (D-DE)
Finance	Ron Wyden (D-OR)		Ron Wyden (D-OR)
Foreign Relations	Bob Menendez (D-NJ)		Bob Menendez (D-NJ)
HELP	Bernie Sanders (I-VT)		Patty Murray (D-WA)		Sanders has seniority in both HELP and Budget but prefers HELP Next in line are Bob Casey (D-PA) and Tammy Baldwin (D- WI)
Homeland Security	Gary Peters (D-MI)		Gary Peters (D-MI)
Indian Affairs	Brian Schatz (D-HI)		Brian Schatz (D-HI)
Intelligence	Mark Warner (D-VA)		Mark Warner (D-VA)
International Narcotics Control	Richard Blumenthal (D-CT)		Sheldon Whitehouse (D-RI)		Assuming Sanders takes HELP and Whitehouse takes Budget; Blumenthal has seniority
Judiciary	Dick Durbin (D-IL)		Dick Durbin (D-IL)
Rules and Administration	Amy Klobuchar (D-MN)		Amy Klobuchar (D-MN)
Small Business	Ben Cardin (D-MD)		Ben Cardin (D-MD)
Veterans’ Affairs	Jon Tester (D-MT)		Jon Tester (D-MT)
SENATE CHAIR / RANKING MEMBER IF DEMOCRATIC MAJORITY
Committee	118th Congress Chair		117th Congress Chair		Notes
Aging	Bob Casey (D-PA)		Bob Casey (D-PA)
Agriculture	Debbie Stabenow (D-MI)		Debbie Stabenow (D-MI)
Appropriations	Patty Murray (D-WA)		Patrick Leahy (D-VT)		Leahy not seeking re-election; Murray has seniority
Armed Services	Jack Reed (D-RI)		Jack Reed (D-RI)
Banking, Housing and Urban Affairs	Sherrod Brown (D-OH)		Sherrod Brown (D-OH)
Budget	Sheldon Whitehouse (D-RI)		Bernie Sanders (I-VT)		Sanders has seniority in both HELP and Budget but seems to prefer HELP; Whitehouse is next in line
Commerce	Maria Cantwell (D-WA)		Maria Cantwell (D-WA)
Energy and Natural Resources	Joe Manchin (D-WV)		Joe Manchin (D-WV)
Environment and Public Works	Tom Carper (D-DE)		Tom Carper (D-DE)
Ethics	Chris Coons (D-DE)		Chris Coons (D-DE)
Finance	Ron Wyden (D-OR)		Ron Wyden (D-OR)
Foreign Relations	Bob Menendez (D-NJ)		Bob Menendez (D-NJ)
HELP	Bernie Sanders (I-VT)		Patty Murray (D-WA)		Sanders has seniority in both HELP and Budget but prefers HELP Next in line are Bob Casey (D-PA) and Tammy Baldwin (D- WI)
Homeland Security	Gary Peters (D-MI)		Gary Peters (D-MI)
Indian Affairs	Brian Schatz (D-HI)		Brian Schatz (D-HI)
Intelligence	Mark Warner (D-VA)		Mark Warner (D-VA)
International Narcotics Control	Richard Blumenthal (D-CT)		Sheldon Whitehouse (D-RI)		Assuming Sanders takes HELP and Whitehouse takes Budget; Blumenthal has seniority
Judiciary	Dick Durbin (D-IL)		Dick Durbin (D-IL)
Rules and Administration	Amy Klobuchar (D-MN)		Amy Klobuchar (D-MN)
Small Business	Ben Cardin (D-MD)		Ben Cardin (D-MD)
Veterans’ Affairs	Jon Tester (D-MT)		Jon Tester (D-MT)
Committee	118th Congress Ranking Member		117th Congress Ranking Member		Notes
Aging	Mike Braun (R-IN)		Tim Scott (R-SC)		Tim Scott is expected to Chair Banking; Braun has seniority
Agriculture	John Boozman (R-AR)		John Boozman (R-AR)
Appropriations	Susan Collins (R-ME)		Richard Shelby (R-AL)		Shelby not seeking re-election; Collins has seniority
Armed Services	Roger Wicker (R-MS)		Jim Inhofe (R-OK)		Inhofe not seeking re-election; Wicker has seniority
Banking, Housing and Urban Affairs	Tim Scott (R-SC)		Pat Toomey (R-PA)		Toomey not seeking re-election; Scott has seniority and is expected to Chair Banking in lieu of Aging, where he was Ranking Member in the 117th Congress
