New York partner Harris Mufson and associate Lizzy Brilliant are the authors of “Complying With Electronic Monitoring Laws In NY And Beyond” [PDF] published by Law360 on May 19, 2022.

Washington, D.C. partner Judith Alison Lee, Munich associate Nikita Malevanny and Washington, D.C. associate Claire Yi are the authors of “Russia strikes back – countersanctions” [PDF] published by Financier Worldwide in its June 2022 issue.

The Federal Trade Commission (FTC) stalemate ended on Wednesday, May 11, 2022, with Vice President Kamala Harris breaking the 50-50 Senate tie to confirm Alvaro Bedoya. The addition of Commissioner Bedoya establishes the first Democratic majority at the FTC since Commissioner Rohit Chopra left the agency to lead the Consumer Financial Protection Bureau in October 2021 and creates a pathway for Chair Lina Khan’s ambitious agency agenda. Commissioner Bedoya, a privacy scholar, brings with him substantial interest in privacy and algorithmic fairness which are issues at the top of the FTC’s priorities.

Commissioner Bedoya comes to the FTC from the Center on Privacy and Technology at the Georgetown University Law Center, where he served as the founding director and a professor. At Georgetown, Commissioner Bedoya specialized in digital privacy issues, including on the intersection of privacy and civil rights, biometric software, “algorithmic discrimination,” children’s privacy, and data aggregation. He previously engaged in advocacy on the regulation and moratoria of law enforcement’s use of facial recognition, use of information related to unaccompanied children in immigration proceedings, and automated scanning of social media related to immigration enforcement. Before arriving at Georgetown, Commissioner Bedoya served as Chief Counsel to the Senate Judiciary Subcommittee on Privacy, Technology & the Law, where he worked on the bipartisan transparency provisions in the USA FREEDOM Act, helped run oversight hearings involving large technology companies, and conducted work on so-called “stalking apps.”

While less is known about Commissioner Bedoya’s stance on antitrust issues, he has expressed concerns over a “consolidated and concentrated technology sector” and likely will be in favor of robust antitrust enforcement. Commissioner Bedoya has also expressed interest in getting the FTC more resources for privacy enforcement, expanding the FTC’s technological expertise, combating fraud and abuse related to the COVID pandemic, and curbing certain debt collection practices.

Below we identify key issues that may see more activity in light of the new Democratic majority:

Privacy Rulemaking. The Biden Administration has encouraged the FTC to establish rules on “corporate surveillance” and the accumulation of data. In late 2021, the FTC officially announced interest in crafting a trade regulation rule under Section 18 of the FTC Act “to curb lax security practices, limit privacy abuses, and ensure that algorithmic decision-making does not result in unlawful discrimination.”[1] Both Chair Khan and Commissioner Rebecca Slaughter have been in favor of far-reaching FTC privacy rulemaking, while Commissioners Noah Phillips and Christine Wilson have voiced concerns with the scope of potential privacy rules. We may therefore see more momentum on FTC privacy rulemaking, especially if the Congressional stalemate on federal privacy legislation continues. Chair Khan has expressed a preference for substantive limits on data collection rather than procedural protections, stating that procedural protections “sidestep[] more fundamental questions about whether certain types of data collection and processing should be permitted in the first place.”[2]

The FTC’s privacy rulemaking activities may also be informed by several petitions to curb corporate data practices—including, for example, the Electronic Privacy Information Center’s petition for rulemaking on artificial intelligence, Accountable Tech’s petition to deem targeted advertising as an unfair method of competition, the Center for Democracy and Technology’s petition for rulemaking to address purported civil rights abuses in data-driven commerce, Athena Coalition’s petition to ban corporate use of facial surveillance technology, and the Council on American-Islamic Relations’ petition for an FTC investigation of the use of location data. The FTC’s activities may also be informed by the addition of new agency staff focused on algorithms, biometrics, and technology platforms.[3]

The agency’s authority to craft trade regulation rules covering unfair and deceptive trade practices, known as UDAP rulemaking, may face procedural and substantive questions, such as whether the recent reforms to the Section 18 rulemaking processes align with Congressional intent, and whether the contemplated privacy rules are limited to practices that have been found to be unfair or deceptive. Further, given Chair Khan’s interest in the intersection of privacy and competition, especially as to data accumulation, it will be interesting to see whether the FTC pursues data-related rulemakings through a competition or UDAP lens, or whether the FTC takes a hybrid approach.[4]

We also envision the FTC will continue to focus on privacy enforcement, with an emphasis on the intersection of privacy and civil rights, personal autonomy, and vulnerable consumers including children.

Competition Rulemaking. In July 2021, the FTC voted 3-2 to rescind the 2015 guidelines concerning the scope of its authority under Section 5 of the FTC Act, with the majority suggesting that the FTC “will consider whether . . . to propose rules that will further clarify the types of practices that warrant scrutiny under this provision.”[5] Although the fact and scope of FTC’s authority to engage in competition rulemaking remain open questions, with Commissioner Bedoya confirmed, it is more likely that the FTC will vote to initiate a rulemaking to classify certain conduct as an “unfair method[] of competition” that violates Section 5 of the FTC Act. Agency leadership has stated they will take a thoughtful and energetic approach to rulemaking and prefer rulemaking over enforcement because rules set clear expectations, allow businesses to plan, and proactively deter bad conduct.

In particular, given the increased attention to labor issues,[6] the FTC may consider a rulemaking aimed at addressing labor markets, such as a rulemaking addressing the legality of non-competes under the FTC Act. Agency staff have stated that they believe non-compete rules would lead to higher wages, better working conditions, and increased competition in downstream goods markets. Critics, however, have noted that such rulemaking may exceed the Commission’s authority and have unintended consequences, such as disruption of innovation and decreased investment in workforce training. Other potential rulemakings, as itemized in the Biden Competition Executive Order, include “other clauses or agreements that may unfairly limit worker mobility,” “unfair anticompetitive restrictions on third-party repair or self-repair of items,” and “unfair anticompetitive conduct or agreements in the prescription drug industries.”[7]

The FTC’s labor focus will likely not be limited to rulemaking. The FTC’s enforcement docket will also consider purported harms to employees and small business both in the consumer protection and competition arenas. The FTC will also continue to pursue the administration’s key enforcement priorities, including those the agency identified at the July 2021 public meeting, such as large technology companies, the healthcare industry, M&A, and “repeat offenders.”[8]

Penalty Offense Authority. The FTC has shown a renewed interest in penalty offense authority, largely due to its inability to get equitable monetary penalties under Section 13(b) of the FTC Act, in light of the Supreme Court’s unanimous holding in AMG Capital Management v. FTC.[9] The FTC’s Civil Penalty Authority allows the agency to seek civil penalties against nonparties when two conditions are met: (1) the company must have actual notice that the conduct is unfair or deceptive in violation of the FTC Act, and (2) there must be an FTC administrative decision that such conduct is unfair or deceptive. The sheer breadth of the agency’s recent efforts – notices to 1,100 businesses regarding “money-making opportunities,” notices to 700 businesses regarding endorsements and testimonials, and notices to 70 for-profit higher education institutions – is noteworthy and raises important questions surrounding notice and due process. As agency investigations continue, this is an area to watch.

Health and Wellness Apps’ Data Practices. On September 15, 2021, the FTC issued a policy statement that arguably sought to expand the type of entities covered by the agency’s Health Breach Notification Rule. The Health Breach Notification Rule requires vendors of personal health records to notify consumers, the FTC, and in some cases, the media, when data is disclosed or acquired without the consumer’s authorization. Specifically, the FTC (on a 3-2 vote) found that health and wellness apps that hold consumers’ health information are subject to the Rule because they arguably furnish health care services and can draw information from multiple sources, such as through consumer inputs and application programming interfaces. This arguable expansion drew dissents from Commissioners Phillips and Wilson, who objected that the agency exceeded its authority by expanding the coverage outside of the statutory mandate, acted contrary to agency guidance, and curtailed the public input process, among other criticisms. Key factual issues also remain including questions surrounding triggers for “unauthorized access” and “discovery of a breach of security,” as noted in these dissents. The FTC’s approach on these issues is an area to watch.

Individual and Intermediary Liability. Chair Khan and Commissioner Slaughter have encouraged the FTC to push for individual and intermediary liability in consumer protection investigations. The FTC is also focusing on “gatekeepers” that in the agency’s words – “use their critical market position” to “dictate terms,” “protect and extend their market power,”[10] and “degrade privacy without ramifications.”[11] We expect more activity in this area with the Democratic majority.

Merger Enforcement. Commissioner Bedoya’s confirmation provides the FTC with a Democratic majority that may authorize novel theories of harm to challenge alleged anticompetitive mergers. In recent months, Chair Khan has suggested that some mergers may lead to lower wages for workers,[12] conglomerate effects (competitive harm where the merging parties’ products are in neither in horizontal competition nor in the same supply chain),[13] or excessive aggregation of data.[14] In a departure from past practice, any or all of these theories of harm may be alleged in future merger challenges by the FTC.

Increased Hill Interaction. Given self-perceived gaps in FTC authority and several of the Commissioners’ significant Hill experience,[15] we expect the agency to be more active on Capitol Hill, potentially furthering calls on Congress to act by: amending Section 13(b) to give the agency the authority to obtain monetary relief that the Supreme Court held it lacked in AMG Capital, introducing privacy legislation with provisions that increase FTC funding, establish a new FTC privacy bureau, and provide the agency first-time fining authority, and engaging in substantive and procedural antitrust revisions.

The FTC consumer protection and competition dockets may soon be in overdrive, with several of the more controversial items such as far ranging market studies, privacy and competition rulemakings, and enforcement actions alleging novel theories and unprecedented remedies, potentially seeing the light of day.

Companies should be mindful of FTC’s vast mandate, ambitious agenda, and stated “adjustments in approach,” as they navigate compliance counseling, M&A transactions, and the many ongoing agency investigations. Given the sheer breadth of agency initiatives, companies should also consider participating in the agency rulemaking process to offer real-world, empirical evidence to build a fuller agency record.

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[1] Trade Regulation Rule on Commercial Surveillance, Office of Information and Regulatory Affairs (Fall 2021), here.

[2] Remarks of Chair Lina M. Khan as Prepared for Delivery at IAPP Global Privacy Summit 2022 (Apr. 11, 2022), here.

[3] See Press Release, FTC Chair Lina M. Khan Announces New Appointments in Agency Leadership Positions (Nov. 19, 2021), here.

[4] Nat’l Petroleum Refiners Ass’n v. FTC, 482 F.2d 672 (D.C. Cir. 1973).

[5] Statement of Chair Lina M. Khan and Commissioners Rohit Chopra and Rebecca Kelly Slaughter on the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (July 1, 2021), here.

[6] See Gibson Dunn Client Alert, Employers Beware: Aggressive and Expansive Labor-Focused Antitrust Enforcement Will Remain the New Normal (Apr. 18, 2022), here.

[7] Executive Order on Promoting Competition in the American Economy (July 9, 2021), here.

[8] Press Release, FTC Authorizes Investigations into Key Enforcement Priorities (July 1, 2021), here.

[9] See Gibson Dunn Client Alert, Supreme Court Restricts Power of the Federal Trade Commission to Seek Monetary Relief in Courts (Apr. 22, 2021), here

[10] Memorandum of Chair Lina M. Khan, Vision and Priorities for the FTC (Sept. 22, 2021), here.

[11] Statement of Chair Lina M. Khan Regarding the Report to Congress on Privacy and Security (Oct. 1, 2021), here.

[12] Press Release, Federal Trade Commission and Justice Department Seek to Strengthen Enforcement Against Illegal Mergers (Jan. 18, 2022), here.

[13] Chair Khan Remarks, 2022 Antitrust and Competition Conference, Stigler Center (Apr. 22, 2022), quoted here.

[14] Remarks of Chair Lina M. Khan Regarding Request for Information of Merger Enforcement (Jan. 18, 2022), here.

[15] Chair Khan previously served as Counsel to the U.S. House Judiciary Committee on Antitrust, Commercial, and Administrative Law. Commissioner Philips previously served as Chief Counsel to U.S. Senator John Cornyn, of Texas, on the Senate Judiciary Committee. Commissioner Slaughter previously served as Chief Counsel to Senator Charles Schumer of New York, the Democratic Leader. Commissioner Bedoya previously served as Chief Counsel to the Senate Judiciary Subcommittee on Privacy, Technology & the Law, among other roles.

The following Gibson Dunn lawyers prepared this client alert: Svetlana Gans, JeanAnn Tabbaa, and Chris Wilson.

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 Antitrust & Competition, Privacy, Cybersecurity & Data Innovation, Labor & Employment, Administrative Law & Regulatory, Public Policy, or FDA & Health Care practice groups, or any of the following authors and practice leaders:

Antitrust & Competition Group:
Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, [email protected])
Rachel S. Brass – San Francisco (+1 415-393-8293, [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 & 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])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])

Labor & Employment Group:
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, [email protected])
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, [email protected])

Administrative Law & 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])

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

FDA & Health Care Group:
Marian J. Lee – Washington, D.C. (+1 202-887-3732, [email protected])
John D.W. Partridge – Denver (+1 303-298-5931, [email protected])

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

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Connecticut has joined California, Virginia, Colorado, and Utah in enacting comprehensive data privacy legislation, with a signature from Governor Lamont this week on the Connecticut Data Privacy Act (“CTDPA”). Meanwhile, the text of Virginia’s privacy law was amended and finalized, and the California Privacy Protection Agency (“CPPA”) held pre-rulemaking stakeholder sessions about topics related to automated decision-making, consumers’ rights, business’ concerns, and cybersecurity, among others. Companies should account for these changes as they develop and refine their privacy compliance programs.

Connecticut Data Privacy Act

The CTDPA draws heavily upon its predecessor statutes in Virginia and Colorado, with very few departures of significance.[1] Indeed, while the specific combination of features in the CTDPA may be unique, the combination is largely made of elements seen in at least one of its preceding laws. The CTDPA will become effective by its terms in a little over a year, on July 1, 2023[2] – six months after the California Privacy Rights Act (“CPRA”) and Virginia Consumer Data Protection Act (“VCDPA”), simultaneously with the Colorado Privacy Act (“CPA”), and six months before the Utah Consumer Privacy Act (“UCPA”).

Potentially one of the most significant differences between the CTDPA and other states’ laws may be within the threshold requirements. The CTDPA applies to persons that conduct business in Connecticut or produce products or services that are targeted to residents of the state, and that control or process the personal data of a particular number of residents, namely either:

100,000 or more Connecticut residents, excluding residents whose personal data is controlled or processed solely for the purpose of completing a payment transaction; or
25,000 or more Connecticut residents, where the business derives more than 25% of its gross revenue from the sale of personal data.[3]

Connecticut is the first state law to explicitly carve out payment transaction data from its applicability threshold; this provision was added to alleviate concerns of restaurants, small convenience stores, and similar businesses that process the personal information of many customers for the sole purpose of completing a transaction.

Like existing state data privacy laws, the CTDPA grants consumers—defined as Connecticut residents who are not acting in a commercial or employment context—various rights, including: (1) to confirm whether an entity acting as a data controller is processing their personal data, and to access such data; (2) to obtain a copy of their personal data in a portable and readily usable format; (3) to correct inaccuracies therein; and (4) to delete personal data provided by, or obtained about, them. It also requires data controllers to practice data minimization and purpose limitation, implement technical safeguards, and conduct data protection assessments.[4] The CTDPA adopts language similar to that of Virginia’s recent amendment, described more fully below, relating to compliance with a consumer’s request to delete by opting the consumer out of the processing of such personal data, where such information was obtained from a source other than the consumer.

Like the Virginia and Colorado laws, the CTDPA allows consumers to opt out of the processing of their personal data for purposes of (a) targeted advertising, (b) the sale of personal data, and (c) profiling in furtherance of solely automated decisions that produce similarly significant effects.[5] Like the California and Colorado laws, the CTDPA permits consumers to designate an authorized agent to act on their behalf and opt out of the processing of their data.[6] By January 1, 2025, data controllers must allow consumers to exercise their opt-out right through an opt-out preference signal.[7] Unlike California, which expects its CPPA to opine on what an opt-out signal might be, and how it might work, this provision is largely undefined, encouraging the market to create signals, bringing with it the potential for confusion as to what signals must be followed. The CTDPA, like other state laws, also prohibits processing a consumer’s sensitive data without consent, and requires data controllers to provide a mechanism for revoking consent that is “at least as easy as” the mechanism by which the consumer provided consent.[8]

Like Virginia, Colorado, and Utah, and unlike California, Connecticut does not include a private right of action in its law – the CTDPA limits enforcement to the states’ attorney general.[9] Until December 31, 2024, enforcement actions will be subject to 60-day cure period; thereafter, the attorney general may, but is not required to, provide an opportunity to correct an alleged violation.[10] A violation of the CTDPA will constitute an unfair trade practice,[11] which carries civil penalties of up to $5,000 per violation for willful offenses.[12]

Finally, the CTDPA, similar to Virginia, requires the joint standing committee of the General Assembly convene a task force to study various topics concerning data privacy. The task force must submit a report of its findings and recommendations to the joint standing committee by January 1, 2023.

Developments in Other States

Virginia

In April, Virginia Governor Youngkin signed into law three amendments to the VCDPA, which finalizes the VCDPA’s text ahead of its January 1, 2023 effective date. The first amendment concerns consumers’ right to delete their personal information. The VCDPA grants consumers the right to delete “personal data provided by or obtained about” them. The amendment provides that data controllers that have obtained personal data from a source other than the consumer will be deemed to be in compliance with a consumer’s request to delete if they opt the consumer out of the processing of such personal data, allowing businesses to avoid potentially technically infeasible requirements to delete data, so long as they no longer use it for any purpose.[13] The second amendment changes the definition of “nonprofit organization” to include political organizations, thus exempting them from the VCDPA.[14] The third and final amendment provides that all civil penalties, expenses, and attorney fees will be paid into the state treasury and credited toward the Regulatory, Consumer Advocacy, Litigation, and Enforcement Revolving Trust Fund, rather than a separate Consumer Privacy Fund.[15] Unlike California’s and Colorado’s laws, the VCDPA does not include rulemaking authority. Therefore, businesses subject to the VCDPA can develop their compliance programs ahead of January 1, 2023 without concern of significant changes resulting from the adoption of regulations.

