On August 16, 2021, the U.S. Securities and Exchange Commission announced a settled enforcement action against Pearson plc, a U.K. educational publisher, for inadequate disclosure of a cyber intrusion. According to the settlement, following a cyberattack, which the SEC deemed to be material, Pearson failed to revise its periodic cybersecurity risk disclosure to reflect that it had experienced a material data breach. In addition, in a subsequent media statement, Pearson misstated the significance of the breach by minimizing its scope and overstating the strength of the company’s security measures. The settlement, in which Pearson agreed to pay a $1 million penalty, is the latest indication of the SEC’s continuing focus on cyber disclosures as an enforcement priority and an important signal to public companies that, particularly in the face of an environment of increasing cyberattacks, accurate public disclosure about cyber events and data privacy is critical. The SEC action also underscores the importance, as part of an overall cyber-incident response, of carefully making materiality judgments.

According to the SEC Order,[1] Pearson learned in March 2019 that a sophisticated attacker took advantage of a vulnerability in software that Pearson provided to 13,000 school, district, and university accounts to access and download user names and passwords that were protected with an outdated algorithm as well as more than 11 million rows of student data that included names, dates of birth, and email addresses. The software manufacturer had publicized the existence of the vulnerability in September 2018 and made a patch available at that time; however, Pearson did not install the patch until after learning about the breach in March 2019. Also, at that time, Pearson conducted an internal investigation and began notifying impacted customers in July 2019.

According to the SEC Order, Pearson determined that it was not necessary to issue a public disclosure of the incident. The company’s next report on Form 6-K contained the same data security risk disclosure that it had used in previous reports, stating that there was a “[r]isk” that “a data privacy incident or other failure to comply with data privacy regulations and standards and/or a weakness in information security, including a failure to prevent or detect a malicious attack on our systems, could result in a major data privacy or confidentiality breach causing damage to the customer experience and our reputational damage, a breach of regulations and financial loss” (emphasis added). Consistent with its past position that companies should not discuss risks as hypothetical if they have already materialized or are materializing,[2] the SEC viewed this statement as implying that no “major data privacy or confidentiality breach” had occurred, and determined it was therefore misleading.

A few days after it filed this Form 6-K, a journalist asked Pearson about the data breach. In response, Pearson provided a statement, which it later posted on its website, that the SEC also described as misleading. According to the SEC Order, the statement had been prepared months earlier and failed to disclose that the attacker had extracted data, not just accessed it; understated what types of data were taken; suggested that it was uncertain whether data had been taken, whereas Pearson by that time allegedly knew exactly what data had been extracted; did not state how many rows of data were involved; and stated that Pearson had “strict data protections” and had patched the vulnerability, even though Pearson had waited months to install the patch and had relied upon outdated software to encrypt passwords.

As a result of the foregoing statements, the SEC Order states that Pearson violated Sections 17(a)(2) and (a)(3) of the Securities Act, provisions which prohibit misleading statements or omissions in the context of a securities offering,[3] as well Section 13(a) of the Exchange Act. The SEC Order also finds that the conduct demonstrated that Pearson failed to maintain adequate disclosure controls and procedures in violation of Exchange Act Rule 13a-15(a).

The Pearson settlement reflects a number of instructive points. First, this settlement demonstrates the importance of carefully assessing the materiality of a cyberattack. Here, the SEC determined that the data breach was material based on, among other things, the company’s business and its user base, the nature and volume of the data exfiltrated, and the importance of data security to the company’s reputation, as reflected in the company’s existing risk disclosures. However, the order does not assert that there was any adverse impact on Pearson’s business as a result of the incident. In fact, Pearson’s subsequent filings on Form 20-F expressly stated that prior attacks “have not resulted in any material damage” to the business. Consulting with counsel in making materiality assessments can help mitigate the risk of the government second-guessing materiality judgments in hindsight. Second, this is the third recent enforcement case that the SEC has brought based on disclosures contained in reports that are “furnished,” not “filed” with the SEC and in media statements.[4] Third, this is the second enforcement case in which the SEC has found that a company’s disclosures regarding a cybersecurity incident reflected inadequate disclosure controls and procedures.[5] Collectively, these cases reiterate that the SEC is intensely focused on cybersecurity disclosure issues, that public companies should be mindful of SEC disclosure considerations when responding to or publicly commenting on a cybersecurity issue, and that companies should ensure that their disclosure controls and procedures appropriately support their cybersecurity response plans.