Budget	Lindsey Graham (R-SC)		Lindsey Graham (R-SC)
Commerce	Ted Cruz (R-TX)		Roger Wicker (R-MS)		Wicker to Chair Armed Services; Thune is expected to be Whip; Blunt not seeking re-election; Cruz is next in line
Energy and Natural Resources	John Barrasso (R-WY)		John Barrasso (R-WY)
Environment and Public Works	Shelley Moore Capito (R-WV)		Shelley Moore Capito (R-WV)
Ethics	James Lankford (R-OK)		James Lankford (R-OK)		If Paul chooses HELP and Lankford is Chair of Homeland Security, then McConnell would appoint a new Ethics Chair
Finance	Mike Crapo (R-ID)		Mike Crapo (R-ID)
Foreign Relations	James Risch (R-ID)		Jim Risch (R-ID)
HELP	Rand Paul (R-KY) Bill Cassidy (R-LA)		Richard Burr (R-NC)		Burr not seeking re-election. If Paul chooses Homeland and assuming Collins chooses Appropriations, Cassidy is next in line
Homeland Security	Rand Paul (R-KY), James Lankford (R-OK)		Rob Portman (R-OH)		Portman not seeking re-election; if Paul chooses HELP, Lankford gets Homeland
Indian Affairs	Lisa Murkowski (R-AK)		Lisa Murkowski (R-AK)
Intelligence	Marco Rubio (R-FL)		Marco Rubio (R-FL)
International Narcotics Control	John Cornyn (R-TX)		John Cornyn (R-TX)
Judiciary	Chuck Grassley (R-IA)		Chuck Grassley (R-IA)
Rules and Administration	Deb Fischer (R-NE)		Roy Blunt (R-MO)		Blunt not seeking re-election; Fischer has seniority.
Small Business	Joni Ernst (R-IA)		Rand Paul (R-KY)
Veterans’ Affairs	Jerry Moran (R-KS)		Jerry Moran (R-KS)
U.S. HOUSE OF REPRESENTATIVES: COMMITTEE LEADERSHIP
HOUSE CHAIR / RANKING MEMBER IF REPUBLICAN MAJORITY
Committee	118th Congress Chair		117th Congress Ranking Member		Notes
Agriculture	G.T. Thompson (R-PA)		G.T. Thompson (R-PA)
Appropriations	Kay Granger (R-TX)		Kay Granger (R-TX)
Armed Services	Mike Rogers (R-AL)		Mike Rogers (R-AL)
Budget	OPEN		Jason Smith (R-MO)		Smith is publicly seeking Ways & Means Chair, potential candidates are, Jodey Arrington (R-TX), Lloyd Smucker (R-PA), Buddy Carter (R-GA); Smith could return to Budget if he fails
Education and Labor (Under GOP, renamed Education & the Workforce)	Tim Walberg (R-MI)		Virginia Foxx (R-NC)		Foxx is term-limited under current Conference rules and McCarthy has signaled he’s not interested in granting a waiver; Walberg most likely but Jim Banks (R-IN) may get this if loses the Whip Race
Energy and Commerce	Cathy McMorris Rodgers (R-WA)		Cathy McMorris Rodgers (R-WA)
Ethics	Michael Guest (R-MS)		Michael Guest (R-MS)
Financial Services	Patrick McHenry (R-NC)		Patrick McHenry (R-NC)
Foreign Affairs	Michael McCaul (R-TX)		Mike McCaul (R-TX)
Homeland Security	OPEN		John Katko (R-NY)		Potential candidates: Dan Crenshaw (R-TX), Mark Green (R-TN), Clay Higgins (R-LA), Kat Cammack (R-FL), Dan Bishop (R-NC)
House Administration	OPEN		Rodney Davis (R-IL)		Speaker appointee; Bryan Stiel (R-WI) or Barry Loudermilk (R-GA) may get it
Judiciary	Jim Jordan (R-OH)		Jim Jordan (R-OH)
Natural Resources	Bruce Westerman (R-AR)		Bruce Westerman (R-AR)