California

As explained in more detail in a prior update, the CPPA is responsible for implementing and enforcing the CPRA and California Consumer Privacy Act (“CCPA”), a role which includes updating existing regulations and adopting new regulations. The CPPA is currently engaging in preliminary information-gathering activities to help inform its rulemaking. The CPPA accepted written comments in Fall 2021, provided informational sessions in March 2022, and, recently, held stakeholder sessions on May 4, 5, and 6, 2022, to provide an opportunity for stakeholders to speak on topics relevant to the upcoming rulemaking.

The topics discussed during the stakeholder sessions included automated decision-making, data minimization and purpose limitations, dark patterns, consumers’ rights, business’ concerns, and cybersecurity, among others. Between two and ten stakeholders spoke on each topic, and the speakers ranged from individuals to representatives of private organizations, non-profits, government, and industry groups.

Below are highlights from some of the sessions:

Automated Decision-Making. Stakeholders articulated divergent views on the definition of Automated Decision-Making (“ADM”). Industry stakeholders proposed a narrower definition to exclude processes related to safety, such as automobile lane-keeping features. Consumers and NGOs conversely asked for a broad definition that would sweep in processes that are not fully automated but that would have a substantial impact on individuals.
Business Concerns. Businesses expressed a number of concerns over their responsibilities related to disclosure and consumers’ rights, including the difficulty of harmonizing compliance across numerous regimes, including other states’ laws and GDPR; the vagueness of certain definitions, including “contractor,” “service provider,” and “sale,” among others; the cost of implementation; and harm to data-driven businesses through strict interpretation of the “purpose limitation.”
Consumer Concerns. Consumers were concerned with the difficulty of navigating click-through options to exercise their rights, noting that in some cases, they had to hand over PII in connection with the verification process before they could ask for correction or deletion of their information. Single-click and global, browser-level opt-outs were the most commonly cited suggestion for making the consumer experience of exercising rights more effective and easier, and discussion about how those should be implemented based on the language of the statute were also brought up.
Dark Patterns. Stakeholders requested more clarity on the definition of “dark patterns,” and suggested that unfair and deceptive practice laws and regulations could already be used to address dark patterns that harm consumers.
Cybersecurity and Risk Assessments. Speakers suggested looking to the GDPR for guidance around risk assessment requirements and implementation, and emphasized the benefits of harmonizing the requirements across jurisdictions.

The CPPA did not comment on any suggestions, and noted that they were in “listening mode.” The CPPA has not commenced formal rulemaking activities, and continues to gather information. Updates on the CPPA’s activities related to rulemaking are available here.

Separately, there has been no further movement on the proposals floated by the California legislature to extend the business-to-business and employment-related exemptions in the CCPA, leaving businesses to continue to consider how to comply with the CPRA with respect to those individuals’ information.

Other States

Proposed data privacy legislation currently remains in committee in Alaska, Louisiana, Massachusetts, Michigan, North Carolina, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, and Vermont. Numerous other states also are actively considering such laws, with drafting and negotiations at various phases.

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

__________________________

[1] Connecticut Data Privacy Act (“CTDPA”), S.B. 6, 2022 Gen. Assemb., Reg. Sess. (Conn. 2022).

[2] CTDPA, § 1.

[3] CTDPA, § 2.

[4] CTDPA, §§ 6(1)–(3); 8

[5] CTDPA, § 4(a).

[6] CTDPA, § 5.

[7] CTDPA, § 6(e)(1)(A)(ii).

[8] CTDPA, § 6.

[9] CTDPA, § 11(a).

[10] CTDPA, § 11(b).

[11] CTDPA, § 11(e).

[12] Conn. Gen. Stat. § 42-110o.

[13] H 381, 2022 Gen. Assemb., Reg. Sess. (Va. 2022).

[14] S 534, 2022 Gen. Assemb., Reg. Sess. (Va. 2022).

[15] S 534, 2022 Gen. Assemb., Reg. Sess. (Va. 2022).

This alert was prepared by Cassandra Gaedt-Sheckter, Ryan Bergsieker, Alexander Southwell, Sarah Scharf, Abbey Barrera, Tony Bedel, Courtney Wang, Raquel Sghiatti, and Samantha Abrams-Widdicombe.

United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, [email protected])
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, [email protected])
Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])
Matthew Benjamin – New York (+1 212-351-4079, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
David P. Burns – Washington, D.C. (+1 202-887-3786, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])
Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, [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])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Ashley Rogers – Dallas (+1 214-698-3316, [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])

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])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Alejandro Guerrero – Brussels (+32 2 554 7218, [email protected])
Vera Lukic – Paris (+33 (0) 1 56 43 13 00, [email protected])
Sarah Wazen – London (+44 (0) 20 7071 4203, [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])

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

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On January 31, 2022 the Ministry of Finance of the United Arab Emirates (UAE) announced the introduction of a federal Corporate Tax (“CT”) on business profits, effective from the financial year beginning June 1, 2023. Pursuant to the aforementioned announcement, the Ministry of Finance published a consultation document to collect and appraise the responses of stakeholders (“Consultation Document”) with regards to the most prominent features of the legislation and its implementation, ahead of the release of the draft CT legislation. The formal responses to the Consultation Document should be submitted using this form by May 19, 2022. The Consultation Document can be viewed here.

In this client alert, we provide a summary of the key policy drivers, the key features of the proposed regime, and high level commentary contextualising the potential effects of the legislative reforms on our clients.

Background

The UAE currently does not have a federal CT regime. CT is determined at an Emirate level through tax decrees. Currently, at an Emirate level, the UAE only levies corporate tax on oil and gas companies and branches of foreign banks. Furthermore, the UAE benefits from the presence of more than 40 free zones, which have their own rules and regulations. Such zones generally afford companies incorporated therein significant tax benefits, making the UAE an attractive jurisdiction from a tax perspective. Additionally, the UAE does not levy income tax on employment-based income.

Key Policy Drivers

The UAE, as a member of the OECD inclusive framework, is introducing the federal CT regime as a stepping stone to the execution of its commitment to the global minimum effective tax rate concept proposed by Pillar II of the OECD Base Erosion and Profit Shifting project (“OECD BEPS”).[1] The responsible body of oversight has been designated as the Federal Tax Authority (“FTA”). In introducing CT, the UAE aims to further its objectives of accelerating its development and transformation by introducing “a competitive CT regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, [which] will cement the UAE’s position as a leading jurisdiction for business and investment”.[2] The introduction of CT is also perceived as an important step in diversifying the UAE Government’s budget revenue away from revenues that today are mainly generated from the hydrocarbon industry. The Consultation Document offers assurances that the CT regime will build on international best practices as opposed to introducing new concepts, in order to ensure the seamless integration and cooperation of the regime with existing international frameworks.

The Consultation Document indicates that the UAE Government has been guided by a set of key principles in its legislative undertaking. Such principles include: (1) flexibility and alignment with modern business practices, ensuring adaptability to changing socio-economic circumstances; (2) certainty and simplicity of the tax rules to support businesses’ accurate decision-making and cost-effective operation; (3) neutrality and equity, ensuring fair taxation treatment to different types of businesses; and (4) transparency.

The Consultation Document heavily emphasises the UAE’s ongoing commitment to execute BEPS 2.0, noting that “further announcements on how the Pillar Two rules will be embedded into the UAE CT regime will be made in due course.”[3] No further practical guidance is otherwise offered in the Consultation Document. In this regard, international entities which may be subject to Pillar II are advised to keep a close eye on developments in the law that are likely to apply to them, to the extent they are taxable entities subject to the UAE CT regime.

Key Features of the Corporate Tax Regime

Taxable Persons

Subject to certain exemptions discussed below, CT will be levied on UAE-incorporated companies such as LLCs, PSCs, PJSCs, and any other legal entities with a distinct legal personality, including, for example, LLPs and partnerships limited by shares.

In line with tax measures in other jurisdictions, CT will be levied on foreign legal entities: (1) with a permanent establishment (“PE”) in the UAE, and that earn UAE sourced income, or (2) that are tax resident by way of management and control in the UAE.

Unincorporated partnerships and other unincorporated ventures will be deemed ‘transparent’ for UAE CT purposes. Income of such entities may be taxed in the hands of their partners or members. Helpfully, in order to tackle the discrepancies in the classification of partnerships (transparent vs opaque) in different jurisdictions, the UAE CT treatment of foreign unincorporated partnerships will defer to the tax treatment of the partnership in the relevant foreign jurisdiction.

Companies and branches registered in free zones will also fall within the scope of the CT regime, and will be subject to tax return filing requirements. In order to honour existing tax arrangements within free zones, such entities will be subject to a 0% CT rate provided that they maintain adequate substance and comply with all regulatory requirements. A free zone person with a branch in mainland UAE will be taxed at a regular CT rate on mainland source income while continuing to benefit from the 0% CT rate on its “other income”. Where a free zone person transacts with mainland UAE but does not have a mainland branch, the free zone person can continue to benefit from the 0% CT rate if its income from mainland UAE is limited to ‘passive’ income (meaning interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies). The 0% CT rate will also apply to any transactions between free zone entities and their group companies in mainland UAE. However, payments made to free zone entities by a mainland group company will not be tax deductible. Furthermore, the Consultation Document notes that, to prevent free zone businesses from gaining an unfair competitive advantage compared to businesses established in mainland UAE, any other mainland sourced income will disqualify a free zone person from the 0% CT regime in respect of all their income. Once the draft law is released, we expect that free zone registered entities will need to evaluate their existing position and whether they will continue to benefit from the tax exemptions, or whether their position will change in light of the CT law.

Income tax will not be payable by natural persons, provided that they do not engage in business or commercial activity in the UAE. Taxable natural persons operating through sole establishments or proprietorships or as individual partners in an unincorporated partnership, conducting business in the UAE, will be subject to the CT regime. The Consultation Document indicates that it remains to be the case that employment based income obtained in the UAE will not be subject to income tax.

Applicable Rates

CT will be charged on the annual taxable income of a business as follows:

0%, for taxable income not exceeding AED 375,000;
9%, for taxable income exceeding AED 375,000; and
a different tax rate (not yet specified) for large multinationals that meet specific criteria set with reference to Pillar II of the OECD BEPS.[4] In light of the Consultation Document’s emphasis on the UAE’s commitment to implementing the BEPS 2.0 measures, we expect that the rate will be fixed with reference to the rate finally determined by the OECD.

Exempt Entities

The following list of entities will be exempt from CT, either automatically or by way of application (the method is still undetermined):

the federal UAE Government and Emirate Governments and their departments, authorities and other public institutions;
wholly Government-owned UAE companies that carry out a sovereign or mandated activity, and that are listed in a cabinet decision;
businesses engaged in the extraction and exploitation of UAE natural resources that are subject to Emirate-level taxation (e.g. upstream oil and gas companies);
charities and other public benefit organisations that are listed in a Cabinet Decision issued at the request of the Ministry of Finance, upon application of the relevant entity;
public and regulated private social security and retirement pension funds; and
investment funds, as they are typically organised as ‘flow-through’ limited partnerships. Furthermore, regulated investment funds and Real Estate Investment Trusts can apply to the FTA to be exempt from CT subject to meeting certain requirements.[5]

Residency

As previously indicated, tax residency is a pivotal factor in determining whether business profits will be subject to CT in the UAE. In furtherance of its objective of achieving certainty, the UAE relies on international principles in determining tax residency.

The Consultation Document notes that a legal person that is incorporated in the UAE will automatically be considered a ‘resident’ person for UAE CT purposes. Equally, any natural person who is engaged in a business or commercial activity in the UAE, either in their own name or through an unincorporated partnership, will also be considered a resident person for purposes of the UAE CT regime. A foreign company may be treated as a resident person if it is effectively “managed and controlled” in the UAE. This will be a question of fact, but the Consultation Document indicates this would “typically look at where the directors or other decision makers of the company make the key management and commercial decisions”.[6]

UAE resident legal persons will be taxed in the UAE on their worldwide income. Natural persons will only be taxed on income earned from their business activities carried out in the UAE. However, certain income earned from overseas will be exempt from CT, including income from foreign branches and qualifying foreign shareholdings. Where income earned from abroad is not exempt, income taxes paid in the foreign jurisdiction can be credited against the CT payable in the UAE on the relevant income to prevent double taxation.

Non-Residents

Non-residents will be subject to UAE CT on taxable income (1) from a PE in the UAE, and (2) which is sourced in the UAE. The Consultation Document indicates that the law is to refer to the definition of PE outlined in Article 5 of the OECD Model Tax Convention, and the intention is for foreign companies and advisors to be entitled to rely on OECD Commentary when assessing whether they have a PE in the UAE. Thus, the existence of a PE in the UAE will be determined by reference to whether either there is a “fixed place of business” of, or a “dependent agent” habitually exercising the authority to conclude contracts on behalf of, the non-resident person in the UAE.

Significantly, the Consultation Document notes that the UAE CT regime will allow regulated UAE investment managers to provide discretionary investment management services to foreign customers without triggering a UAE PE for the foreign investor or the foreign investment fund – this investment management exemption will “be subject to conditions that are comparable to similar regimes in leading financial centres”.[7]

Calculating Taxable Income

The UAE CT regime proposes to use the accounting net profit (or loss) position in the financial statements of a business as the starting point for determining taxable income. IFRS standards are typically used by businesses in the UAE and will form the basis for such assessment, but the CT law will allow for alternative financial reporting standards.

Exemptions & Deductions

The CT law will include a participation exemption from CT on dividends received, and capital gains earned from the sale of shares of a subsidiary company. The UAE CT regime will exempt all domestic dividends earned from UAE companies, including dividends paid by a free zone registered entity benefitting from the 0% CT regime. The main condition to benefit from the participation exemption is that the UAE shareholder company must own at least 5% of the shares of the subsidiary company. This participation requirement remains competitive in comparison with other jurisdictions. For example, the participation exemption in the UK (the “substantial shareholding exemption”) requires (amongst other things) the shareholder to own at least 10% of the ordinary shares in the subsidiary for a consecutive period of at least 12 months.

In order to remain an attractive tax jurisdiction for international businesses, the UAE will allow for foreign branches of UAE companies (subject to certain conditions) to either (i) claim a foreign tax credit for taxes paid in the foreign branch country, or (ii) elect to claim an irrevocable exemption for their foreign branch profits.

Interest and other financing costs will be deductible for CT purposes. However, the deductibility of interest will be capped at 30% of a business’ earnings before interest, tax, depreciation, and amortisation (EBITDA), in line with Action 4 of the OECD BEPS project, in order to disincentivise businesses from using excessive levels of debt financing (as opposed to equity financing) in pursuance of a tax benefit. Interest capping rules will not apply to banks, insurance business and other financial services entities.

Losses

In line with international best practices, a business will be able to offset a loss incurred in one period against the taxable income of future periods, up to a maximum of 75% of the taxable income in each of those future periods.

Tax losses will be able to be carried forward indefinitely provided the same shareholders hold at least 50% of the share capital from the start of the period when a loss is incurred to the end of the period in which a loss is offset against the taxable income.

Groups

A UAE resident group of companies will be able to elect to form a tax group, capable of being treated as a single taxable person (or a fiscal unity) if the parent company holds at least 95% of the share capital and voting rights of its subsidiaries. To form a tax group, neither the parent company nor any of the subsidiaries can be an exempt person or a free zone entity benefitting from the 0% CT rate, and all group members must use the same financial year. For other groups of companies which do not meet the 95% threshold, the CT regime will allow the transfer of losses between group companies, provided that they are at least 75% commonly owned.

Whilst no clear indications are given as to the features of the proposed law in respect of business reorganisations, the Consultation Document asserts that such reorganisations are to be undertaken on a tax neutral basis.[8] Intra-group transfer relief will be available for transfers of assets and liabilities between UAE resident companies that are at least 75% commonly owned, provided the assets and/or liabilities being transferred remain within the same group for a minimum of three years.

To further facilitate corporate restructuring transactions, the UAE CT regime will exempt or allow for a deferral of taxation where a whole business, or independent parts of a business, are transferred in exchange for shares or other ownership interests.

Such features are positive and welcome additions to the CT rules, particularly if other aspects of the CT regime prompt corporate restructurings (please see below with regards to transfer pricing). Furthermore, group relief is often sought to assist the financing of further mergers and acquisitions, potentially leading to increased activity in the UAE.

Transfer Pricing

Transfer pricing rules are expected to apply to transactions between related and connected persons, in accordance with the principles of the OECD Transfer Pricing Rules. Therefore, transactions between related or connected parties must be conducted on an arm’s-length basis.

Large business groups, particularly family-owned conglomerates with cross-border operations may need to rethink their group structures and assess their intra-group transactions from a transfer pricing perspective, to ensure that their transactions are indeed conducted on an arm’s-length basis.

Tax Credits

As noted above, UAE resident companies will be subject to UAE CT on their worldwide income, which includes foreign sourced income that may have been subject to tax of a similar nature to CT in another country. To avoid double taxation, the UAE CT regime will allow a credit for a foreign tax paid in a foreign jurisdiction against the UAE CT liability on the foreign-sourced income that has not been otherwise exempted.

Administrative Aspects

A business subject to CT will need to register with the FTA and obtain a tax registration number within a period of time to be prescribed in the law. The FTA can also automatically register a business for CT purposes if the person does not voluntarily do so. Businesses can also deregister if they cease to be subject to CT. To reduce administrative efforts and costs, businesses will only need to prepare and file one tax return (and other related supporting schedules) with the FTA for each tax period. A CT return must be filed, and any CT payment made, within nine months of the end of the relevant tax period.

Conclusion

The introduction of CT in the UAE logically follows from the UAE’s role as a member of the OECD inclusive framework, particularly in light of discussions on the global minimum tax proposed by Pillar II. The proposed tax rate of 9% still remains highly competitive in comparison to other jurisdictions. In addition, it can be seen from the Consultation Document that the proposed CT regime is based on well-recognised and practiced international principles, making the cost and process of implementing the law relatively efficient for businesses subject to similar regimes in other jurisdictions. The law will seemingly also maintain some of the most distinct tax benefits of the UAE, for example, the tax benefits afforded to free zone registered entities. Inevitably, once the regime takes effect, different businesses might want to reconsider their corporate structures in order to avail themselves of the available tax benefits.

We would be happy to help clients consider and review their current corporate structures to assess the impact of the proposed UAE CT rules, and also discuss any opportunities resulting therefrom.

___________________________

[1] For further information regarding Pillar I and Pillar II of the OECD Base Erosion and Profit Shifting project, please refer to our UK Tax Quarterly Update – February 2022 (pp. 12-16) here.