The Pearson settlement is the latest — and likely not the last — SEC cyber disclosure enforcement action. The SEC Enforcement Division has also taken an expansive look into cyber disclosures with a sweep related to how companies responded to the widely reported SolarWinds breach, where foreign hackers believed to be tied to Russia used SolarWinds’ software to breach numerous companies and government agencies.[6] The agency asked companies it believed were impacted to voluntarily furnish information about the attack, and offered immunity, under certain conditions, for potential disclosure failings.[7]

In addition, although SEC interpretive guidance on cybersecurity disclosures was issued in 2018,[8] additional disclosure rulemaking appears likely. According to the Unified Agenda of Regulatory and Deregulatory Actions (“Reg Flex Agenda”) made available in June 2021, the first reflecting Chair Gary Gensler’s agenda,[9] the SEC is considering whether to propose new rules to enhance issuer disclosure on “cybersecurity risk governance.”[10]

The possible new proposed rulemaking project and the increasing enforcement efforts are a clear signal of the SEC’s continuing focus on accurate cybersecurity disclosures and robust disclosure controls and procedures around cybersecurity. The recent increase in cyberattacks contributes to the focus, as does the apparent perception of a risk that companies may under-report data security incidents. The Pearson enforcement action makes plain that a company’s disclosure about the possible risk of a data breach will likely be insufficient — and even be viewed as misleading — if the company has in fact suffered a cyber breach that the SEC deems to be material. Moreover, the SEC’s actions reinforce the importance of having strong disclosure controls and procedures so that full information about data breaches and vulnerabilities are communicated to those making decisions about disclosures.

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[1] In re Pearson plc, Release No. 33-10963 (Aug. 16, 2021), https://www.sec.gov/litigation/admin/2021/33-10963.pdf.

[2] See Gibson, Dunn & Crutcher, “Considerations For Preparing Your 2019 Form 10-K” (Jan. 13, 2020), https://www.gibsondunn.com/considerations-for-preparing-your-2019-form-10-k; Gibson, Dunn & Crutcher, “Considerations For Preparing Your 2020 Form 10-K” (Feb. 3, 2021), https://www.gibsondunn.com/considerations-for-preparing-your-2020-form-10-k.

[3] These violations, which the SEC Order notes do not require a showing of intent, appear to be premised on the fact that Pearson had employee benefit plan equity offerings on-going that were registered on a Form S-8.

[4] See also In re First American Financial Corp., Release No. 34-92176 (June 14, 2021), https://www.sec.gov/litigation/admin/2021/34-92176.pdf; The Cheesecake Factory Incorporated, Release No. 34-90565 (Dec. 4, 2020), https://www.sec.gov/litigation/admin/2020/34-90565.pdf (disclosure involved two “furnished” Form 8-Ks).

[5] In re First American Financial Corp., Release No. 34-92176 (June 14, 2021), https://www.sec.gov/litigation/admin/2021/34-92176.pdf. In the First American Financial Corp. case, the SEC Order alleged that company executives did not have full information about a cybersecurity vulnerability when the company issued a statement to a reporter and furnished a voluntary Form 8-K addressing the situation. Id.

[6] Katanga Johnson, “U.S. SEC probing SolarWinds clients over cyber breach disclosures -sources,” Reuters (June 22, 2021), https://www.reuters.com/technology/us-sec-official-says-agency-has-begun-probe-cyber-breach-by-solarwinds-2021-06-21.

[7] In the Matter of Certain Cybersecurity-Related Events (HO-14225) FAQs, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/enforce/certain-cybersecurity-related-events-faqs (last modified June 25, 2021).

[8] Commission Statement and Guidance on Public Company Cybersecurity Disclosures, 83 Fed. Reg. 8166 (Feb. 26, 2018), https://www.govinfo.gov/content/pkg/FR-2018-02-26/pdf/2018-03858.pdf.

[9] Press Release, U.S. Sec. & Exch. Comm’n, SEC Announces Annual Regulatory Agenda (June 11, 2021), https://www.sec.gov/news/press-release/2021-99.

[10] See Gibson, Dunn & Crutcher, “Back to the Future: SEC Chair Announces Spring 2021 Reg Flex Agenda” (June 21, 2021), https://www.gibsondunn.com/back-to-the-future-sec-chair-announces-spring-2021-reg-flex-agenda.

This alert was prepared by Alexander H. Southwell, Mark K. Schonfeld, Lori Zyskowski, Thomas J. Kim, Ron Mueller, Eric M. Hornbeck, and Terry Wong.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Privacy, Cybersecurity and Data Innovation, Securities Regulation and Corporate Governance, and Securities Enforcement practice groups, or the following authors:

Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])
Lori Zyskowski – New York (+1 212-351-2309, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Eric M. Hornbeck – New York (+1 212-351-5279, [email protected])

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

This update provides an overview of key class action developments during the second quarter of 2021. Part I covers TransUnion v. Ramirez, 141 S. Ct. 2190 (2021), an important decision from the Supreme Court about Article III standing and its application to damages class actions. Significantly, the Supreme Court for the first time held that all class members seeking to recover damages must have Article III standing. Part II reports on developments in a closely watched Ninth Circuit appeal that also concerns the application of Article III standing in putative class actions.