Oversight and Reform	Jim Comer (R-KY)		Jim Comer (R-KY)		Other potential candidates: Stephen Lynch (D-MA), Gerald Connolly (D-VA), Jamie Raskin (D-MD)
Rules	Tom Cole (R-OK)		Tom Cole (R-OK)
Science, Space and Technology	Frank Lucas (R-OK)		Frank Lucas (R-OK)
Small Business	Blaine Luetkemeyer (R-MO)		Blaine Luetkemeyer (R-MO)		May also be Roger Williams (R-TX) if Luetkemeyer chooses to lead a subcommittee at Financial Services; Pete Stauber (R-MN) may also run
Transportation and Infrastructure	Sam Graves (R-MO)		Sam Graves (R-MO)
Veterans’ Affairs	Mike Bost (R-IL)		Mike Bost (R-IL)
Ways and Means	OPEN		Kevin Brady (R-TX)		Potential candidates: Adrian Smith (R-NE), Vern Buchanan (R-FL), Jason Smith (R-MO)
Intelligence	Mike Turner (R-OH)		Mike Turner (R-OH)
Republican Study Committee	Kevin Hern (R-OK)		Jim Banks (R-IN)		Banks eyeing for Whip, Hern is expected to take over
Committee	118th Congress Ranking Member		117th Congress Chair		Notes
Agriculture	David Scott (D-GA)		David Scott (D-GA)
Appropriations	Rosa DeLauro (D-CT)		Rosa DeLauro (D-CT)
Armed Services	Adam Smith (D-WA)		Adam Smith (D-WA)
Budget	Brian Higgins (D-NY)		John Yarmuth (D-KY)		Could also be Brendan Boyle (D-PA)
Education and Labor (Under GOP, renamed Education & the Workforce)	Bobby Scott (D-VA)		Bobby Scott (D-VA)
Energy and Commerce	Frank Pallone (D-NJ)		Frank Pallone (D-NJ)
Ethics	OPEN		Susan Wild (D-PA)		To be appointed by the Minority Leader
Financial Services	Maxine Waters (D-CA)		Maxine Waters (D-CA)
Foreign Affairs	Gregory Meeks (D-NY)		Gregory Meeks (D-NY)
Homeland Security	Bennie Thompson (D-MS)		Bennie Thompson (D-MS)
House Administration	Zoe Lofgren (D-CA)		Zoe Lofgren (D-CA)
Judiciary	Jerrold Nadler (D-NY)		Jerry Nadler (D-NY)
Natural Resources	Raúl M. Grijalva (D-AZ)		Raúl Grijalva (D-AZ)
Oversight and Reform	OPEN		Carolyn Maloney (D-NY)		Potential candidates: Stephen Lynch (D-MA), Gerald Connolly (D-VA), Jamie Raskin (D-MD)
Rules	Jim McGovern (D-MA)		Jim McGovern (D-MA)
Science, Space and Technology	OPEN		Eddie Bernice Johnson (D-TX)		Potential candidates: Zoe Lofgren (D-CA), Suzanne Bonamici (D-OR), Haley Stevens (D-MI)
Small Business	Nydia Velázquez (D-NY)		Nydia Velázquez (D-NY)
Transportation and Infrastructure	OPEN		Peter DeFazio (D-OR)		Potential candidates: Eleanor Holmes Norton (D-DC), Rick Larsen (D-WA)
Veterans’ Affairs	Mark Takano (D-CA)		Mark Takano (D-CA)
Ways and Means	Richard Neal (D-MA)		Richard Neal (D-MA)
Intelligence	Adam Schiff (D-CA)		Adam Schiff (D-CA)
HOUSE CHAIR / RANKING MEMBER IF DEMOCRATIC MAJORITY
Committee	118th Congress Chair		117th Congress Chair		Notes
Agriculture	David Scott (D-GA)		David Scott (D-GA)
Appropriations	Rosa DeLauro (D-CT)		Rosa DeLauro (D-CT)
Armed Services	Adam Smith (D-WA)		Adam Smith (D-WA)
Budget	Brian Higgins (D-NY)		John Yarmuth (D-KY)		Could also be Brendan Boyle (D-PA)
Education and Labor	Bobby Scott (D-VA)		Bobby Scott (D-VA)
Energy and Commerce	Frank Pallone (D-NJ)		Frank Pallone (D-NJ)
Ethics	OPEN		Susan Wild (D-PA)		To be appointed by the Speaker
Financial Services	Maxine Waters (D-CA)		Maxine Waters (D-CA)
Foreign Affairs	Gregory Meeks (D-NY)		Gregory Meeks (D-NY)