[2] Consultation Document, ¶ 2.2.

[3] Consultation Document, Section 9.3.

[4] https://u.ae/en/information-and-services/finance-and-investment/taxation/corporate-tax.

[5] Consultation Document, Sections 3.3 and 3.7.

[6] Consultation Document, ¶ 4.4.

[7] Consultation Document, ¶ 4.21.

[8] Consultation Document, Section 6.3

The following Gibson Dunn lawyers prepared this client alert: Jeffrey Trinklein, Sandy Bhogal, Benjamin Fryer, Hanna Chalhoub, Siham Freihat*, and William Inchbald.

Gibson Dunn’s lawyers are available to assist in addressing any questions that you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Tax or Corporate practice groups, or the following authors:

Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224 /+1 212-351-2344), [email protected])

Sandy Bhogal – London (+44 (0) 20 7071 4266, [email protected])

Benjamin Fryer – London (+44 (0) 20 7071 4232, [email protected])

Hanna Chalhoub – Dubai (+971 (0) 4 318 4634, [email protected])

William Inchbald – London (+44 (0) 20 7071 4264, [email protected])

* Siham Freihat is a trainee solicitor in Gibson Dunn’s London office.

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Dallas partner Jonathan Whalen and Houston of counsel James Robertson are the authors of “E&P A&D Business Strategies: Getting the Deal Done” [PDF] published by Oil and Gas Investor on April 28, 2022.

When buyers and sellers negotiate acquisition agreements, they often spend a significant percentage of their negotiating time working out the terms of the provisions that govern adjustments to the purchase price. Purchase price adjustment mechanics are also a frequent cause of post-closing disputes between buyers and sellers. In this recorded webcast, Gibson Dunn lawyers and an accounting expert examine purchase price adjustments in detail. The webcast includes discussions of the following:

A review of the issues that arise in negotiating purchase price adjustment provisions, and drafting tips for corporate counsel
A discussion of the common sources of post-closing adjustment disputes, and accountants’ views on how these disputes may be resolved
A litigator’s views on litigating purchase price adjustment disputes

PANELISTS:

Stephen Glover is a partner in Gibson Dunn’s Washington, D.C. office and has served as Co-Chair of the firm’s Mergers and Acquisitions Practice Group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, strategic alliances and joint ventures, as well as other corporate matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others.

Michelle M. Gourley is a partner in Gibson Dunn’s Orange County office and is a member of the firm’s Corporate Department. Ms. Gourley practices general corporate and business law, with a focus on mergers and acquisitions and general corporate counseling. Ms. Gourley has significant experience with domestic and international transactions, including acquisitions, mergers, round financings and buy-out options across numerous industries such as manufacturing, medical device and software. Ms. Gourley regularly provides advice to senior management and boards of private companies in connection with their day-to-day operations.

Ron Hauben is senior counsel in Gibson Dunn’s New York office and Co-Chair of the firm’s Accounting Firm Advisory and Defense Practice Group. Mr. Hauben’s practice focus is on bringing the full scope of the firm’s legal services to the accounting profession, including regulatory enforcement and litigation defense, corporate governance, counseling and advice on a wide range of risk, crisis management and professional practice issues. Mr. Hauben also has extensive experience counseling with public and private company boards and management on the role of independent auditors and the importance of the independent audit to stakeholders and capital markets.

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

Christen Morand is a partner at Ernst & Young LLP in the Forensic & Integrity Services practice. She provides litigation support services and alternative dispute resolution services on a variety of matters, including expert testimony, post-transaction disputes, purchase price disputes and analysis and resolution of transaction or contractual provisions. Ms. Morand’s experience in providing arbitration and expert testimony services includes net working capital disputes, earn-out disputes, GAAP vs historical consistency issues, GAAP vs IFRS issues and other complex accounting issues. She also has experience conducting accounting and financial fraud investigations, including revenue recognition, asset misappropriation and earnings management.

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

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While news about any artificial intelligence-related legal development often remained buried among the more pressing news of other major world events in the first quarter of 2022, that is not to say that nothing notable occurred. Indeed, each of the three branches of the U.S. Government took a number of significant steps towards developing more focused AI strategies, legislation, regulations, and principles of governance. As highlighted below in this quarter’s update, Congress, the Department of Defense, the Department of Energy, the Intelligence directorates, NIST, the FTC, and the EEOC all were active players in early 2022 in matters relating to AI. In addition, the EU continued this quarter in advancing efforts toward a union-wide, general AI policy and regulation, which, if and when ultimately adopted, seems likely to have an influential impact on much of the debate that continues in the U.S. on the need for a national approach. Meanwhile, state and local governments in the U.S. continue to fill some of the perceived gaps left by the continued piecemeal regulatory approach taken to date by the federal government.

Our 1Q22 Artificial Intelligence and Automated Systems Legal Update focuses on these key efforts, and also examines other policy developments within the U.S. and EU that may be of interest to domestic and international companies alike.

I. U.S. POLICY & REGULATORY DEVELOPMENTS

A. U.S. National AI Strategy

1. Department of Defense Announces Release of Joint All-Domain Command and Control Implementation Plan

On March 15, 2022, Deputy Secretary of Defense, Dr. Kathleen Hicks, signed the Department of Defense Joint All-Domain Command and Control (JADC2) Implementation Plan. JADC2 enables the Joint Force to “sense,” “make sense,” and “act” on information across the battle-space quickly using automation, artificial intelligence, predictive analytics, and machine learning to deliver informed solutions via a resilient and robust network environment. The JADC2 Cross-Functional Team will oversee the execution of the JADC2 Strategy, initially announced in June 2021, and the Implementation Plan.[1]

The unclassified summary of the strategy provides six guiding principles to promote coherence of effort across the Department in delivering JADC2 improvements: “(1) Information Sharing capability improvements are designed and scaled at the enterprise level; (2) Joint Force C2 improvements employ layered security features; (3) JADC2 data fabric consists of efficient, evolvable, and broadly applicable common data standards and architectures; (4) Joint Force C2 must be resilient in degraded and contested electromagnetic environments; (5) Department development and implementation processes must be unified to deliver more effective cross-domain capability options; and, (6) Department development and implementation processes must execute at faster speeds.”[2]

The JADC2 Implementation Plan is classified but is described as “the document which details the plans of actions, milestones, and resourcing requirements. It identifies the organizations responsible for delivering JADC2 capabilities. The plan drives the Department’s investment in accelerating the decision cycle, closing operational gaps, and improving the resiliency of C2 systems. It will better integrate conventional and nuclear C2 processes and procedures and enhance interoperability and information-sharing with our mission partners.”[3]

2. Congress Works to Reconcile the America COMPETES Act (passed by the House of Representatives) with a Similar Bill: the U.S. Innovation and Competition Act (passed by the Senate)

On February 4, 2022, the House voted 222-210 to approve the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength Act of 2022 or the America COMPETES Act of 2022, which would allot nearly $300 billion to scientific research and development and improve domestic manufacturing in an effort to boost the country’s ability to compete with Chinese technology.[4] The vote has triggered some divergence with the Senate, which passed a largely similar bill on June 8, 2021, the United States Innovation and Competition Act of 2021.[5] House and Senate members have started discussions to resolve the differences between the bills.

Like the U.S. Innovation and Competition Act, the America COMPETES Act identifies artificial intelligence, machine learning, autonomy and related advances as a “key technology focus area;” however, unlike the Senate bill, the America COMPETES Act does not establish a Directorate of Technology to support research and development in the key technology focus areas and does not include provisions comparable to the “Advancing American AI Act” which was intended to “encourage agency artificial intelligence-related programs and initiatives that enhance the competitiveness of the United States” while ensuring AI deployment “align[s] with the values of the United States, including the protection of privacy, civil rights, and civil liberties.”[6]

Instead, the America COMPETES Act relies on the Director of the National Institute of Science and Technology (NIST) “to support the development of artificial intelligence and data science, and carry out the activities of the National Artificial Intelligence Initiative Act of 2020 authorized in division E of the National Defense Authorization Act for Fiscal Year 2021.”[7] Also, in many instances, the America COMPETES Act incorporates artificial intelligence as an aspect of a broader research objective.[8]

3. Office of Science and Technology Policy Seeks Information Ahead of Updating the National Artificial Intelligence Research and Development Strategic Plan

In June of 2019, the Trump Administration last released an update to the National Artificial Intelligence Research and Development (AI R&D) Strategic Plan.[9] The plan set out eight strategic aims:

Make long-term investments in AI research.
Develop effective methods for human-AI collaboration.
Understand and address the ethical, legal, and societal implications of AI.
Ensure the safety and security of AI systems.
Develop shared public datasets and environments for AI training and testing.
Measure and evaluate AI technologies through standards and benchmarks.
Better understand the national AI R&D workforce needs.
Expand Public-Private Partnerships to accelerate advances in AI.

The National AI Initiative Act, which became law on January 1, 2021, calls for regular updates to the National AI R&D Strategic Plan to include goals, priorities, and metrics for guiding and evaluating how the agencies carrying out the National AI Initiative will:

Determine and prioritize areas of artificial intelligence research, development, and demonstration requiring Federal Government leadership and investment;
Support long-term funding for interdisciplinary artificial intelligence research, development, demonstration, and education;
Support research and other activities on ethical, legal, environmental, safety, security, bias, and other appropriate societal issues related to artificial intelligence;
Provide or facilitate the availability of curated, standardized, secure, representative, aggregate, and privacy-protected data sets for artificial intelligence research and development;
Provide or facilitate the necessary computing, networking, and data facilities for artificial intelligence research and development;
Support and coordinate Federal education and workforce training activities related to artificial intelligence;
Support and coordinate the network of artificial intelligence research institutes.[10]

The Office of Science and Technology Policy, on behalf of the National Science and Technology Council’s (NSTC) Select Committee on Artificial Intelligence, the NSTC Machine Learning and AI Subcommittee, the National AI Initiative Office, and the Networking and Information Technology Research and Development National Coordination Office, is currently considering the input provided through comments in order to provide an updated strategic plan to reflect current priorities related to AI R&D.[11]

4. NIST is Reviewing Stakeholder Input Relating to Advancing a More Productive Tech Economy to Inform a Report that will be Submitted to Congress

On November 22, 2021, NIST issued a Request for Information (RFI) about the public and private sector marketplace trends, supply chain risks, legislation, policy, and the future investment needs of eight emerging technology areas, including: artificial intelligence, internet of things, quantum computing, blockchain technology, new and advanced materials, unmanned delivery services, and three-dimensional printing. The RFI sought comments to help identify, understand, refine, and guide the development of the current and future state of technology in the eight identified emerging technology areas to inform a final report that will be submitted to Congress.[12] The comments are currently under review and includes policy suggestions and information regarding current technological trends.

5. The U.S. Department of Energy (DOE) Announces The Establishment of The Inaugural Artificial Intelligence Advancement Council (AIAC)

On April 18, 2022, the U.S. Department of Energy announced the establishment of AIAC, which will lead artificial intelligence governance, innovation and AI ethics at the department. Through internal and external partnerships with industry, academia, and government, the AIAC will coordinate AI activities and define the Department of Energy AI priorities for national and economic competitiveness and security. The AIAC members will offer recommendations on AI strategies and implementation plans in support of a broader DOE AI strategy that is led by the Office of Artificial Intelligence and Technologies.[13] Notably, the DOE also announced on March 24, 2022, that it would issue $10 million in funding for projects in artificial intelligence research to High Energy Physics to support research that furthers understanding of fundamental particles and their interactions by making use of artificial intelligence.[14]

6. Intelligence Advanced Research Projects Activity Launches New Biometric Technology Research Program

On March 11, 2022 the Intelligence Advanced Research Projects Activity (IARPA), the research and development arm of the Office of the Director of National Intelligence, announced the Biometric Recognition & Identification at Altitude and Range (BRIAR) program, a multi-year research effort to develop new software systems capable of performing whole-body biometric identification from great heights and long ranges. The program’s goal is to enable the Intelligence Community and Department of Defense to recognize or identify individuals under challenging conditions, such as from unmanned aerial vehicles (UAVs), at far distances, and through distortions caused by atmospheric turbulence. BRIAR research contracts regarding research objectives have been awarded to several private companies and universities.[15]

B. Algorithmic Fairness & Consumer Protection

1. FTC Policy

a) WW International Settlement

On March 4, 2022, the FTC entered into a settlement with WW International, Inc., formerly known as Weight Watchers, and a subsidiary called Kurbo, Inc. over allegations that they collected information from children through a weight loss app.[16] WW has agreed to pay a $1.5 million penalty and delete personal information it obtained from underage users of the its Kurbo program without parental consent in order to resolve the FTC’s claims that it unlawfully gathered data from thousands of children.

As part of the settlement, WW and Kurbo will also be required to destroy all personal information they’ve already gathered without adequate notice or parental consent from minors through the Kurbo program; delete any models or algorithms they’ve developed using this data; and ensure that, moving forward, parents receive clear and direct notice of the collection, use and disclosure of their children’s information and are able to consent to these practices.

b) FTC Priorities

Following the WW International settlement, Commissioner Rebecca Slaughter discussed the settlement, and noted that she hoped that the FTC’s increased use of algorithmic destruction as an enforcement tool would lead to discussions between the agency and Congress with respect to legislative or rulemaking action on privacy.[17]

Commissioner Slaughter also addressed the changing landscape following the “devastating” ruling in AMG Capital Mgmt., LLC v. FTC, a 2021 Supreme Court case which curtailed the FTC’s authority under Section 13(b) of the FTC Act to seek monetary redress for consumers.[18] She noted that the AMG ruling informed the need for rulemaking authority, since consumers relied on the FTC to protect them and seek redress from companies that have violated the law. Several Senators have introduced bills that would give the FTC the authority to seek restitution in federal district court, but no bills have yet been passed.

The FTC’s recent shift in focus to rulemaking has posed a challenge for the Commission, however, as it has been operating with only a partial slate of four Commissioners, leaving the Commission without a tiebreaker. The Senate has largely deadlocked in their votes on a fifth Commissioner, but recently advanced the nomination of Alvaro Bedoya, which may allow for an acceleration of rulemaking by the FTC if he is ultimately confirmed.

2. Algorithmic Accountability Act of 2022

The Algorithmic Accountability Act of 2022[19] was introduced on February 3, 2022 by Sen. Ron Wyden, Sen. Cory Booker, and Rep. Yvette Clark. If passed, the bill would require large technology companies across states to perform a bias impact assessment of any automated decision-making system that makes critical decisions in a variety of sectors, including employment, financial services, healthcare, housing, and legal services. The Act’s scope is potentially far reaching as it defines “automated decision system” to include “any system, software, or process (including one derived from machine learning, statistics, or other data processing or artificial intelligence techniques and excluding passive computing infrastructure) that uses computation, the result of which serves as a basis for a decision or judgment.” The Act comes as an effort to improve upon the 2019 Algorithmic Accountability Act after consultation with experts, advocacy groups, and other key stakeholders.

3. NIST

a) NIST Releases Initial Draft of a Framework for AI Risk Management

On March 17, NIST released an initial draft of an AI Risk management Framework.[20] The Framework is “intended for voluntary use in addressing risks in the design, development, use, and evaluation of AI products, services, and systems.” NIST accepted public comments on this draft framework until April 29, 2022.

b) NIST Releases Update to a Special Publication Concerning Standards to Manage Algorithmic Bias

Additionally, on March 16, NIST published an update to a previously released publication, Towards a Standard for Identifying and Managing Bias in Artificial Intelligence (NIST Special Publication 1270).[21] The publication seeks to encourage standards for the adoption of artificial intelligence to help minimize the risk of unintentional biases in algorithms causing widespread societal harm. The main distinction between the draft and final versions of the publication is the “new emphasis on how bias manifests itself not only in AI algorithms and the data used to train them, but also in the societal context in which AI systems are used.”[22]

C. Facial Recognition

Challenges to facial recognition technology have continued in early 2022.

Following bipartisan backlash, the U.S. Internal Revenue Service (IRS) decided to abandon its use of facial recognition software in February 2022.[23] The IRS intended to utilize the software to authenticate taxpayers’ online accounts by having users uploading a video selfie. Taxpayers reported frustration with the process and there were a host of security and privacy concerns raised regarding the collection of biometric data.

In March 2022, a federal proposed class action was filed in Delaware alleging that Clarifai Inc. violated the Illinois Biometric Information Privacy Act (BIPA) by accessing plaintiff’s profile photos on OKCupid and using them to develop its facial recognition technology without her knowledge or consent.[24] The Complaint alleges that Clarifai has gathered biometric identifiers from more than 60,000 OKCupid users in Illinois and claims several violations of BIPA as well as unjust enrichment. Plaintiff also seeks declaratory and injunctive relief, attorney fees, and statutory damages of up to $5,000 for each violation of BIPA.

Also in March 2022, the District Court for the District of Columbia dismissed a suit challenging the U.S. Postal Service’s use of facial recognition in the Internet Covert Operations Program.[25] Plaintiff alleged that the U.S. Postal Service’s collection of personal data was unlawful because it failed to conduct a privacy impact assessment regarding data collection. In addition, plaintiff accused the Postal Service of using Clearview AI’s controversial facial recognition service. The court, however, made clear that failure to publish a privacy impact assessment is not sufficient to create an information injury for standing.

D. Labor & Employment

Employers are soon to be subject to a patchwork of recently enacted state and local laws regulating AI in employment.[26] Our prior alerts have addressed a number of these legislative developments in New York City, Maryland, and Illinois.[27] So far, New York City has passed the broadest AI employment law in the U.S., which governs automated employment decision tools in hiring and promotion decisions and will go into effect on January 1, 2023. Specifically, before using AI in New York City, employers will need to audit the AI tool to ensure it does not result in disparate impact based on race, ethnicity, or sex. The law also imposes posting and notice requirements for applicants and employees. Meanwhile, since 2020, Illinois and Maryland have had laws in effect directly regulating employers’ use of AI when interviewing candidates. Further, effective January 2022, Illinois amended its law to require employers relying solely upon AI video analysis to determine if an applicant is selected for an in-person interview to annually collect and report data on the race and ethnicity of (1) applicants who are hired, and (2) applicants who are and are not offered in-person interviews after AI video analysis.[28]

Washington, D.C. has also stepped into the ring by proposing a law that would prohibit adverse algorithmic eligibility determinations (based on machine learning, AI, or similar techniques) in an individual’s eligibility for, access to, or denial of employment based on a range of protected traits, including race, sex, religion, and disability.[29] If passed, the law would require DC-based employers to conduct audits of the algorithmic determination practices, as well as provide notice to individuals about how their information will be used. As noted above in Section II.b., the Algorithmic Accountability Act of 2022 would also impose requirements upon employers.