Homeland Security	Bennie Thompson (D-MS)		Bennie Thompson (D-MS)
House Administration	Zoe Lofgren (D-CA)		Zoe Lofgren (D-CA)
Judiciary	Jerrold Nadler (D-NY)		Jerry Nadler (D-NY)
Natural Resources	Raúl M. Grijalva (D-AZ)		Raúl Grijalva (D-AZ)
Oversight and Reform	OPEN		Carolyn Maloney (D-NY)		Potential candidates: Stephen Lynch (D-MA), Gerald Connolly (D-VA), Jamie Raskin (D-MD)
Rules	Jim McGovern (D-MA)		Jim McGovern (D-MA)
Science, Space and Technology	OPEN		Eddie Bernice Johnson (D-TX)		Potential candidates: Zoe Lofgren (D-CA), Suzanne Bonamici (D-OR), Haley Stevens (D-MI)
Small Business	Nydia Velázquez (D-NY)		Nydia Velázquez (D-NY)
Transportation and Infrastructure	OPEN		Peter DeFazio (D-OR)		Potential candidates: Eleanor Holmes Norton (D-DC), Rick Larsen (D-WA)
Veterans’ Affairs	Mark Takano (D-CA)		Mark Takano (D-CA)
Ways and Means	Richard Neal (D-MA)		Richard Neal (D-MA)
Intelligence	Adam Schiff (D-CA)		Adam Schiff (D-CA)
Committee	118th Congress Ranking Member		117th Congress Ranking Member		Notes
Agriculture	G.T. Thompson (R-PA)		G.T. Thompson (R-PA)
Appropriations	Kay Granger (R-TX)		Kay Granger (R-TX)
Armed Services	Mike Rogers (R-AL)		Mike Rogers (R-AL)
Budget	OPEN		Jason Smith (R-MO)		Smith is publicly seeking Ways & Means Ranking Member, potential candidates are, Jodey Arrington (R-TX), Lloyd Smucker (R-PA), Buddy Carter (R-GA); Smith could return to Budget if he fails
Education and Labor	Tim Walberg (R-MI)		Virginia Foxx (R-NC)		Foxx is term-limited under current Conference rules; Walberg most likely but Jim Banks (R-IN) may also get this
Energy and Commerce	Cathy McMorris Rodgers (R-WA)		Cathy McMorris Rodgers (R-WA)
Ethics	Michael Guest (R-MS)		Michael Guest (R-MS)
Financial Services	Patrick McHenry (R-NC)		Patrick McHenry (R-NC)
Foreign Affairs	Michael McCaul (R-TX)		Mike McCaul (R-TX)
Homeland Security	OPEN		John Katko (R-NY)		Potential candidates: Dan Crenshaw (R-TX), Mark Green (R-TN), Clay Higgins (R-LA), Kat Cammack (R-FL), Dan Bishop (R-NC)
House Administration	OPEN		Rodney Davis (R-IL)		Minority leader appointee; Bryan Stiel (R-WI) or Barry Loudermilk (R-GA) may get it
Judiciary	Jim Jordan (R-OH)		Jim Jordan (R-OH)
Natural Resources	Bruce Westerman (R-AR)		Bruce Westerman (R-AR)
Oversight and Reform	Jim Comer (R-KY)		Jim Comer (R-KY)		Other potential candidates: Stephen Lynch (D-MA), Gerald Connolly (D-VA), Jamie Raskin (D-MD)
Rules	Tom Cole (R-OK)		Tom Cole (R-OK)
Science, Space and Technology	Frank Lucas (R-OK)		Frank Lucas (R-OK)
Small Business	Blaine Luetkemeyer (R-MO)		Blaine Luetkemeyer (R-MO)		May also be Roger Williams (R-TX) if Luetkemeyer chooses to lead a subcommittee at Financial Services; Pete Stauber (R-MN) may also run
Transportation and Infrastructure	Sam Graves (R-MO)		Sam Graves (R-MO)
Veterans’ Affairs	Mike Bost (R-IL)		Mike Bost (R-IL)
Ways and Means	OPEN		Kevin Brady (R-TX)		Potential candidates: Adrian Smith (R-NE), Vern Buchanan (R-FL), Jason Smith (R-MO)
Intelligence	Mike Turner (R-OH)		Mike Turner (R-OH)
Republican Study Committee	Kevin Hern (R-OK)		Jim Banks (R-IN)		Banks eyeing for Whip, Hern is expected to take over

*Certain congressional races are still too close to call and this Client Alert reflects our best judgment at the time of posting.

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The following Gibson Dunn attorneys assisted in preparing this client update: Michael D. Bopp, Roscoe Jones, Jr., Daniel P. Smith, and Alex Xiao.

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 or the following lawyers in the firm’s Congressional Investigations or Public Policy practice groups:

Michael D. Bopp – Chair, Congressional Investigations 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])

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

Alex Xiao – New York (+1 212-351-5339, [email protected])

*Admitted only in Illinois; practicing under the supervision of members of the District of Columbia Bar under D.C. App. R. 49.

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On October 31, 2022, the president and owner of a paving and asphalt contractor pleaded guilty to attempting to monopolize the market for highway crack-sealing services in Montana and Wyoming in violation of Section 2 of the Sherman Act.[1] This is the U.S. Department of Justice’s (“DOJ”) first criminal prosecution of a Section 2 violation in over forty years, following Assistant Attorney General Jonathan Kanter’s announcement in April that the DOJ would “vigorously enforce Section 2 of the Sherman Act” after its “very near death.”[2]

The DOJ typically charges market allocation conspiracies, such as the one proposed by the defendant in this case, under Section 1 of the Sherman Act. However, the indictment describes a “proposed market allocation agreement” that was never accepted.[3] According to the indictment, Nathan Nephi Zito, the president and owner of unnamed “Company A,” contacted his counterpart at “Company B” in January 2020 to propose a “strategic partnership” to divide regional markets for highway repairs.[4] Under the terms of the proposed agreement, Company B would no longer bid for publicly-funded highway crack sealing projects in Montana and Wyoming, while Company A would no longer bid for such projects in South Dakota and Nebraska.[5] Zito further offered to pay Company B $100,000 in compensation for its lost business and to prepare a “sham agreement” to conceal the anti-competitive purpose of the arrangement.[6] Zito allegedly said that “their companies’ revenue streams would be more stable and their margins would be higher” if they implemented the proposed agreement.[7] The president and owner of Company B rejected the invitation and reported it to the government, cooperating with the DOJ to record calls with Zito.[8]

Although attempts to enter anticompetitive agreements are not actionable under Section 1 of the Sherman Act, the DOJ has stated that attempts to collude may be prosecuted under the mail and wire fraud statutes.[9] Individuals charged with attempted mail or wire fraud may be imprisoned for up to 20 years and fined up to $250,000—potentially harsher sanctions than are available for the Sherman Act itself.[10] While the DOJ has prevailed in charging attempts to collude as wire fraud,[11] it has a mixed track record of success in prosecuting those cases. The DOJ last indicted an attempt to collude under the wire fraud statute in 2007 after a nearly five-year investigation into suspected price-fixing.[12] The DOJ voluntarily dismissed the indictment in 2010 after Gibson Dunn filed a motion to dismiss on behalf of the defendant, arguing that “the wire fraud statute is not—and may not constitutionally be interpreted as—a ‘catch-all’ criminal statute that fills a prosecutor’s perceived gaps in other statutory schemes.”[13]

This newly announced plea, which successfully uses Section 2 to prosecute an attempted market allocation, appears to open another path to prosecuting attempted but not consummated agreements. Whether the DOJ can prove such a claim at trial remains to be seen. Section 2 presents several challenges that both limit its application and create a high evidentiary burden. As a threshold matter, Section 2 is applicable only when an attempt to collude would have resulted in a party securing or preserving monopoly power in a defined market. This may be possible in the context of a certain attempted market allocation agreement affecting distinct product and geographic markets, but will not reach most per se unlawful agreements that are offered and declined. At trial, the DOJ would need to prove a distinct market and, inter alia, that the defendant had the specific intent to achieve monopoly power and that the proposed agreement would have created a “dangerous probability” of achieving monopoly power, such as the ability to raise prices or exclude competitors.[14] The DOJ has not met this burden in a civil case for a number of years, much less in a criminal prosecution where the government will be required to prove its case beyond a reasonable doubt.

In this case, the parties entered a plea agreement that is favorable to Zito and may have incentivized him to plead guilty to a relatively novel Section 2 charge. The DOJ made the rare decision not to recommend detention for a crime that is otherwise subject to a maximum sentence of 10 years’ imprisonment.[15] The DOJ also agreed to a fine of only $27,000—one percent of the affected volume of commerce, which the parties agreed amounted to $2.7 million.[16] The fine represents the bottom of the range in the U.S. Sentencing Guidelines, which recommends that individuals be fined “one to five percent of the volume of commerce” and not “less than $20,000.”[17] Notably, there is no indication in the agreement that the low criminal fine was based on Zito’s inability to pay or substantial assistance to the investigation. If the DOJ had instead sought to indict Zito under the wire fraud statute, he would have faced a significantly higher sentencing range.