The U.S. Equal Employment Opportunity Commission (EEOC) remains in the early stages of its initiative that ultimately seeks to provide guidance on algorithmic fairness and the use of AI in employment decisions.[30] Thus far, the EEOC has completed a listening session focused on disability-related concerns raised by key stakeholders.[31]

E. Privacy

The first quarter of 2022 included several interesting developments for artificial intelligence in privacy litigation. Through its private right of action, a number of Illinois’ Biometric Information Privacy Act (BIPA) lawsuits have been filed in 2022. These cases promise that BIPA will continue to be the focal point for AI privacy law.

1. Specific Personal Jurisdiction

Rule 9 Challenges to the forum’s exercise of jurisdiction over a defendant continue to be a good first option for defendants seeking an early exit from an BIPA-based lawsuit.[32] A key inquiry for BIPA cases is typically the defendant’s contacts with the forum state. Indeed, the Northern District recently held that an Illinois plaintiff’s choice to download an app, without much more, failed to create specific jurisdiction.[33] In that case, Wemagine, a Canadian app developer, allegedly used artificial intelligence to extract a person’s face from a photo and transform it to look like a cartoon. The Guitierrez court distinguished other cases with a greater connection to Illinois, noting that the defendant was “not registered to do business in Illinois, ha[d] no employees in Illinois,” did not undertake “Illinois-specific shipping, marketing, or advertising, [n]or sought out the Illinois market in any way” and granted dismissal.[34]

However, while this dismissal tactic may useful, another recent case illustrates how it may only offer temporary reprieve, at least when plaintiffs are motivated to continue the fight elsewhere. In a BIPA case filed in Illinois federal court, Clarifai, a technology company incorporated in Delaware and based in New York, allegedly accessed OKCupid dating profile images to build its facial recognition database.[35] However, the Northern District of Illinois held that the company’s profile photo collection from Illinois-based residents and sale of pre-trained visual recognition models to two Illinois customers did not provide sufficient contacts with the state.[36] Rather than be deterred, Plaintiffs subsequently refiled their complaint in Delaware, Clarifai’s state of incorporation.[37]

2. Novel Biometrics

The BIPA litigation landscape often involves technologies that use facial recognition and fingerprints.[38] However, in 2021, the plaintiffs’ bar also began to explore the potential to use voice recordings, which have proliferated through automated business processing systems, as a foundation for BIPA lawsuits. Many of these initial lawsuits suffered from factual pleading deficiency issues relating to how the business actually used the audio recording. In such cases, Plaintiffs cannot simply claim that a defendant recorded a plaintiff’s appearance or voice. Instead, they must show that the audio was used to create some “set of measurements of a specified physical component . . . used to identify a person.”[39]

The Northern District of Illinois recently emphasized this distinction as applied to audio recordings in deciding a motion to dismiss.[40] In this case, plaintiff alleged that McDonald’s “deploys an artificial intelligence voice assistant in the drive-through lanes” to facilitate food orders and violated BIPA by collecting voiceprint biometrics.[41] In assessing how the technology worked, the court noted that:

“[C]haracteristics like pitch, volume, duration, accent and speech pattern, and other characteristics like gender, age, nationality, and national origin—individually—are not biometric identifiers or voiceprints. They surely can help confirm or negate a person’s identity, but one cannot be identified uniquely by these characteristics alone . . . .”[42]

Noting some skepticism and explicitly drawing inferences in the plaintiff’s favor the court nonetheless held that this was enough to survive a motion to dismiss, stating “[b]ased on the facts pleaded in the complaint . . . it is reasonable to infer—though far from proven—that Defendant’s technology mechanically analyzes customers’ voices in a measurable way such that McDonald’s has collected a voiceprint from Plaintiff and other customers.”[43]

For businesses subject to federal regulation, preemption arguments similar to those pled for fingerprint and facial recognition technologies may also provide a successful strategy to avoid BIPA liability for audio recordings. In another recent case, American Airlines faced a BIPA complaint for using an interactive voice response software in the airline’s customer service hotline.[44] The plaintiff alleged that “American’s voice response software collects, analyzes, and stores callers’ actual voiceprints to understand or predict the caller’s request, automatically respond with a personalized response, and ‘trace’ callers” customer interactions.[45] In response, American argued that the Airline Deregulation Act preempted the BIPA lawsuit. The court agreed, granting the motion to dismiss on the basis of federal preemption and holding that “[because] the state-law claims directly impact American’s interactions with its customers, and directly regulate the airline’s provision of services, that state law inherently interferes with the [Airline Deregulation Act]’s purpose.”[46]

These cases indicate that the plaintiffs’ bar will continue to think of creative applications for BIPA.[47]

F. Intellectual Property

Intellectual property has historically offered uncertain protection to AI works. Authorship and inventorship requirements are perpetual stumbling blocks for AI-created works and inventions. For example, in the United States, patent law has rejected the notion of a non-human inventor. Last year, the Artificial Inventor Project and its leader, Dr. Thaler, made several noteworthy challenges to the paradigm. First, the team created DABUS, the “Device for the Autonomous Bootstrapping of Unified Sentience”—an AI system that has created several inventions.[48] The project then partnered with attorneys to lodge test cases in the United States, Australia, the EU, and the UK.[49] These ambitious cases reaped mixed results, likely to further diverge as AI inventorship proliferates.

DABUS’ attempt to gain protection under a copyright theory recently failed in the United States. The Copyright Review Board considered the copyrightability of a two-dimensional artwork, created by DABUS, titled “A Recent Entrance to Paradise.” The board previously refused to register the work in August 2019 and March 2020. In February, the board rejected a second request for reconsideration and the argument that human authorship was not necessary for registration. While the specific question of copyright registration appeared to be a matter of first impression and no express requirement for human authorship exists in the Copyright Act, the board explained that “Thaler must either provide evidence that the Work is the product of human authorship or convince the Office to depart from a century of copyright jurisprudence.”[50] The board reached back to Supreme Court decisions from 1884, which defined an “author” as “he to whom anything owes its origins” and a number of other sources to build a wall against the concept of non-human authorship. For now, “A Recent Entrance to Paradise” is a dead end under U.S. copyright law.

II. EU POLICY & REGULATORY DEVELOPMENTS

The April 2021 European Commission’s proposal for the Regulation of Artificial Intelligence (“Artificial Intelligence Act”) continues to be the focus in the EU regarding AI matters. Various players, from EU Member States to European Parliament Committees, are publishing suggested amendments and opinions, based on public consultations, to address the underlying shortcomings of the Act.

First, France assumed the Presidency of the Council of the EU in January 2022, a role formerly held by Slovenia, and has circulated additional proposed amendments to the Artificial Intelligence Act, particularly regarding definitions about “high-risk” AI systems.[51] While the current Artificial Intelligence Act considers risks to “health, safety, and fundamental rights,” to be “high-risk,” some Member States argue that “economic risks” should also be factored in the same category. Moreover, it was proposed that providers of “high-risk” AI technology should be liable for ensuring that their systems have human oversight under Article 14(4).[52] Additionally, France suggested that the Commission’s desire for data sets to be “free of errors and complete” under Article 10(3) is unrealistic and that instead datasets should be complete and free of error to the “best extent possible,” which affords some leeway for providers of AI systems.[53] Ultimately, finding a consensus among all relevant actors regarding the Artificial Intelligence Act is still far away: indeed, some EU countries have yet to form official positions on the Act.

Second, several European Parliament committees, such as the Committee on Legal Affairs (“JURI”) and the Committee on Industry, Research and Energy (“ITRE”) have published their draft opinions about the Artificial Intelligence Act. After its public consultation in February 2022, JURI published its draft opinion in 2 March 2022: the opinion focuses on addressing the need to balance innovation and the protection of EU citizens; maximizing investment; and harmonizing the digital market with clear standards.[54] ITRE published its draft opinion a day later and called for an internationally recognised definition of artificial intelligence; emphasized the importance of fostering social trust between businesses and citizens; and flagged the need to future-proof the Artificial Intelligence Act given the onset of the “green transition” and continued advancements in AI technologies.[55] Finally, after their joint hearing in 21 March 2022, the European Parliament’s Committee on the Internal Market and Consumer Protection and the Committee on Civil Liberties, Justice and Home Affairs, who are jointly leading the negotiations of the Artificial Intelligence Act, are expected to produce a draft report in April.

Ultimately, the Artificial Intelligence Act continues to be discussed by co-legislators, the European Parliament and EU Member States. This process is expected to continue until 2023 before the Artificial Intelligence Act becomes law.[56]

____________________________

[1] U.S. Department of Defense, DoD Announces Release of JADC2 Implementation Plan, U.S. Department of Defense (March 17, 2022), available at https://www.defense.gov/News/Releases/Release/Article/2970094/dod-announces-release-of-jadc2-implementation-plan/.

[2] U.S. Department of Defense, Summary of the Joint Command and Control (JADC2) Strategy, U.S. Department of Defense (March 17, 2022), available at https://media.defense.gov/2022/Mar/17/2002958406/-1/-1/1/SUMMARY-OF-THE-JOINT-ALL-DOMAIN-COMMAND-AND-CONTROL-STRATEGY.PDF.

[3] U.S. Department of Defense, DoD Announces Release of JADC2 Implementation Plan, U.S. Department of Defense (March 17, 2022), available at https://www.defense.gov/News/Releases/Release/Article/2970094/dod-announces-release-of-jadc2-implementation-plan/.

[4] Catie Edmondson and Ana Swanson, House Passes Bill Adding Billions to Research to Compete With China, New York Times (Feb. 4, 2022), available at https://www.nytimes.com/2022/02/04/us/politics/house-china-competitive-bill.html.

[5] For more information, please see our Artificial Intelligence and Automated Systems Legal Update (2Q21).

[6] H.R.4521, 117th Cong. (2021-2022); S. 1260, 117th Cong. (2021).

[7] H.R.4521, 117th Cong. (2021-2022).

[8] See id. (“In general.–The Secretary shall support a program of fundamental research, development, and demonstration of energy efficient computing and data center technologies relevant to advanced computing applications, including high performance computing, artificial intelligence, and scientific machine learning.”).

[9] For more information, please see our Artificial Intelligence and Automated Systems Legal Update (2Q19).

[10] Science and Technology Policy Office, Request for Information to the Update of the National Artificial Intelligence Research and Development Strategic Plan, Federal Register (June 2, 2022), available at https://www.federalregister.gov/documents/2022/02/02/2022-02161/request-for-information-to-the-update-of-the-national-artificial-intelligence-research-and.

[11] Id.

[12] National Institute of Science and Technology, Study To Advance a More Productive Tech Economy, Federal Register (January 28, 2022), available at https://www.federalregister.gov/documents/2022/01/28/2022-01528/study-to-advance-a-more-productive-tech-economy#:~:text=The%20National%20Institute%20of%20Standards%20and%20Technology%20(NIST)%20is%20extending,Register%20on%20November%2022%2C%202021; comments available at https://www.regulations.gov/document/NIST-2021-0007-0001/comment.

[13] Artificial Intelligence and Technology Office, U.S. Department of Energy Establishes Artificial Intelligence Advancement Council, energy.gov (April 18, 2022), available at https://www.energy.gov/ai/articles/us-department-energy-establishes-artificial-intelligence-advancement-council.

[14] Office of Science, Department of Energy Announces $10 Million for Artificial Intelligence Research for High Energy Physics, energy.gov (March 24, 2022), available at https://www.energy.gov/science/articles/department-energy-announces-10-million-artificial-intelligence-research-high.

[15] Office of the Director of National Intelligence, IARPA Launches New Biometric Technology Research Program, Office of the Director of National Intelligence (March 11, 2022), available at https://www.dni.gov/index.php/newsroom/press-releases/press-releases-2022/item/2282-iarpa-launches-new-biometric-technology-research-program.

[16] The Federal Trade Commission, Weight Management Companies Kurbo Inc. and WW International Inc. Agree to $1.5 Million Civil Penalty and Injunction for Alleged Violations of Children’s Privacy Laws, Office of Public Affairs (March 4, 2022), available at https://www.justice.gov/opa/pr/weight-management-companies-kurbo-inc-and-ww-international-inc-agree-15-million-civil-penalty; United States v. Kurbo Inc and WW International, Inc, No. 3:22-cv-00946-TSH (March 3, 2022) (Dkt. 15).

[17] Rebecca Kelly Slaughter, Commissioner, Fed. Trade Comm’n, Fireside Chat with FTC Commissioner Rebecca Slaughter, Privacy + Security Forum (March 24, 2022).

[18] 593 U.S. ___ (2021).

[19] 117th Cong. H.R. 6580, Algorithmic Accountability Act of 2022 (February 3, 2022), available at https://www.wyden.senate.gov/imo/media/doc/Algorithmic%20Accountability%20Act%20of%202022%20Bill%20Text.pdf?_sm_au_=iHVS0qnnPMJrF3k7FcVTvKQkcK8MG.

[20] NIST, AI Risk Management Framework: Initial Draft (March 17, 2022), available at https://www.nist.gov/system/files/documents/2022/03/17/AI-RMF-1stdraft.pdf.

[21] NIST Special Publication 1270, Towards a Standard for Identifying and Managing Bias in Artificial Intelligence (March 2022), available at https://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.1270.pdf.

[22] NIST Pres Release, There’s More to AI Bias Than Biased Data, NIST Report Highlights (March 16, 2022), available at https://www.nist.gov/news-events/news/2022/03/theres-more-ai-bias-biased-data-nist-report-highlights.

[23] IRS, IRS announces transition away from use of third-party verification involving facial recognition (Feb. 7, 2022), available at https://www.irs.gov/newsroom/irs-announces-transition-away-from-use-of-third-party-verification-involving-facial-recognition.

[24] Stein v. Clarifai, Inc., No. 1:22-cv-00314 (D. Del. Mar. 10, 2022).

[25] Electronic Privacy Information Center v. United States Postal Service, No. 1:21-cv-02156 (D.D.C. Mar. 25, 2022).

[26] For more details, see Danielle Moss, Harris Mufson, and Emily Lamm, Medley Of State AI Laws Pose Employer Compliance Hurdles, Law360 (Mar. 30, 2022), available at https://www.gibsondunn.com/wp-content/uploads/2022/03/Moss-Mufson-Lamm-Medley-Of-State-AI-Laws-Pose-Employer-Compliance-Hurdles-Law360-Employment-Authority-03-30-2022.pdf.

[27] For more details, see Gibson Dunn’s Artificial Intelligence and Automated Systems Legal Update (4Q20) and Gibson Dunn’s Artificial Intelligence and Automated Systems Annual Legal Review (1Q22).

[28] Ill. Public Act 102-0047 (effective Jan. 1, 2022).

[29] Washington, D.C., Stop Discrimination by Algorithms Act of 2021 (proposed Dec. 8, 2021), available at https://oag.dc.gov/sites/default/files/2021-12/DC-Bill-SDAA-FINAL-to-file-.pdf.

[30] For more details, see Gibson Dunn’s Artificial Intelligence and Automated Systems Annual Legal Review (1Q22).

[31] EEOC, Initiative on AI and Algorithmic Fairness: Disability-Focused Listening Session, YouTube (Feb. 28, 2022) available at https://www.youtube.com/watch?app=desktop&v=LlqZCxKB05s.

[32] For past examples of these tactic, see, e.g., Gullen v. Facebook.com, Inc., No. 15 C 7681, 2016 WL 245910 at *2 (N.D. Ill. Jan. 21, 2016) (holding that no specific jurisdiction existed because “plaintiff does not allege that Facebook targets its alleged biometric collection activities at Illinois residents, [and] the fact that its site is accessible to Illinois residents does not confer specific jurisdiction over Facebook.”).

[33] Gutierrez v. Wemagine.AI LLP, No. 21 C 5702, 2022 WL 252704, at *2 (N.D. Ill. Jan. 26, 2022) (“There was no directed marketing specific to Illinois, and the fact that Viola is used by Illinois residents does not, on its own, create a basis for personal jurisdiction over Wemagine.”).

[34] Id. at *3.

[35] Stein v. Clarifai, Inc., 526 F. Supp. 3d 339 (N.D. Ill. 2021).

[36] Id. at 346.

[37] Stein v. Clarifai, Inc., No. 22-CV-314 (D. Del. March 10, 2022).

[38] See, e.g., Rosenbach v. Six Flags Ent. Corp., 129 N.E.3d 1197 (Ill. 2019) (fingerprints); Patel v. Facebook Inc., 290 F. Supp. 3d 948 (N.D. Cal. 2018) (facial biometrics).

[39] Rivera v. Google Inc., 238 F. Supp. 3d 1088, 1096 (N.D. Ill. 2017).

[40] Carpenter v. McDonald’s Corp., No. 1:21-CV-02906, 2022 WL 897149 (N.D. Ill. Jan. 13, 2022).

[41] Id. at *1.

[42] Id. at *3 (emphasis added).

[43] Id.

[44] Kislov v. Am. Airlines, Inc., No. 17 C 9080, 2022 WL 846840 (N.D. Ill. Mar. 22, 2022).

[45] Id. at *1.

[46] Id. at *2.

[47] Other recent complaints also include a lawsuit against a testing company for hand vein scans that are used to verify test taker identity (Velazquez v. Pearson Education, No. 2022-CH-00280 (Cook Co. Cir. Court Jan. 13, 2022)), AI-powered vehicle cameras that record facial geometry to monitor driver safety (Arendt v. Netradyne, Inc., No. 2022-CH-00097 (Cook Co. Cir. Court Jan. 5, 2022)), and an insurer’s use of an AI chat bot to analyze videos submitted by consumers for fraud (Pruden v. Lemonade, Inc., et al., No. 1:21-cv-07070-JGK (S.D.N.Y. Aug. 20, 2021).

[48] The Artificial Inventor Project ambitiously describes DABUS as an advanced AI system. DABUS is a “creative neural system” that is “chaotically stimulated to generate potential ideas, as one or more nets render an opinion about candidate concepts” and “may be considered ‘sentient’ in that any chain-based concept launches a series of memories (i.e., affect chains) that sometimes terminate in critical recollections, thereby launching a tide of artificial molecules.” Ryan Abbott, The Artificial Inventor behind this project, available at https://artificialinventor.com/dabus/.