Zito’s sentencing is scheduled for February 2023. The DOJ has not publicly indicted his company to date, nor is it included in the proposed plea agreement.

___________________________

[1] Plea Agreement at ¶ 4, United States v. Zito, No. CR 22-113 (D. Mont. Sep. 19, 2022).

[2] Jonathan Kanter, Assistant Attorney General, DOJ Antitrust Div., Antitrust Enforcement: The Road to Recovery, Keynote at the University of Chicago Stigler Center (Apr. 21, 2022), available at https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-keynote-university-chicago-stigler.

[3] Indictment at ¶ 9, United States v. Zito, No. CR 22-113 (D. Mont. Sep. 19, 2022).

[4] Id. at ¶ 8.

[5] Id. at ¶ 9.

[6] Id. at ¶¶ 9, 11.

[7] Id. at ¶ 10.

[8] Id. at ¶¶ 8, 12.

[9] 18 U.S.C. §§ 1341, 1343, 1349; see DOJ Antitrust Div., An Antitrust Primer for Federal Law Enforcement Personnel at 8 (Apr. 2022), available at https://www.justice.gov/atr/page/file/1091651/download.

[10] Id. §§ 1341, 1343, 1349, 3571(b)(3).

[11] United States v. Ames Sintering Co., 927 F.2d 232 (6th Cir. 1990).

[12] Indictment at 2, United States v. Cadorette, No. 4:07-cr-00144-1 (S.D. Tex. Apr. 17, 2007).

[13] Motion to Dismiss at 10-11, United States v. Cadorette, No. 4:07-cr-00144-1 (S.D. Tex. Nov. 6, 2007).

[14] Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993).

[15] Plea Agreement at ¶ 10, United States v. Zito, No. CR 22-113 (D. Mont. Sep. 19, 2022).

[16] Id. at ¶ 3. Neither the indictment nor Zito’s plea agreement specifies how the parties arrived at $2,700,000 for the relevant volume of commerce.

[17] USSG § 2R1.1(c)(1).

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The following Gibson Dunn lawyers prepared this client alert: Scott Hammond, Jeremy Robison, and Sarah Akhtar.

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 practice group:

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])

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

The Financial Stability Board’s (FSB) report to the G20 Finance Ministers and Central Bank Governors on regulatory and supervisory approaches to stablecoins and other crypto-assets was recently released. Please join us for this webcast hosted by our Global Financial Regulatory Practice Group. We discuss the latest legal and regulatory developments in digital assets markets, including:

1. FSB’s recommendations, and what they mean for the global regulatory and supervisory direction of travel for stablecoin arrangements and crypto-asset markets
2. Hong Kong and Singapore digital assets regulatory developments
3. UK and EU digital assets regulatory developments, including the Markets in Crypto-Assets (MiCA) regulation
4. US digital assets regulatory developments

We discuss how these regulatory and supervisory developments will impact on digital assets businesses operating in or providing services in these key jurisdictions, and share our views on how businesses can anticipate and prepare for the coming wave of regulatory and supervisory reforms that will impact on stablecoins and other crypto-assets. In addition, the team brings their predictions for the future of digital assets regulation, supervision and enforcement policy, based on their extensive experience in helping clients to navigate global regulations and to engage with key global regulators.

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PANELISTS:

William Hallatt, a partner in our Hong Kong office and a Co-Chair of the firm’s Global Financial Regulatory Practice Group, is one of the Asia-Pacific region’s most prominent regulatory lawyers. He has close working relationships with key regulators, both at the local jurisdictional and international levels. He is heavily involved in regulatory reform initiatives and regularly leads discussions with the regulators on behalf of the financial services industry. This includes working closely with leading industry bodies, including ASIFMA and AIMA. Will has particular expertise in relation to the regulation of cryptocurrencies and other digital assets, and has advised the world’s leading cryptocurrency exchanges as well as regulated financial institutions on a range of key strategic matters in this space. This includes advising cryptocurrency exchanges on regulatory restructurings, high profile regulatory investigations and the handling of licence applications in multiple jurisdictions.