[49] Ryan Abbott, The Artificial Inventor Project, available at https://artificialinventor.com/frequently-asked-questions/.

[50] Ryan Abbott, Second Request for Reconsideration for Refusal to Register A Recent Entrance to Paradise (Correspondence ID 1-3ZPC6C3; SR # 1-7100387071), United States Copyright Office, Copyright Review Board (Feb. 14, 2022), available at https://www.copyright.gov/rulings-filings/review-board/docs/a-recent-entrance-to-paradise.pdf (emphasis added).

[51] European Union (French Presidency), Laying Down Harmonised Rules on Artificial Intelligence (Artificial Intelligence Act) and Amending Certain Union Legislative Acts Chapter 2 (Articles 8 – 15) and Annex IV Council Document 5293/22 (12 January 2022), available at https://www.statewatch.org/media/3088/eu-council-ai-act-high-risk-systems-fr-compromise-5293-22.pdf.

[52] Id.

[53] Id.

[54] European Parliament Committee on Legal Affairs, Draft Opinion on the proposal for a regulation of the European Parliament and of the Council laying down harmonised rules on artificial intelligence (Artificial Intelligence Act) and amending certain Union Legislative Acts (COM(2021)0206 – C9-0146/2021 – 2021/0106(COD)) (2 March 2022), available at https://www.europarl.europa.eu/doceo/document/JURI-PA-719827_EN.pdf.

[55] European Parliament Committee Industry, Research and Energy, Draft Opinion on the proposal for a regulation of the European Parliament and of the Council laying down harmonised rules on artificial intelligence (Artificial Intelligence Act) and amending certain Union legislative acts (COM(2021)0206 – C9-0146/2021 – 2021/0106(COD)) (3 March 2022), available at https://www.europarl.europa.eu/doceo/document/ITRE-PA-719801_EN.pdf.

[56] Nuttall, Chris, EU takes lead on AI laws (21 April 2021), available at https://www.ft.com/content/bdbf8d8b-fdcc-410d-9d37-fec99b889f20.

The following Gibson Dunn lawyers prepared this client update: H. Mark Lyon, Frances Waldmann, Tony Bedel, Iman Charania, Kevin Kim, Brendan Krimsky, Emily Lamm, and Prachi Mistry.

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 members:

Artificial Intelligence and Automated Systems Group:
H. Mark Lyon – Chair, Palo Alto (+1 650-849-5307, [email protected])
J. Alan Bannister – New York (+1 212-351-2310, [email protected])
Patrick Doris – London (+44 (0)20 7071 4276, [email protected])
Kai Gesing – Munich (+49 89 189 33 180, [email protected])
Ari Lanin – Los Angeles (+1 310-552-8581, [email protected])
Robson Lee – Singapore (+65 6507 3684, [email protected])
Carrie M. LeRoy – Palo Alto (+1 650-849-5337, [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])

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On April 25, 2022, the Consumer Financial Protection Bureau announced that it will begin relying upon a “largely unused legal provision” of the Dodd-Frank Act to supervise nonbank financial companies that purportedly pose risks to consumers. To facilitate that process, the CFPB simultaneously promulgated a procedural rule that authorizes it to publish its decisions about whether certain nonbank entities present such a risk. The CFPB has stated that it intends for these decisions to provide nonbank entities with guidance about the circumstances in which they may be subject to regulation. Left unstated is the reality that the threat to publicly designate an entity as posing risks to consumers will provide the CFPB with additional leverage over such entities.

The CFPB’s announcement marks a significant expansion of its supervisory reach. The CFPB said that it intends to “conduct examinations” of “fintech” companies and “to hold nonbanks to the same standards that banks are held to.” And it is expected that the CFPB will assert the same authority over crypto firms. The CFPB’s announcement comes at a time of increasingly intense competition among regulators to assert jurisdiction over fintech and digital assets firms. Gibson Dunn represents many clients at the forefront of crypto and fintech innovation, and has deep experience challenging over-extension of agencies’ regulatory authority, including by financial regulators. We stand ready to help guide industry players as the CFPB moves forward with its ambitious plans.

I. The CFPB’s Authority to Regulate Nonbank Entities

Historically, only banks and credit unions were subject to federal financial supervision. That changed when Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

Under Dodd-Frank, the CFPB has supervisory authority over several categories of nonbank entities, including entities that provide mortgage, private student loan, or payday loan services. 12 U.S.C. § 5514(a)(1)(A), (D)–(E). In addition, and most relevant here, the CFPB may regulate nonbank entities when it “has reasonable cause to determine”—after providing notice and an opportunity to respond—that the entity “poses risks to consumers” regarding the provision of consumer financial products or services. Id. § 5514(a)(1)(C).

The CFPB issued a procedural rule in 2013 delineating the risk-determination process, but it has never before used this authority to supervise a nonbank. As the CFPB’s April 25, 2022 announcement explains, however, that is about to change. In the announcement, the CFPB said that it will begin exercising its “dormant authority” under Dodd-Frank to supervise nonbank entities—including “fintech” firms—that it has determined pose a risk to consumers.

The Dodd-Frank Act and the CFPB’s implementing regulations detail the risk-determination process and the consequences of being subject to regulation.

The Risk-Determination Process. The CFPB promulgated detailed procedures for the process it uses to determine whether nonbank entities are a risk to consumers, and thus subject to regulation under Dodd-Frank. See 12 C.F.R. §§ 1091.100–.115. Those procedures give the CFPB discretion to initiate the risk-determination process through issuing a “Notice of Reasonable Cause,” id. § 1091.102, or through bringing charges in an adjudicatory proceeding, id. § 1091.111. Whichever path the CFPB chooses, it must provide notice of the basis for the apparent risk and an opportunity for the nonbank entity to respond. The CFPB has stated that it may base its risk determinations on “complaints collected by the CFPB, or on information from other sources, such as judicial opinions and administrative decisions,” as well as “whistleblower complaints, state partners, federal partners, or news reports.” After considering the available evidence and any responses from the nonbank entity, the Director will decide whether it has “reasonable cause” to find a risk to consumers. The Director’s decision to subject an entity to regulation under Dodd-Frank is subject to review under the Administrative Procedure Act.

Regulation under Dodd-Frank. If the CFPB determines that a nonbank entity is subject to regulation based on a risk determination, then it faces the same level of regulation as banks. Among other things, the CFPB can conduct examinations to ensure compliance with consumer financial laws, 12 U.S.C. § 5514(b)(1), require entities to comply with recordkeeping requirements, id. § 5514(b)(7), and is generally vested with exclusive enforcement authority over federal consumer financial laws, id. § 5514(c). Notwithstanding the formal processes for making risk determinations, entities may also voluntarily consent to regulation under Dodd-Frank. 12 C.F.R. §§ 1091.110(a), 1091.111(a).

Petition for Termination. In the event the CFPB determines after the Issuance of a Notice of Reasonable Cause that a nonbank entity poses a risk to consumers and is thus subject to regulation under Dodd-Frank, that entity may file a petition before the Director to terminate the decision and escape regulation under the Act. 12 C.F.R. § 1091.113(a). That petition may be filed “no sooner than two years after” the decision, and only one petition may be filed per year. Id. The Director’s decision on a petition qualifies as “final agency action” that may be subject to review under the Administrative Procedure Act. Id. § 1091.113(e)(3).

II. New Rule Allowing Publication of Risk-Determination Decisions

Accompanying its announcement to begin supervising fintech nonbanks, the CFPB issued a procedural rule amending the risk-determinations procedures. Supervisory Authority Over Certain Nonbank Covered Persons Based on Risk Determination; Public Release of Decisions and Orders, 87 Fed. Reg. 25397 (proposed Apr. 29, 2022).

As a general matter, materials submitted in connection with a risk determination are considered confidential. 12 C.F.R. § 1091.115(c). But with this new rule, which took effect on April 29, 2022, the CFPB may in the Director’s discretion publish decisions and orders made during the risk-determination process on the CFPB’s website. According to the CFPB, this is designed to “increase the transparency of the risk-determination process” and give nonbank entities guidance about how the CFPB will enforce the Dodd-Frank Act moving forward. Of course, the measure also affords the CFPB an opportunity to make headlines regarding its efforts to bring large, innovative, and/or well-known entities under its supervisory control. The rule gives the nonbank entity subject to the order or decision an opportunity to file a submission with the CFPB regarding publication of the CFPB’s determination. The Director also decides whether to publish on the CFPB’s website the decision about whether the risk determination will be publicly released.

The CFPB has requested public comments on the rule, which must be received by May 31, 2022. Interested parties should consider commenting on the proposal to express any concerns, propose improvements, and to preserve their ability to bring a legal challenge to the rule. For regulated entities, a challenge to the rule may be preferable to raising objections only after the CFPB has identified the entity by name in a published risk determination.

III. Implications for Fintech and Crypto Companies

The CFPB’s announcement of its intent to begin supervising fintech firms—which is believed to include crypto firms as well—represents a muscular expansion of the agency’s regulatory purview. It is yet another aggressive action in the young tenure of Director Rohit Chopra—one that has been controversial and generally perceived as hostile to industry. The consequences for fintech and crypto firms could be significant. Although much will depend on the vigor with which the CFPB pursues its rediscovered supervisory authority, the CFPB stated that it intends to “conduct examinations” of fintech companies and to hold them to “the same standards that banks are held to.” Further, the CFPB’s new procedural rule allows the agency to publicize its findings about the risks that a fintech or crypto company poses to consumers before the agency completes an examination of the company, contrary to the confidentiality principles encouraging full and frank communications between an entity and its regulator, which principles lie at the heart of the supervisory process.

The CFPB’s new assertion of jurisdiction is in keeping with the surge of interest among federal regulators in the fintech and crypto industries over the past year. The SEC, CFTC, FinCEN, Treasury, and other agencies have been jockeying for position to regulate this fast-growing and innovative space. Absent legislation from Congress clearly defining regulatory roles within the industry, that jockeying is likely to continue. In March 2022, President Biden issued an executive order directing numerous agencies to evaluate the risks and benefits of digital assets. The reports resulting from that executive order may only heighten scrutiny of the crypto industry and increase the number of regulators asserting jurisdiction over it.

* * *

As the CFPB decides which entities it will seek to regulate under Dodd-Frank, companies can take steps now to begin assessing their compliance with the laws administered by the CFPB. Gibson Dunn represents many clients at the forefront of fintech, crypto, and blockchain innovation and stands ready to help guide industry players through this new era of CFPB regulation and the growing patchwork of federal regulation. The Gibson Dunn team has the expertise to provide guidance and develop innovative arguments challenging the CFPB’s authority. E.g., PHH Corp. v. CFPB, 839 F.3d 1 (D.C. Cir. 2016) (holding that the CFPB was unconstitutionally structured in violation of Article II and that the CFPB violated the APA), on reh’g en banc, 881 F.3d 75, 83 (D.C. Cir. 2018) (en banc) (vacating a $109 million penalty because the CFPB misinterpreted the statute and violated due process by retroactively applying its new interpretation); Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011) (defeat of SEC “proxy access” rule).

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact Gibson Dunn’s Crypto Taskforce ([email protected]), or any member of its Financial Institutions, Global Financial Regulatory, Privacy, Cybersecurity and Data Innovation, Public Policy, or Administrative Law teams, including the following authors:

Ryan T. Bergsieker – Partner, Privacy, Cybersecurity & Data Innovation Group, Denver (+1 303-298-5774, [email protected])

Ashlie Beringer – Co-Chair, Privacy, Cybersecurity & Data Innovation Group, Palo Alto (+1 650-849-5327, [email protected])

Matthew L. Biben – Co-Chair, Financial Institutions Group, New York (+1 212-351-6300, [email protected])

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

Stephanie L. Brooker – Co-Chair, Financial Institutions Group and White Collar Defense & Investigations Group, Washington, D.C. (+1 202-887-3502, [email protected])

M. Kendall Day – Co-Chair, Financial Institutions Group, Washington, D.C. (+1 202-955-8220, [email protected])

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

Eugene Scalia – Co-Chair, Administrative Law & Regulatory Practice Group, Washington, D.C. (+1 202-955-8543, [email protected])

Helgi C. Walker – Co-Chair, Administrative Law & Regulatory Practice Group, Washington, D.C. (+1 202-887-3599, [email protected])

Associates Nick Harper and Philip Hammersley also contributed to this client alert.

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

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According to recent statements of agency officials, the Federal Trade Commission (FTC) is looking to revise the Premerger Notification and Report Form (the “HSR Form”) “to conform to changing market realities and global standards.”[1] The FTC has not released details of the proposed changes, but recent statements from agency leadership provide some indication as to how the agency may expand the filing requirements. FTC Chair Lina Khan recently announced that the agency is exploring “ways to collect on the front end information that is more probative of whether parties are proposing an unlawful deal.”[2] And FTC Bureau of Competition Director Holly Vedova explained that the FTC wants, as part of the HSR filing, “overlap information, customers, things like that.”[3] The Bureau Director amplified that, under the proposed changes, the parties would “do that work ahead of time, and come in with that information, so that we don’t spend ten, twenty, thirty days trying to collect all that information.”[4]

Generally, M&A transactions are reportable under the HSR Act if, as a result of the transaction, (i) the buyer will hold stock, non-corporate interests, and/or assets of the seller valued at more than $101 million as a result of the deal (the “size-of-transaction” test) and, if the transaction is valued at $403.9 million or less, (ii) one party to the deal has assets or annual sales of $202 million or more, and the other party has assets or annual sales of $20.2 million or more (the “size-of-person” test). Certain exemptions and additional thresholds may apply.

While any changes to the HSR Form likely would not affect these filing thresholds or other rules relating to whether a transaction must be reported under the HSR Act, they would affect the information and documents that must be supplied to the FTC and DOJ in connection with those filings. To the extent that the changes require HSR forms to include the type of detailed information about the marketplace and industry participants that are often required in other jurisdictions, the changes would potentially impose substantial increased costs and potential delays in making HSR filings, including those that have no plausible competitive concerns.

The FTC has not yet expanded on Chair Khan and Bureau Director Vedova’s statements or floated, formally or informally, any specific proposed changes to the HSR Form. However, based on Bureau Director Vedova’s reference to “overlap information,” the new form might require additional information, including top customer lists and contact information for those customers, only where the filing parties report an “overlap” which, for purposes of the HSR Form, means that both parties produced revenues in the same 6-digit North American Industrial Classification System (NAICS) code in the most recent year. However, because the NAICS codes define broad industry sectors, parties that report an overlap are often not competitors. Beyond that, it is premature to speculate on the precise scope of the changes to the HSR Form or the magnitude of incremental cost, burden, and delays that such changes would impose on filing parties.

Such changes to the HSR Form are not likely to be adopted and implemented immediately. Although minor or administrative changes to the HSR Form have been made over the years without notice and comment, substantive changes would require the FTC to go through the notice and comment process under the Administrative Procedure Act (“APA”). The scope of changes previewed by the FTC would likely be considered “substantive,” as they were in 2011 when the concept of “associates” was added to the Rules and Items 4(d), 6(c)(ii) and 7(d) were added to the Form “in order to capture additional information that would significantly assist the Agencies in their initial review.”[5] The 2011 changes took just over a year from first publication to the final changes taking effect. While the changes contemplated by the FTC will likely not be as complex as the “associate” changes, the APA’s notice and comment period would still likely take many months. The HSR Act provides the FTC with discretion to determine the scope of the Form “as is necessary and appropriate” to enable the FTC and Department of Justice “to determine whether such acquisition may, if consummated, violate the antitrust laws.”[6] If the FTC makes changes that do not appear linked to the legality of the transaction under the antitrust laws, or otherwise appear to be “arbitrary and capricious”, then such changes might be subject to challenge. Although changes to the Form would not require new legislation, a three-Commissioner majority must vote in favor of the changes.

We will continue to keep you posted as developments on this front occur.

______________________

[1] David Hatch, FTC Wants More Upfront Merger Information, The Deal, April 12, 2022.

[2] 70th American Bar Association Antitrust Law Section Spring Meeting, Enforcers Roundtable, April 8, 2022.

[3] David Hatch, FTC Wants More Upfront Merger Information, The Deal, April 12, 2022.

[4] Id.

[5] 76 Fed. Reg. 42,471 (July 19, 2011). The “associate” changes were first published by the Commission on August 13, 2010, in a Notice of Proposed Rulemaking and Request for Public Comment available on its website. The final change to the Rules and Form and Instructions did not become effective until August 18, 2011.

[6] 15 U.S.C. § 18a(d)(1).

The following Gibson Dunn lawyers prepared this client alert: Andrew Cline, Rachel Brass, and Stephen Weissman.

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 or Mergers and Acquisitions practice groups, or the following:

Antitrust and Competition Group:
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])

Mergers and Acquisitions Group:
Eduardo Gallardo – Co-Chair, New York (+1 212-351-3847, [email protected])
Robert B. Little – Co-Chair, Dallas (+1 214-698-3260, [email protected])
Saee Muzumdar – Co-Chair, New York (+1 212-351-3966, [email protected])

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

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On April 28, 2022, the New York City Council amended the City’s pay transparency law, which was scheduled to go into effect on May 15. The amendments delay the effective date of the law until November 1, 2022. The amendments also make additional key changes that are noteworthy for employers.

Brief Summary of Law

The pay transparency law makes it an “unlawful discriminatory practice” under the New York City Human Rights Law for an employer to advertise a job, promotion, or transfer opportunity without stating the position’s minimum and maximum salary in the advertisement. The law applies to all employers with at least four employees in New York City, and independent contractors are counted towards that threshold. The law does not apply, however, to temporary positions advertised by temporary staffing agencies. The New York City Commission on Human Rights is authorized to take action to implement the law.

Recent Amendments

First, the new amendments clarify that only current employees may pursue a private right of action against their employers for an alleged violation of the law in relation to an advertisement for a job, promotion, or transfer opportunity. This important change eliminates the risk of applicants pursuing private claims against prospective employers.

Second, an employer will now have 30 days from receipt of an initial complaint of non-compliance to cure the employer’s “first time” violation of the law before facing a fine from the NYC Commission on Human Rights.

Third, the amendments clarify that either annual salary or hourly wage information must be disclosed in the required postings.

And finally, the new amendments expressly state that positions that cannot or will not be performed, at least in part, in New York City are exempt from the posting requirement.

Takeaways

The amendments were passed in response to concerns raised by the business community that the law was unclear, too burdensome, and could lead to an avalanche of litigation. All covered employers in New York City should ensure they are prepared to comply with the amended law effective November 1, 2022.

The following Gibson Dunn attorneys assisted in preparing this client update: Harris Mufson, Danielle Moss, Gabrielle Levin, and Hayley Fritchie.

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

Mylan Denerstein – New York (+1 212-351-3850, [email protected])

Gabrielle Levin – New York (+1 212-351-3901, [email protected])

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

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

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

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

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

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The Department of Justice’s Antitrust Division promised in a recent speech to increase enforcement of Section 8 of the Clayton Act, which prohibits competing corporations from sharing common directors or officers. The prevailing enforcement climate means that companies should have a compliance plan in place to discover potential director interlocks before they develop and monitor existing outside director positions to ensure they conform to existing Section 8 safe harbors.

Background

Jonathan Kanter, Assistant Attorney General for DOJ’s Antitrust Division, stated in a April 2022 speech that “[f]or too long, our Section 8 enforcement has essentially been limited to our merger review process.”[1] DOJ is “ramping up efforts to identify violations across the broader economy” and “will not hesitate to bring Section 8 cases to break up interlocking directorates.”[2]

The agencies have periodically issued warnings on Section 8 compliance. In 2019, the FTC published a blog post, Interlocking Mindfulness, reminding companies of the need to avoid director interlocks, particularly where mergers or spin-offs are involved.[3] This followed a 2017 post advising that companies “[h]ave a plan to comply with the bar on horizontal interlocks”.[4] Kanter’s statements are a marked evolution from the FTC’s 2017 guidance stating that the Commission “relie[s] on self-policing to prevent Section 8 violations,”[5] and indicate that DOJ may bring litigation to address potential interlocks.

Clayton Act, Section 8

Section 8 of the Clayton Act (15 U.S.C. § 19) prohibits one person from being an officer (defined as an “officer elected or chosen by the Board of Directors”) or director at two companies that are “by virtue of their business and location of operation, competitors.” “Person” has a broader meaning than a natural person, and includes a single firm.[6] Under this construction, a single firm could not appoint two different people as its agents to sit on the board or act as an officer of two competing corporations.

Section 8 broadly defines “competitors” to include any two corporations where “the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.” Section 8 is broad and potentially applies where two competing companies have an officer or director in common, subject to certain exceptions.

There are three potential safe harbors from Section 8 liability:

The competitive sales of either company are less than 2% of that company’s total sales;
The competitive sales of each company are less than 4% of that company’s total sales; or
The competitive sales of either company are less than $4,103,400 as of 2022.

While there are no penalties or fines imposed due to a Section 8 violation, the statute requires that the parties eliminate the interlock if a violation is found to have occurred. There is a one-year grace period to cure violations that develop after the interlock has occurred (e.g., competitive sales surpassing de minimis thresholds), provided the interlock did not violate Section 8 when it first occurred.

An antitrust investigation into a potential interlock may force the resignation of key officers or directors, delay the closing of a proposed transaction, or trigger consumer class actions alleging collusion.

Section 8 Compliance in the Current Regulatory Environment

As noted in a previous Client Alert, the DOJ has taken action against suspected interlocks even before Kanter’s April 2022 statements. Corporations should take proactive steps to detect interlocks before they occur and monitor existing ones to ensure they comply with current Section 8 safe harbors.

Corporations whose directors or officers are being considered for an outside position should first evaluate the position for potential Section 8 concerns. Where a corporation’s director or officer holds an outside position at another firm subject to a safe harbor due either to a lack of competition or a de minimis overlap, counsel should reevaluate the relationship periodically to ensure marketplace developments do not cause the position to run afoul of Section 8. This can occur because of growing sales in existing overlaps or entry into new lines of business. These checks can be incorporated as part of existing director/officer independence analyses.

Corporations engaged in financial transactions, such as spin-offs where the parent’s directors or officers may hold positions at the spin-off, should check whether the parent and the spin-off may compete in any line of business and evaluate potential Section 8 issues.

Private equity firms holding board seats or appointing leadership in multiple portfolio companies should evaluate carefully whether any could be considered “competitors” for Section 8 purposes.

Other antitrust statutes, particularly Section 1 of the Sherman Act (which prohibits agreements that unreasonably restrain trade), continue to apply even if the interlock is within Section 8 safe harbors. A sound compliance plan will therefore also establish procedures to prevent sharing of competitively sensitive information and avoid the appearance of potential competition concerns.

___________________________________

[1] Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers Summit, April 4, 2022, available at: https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.

[2] Id.

[3] Michael E. Blaisdell, Interlocking Mindfulness, June 26, 2019, available at: https://www.ftc.gov/enforcement/competition-matters/2019/06/interlocking-mindfulness.

[4] Debbie Feinstein, Have a plan to comply with the bar on horizontal interlocks, Jan. 23, 2017, available at: https://www.ftc.gov/enforcement/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks.

[5] Id.

[6] Interlocking Mindfulness (Section 8 “prohibits not only a person from acting as officer or director of two competitors, but also any one firm from appointing two different people to sit as its agents as officers or directors of competing companies”).

The following Gibson Dunn lawyers prepared this client alert: Daniel Swanson, Rachel Brass, Cynthia Richman, and Chris Wilson.

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, Mergers and Acquisitions, Private Equity, or Securities Regulation and Corporate Governance practice groups, or the following practice leaders:

Antitrust and Competition Group:
Rachel S. Brass – San Francisco (+1 415-393-8293, [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])

Mergers and Acquisitions Group:
Eduardo Gallardo – New York (+1 212-351-3847, [email protected])
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])

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

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In our previous client alerts “US and Allies Announce Sanctions on Russia and Separatist Regions of Ukraine”, “United States Responds to the Crisis in Ukraine with Additional Sanctions and Export Controls” and “Russia’s Suppression of the Media Violates Its International Law Obligations”, as well as our “The World Reacts to the Crisis in Ukraine” webcast series offered on March 4, 2022, March 10, 2022 and March 22, 2022, we noted that Russia has imposed significant “countersanctions” against “unfriendly countries” and companies that are trying to comply with the U.S., UK, EU and other sanctions regimes against Russia and Belarus. These countersanctions can place companies that operate globally and that are committed to complying with all applicable laws in a very difficult position and may end up hastening the withdrawal of more companies from Russia.

This client alert discusses the most significant measures Russia has taken in order to counter international sanctions imposed against it.[1]

Measures against so-called “Unfriendly States”

Accurately described as countersanctions in the narrow sense, a significant category of the Russian measures is directly related to the sanctions against Russia imposed by other countries. The Russian Government adopted a list of such “unfriendly states”, which currently includes the United States, all EU member states, Albania, Andorra, Australia, Canada, Iceland, Japan, Liechtenstein, Micronesia, Monaco, Montenegro, New Zealand, North Macedonia, Norway, San Marino, Singapore, South Korea, Switzerland, Taiwan, Ukraine and the UK.[2]

As of April 29, 2022, the following measures have been adopted by Russia against so-called “unfriendly states”:

Russian debtors are allowed to pay off their large debts (i.e., debts exceeding 10 million rubles = approx. 140,000 USD in value) to non-Russian creditors based in “unfriendly states” in Russian rubles (instead of otherwise applicable currency) according to the official exchange rate of the Bank of Russia as of the first day of the respective month.[3]

Buyers of Russian natural gas based in “unfriendly states” (or in cases when gas is supplied to an “unfriendly state”) are obliged to pay for gas in Russian rubles:[4]
- Non-compliance with this requirement could lead to a halt to further supplies.
- The requirement is somewhat mitigated by the special payment procedure, according to which buyers of gas must open accounts in both Russian rubles and non-ruble currency at Gazprombank and initially pay for gas in non-ruble currency, which is then sold by Gazprombank on the Moscow Exchange against Russian rubles credited to the buyer’s ruble account and subsequently paid to the seller of gas.
Russian residents are prohibited, without a prior clearance by the Government Commission for Control over Foreign Investments, from conducting the following transactions with foreigners based in “unfriendly states” and persons controlled by such foreigners:
- Providing loans in rubles;
- Transferring ownership of securities; or
- Transferring ownership of real estate.[5]
The compensation to be paid to rightholders from “unfriendly states” for the use of an invention, utility model or industrial design in cases where such protected subject-matter may be used without their consent shall amount to 0 % of the actual proceeds from the production and sale of goods, performance of works or rendering of services for which the respective invention, utility model or industrial design has been used.[6]

Any money transfers from Russian accounts of nonresidents (companies or individuals) from “unfriendly states” to their accounts outside of Russia are suspended for six months.[7]

Companies from “unfriendly states” are prohibited from buying any non-ruble currency in Russia.[8]

Russian state companies subject to sanctions by “unfriendly states” are allowed to refrain from publishing information on their public procurement activities and their suppliers.[9]

Until December 31, 2022, Russian banks and financial institutions are allowed to refrain from publishing certain information in order to avoid sanctions of “unfriendly states,” in particular as regards their ownership and control structure, members of management bodies and other officers, as well as corporate restructuring.[10]

Until December 31, 2022, Russian insurance companies are prohibited from entering into contracts with insurance and reinsurance companies and insurance brokers from “unfriendly states”.[11]

Several top officials of the United States, EU, UK and other countries with “unfriendly state” status are banned from entering Russia.

Further Countermeasures

In addition to the countersanctions in the narrow sense as described above, Russia has taken numerous further measures which do not specifically target countries that have imposed sanctions against Russia. Such countersanctions in the broad sense include measures generally taken to mitigate the effects of international sanctions on the Russian economy as well as to stifle free expression and limit media coverage that is critical of the government (on the latter set of measures and their international law implications, see also our previous client alert “Russia’s Suppression of the Media Violates Its International Law Obligations”).

In particular, Russia has adopted the following measures that are designed to mitigate the effects of international sanctions:

Professional brokers in Russia are prohibited from selling securities on behalf of any non-Russian companies or individuals.[12]

Issuance and trading outside of Russia of depositary receipts representing shares of Russian companies is prohibited, with such Russian companies being obliged to terminate their respective agreements so that the depositary receipts are converted into underlying shares that can be traded only in Russia.[13]

Russian residents are prohibited from:
- Depositing non-ruble currency into their accounts in banks abroad;
- Transferring money using non-Russian electronic payment services without opening an account; and
- Transferring non-ruble currency to any nonresidents under loan agreements.[14]
Russian residents participating in foreign trade are obliged to sell 80% of non-ruble currency received through foreign trade contracts beginning February 28, 2022. Non-ruble currency must be sold within three working days of receiving each transfer. This obligation also retroactively applies to all funds received since January 1, 2022.[15]

Cash exports of non-ruble currency from Russia in an amount exceeding $10,000 in value are prohibited.[16]

Until September 9, 2022, individuals may withdraw no more than $10,000 in cash from their non-ruble accounts in Russian banks; cash withdrawals exceeding this threshold can be made only in rubles.[17] For resident companies and individual entrepreneurs, this threshold is set to $5,000 to be used only for business trips outside of Russia.[18] For nonresident companies and individual entrepreneurs, cash withdrawals in USD, EUR, JPY and GBP are completely banned.[19]

Until October 2022, individuals (as long as they are not associated with “unfriendly states”) may transfer no more than $10,000 in value per month from their bank accounts in Russian banks to their accounts or accounts of other individuals in banks abroad, and no more than $5,000 in value using payment services without opening an account.[20]

Until December 31, 2022, Russian residents are prohibited from paying shares in any nonresident companies or making payments to any nonresidents under joint venture agreements, unless they obtain a permit of the Bank of Russia.[21]

For certain types of contracts with any nonresidents, Russian residents are prohibited from making advance payments exceeding 30% of the sum of their obligations under the contract.[22]

Parallel imports of certain goods protected by certain IP rights (patents, trademarks, utility models and design patents) are legalized. Lists of such goods are yet to be designated by the Ministry of Industry and Trade.[23]

Additionally, Russia has adopted the following measures that are designed to suppress free expression:

Amendments to the Russian Criminal Code have been enacted, criminalizing the following activities:
- Public dissemination of “fake news” about the operations of Russian military or other state bodies abroad (Art. 207.3 of Russian Criminal Code);
- Public actions aimed at “discrediting” the use of Russian military or other state bodies abroad (Art. 280.3 of Russian Criminal Code);
- Calls for the introduction of sanctions against Russia or Russian nationals/companies (Art. 284.2).[24]
Russian media watchdog Roskomnadzor banned numerous independent Russian media outlets due to their reports on Russia’s war in Ukraine.

Roskomnadzor further banned several Russian-language media outlets associated with countries that have imposed sanctions against Russia, in particular Voice of America and Radio Free Europe/Radio Liberty (U.S.), BBC (UK) and Deutsche Welle (Germany).

Roskomnadzor further banned the most popular social networks in Russia.

Outlook

While numerous international companies are exiting the Russian market, we expect that further Russian countermeasures will be imposed.

In particular, the Russian Economic Ministry recently presented a draft bill on the “external administration” of companies closing their Russian businesses.[25]

Another draft bill stipulates that property of “unfriendly states” and of persons associated with such states located in Russia shall be subject to expropriation without compensation.[26]

A further draft bill proposes to introduce criminal liability for managers of companies and other entities for “abuse of office” committed in Russia for the purpose of compliance with international sanctions against Russia.[27]

According to another draft bill, which has already been passed by the Russian State Duma, Russian banks shall be prohibited from providing information on clients and their transactions upon request of any non-Russian authorities without prior consent of Russian authorities.[28]

The interaction between international sanctions and Russian countermeasures is creating and will continue to create difficult questions for companies with global operations, especially with touchpoints in Russia. We continue to closely track developments in this area.

________________________

[1] This alert cannot replace Russian local counsel advice on the continuously developing regulatory landscape.

[2] Russian Government’s Order No. 430-r of March 5, 2022.

[3] Russian President’s Decree No. 95 of March 5, 2022.

[4] Russian President’s Decree No. 172 of March 31, 2022.

[5] Russian President’s Decree No. 81 of March 1, 2022.

[6] Russian Government’s Regulation No. 299 of March 6, 2022.

[7] See Bank of Russia, Press Release of April 1, 2022 (Russian); see also Russian President’s Decree No. 126 of March 18, 2022.

[8] Decision of the Board of Directors of the Bank of Russia of April 1, 2022.

[9] See Meduza of March 8, 2022 (Russian).

[10] Federal Law No. 55-FZ of March 14, 2022.

[11] Federal Law No. 55-FZ of March 14, 2022.

[12] WSJ of February 28, 2022.

[13] Federal Law No. 114-FZ of April 16, 2022.

[14] Russian President’s Decree No. 79 of February 28, 2022.

[15] Russian President’s Decree No. 79 of February 28, 2022.

[16] Russian President’s Decree No. 81 of March 1, 2022.

[17] Bank of Russia, Press Release of March 9, 2022 (Russian); see also Bank of Russia, Press Release of April 8, 2022 (Russian).

[18] Bank of Russia, Press Release of March 10, 2022 (Russian); this restriction is applicable until September 10, 2022 and concerns only cash withdrawals in USD, EUR, JPY and GBP.

[19] Bank of Russia, Press Release of March 10, 2022 (Russian).

[20] Bank of Russia, Press Release of April 1, 2022 (Russian).

[21] Decision of the Board of Directors of the Bank of Russia of April 1, 2022; Russian President’s Decree No. 126 of March 18, 2022.

[22] Russian President’s Decree No. 126 of March 18, 2022.

[23] Russian Government’s Regulation of March 29, 2022 No. 506.

[24] The latter provision criminalizes only Russian citizens and only if the offence has been committed within a year after being subject to an administrative penalty for a similar offence.

[25] Draft bill No. 104796-8, registered at the Russian State Duma on April 12, 2022.

[26] Draft bill No. 103072-8, registered at the Russian State Duma on April 8, 2022.

[27] Draft bill No. 102053-8, registered at the Russian State Duma on April 8, 2022.

[28] Draft bill No. 1193544-7, passed by the Russian State Duma on April 20, 2022.

The following Gibson Dunn lawyers assisted in preparing this client update: Nikita Malevanny, Michael Walther, Richard Roeder, Claire Yi, Anna Helmer, Judith Alison Lee, and Adam M. Smith.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, [email protected])
David P. Burns – Washington, D.C. (+1 202-887-3786, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Marcellus A. McRae – Los Angeles (+1 213-229-7675, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
Laura R. Cole – Washington, D.C. (+1 202-887-3787, [email protected])
Chris R. Mullen – Washington, D.C. (+1 202-955-8250, [email protected])
Samantha Sewall – Washington, D.C. (+1 202-887-3509, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, [email protected])

Asia:
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
David A. Wolber – Hong Kong (+852 2214 3764, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Beijing – (+86 10 6502 8534, [email protected])

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Nicolas Autet – Paris (+33 1 56 43 13 00, [email protected])
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Patrick Doris – London (+44 (0) 207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 (0) 20 7071 4205, [email protected])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Matt Aleksic – London (+44 (0) 20 7071 4042, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Michael Walther – Munich (+49 89 189 33 180, [email protected])
Richard W. Roeder – Munich (+49 89 189 33 115, [email protected])

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

Prospective joint venture partners frequently spend many hours discussing governance matters because they understand strong governance can be a key to venture success. In this recorded webcast, experts from Gibson Dunn and Ankura Consulting talk about designing an effective joint venture governance system. In particular, they discuss the following:

Why joint venture governance matters, and the relationship between governance and venture performance
How to make decisions regarding board structure and composition, including board size, quorum requirements, and the role of independent directors, observers, and committees
How to manage fiduciary duties and other conflicts of interest joint venture board directors face
What practical steps can be taken to ensure that governance processes continue to operate smoothly after the venture commences operation, and as the venture evolves over time

PANELISTS:

Stephen Glover is a partner in Gibson Dunn’s Washington, D.C. office and has served as Co-Chair of the firm’s Mergers and Acquisitions practice group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, strategic alliances and joint ventures, as well as other corporate matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others.

Alisa Babitz is of counsel in Gibson Dunn’s Washington, D.C. office. She is a member of the firm’s Mergers and Acquisitions practice group. Ms. Babitz advises public and private companies on a wide range of general corporate, securities and M&A matters including acquisitions, dispositions and other business combinations; strategic alliances and joint ventures; public and private securities offerings; and venture capital investments.