Hardeep Plahe, an English-qualified partner and cross-border transactional lawyer based in our London office, is a member of the firm’s Mergers and Acquisitions, Private Equity, Capital Markets, Global Financial Regulatory and Financial Institutions Practice Groups. He has a broad and deep knowledge of the Middle East business landscape having spent 16 years in the region. He has helped clients navigate their way through some of their most complex and important transactions and financial regulatory matters in the UK, Continental Europe and the Middle East. He has advised private equity clients, financial institutions, corporates, sovereign wealth funds and governments.

Michelle M Kirschner is a partner in the London office and Co-Chair of the firm’s Global Financial Regulatory Practice Group. Ms. Kirschner advises a broad range of financial institutions and fintech businesses on areas such as systems and controls, market abuse, conduct of business and regulatory change management, and she conducts internal investigations and reviews of corporate governance and systems and controls in the context of EU and UK regulatory requirements and expectations.

Jeffrey Steiner is a partner in the Washington D.C. office and Co-Chair of the firm’s Global Financial Regulatory Practice Group, Chair of the firm’s Derivatives Practice and co-lead of the Digital Currencies and Blockchain Technologies group. Mr. Steiner advises a range of clients on regulatory, legislative, enforcement and transactional matters related to OTC and listed derivatives, commodities and securities. He also advises clients, including exchanges, financial institutions and fintech firms, on matters related to digital assets and cryptocurrencies. Prior to joining the Firm, Mr. Steiner was a special counsel at the U.S. Commodity Futures Trading Commission (CFTC).

Grace Chong is Of Counsel in Gibson Dunn’s Singapore office and a member of the firm’s Global Financial Regulatory Group. She has been consistently named as one of Singapore’s top 10 FinTech lawyers and is highly ranked in Chambers FinTech 2022, with clients noting that she “is very savvy and shares her knowledge of the MAS and market trends.” Further, she is recommended in Financial Services Regulatory for Singapore by The Legal 500 2022 guide which notes that she “is one of the best crypto regulatory lawyers in Singapore.” Ms. Chong is an elected board member of the Singapore Association of Cryptocurrency Enterprises and Startups (ACCESS), is closely involved in regional regulatory reform initiatives and has led discussions with regulators on behalf of the financial services industry.

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Summary

• On 25 October 2022, the European Commission (“Commission”) published guidance to clarify and modernize its leniency notice to companies seeking immunity from cartel behavior.

• These measures signal a continued commitment from the Commission to enforcing its laws against cartels by encouraging potential whistleblowers to come forward.

• The Commission’s guidance includes the possibility for companies to inquire on a no-names basis as to whether they may qualify under the leniency programme, which will be beneficial for companies involved in conduct outside of the Commission’s traditional enforcement areas, such as no-poach or other novel conduct.

• The Commission has also created the new role of Leniency Officer as a contact point for potential leniency applicants to obtain “informal advice” and discuss the leniency process.

• These new tools will likely prove useful to assess and manage the legal risk when considering potential leniency applications.

Background

Cartel enforcement remains at the top of the Commission’s priorities.  Last year alone, the Commission adopted ten cartel decisions with total fines amounting to roughly EUR 1.8 billion—the highest cumulative fines since 2016.

The Commission has stated that it is committed to aggressively pursuing cartel cases and building on its recent successes.  On 22 October 2021, EVP Margrethe Vestager declared that “cartels are the most fundamental threat to competition […] and so, ever since the early days of the EU, the fight against cartels has been right at the top of the Commission’s priorities.”[1]

The leniency programme has been a critical tool for the Commission’s cartel enforcement over the years – with many cartels uncovered due to companies self-reporting the conduct and seeking immunity.  Yet, the Commission has noticed a downturn in the number of leniency applications in recent years.

In response to this recent decline, the Commission has been actively considering changes to make its leniency programme more attractive to potential applicants – including by shielding the immunity applicant from follow-on damage claims[2] or providing clearer guidance to companies involved in non-traditional cartels (such as no-poach cartels).

The Commission published guidance on 25 October 2022 that adopts several changes to its leniency programme and offers clarity for potential applicants about how the programme operates in practice.  In many ways, the Commission’s new guidance is modeled on the Frequently Asked Questions (“FAQs”) published by the U.S. Department of Justice, which have successfully offered clarity about the DOJ’s practices and procedures for implementing its Corporate Leniency Policy for the past 25 years.

The Commission’s guidance is consistent with a broader effort across competition authorities, such as the Brazilian competition authority CADE, to reinvigorate leniency programmes.

The Commission’s Guidance Aims at Making the Leniency Programme More Attractive

The Commission’s guidance seeks to further clarify the rules applicable to companies potentially involved in a cartel who wish to cooperate with the Commission and disclose their participation in exchange for full immunity or a partial reduction in fines.

While the Commission’s guidance sheds light on various aspects of the leniency programme, the most notable changes relate to the possibility of approaching the Commission on a “no-names” basis and the introduction of a Leniency Officer – both of which illustrate the Commission’s willingness to engage in informal discussions with potential applicants to reduce the uncertainty that may arise in a specific matter.

First, the Commission’s guidance sets out that “the Commission is available for informal exchanges about potential immunity applications on a no-names basis and without any requirement to disclose the sector, the participants or other details identifying the cartel.”

The ability to engage in informal discussions, on a no-names basis, to explore whether particular conduct qualifies under the leniency programme will be helpful for potential leniency applicants – especially “if the conduct is novel.”[3]

In recent years, the Commission has imposed fines in cases that differ from traditional hardcore cartels.  This includes, for example, fines imposed on companies that engaged in restraints on innovation, which effectively restricted competition on technical development.  The Commission has also signaled its desire to expand its cartel enforcement to no-poach and other labor market agreements.[4]

With the Commission’s guidance, companies will have more certainty when assessing whether their conduct creates legal risks that could be avoided or mitigated if they decide to come forward.

Second, the Commission’s guidance introduces a Leniency Officer who will be the first point of contact for any potential leniency applicant.  Although novel with the Commission, the position of Leniency Officer was established in France in 2011 and has existed in the Netherlands since at least 2006.

As explained in the Commission’s guidance, “the Leniency Officer can offer informal advice, provide information on the leniency process and engage with prospective applicants or their legal representatives to discuss potential applications on a ‘no-names’ basis.”  The Leniency Officer can also inform potential immunity applicants if immunity is available for the cartel that these potential applicants are involved in.

The Leniency Officer will constitute a helpful point of contact for potential and actual leniency applicants going forward and is designed to provide leniency applicants with additional reassurances as they consider self-reporting their conduct.

Conclusion

The Commission’s guidance is a valuable acknowledgement that its leniency programme must evolve and a notable step toward reducing uncertainty and building trust that can help to ensure its continued success.  This guidance offers potential leniency applicants the opportunity to make a more informed decision about the need for and desirability of seeking leniency, which should result in an uptick in utilization of the leniency programme.  Conversely, the Commission may receive more leniency applications in novel areas it wants to pursue while simultaneously avoiding undesirable leniency applications that may otherwise occupy its resources.

Companies who are party to agreements or other forms of collaboration with their competitors that they suspect may constitute a potential cartel should immediately seek the guidance of external counsel in order to review the nature of their involvement and avoid potentially significant fines.

Any potential whistleblower should act swiftly, as the first participant to come forward is eligible for full immunity from fines and subsequent participants being eligible for increasingly smaller fine reductions.

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[1]   Speech by EVP Vestager at the Italian Antitrust Association Annual Conference, “A new era of cartel enforcement,” available at: https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/speech-evp-m-vestager-italian-antitrust-association-annual-conference-new-era-cartel-enforcement_en.

[2]   GCR, “EU is reviewing leniency policy amidst drop in first-in applications, enforcer says,” available at: https://globalcompetitionreview.com/article/eu-reviewing-leniency-policy-amidst-drop-in-first-in-applications-enforcer-says.

[3]   Antitrust: Commission provides guidance on its leniency policy and practice, available at: https://ec.europa.eu/commission/presscorner/detail/en/IP_22_6373.

[4]   EU Competition Commissioner Signals Tougher Enforcement of No-Poach and Other Labor Market Agreements, available at: https://www.gibsondunn.com/eu-competition-commissioner-signals-tougher-enforcement-of-no-poach-and-other-labor-market-agreements/.  

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The following Gibson Dunn lawyers prepared this client alert: Christian Riis-Madsen, Stéphane Frank, Jeremy Robison, and Sam Latif.

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 practice group:

Antitrust and Competition Group:
Stéphane Frank – Brussels (+32 2 554 72 07, [email protected])
Jeremy Robison – Washington, D.C. (+1 202-955-8518, [email protected])
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, [email protected])
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, [email protected])
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, [email protected])
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, [email protected])

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.