James Bamford is a Senior Managing Director at Ankura and Head of the Joint Venture and Partnership Practice. He joined Ankura with the firm’s 2020 acquisition of Water Street Partners, which he co-founded in 2008. Mr. Bamford serves a global client base on joint venture transactions, governance, restructurings, and other partnership issues. He has advised clients on more than 200 venture transactions valued at more than $300 billion. He has served clients across multiple industries and in more than 50 countries. Mr. Bamford is author of two books and more than 100 articles on joint ventures and alliances.

Tracy Pyle is a Managing Director in Ankura’s Joint Venture and Partnership Practice. Ms. Pyle advises clients on joint ventures, partnerships, and alliances across the entire lifecycle of a partnership – from formation through launch, management, restructuring, and exit. She also advises companies on managing a portfolio of joint ventures. Ms. Pyle has written on the subject of joint ventures in numerous publications, including Sloan Management Review and the Harvard Law School Forum on Corporate Governance.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.5 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 1.0 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.

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Decided April 28, 2022

Cummings v. Premier Rehab Keller, P.L.L.C., No. 20-219

Today, the Supreme Court held 6-3 that emotional-distress damages are not available in discrimination actions against recipients of federal financial assistance.

Background: In a string of statutes, including Title VI of the Civil Rights Act of 1964, the Rehabilitation Act of 1973, the Patient Protection and Affordable Care Act of 2010 (“ACA”), and Title IX of the Education Amendments of 1972, Congress has invoked its authority under the Spending Clause to prohibit recipients of federal funds from discriminating based on race, sex, or disability. Under Title VI, individuals may recover “compensatory damages” for intentional discrimination, and each of the other statutes listed above incorporates this remedial scheme.

The Fifth Circuit held that emotional-distress damages aimed at compensating for humiliation or other noneconomic injuries resulting from intentional discrimination are categorically unavailable under Title VI, the Rehabilitation Act, and the ACA. The Supreme Court has employed a “contract-law analogy” to assess remedies available under Title VI because the conditioning of federal funds on statutory compliance is similar to the formation of a contract: recipients of federal funds agree to take on certain liabilities in exchange for funding. Drawing on that contract-based analogy, the Fifth Circuit reasoned that funding recipients lack notice of their potential liability for emotional-distress damages because that remedy generally is not available for breach of contract actions.

Issue: Whether damages for emotional distress are available in discrimination actions brought against recipients of federal funds under Title VI and the statutes that incorporate its remedial scheme, including the Rehabilitation Act and the ACA.

Court’s Holding: Damages for emotional distress may not be recovered in such actions.

“Cummings would have us treat statutory silence as a license to freely supply remedies we cannot be sure Congress would have chosen to make available.”

Chief Justice Roberts, writing for the Court

What It Means:

The Court’s ruling protects funding recipients, including states, local governments, and businesses, from potential liability for emotional-distress damages, which can be significant and unpredictable.
The Court’s ruling also suggests federal funding recipients will only “be subject to the usual contract remedies in private suits,” not “more fine-grained” exceptions to general rules.
The Court’s decision underscores that where a right of action is implied, as is the case here, congressional silence as to the available remedies should not be taken as an endorsement of all possible remedies.

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

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

Related Practice: Labor and Employment

Jason C. Schwartz
+1 202.955.8242
[email protected]

Katherine V.A. Smith
+1 213.229.7107
[email protected]

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This update provides an overview of key class-action-related developments during the first quarter of 2022 (January through March).

Part I discusses cases from the Eleventh and Ninth Circuits regarding the diversity and amount-in-controversy requirements for federal court jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”).

Part II covers a recent decision from the Seventh Circuit analyzing when an intangible harm from a statutory violation is sufficient for Article III standing in putative class actions.

In addition, while not covered in this update, the Ninth Circuit recently issued a significant en banc opinion regarding class certification issues in Olean Wholesale Grocery v. Bumble Bee Foods, — F.4th —, 2022 WL 1053459 (9th Cir. Apr. 8, 2022) (en banc), including the evidentiary burden for a plaintiff seeking class certification, the assessment of expert testimony at the class certification stage, and the interplay between Rule 23 and injury and Article III standing. Olean is discussed in our separate client alert.

I. The Eleventh and Ninth Circuits Adopt Expansive Views of CAFA Jurisdiction

This past quarter, the Eleventh and Ninth Circuits issued noteworthy decisions relating to aspects of federal court jurisdiction under CAFA (minimal diversity and amount in controversy).

In Cavalieri v. Avior Airlines C.A., 25 F.4th 843 (11th Cir. 2022), the Eleventh Circuit addressed CAFA’s “minimal diversity” requirement, which provides for federal jurisdiction over a class action if there is more than $5 million in controversy and “any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.” 28 U.S.C. § 1332(d)(2)(C). The court held that this requirement can be met in a foreign-defendant case by plausible allegations that a nationwide class includes at least one U.S. citizen.

In Cavalieri, two Venezuelan citizens, one of whom is a legal permanent resident of the United States, filed a putative class action against a Venezuelan airline for breach of contract. 25 F.4th at 848. On appeal, the Eleventh Circuit sua sponte considered whether plaintiffs had sufficiently alleged diversity jurisdiction. Id.

The court first held that a foreign citizen who is a permanent resident does not qualify as a “citizen[] of a State” under the 2011 amendments to CAFA—which meant that the case did not satisfy the general diversity requirements because both the plaintiffs and the defendant were noncitizens. 25 F.4th at 848–49 (citing 28 U.S.C. § 1332(a)). Nonetheless, the Eleventh Circuit concluded that the allegations supported minimal diversity jurisdiction under CAFA because the plaintiffs had plausibly alleged that “‘at least one unnamed class member is a U.S. citizen and resident and, thus, is diverse from’” the Venezuelan airline. Id. at 849. The court added that it was for “a later stage in the litigation for the district court to make the factual determination on whether there is indeed jurisdiction.” Id. at 850 (citation omitted).

The Ninth Circuit addressed CAFA’s amount-in-controversy requirement in Jauregui v. Roadrunner Transportation Services, Inc., 28 F.4th 989 (9th Cir. 2022). In that case, the plaintiff filed a putative wage-and-hour class action on behalf of all current and former hourly workers of the defendant. Id. at 991. Although the defendant removed the case to federal court under CAFA and presented substantial evidence to establish the amount-in-controversy requirement, the district court nevertheless remanded the case to state court. Id.

The Ninth Circuit reversed. It held that by improperly discounting the defendant’s substantial evidence showing the amount in controversy was satisfied, the district court had impermissibly imposed a “heavy burden” on the defendant that “contravenes the text and understanding of CAFA and ignores precedent.” 28 F.4th at 992. In particular, the district court improperly “put a thumb on the scale against removal” by assigning a $0 value to most of the plaintiff’s claims simply because it disagreed with the assumptions underlying the defendant’s estimates. Id. at 992. But “merely preferring an alternative assumption is not an appropriate basis to zero-out a claim,” and “at most, it only justifies reducing the claim to the amount resulting from the alternative assumption.” Id. at 994. Thus, the district court’s approach “turn[ed] the CAFA removal process into an unrealistic all-or-nothing exercise of guess-the-precise-assumption-the-court-will-pick—even where . . . the defendant provided substantial evidence and analysis supporting its amount in controversy estimate.” Id. The Ninth Circuit also reaffirmed the “expansive understanding of CAFA” under circuit precedent, and encouraged district courts to give defendants “latitude” when analyzing removal “as long as the [defendant’s] reasoning and underlying assumptions are reasonable.” Id. at 993.

II. The Seventh Circuit Addresses When a Violation of Consumer Financial Protection Statutes Gives Rise to Article III Standing

As reported in our prior updates, the federal courts have continued to apply a mix of approaches in determining whether plaintiffs asserting statutory violations have alleged a concrete injury to satisfy Article III under TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021). The Seventh Circuit weighed in this quarter in a case analyzing standing under the Fair Debt Collection Protection Act (“FDCPA”).

In Ewing v. MED-1 Solutions, LLC, 24 F.4th 1146 (7th Cir. 2022), the Seventh Circuit held that debt collectors’ failure to report a customer’s dispute of a debt to credit agencies is a concrete injury sufficient to support standing under the FDCPA. Although the defendants argued the plaintiffs lacked standing under TransUnion because “there is no evidence that [the credit agencies] sent the [plaintiffs’] credit reports to potential creditors,” the court disagreed. 24 F.4th at 1150, 1152. “In the wake of TransUnion,” the Seventh Circuit framed the standing analysis as asking “whether the [plaintiffs] suffered a concrete injury when the [debt collectors] communicated false information (i.e., the reports of debts not being disputed) about them to a credit-reporting agency.” Id. at 1152. Because the FDCPA protects against “reputational harm”—which “is analogous to the harm caused by defamation, which has long common law roots”—the claim satisfied TransUnion’s requirement that the injury bear a close relationship to a traditionally recognized harm. Id. at 1153. Additionally, the fact the credit reporting agencies did not publish the credit reports to third parties was “a red herring,” because the debt collectors published false information to the credit agency, and plaintiffs did not need to show that the credit agency then “also shared that false information” to further third parties. Id. at 1152–53.

The following Gibson Dunn lawyers contributed to this client update: The following Gibson Dunn lawyers contributed to this client update: Jessica Pearigen, Gillian Miller, Yan Zhao, Wesley Sze, Lauren Blas, Bradley Hamburger, Kahn Scolnick, and Christopher Chorba.

Gibson Dunn attorneys 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 in the firm’s Class Actions, Litigation, or Appellate and Constitutional Law practice groups, or any of the following lawyers:

Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, [email protected])
Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, [email protected])
Theane Evangelis – Co-Chair, Litigation Practice Group, Los Angeles (+1 213-229-7726, [email protected])
Kahn A. Scolnick – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7656, [email protected])
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, [email protected])
Lauren M. Blas – Los Angeles (+1 213-229-7503, [email protected])

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

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In this alert, we discuss the Federal Trade Commission’s recent reinstatement of a long dormant policy restricting certain future acquisitions by parties that hereafter enter into an FTC consent order.[1] Since announcing the return of the policy in October 2021, the Commission has included prior approval provisions in each of the seven consent orders issued in connection with conditional approval of mergers. Below, we provide details on these prior approval provisions and describe practical implications of the FTC’s prior approval policy change for companies considering transactions that may be subject to such requirements. Despite the policy reinstatement, FTC consent order terms—including prior approval provisions—remain subject to negotiation between the merging parties and the FTC.

Recent FTC Policy Changes Requiring Prior Approval in Merger Consent Orders

The FTC’s prior approval policy arises in the context of a Commission action to block or restructure a proposed merger. Prior to 1995, the FTC required all companies that entered into a consent decree to settle such an action with a divestiture to obtain prior approval from the FTC for any future transaction in at least the same product and geographic market for which a violation was alleged. The Commission’s 1995 Policy Statement on Prior Approval and Prior Notice Provisions (“1995 Policy Statement”) did away with that condition, requiring prior approval and prior notice only when there was a “credible risk” of an unlawful merger, without regard for market conditions or a company’s prior merger activity.[2]

In July 2021, the FTC voted 3-2 to rescind the 1995 Policy Statement, with Chair Khan, Commissioner Slaughter, and then-Commissioner Chopra voting in favor, and Commissioners Phillips and Wilson dissenting.[3] In support of her vote, Chair Khan cited the FTC’s “strapped resources.” She stated that since the FTC reduced its use of prior approval provisions following the 1995 Policy Statement, the agency had re-reviewed a number of the same or similar proposed transactions that the Commission had previously determined to be problematic. Similarly, she noted that companies in several cases had sought to buy back assets that the Commission had previously ordered those same companies to divest.[4] Commissioner Chopra made similar remarks in favor of the policy change, emphasizing that “Commission staff is stretched to the breaking point,” and arguing that this policy supports the Commission goal of “prevent[ing] egregious repeat offenses.”[5] In his dissenting opinion, Commissioner Phillips argued that this policy change will deter consent agreements, increase the number of merger challenges brought before a court, and result in less competition among companies by, for example, reducing competition in bidding processes as a potential bidder may be less attractive if it is subject to a prior approval provision.[6] And Commissioner Wilson argued in her dissent that the purported justification for the policy change is unsupported by empirical evidence and will result in wasted resources and less certainty.[7]

Subsequently, the FTC issued a Prior Approval Policy Statement in October 2021 (“2021 Policy Statement”), again by a 3-2 vote along party lines, that restored the Commission’s pre-1995 practice of restricting future acquisitions by parties subject to an FTC consent order.[8] Under the 2021 Policy Statement:

Parties settling a proposed transaction with a merger divestiture order will need to obtain prior approval from the Commission before closing any future transaction affecting each relevant market for which a violation was alleged, for a minimum of ten years.
The Commission may seek prior approval provisions that extend to broader markets than the product and geographic markets affected by the challenged merger, depending on the circumstances.
The Commission will weigh a number of factors in determining the scope of a prior approval provision, including: the nature of the transaction (i.e., whether the transaction includes some or all of the assets implicated in a prior transaction challenged by the Commission, or whether either party was subject to a merger enforcement action in the same relevant market); the level of market concentration and degree to which the transaction increases market concentration; the degree of pre-merger market power held by one of the parties; the parties’ history of acquisitions in the same relevant market, in upstream or downstream related markets, or in adjacent or complementary products or geographic areas; and evidence that market characteristics create an ability or incentive for anticompetitive market dynamics post-transaction.
The Commission will also require buyers of divested assets in FTC merger consent orders to agree to a prior approval for any future sale of the assets they acquire in divestiture orders, for a minimum of ten years.
The Commission is less likely to pursue a prior approval provision against merging parties that abandon their transaction prior to certifying substantial compliance with a Second Request (or in the case of a non-HSR reportable deal, with any applicable Civil Investigative Demand or Subpoena Duces Tecum). However, the Commission may seek an order incorporating a prior approval provision even in matters where the Commission issues a complaint to block a merger and the parties subsequently abandon the transaction.

In a dissenting statement, Commissioners Wilson and Phillips characterized the 2021 Policy Statement as a “broadside at the market for corporate control in the United States” and expressed concerns that “[d]espite its unassuming label, a prior approval requirement imposes significant obligations on merging parties and innocent divestiture buyers not with respect to currently pending mergers, but instead with respect to future deals.”[9] During panel discussions at the American Bar Association’s Antitrust Spring Meeting in April 2022, both dissenting Commissioners reiterated their concerns regarding the policy change. Commissioner Wilson suggested that prior approval requirements raise significant due process concerns and argued that this policy change disincentivizes potential divestiture buyers from assisting the FTC in resolving its competitive concerns.[10] Commissioner Phillips similarly stated that the requirements opposed on divestiture buyers are “like a penalty for helping.”[11]

Recent Consent Orders Containing Prior Approval Provisions

Since issuing the 2021 Policy Statement, the FTC has entered into consent agreements containing prior approval provisions to resolve competitive concerns in seven proposed transactions.

Dialysis Services Transaction. The FTC challenged a dialysis company’s proposed acquisition of a number of dialysis clinics from another provider in Utah in October 2021, alleging that the proposed acquisition would reduce competition and increase concentration in the provision of outpatient dialysis services in the greater Provo, Utah area. In the first consent agreement to contain a prior approval provision following the FTC’s announcement of its revised prior approval policy, the buyer agreed to divest four outpatient dialysis clinics to a third party. The consent agreement also required the buyer to seek prior approval from the FTC for a ten-year period before: (1) acquiring an ownership or leasehold interest in any facility that has operated as an outpatient dialysis clinic within six months prior to the date of the proposed acquisition, within the State of Utah; (2) acquiring an ownership interest in any individual or entity that owns any interest in or operates an outpatient dialysis clinic within the State of Utah (but only with respect to that individual or entity’s interest in clinics operated Utah); or (3) entering into any contract for the buyer to participate in the management or business of an outpatient dialysis clinic located within the State of Utah. Notably, the consent agreement did not contain a prior approval provision binding the divestiture buyer.

Generic Pharmaceuticals. In November 2021, the FTC’s challenged ANI Pharmaceuticals, Inc.’s (“ANI”) proposed acquisition of Novitium Pharma LLC (“Novitium”), alleging that the transaction likely would have harmed competition in the U.S. markets for generic sulfamethoxazole-trimethoprim (“SMX-TMP”) oral suspension, an antibiotic used to treat infections, and generic dexamethasone tablets, an oral steroid product used to treat inflammation. The FTC approved a final consent order settling those charges in January 2022, pursuant to which ANI and Novitium agreed to divest ANI’s rights and assets to generic SMX-TMP oral suspension and generic dexamethasone tablets to Prasco LLC (“Prasco”). The consent order imposed prior approval provisions on the merging parties as well as on the divestiture buyer. The order required ANI and Novitium to seek prior approval from the FTC before acquiring any rights or interests in the two relevant markets (generic SMX-TMP and generic dexamethasone), or the therapeutic equivalent or biosimilar of those products, as well as before acquiring any rights or interests in a third pipeline product, erythromycin/ethylsuccinate products, or the therapeutic equivalent or biosimilar of those products. Additionally, for three years, Prasco must seek prior approval before selling or licensing any FDA authorizations for the divested assets, and for an additional seven years thereafter Prasco must seek prior approval before selling or licensing any FDA authorizations for the divested assets to anyone who owns or is seeking approval for an FDA authorization to manufacture or sell a therapeutic equivalent of a divested product.[12]

More recently, in April 2022, the FTC challenged Hikma Pharmaceuticals’ (“Hikma”) proposed acquisition of Custopharm, Inc. (“Custopharm”), alleging that the transaction would likely substantially lessen competition in the U.S. market for generic injectable triamcinolone acetonide (“TCA”), a corticosteroid used for severe skin conditions, allergies, and inflammation. As part of the transaction, Custopharm’s parent company, Water Street Healthcare Partners, LLC (“Water Street”), agreed to retain and transfer Custopharm’s pipeline TCA product, assets, and business to another company Water Street owns, Long Grove Pharmaceuticals, LLC. Under the terms of the consent order entered to resolve the FTC’s allegations, for ten years, Hikma will not acquire any rights or interests in the divested TCA product, assets, and business, or the therapeutic equivalent or biosimilar thereof, without the prior approval of the Commission. The consent order further provides that Water Street shall not sell, transfer, or otherwise convey any interest in the divested TCA assets or business for four years without the prior approval of the Commission. The consent order also includes a novel requirement that the divestiture buyer and its parent company not terminate the operations of the divested TCA business and take all actions necessary to maintain the full economic viability, marketability, and competitiveness of the divested TCA assets and business.[13]

Grocery Stores. Two New York-based supermarket operators—The Golub Corp. (“Golub”), which owns the Price Chopper chain, and Tops Market Corp. (“Tops”)—sought to merge in a transaction that would have created a combined company with nearly 300 supermarkets across six states. In its November 2021 complaint challenging the transaction, the FTC alleged that the proposed merger would substantially lessen competition in the retail sale of food and other grocery products in supermarkets in nine counties in New York and one county in Vermont. To settle those charges, Golub and Tops entered into a final consent agreement with the FTC in January 2022 pursuant to which the merging parties agreed to divest 12 Tops stores and related assets to C&S Wholesale Grocers, Inc. (“C&S”). The consent agreement requires Golub and Tops to obtain prior approval from the FTC for a ten-year period before acquiring any facility that has operated as a supermarket, as well as before acquiring an interest in any entity that has owned or operated a supermarket, in the ten counties comprising the relevant geographic markets alleged in the complaint within six months prior to the date of such proposed acquisition. The consent agreement also requires C&S to seek prior approval for a three-year period before selling a divested supermarket, and for an additional seven-year period before selling a divested supermarket to any person that owned an interest in supermarket located in the same county as the divested supermarket within six months prior to the date of such proposed sale.[14]

Retail Fuel Assets. In December 2021, the FTC challenged Global Partners LP’s (“Global”) proposed acquisition of 27 retail gasoline and diesel outlets from Richard Wiehl (“Wiehl”). The FTC alleged that the transaction would harm competition for the retail sale of gasoline in five local Connecticut markets, as well as for the retail sale of diesel fuel in four of those markets. Pursuant the FTC’s consent order, Global and Wiehl were required to divest to Petroleum Marketing Investment Group (“PMG”) six Global retail fuel outlets and one Wheels retail fuel outlet. Under the order, Global must obtain FTC prior approval for a ten-year period before acquiring an interest in any retail fuel business within a two-mile driving distance from any of the seven divested fuel outlets. Additionally, PMG must not, without FTC prior approval, sell or otherwise convey any of the divested fuel outlets for a period of three years, or sell any of the divested fuel outlets for an additional seven-year period, to any person who owned an interest in any retail fuel business within a two-mile driving distance from any of the seven divested fuel outlets.[15]

Oil and Gas Production Assets. In March 2022, the FTC challenged a proposed transaction that would have combined two of four significant oil and gas development and production companies in northeast Utah’s Uinta Basin, alleging that it would harm competition in the relevant product market for the development, production, and sale of Uinta Basin waxy crude to Salt Lake City area refiners, as well as in a narrower relevant product market for the development, production, and sale of Uinta Basin yellow waxy crude to Salt Lake City area refiners. The complaint alleged harm in a relevant geographic market no broader than the Uinta Basin, as well as in an alternative relevant geographic market consisting of the Salt Lake City area. To resolve the FTC’s allegations, the merging parties entered into a consent agreement with the FTC pursuant to which they agreed to divest certain assets in Utah to a third party. The prior approval provision in the consent agreement required the buyer to receive FTC prior approval for a ten-year period before acquiring any ownership, leasehold, or other interest in any person that has produced or sold, on average over the six months prior to the acquisition, more than 2,000 barrels per day of waxy crude in seven Utah counties, as well as before acquiring any ownership or leasehold interest in lands located in those seven Utah counties where the transaction—or sum of transactions with the same counterparty during any 180-day period—results in an increase in the buyer’s land interests in those seven counties of more than 1,280 acres. The consent agreement also requires the divestiture buyer to obtain prior approval for a three-year period before selling the divested assets, as well as for an additional seven-year period before selling the divested assets to any person engaged in the development, production, or sale of Uinta Basin waxy crude in seven Utah counties.

Glass Enamel and Colorants. The FTC challenged Prince International Corp.’s (“Prince”) proposed acquisition of Ferro Corp. (“Ferro”) in April 2022, alleging that the proposed acquisition would substantially lessen competition in the North American market for porcelain enamel frit and in the worldwide markets for glass enamel and forehearth colorants. To resolve the FTC’s competitive concerns, the parties entered into a consent agreement requiring Prince and Ferro to divest three facilities to a third party: a porcelain enamel frit and forehearth colorants plant in Leesburg, Alabama; a porcelain enamel frit and forehearth colorants plant and research center in Bruges, Belgium; and a glass enamel plant in Cambiago, Italy. Under the terms of the consent order, the merged company must obtain prior approval from the Commission for ten years before buying assets to manufacture and sell porcelain enamel frit in North America, or before buying assets to manufacture and sell glass enamel or forehearth colorants anywhere in the world. The consent order also requires the divestiture buyer to obtain prior approval for three years before transferring any of the divested assets to any buyer, and for seven additional years before transferring any of the divested assets to a buyer that manufactures and sells porcelain enamel frit, glass enamel, or forehearth colorants.[16]

Key Takeaways for Parties Considering Transactions that May be Subject to FTC Consent Orders

Negotiation of Merger Agreements Should Anticipate Prior Approval Provisions in FTC Investigations that Result in Consent Orders. Merging parties should expect that the FTC will require a prior approval provision in any transaction in which potential competitive concerns can be resolved with a divestiture. There may be some flexibility, however, to negotiate the precise contours of a prior approval requirement with the FTC to fit the unique circumstances of a particular transaction. Buyers should therefore consider seeking flexible merger agreement language to avoid being obligated to accept a prior approval provision that would unreasonably impede their ability to pursue potential future transactions, particularly in an area broader than the specific competitive concerns the FTC is likely to have in the earlier transaction. Sellers, on the other hand, would benefit from seeking assurances obligating the buyer to agree to a reasonable prior approval provision to the extent the FTC requires a divestiture to resolve competitive concerns while, at the same time, appreciating a buyer’s reluctance to agree to take on risks associated with a broadly worded obligation.

Negotiation of Prior Approval Provisions with FTC Should Ensure They Do Not Result in Broader Consequences than Intended. A prior approval provision in certain circumstances could apply to any subsequent transaction involving assets that are covered by the prior approval, even if that transaction also includes assets that fall outside the prior approval’s scope. For this reason, parties should carefully negotiate the scope of prior approval provisions with potential future transactions in mind to avoid agreeing to overly broad terms that may impact the timing and risks in future transactions involving assets that include both in-scope and out-of-scope assets.

Product and Geographic Scope Generally Limited to Divestiture Markets. The 2021 Policy Statement suggests that prior approval provisions in FTC consent orders, under certain circumstances, may extend beyond the relevant product and geographic markets affected by the merger. So far, however, the prior approval provisions included in FTC consent orders since the 2021 Policy Statement have generally been narrowly drawn around the divestiture product and geographic areas, and any extensions beyond the relevant markets defined in the FTC’s complaints have been relatively limited. Merging parties should be in a position to comply with a Second Request and be prepared to litigate if needed to gain leverage to secure a settlement on reasonable terms if the FTC seeks to impose prior approval provisions broader than the markets in which the parties have agreed to divest assets.

Duration. Despite the 2021 Policy Statement’s proclamation that prior approval provisions will cover “a minimum of ten years,” none of the prior approval provisions included in the consent orders entered since the 2021 Policy Statement have extended beyond a ten-year period. Additionally, all but one of the consent orders issued include prior approval provisions applicable to buyers of divested assets. With the exception of the four-year period applied to the divestiture buyer in Hikma/Custopharm, the prior approval provisions for divestiture buyers generally cover a three-year period during which the divestiture buyer must obtain prior approval before conveying the divested assets to another buyer, followed by a seven-year period during which the divestiture buyer must seek prior approval before conveying the divested assets to a buyer that operates in a similar product and geographic market as the divested assets.

Transactions Abandoned Post-Complaint. The 2021 Policy Statement put merging parties on notice that even if they abandon a proposed merger after litigation commences, the Commission may subsequently pursue an order incorporating a prior approval provision. To obtain such an order the FTC would have to pursue an enforcement action in its administrative court seeking injunctive relief to prevent a potential recurrence of the alleged violation, which would likely require significant resources. Since the 2021 Policy Statement was issued, the FTC has yet to pursue such an order against merging parties who have abandoned post-complaint but before fully litigating the challenged transaction.[17] There have been indications, however, that the FTC is exploring the possibility of seeking an order against Hackensack Meridian Health and Englewood Healthcare—who abandoned their proposed merger after the Third Circuit upheld a preliminary injunction entered by the U.S. District Court for the District of New Jersey enjoining the merger—that would require the two hospital systems to provide prior notice should they attempt the same merger in the future.[18]

Lack of Convergence with DOJ Policy. The Antitrust Division currently does not have a similar policy requiring prior approval provisions in divestiture orders. Assistant Attorney General Jonathan Kanter’s recent statements about the inadequacy of divestiture remedies and proclamations that the Antitrust Division’s “duty is to litigate, not settle,”[19] suggest that the agency will enter into fewer consent decrees conditionally approving deals with divestitures than in prior administrations. It remains to be seen whether, for such decrees, the Antitrust Division will follow in the FTC’s footsteps with regard to prior approval provisions although, in the first consent decree issued since the new Assistant Attorney General took office, the decree did not include such a provision.

___________________________

[1] Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 25, 2021), here.

[2] Press Release, FTC Rescinds 1995 Policy Statement that Limited the Agency’s Ability to Deter Problematic Mergers (July 21, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/07/ftc-rescinds-1995-policy-statement-limited-agencys-ability-deter-problematic-mergers.

[3] Id.

[4] Remarks of Chair Lina M. Khan Regarding the Proposed Rescission of the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions (July 21, 2021), here.

[5] Prepared Remarks of Commissioner Rohit Chopra Regarding the Motion to Rescind the Commission’s 1995 Policy Statement on Prior Approval and Prior Notice (July 21, 2021), here.

[6] Dissenting Statement of Commissioner Noah Joshua Phillips Regarding the Commission’s Withdrawal of the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases (July 21, 2021), here.

[7] Oral Remarks of Commissioner Christine S. Wilson (July 21, 2021), here.

[8] Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 25, 2021), here.

[9] Dissenting Statement of Commissioners Christine S. Wilson and Noah Joshua Phillips Regarding the Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 29, 2021), here.

[10] Matthew Perlman, FTC’s Republicans Say Leaders Think Mergers are ‘Evil’, Law360, Apr. 6, 2022, here.

[11] Id.

[12] See Complaint, In the Matter of ANI Pharmaceuticals, Inc., Novitium Pharma LLC, and Esjay LLC (Nov. 10, 2021), here; Decision and Order, In the Matter of ANI Pharmaceuticals, Inc., Novitium Pharma LLC, and Esjay LLC (Jan. 12, 2022), here.

[13] See Complaint, In the Matter of Hikma Pharmaceuticals PLC, et al. (Apr. 18, 2022), here;
Decision and Order, In the Matter of Hikma Pharmaceuticals PLC, et al. (Apr. 18, 2022), here.

[14] See Complaint, In the Matter of The Golub Corporation, Tops Markets Corporation, and Project P Newco Holdings, Inc. (Nov. 8, 2021), here; Decision and Order, In the Matter of The Golub Corporation, Tops Markets Corporation, and Project P Newco Holdings, Inc. (Jan. 24, 2022), here.

[15] See Complaint, In the Matter of Global Partners LP and Richard Wiehl (Dec. 20, 2021),
https://www.ftc.gov/system/files/ftc_gov/pdf/final_global_wiehl_complaint_0.pdf;
Decision and Order, In the Matter of Global Partners LP and Richard Wiehl (Dec. 20, 2021),
https://www.ftc.gov/system/files/ftc_gov/pdf/final_global_wiehl_order_0.pdf.

[16] See Complaint, In the Matter of American Securities Partners VII, Prince International Corporation, and Ferro Corporation (Apr. 21, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/2110131ASPFerroComplaint.pdf; Decision and Order, In the Matter of American Securities Partners VII, Prince International Corporation, and Ferro Corporation (Apr. 21, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/2110131ASPFerroDecisionOrder.pdf.

[17] See, e.g., Statement Regarding Termination of Nvidia Corp.’s Attempted Acquisition of Arm Ltd. (Feb. 14, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/02/statement-regarding-termination-nvidia-corps-attempted-acquisition-arm-ltd; Statement Regarding Termination of Lockheed Martin Corporation’s Attempted Acquisition of Aerojet Rocketdyne Holdings Inc. (Feb. 15, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/02/statement-regarding-termination-lockheed-martin-corporations-attempted-acquisition-aerojet; Statement Regarding Termination of Attempted Merger of Rhode Island’s Two Largest Healthcare Providers (Mar. 2, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/03/statement-regarding-termination-attempted-merger-rhode-islands-two-largest-healthcare-providers.

[18] See, e.g., Respondents’ Reply in Support of Motion to Dismiss Complaint, In the Matter of Hackensack Meridian Health, Inc. and Englewood Healthcare Foundation, Dkt No. 9399 (Apr. 20, 2022), here.

[19] Prepared Remarks of Assistant Attorney General Jonathan Kanter, Antitrust Enforcement: The Road to Recovery (Apr. 21, 2022), ttps://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-keynote-university-chicago-stigler.

The following Gibson Dunn lawyers prepared this client alert: Jamie E. France and JeanAnn Tabbaa.

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

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On November 8, 2021 New York Governor Kathy Hochul signed an amendment to the New York Civil Rights Law which requires employers provide notice to employees of electronic monitoring of telephone, email, and internet access and usage. The law, as described briefly below, is scheduled to go into effect on May 7, 2022.

Once effective, the law requires all New York employers (regardless of size) to provide written notice, upon hire, to new employees if the employer does and/or plans to monitor or intercept their telephone or email communications or internet usage. The notice must be in writing (either hard copy or electronic), and it must be acknowledged by new employees. Although employers need not obtain acknowledgements from existing employees, they will be required to post a notice in a “conspicuous place which is readily available for viewing” by existing employees subject to electronic monitoring.

The notice should inform employees that “any and all telephone conversations or transmissions, electronic mail or transmissions, or internet access or usage by an employee by any electronic device or system,” including, but not limited to, “computer, telephone, wire, radio or electromagnetic, photoelectronic or photo-optical systems,” may be subject to monitoring “at any and all times by any lawful means.”

“Conspicuous place” is not defined in the statute. Therefore, employers who have safe harbor policies in their handbooks allowing electronic monitoring may consider posting a stand-alone notice of their electronic monitoring policy in a place in which employees can easily and readily access and review the policy.

Notably, the law does not apply to processes that:

are designed to manage the type or volume of incoming or outgoing electronic mail or telephone voice mail or internet usage;
are not targeted to monitor or intercept the activities of a particular individual; and
are performed solely for the purpose of computer system maintenance and/or protection.

Violations

There is no private right of action available for violations. The Office of the New York State Attorney General is tasked with enforcing the law. Employers who are determined to have violated the law will be subject to fines of up to $500 for the first offense, $1,000 for the second offense, and $3,000 for the third and each subsequent offense.

Takeaway

On or before the effective date (May 7), New York employers who currently and/or plan to conduct electronic monitoring of employees should prepare to provide: (1) an acknowledgement form to new employees upon hire; as well as (2) notice of the electronic monitoring policy to existing employees.

The following Gibson Dunn attorneys assisted in preparing this client update: Harris Mufson, Danielle Moss, and Lizzy Brilliant.

Mylan Denerstein – New York (+1 212-351-3850, [email protected])

Gabrielle Levin – New York (+1 212-351-3901, [email protected])

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

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

Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C.
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Washington, D.C. partner Howard S. Hogan and New York associate Connor S. Sullivan are the authors of “Courts Continue to Debate the Legal Status of Reposted Social Media Content,” [PDF] published by The National Law Journal on April 22, 2022.

In March 2022, the Securities and Exchange Commission approved a rule proposal for new climate change disclosure requirements for both U.S. public companies and foreign private issuers. In this webcast, a panel of Gibson Dunn lawyers provides an overview of the proposed requirements and discuss the key takeaways and the impact the proposal, if adopted, would have on public companies.

PANELISTS:

Aaron Briggs is a partner in Gibson Dunn’s San Francisco office and a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Briggs’ practice focuses on advising technology, life sciences and other companies and their boards of directors on a wide range of securities and governance matters, including ESG, corporate governance, SEC disclosure and compliance, shareholder activism, executive compensation, investor communications, disclosure effectiveness and stakeholder engagement matters. Prior to re-joining the firm in 2018, Mr. Briggs served as Executive Counsel – Corporate, Securities & Finance at General Electric. In addition, Mr. Briggs was named Corporate Governance Professional of the Year by Corporate Secretary Magazine.

Anne Champion is a partner in Gibson Dunn’s New York office and a member of the firm’s Transnational Litigation, Environmental Litigation, Media Law, and Intellectual Property Practice Groups. Ms. Champion has played a lead role in a wide range of high-stakes litigation matters, including trials. Her practice focuses on complex international disputes, including RICO, fraud, and tort claims, and includes federal and state court litigation and international arbitration. She also has significant experience in First Amendment and intellectual property disputes.

Tom Kim is a partner in Gibson Dunn’s Washington, D.C. office and a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Kim focuses his practice on a broad range of SEC disclosure and regulatory matters, including capital raising and tender offer transactions and shareholder activist situations, as well as corporate governance, environmental social governance and compliance issues. He also advises clients on SEC enforcement investigations involving disclosure, registration and auditor independence issues. Mr. Kim served at the SEC for six years as the Chief Counsel and Associate Director of the Division of Corporation Finance, and for one year as Counsel to the Chairman.

Lori Zyskowski is a partner in Gibson Dunn’s New York office and Co-Chair of the firm’s Securities Regulation and Corporate Governance Practice Group. Ms. Zyskowski advises clients, including public companies and their boards of directors, on corporate governance and securities disclosure matters, with a focus on Securities and Exchange Commission reporting requirements, proxy statements, annual shareholders meetings, director independence issues, proxy advisory services, and executive compensation disclosure best practices. She also focuses on advising companies on environmental, social and governance, or ESG, disclosures. Ms. Zyskowski also advises on board succession planning and board evaluations and has considerable experience advising nonprofit organizations on governance matters.

Brian A. Richman is an associate in Gibson Dunn’s Washington, D.C. office and a member of the firm’s Appellate and Constitutional Law, and Administrative Law and Regulatory practice groups. Mr. Richman focuses his practice on high-stakes appellate, administrative law, and complex litigation matters. He regularly litigates constitutional and statutory issues in courts around the country and represents clients in challenging and defending regulatory action by administrative agencies, with an emphasis on securities and financial services matters.

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