I. The Supreme Court Issues Important Ruling on the Application of Article III Standing to Damages Class Actions in TransUnion v. Ramirez

In the years since Spokeo, Inc. v. Robins, 578 U. S. 330 (2016), the courts of appeals have wrestled with applying Article III standing principles to putative class actions. On June 25, 2021, the Supreme Court revisited the issue of Article III standing for the first time since Spokeo. In TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021), the Court reversed a judgment on the claims of more than 6,000 class members whose internal credit reports contained inaccuracies that were never published to any third parties. In so holding, the Court clarified an issue left ambiguous in Spokeo: whether the violation of a federal statute, standing alone, confers Article III standing. The Court held that it does not. If a plaintiff does not suffer a real harm and the risk of future harm never materializes, there is no concrete injury and thus no standing to assert a damages claim. And importantly, the Court held that “every class member”—not just the named plaintiff—is required to meet this standard in order to recover individual damages.

As covered in a previous update, Ramirez concerned a jury verdict awarding $60 million in damages to a class of over 8,000 consumers. The plaintiff alleged that TransUnion violated the Fair Credit Reporting Act (“FCRA”) by inaccurately labelling him and his fellow class members as potential terrorists, drug traffickers, and other threats to national security on their consumer credit reports. The Ninth Circuit noted that “each member of a class certified under Rule 23 must satisfy the bare minimum of Article III standing at the final judgment stage of a class action in order to recover monetary damages in federal court,” but it found that each of the 8,185 class members had done so. 951 F.3d 1008, 1023 (9th Cir. 2020). Even though 75% of the class never had an inaccurate credit report disseminated to any third party, the Ninth Circuit ruled that each class member had standing because they were subjected to a real risk of harm to their privacy, reputational, and informational interests protected by the FCRA. Id. at 1027.

The Supreme Court, in a 5-4 decision, reversed. The core of the Court’s ruling was premised on the straightforward Article III principle: “No concrete harm, no standing.” 141 S. Ct. at 2200. The Court explained that under Spokeo, each class member must have suffered a “concrete” harm bearing a “close relationship” to traditional harms—like physical injury, monetary injury, or intangible injuries like damage to reputation—to have standing. Id. And even though “Congress may create causes of action for plaintiffs to sue defendants who violate . . . legal prohibitions or obligations,” “an injury in law is not an injury in fact.” Id. at 2205. Thus, only those class members whose inaccurate credit reports were actually provided to third parties had Article III standing to pursue the FCRA claim. Id. at 2209–10. By contrast, the remaining 75% of class members, “whose credit reports were not provided to third-party businesses,” did not have Article III standing because the “mere existence of inaccurate information” does not constitute a “concrete injury.” Id. at 2209. The Court left it to the Ninth Circuit to “consider in the first instance whether class certification is appropriate in light of [the] conclusion about standing.” Id. at 2214.

Although the Court’s decision clarifies the Article III standard, and confirms that all class members seeking damages must satisfy it, the decision still left unresolved the question “whether every class member must demonstrate standing before a court certifies a class,” id. at 2208 n.4 (emphasis added), and whether the lead plaintiff’s claims were typical of those of the class, id. at 2216 n.1. As a practical matter, it makes little sense for either party to defer this question until after class certification, because time and resources spent litigating a faulty class action benefits no one. At minimum, the issue of how Article III standing can be proven in a class trial should be part of the Rule 23 calculus. But we expect that in the coming months, the lower courts will grapple with these important issues as they seek to apply TransUnion.

II. The Ninth Circuit Grants Rehearing En Banc in Olean v. Bumble Bee Foods

As we discussed in our First-Quarter 2021 Update, the Ninth Circuit issued an important decision in April 2021 in Olean Wholesale Grocery Cooperative, Inc. v. Bumble Bee Foods LLC, 993 F.3d 774 (9th Cir. 2021), concerning the standards for establishing predominance in putative class actions under Rule 23(b)(3). In a 2-1 decision, the court held that even though plaintiffs may establish predominance using statistical evidence, district courts must still scrutinize the reliability of that evidence before certifying a class. Id. at 791. Additionally, the court stated that the inclusion of uninjured individuals in a class “must be de minimis,” and suggested “that 5% to 6% constitutes the outer limits of a de minimis number.” Id. at 792-93. Consistent with the Supreme Court’s subsequent holding in TransUnion, the court also acknowledged that the presence of uninjured class members presented “serious standing implications under Article III,” but did not reach the issue because class certification failed under Rule 23(b)(3). Id. at 792 n.7.

On August 3, 2021, the Ninth Circuit vacated this split-panel decision and agreed to rehear the matter en banc. 5 F.4th 950 (9th Cir. 2021). Although the court’s order did not specify the issues the court will consider, it will likely provide guidance on the interplay between Article III and Rule 23 in the wake of the Supreme Court’s decision in TransUnion, and potentially address whether Rule 23(b)(3) requires a district court to find that no more than a “de minimis” number of class members are uninjured before certifying a class.

The following Gibson Dunn lawyers contributed to this client update: Christopher Chorba, Kahn Scolnick, Bradley Hamburger, Lauren Blas, Jennafer Tryck, Wesley Sze, and Lauren Fischer.

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 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.

Climate change matters and related calls for regulation are in headlines daily. On August 9, 2021, the UN’s Intergovernmental Panel on Climate Change (IPCC) published the first major international assessment of climate-change research since 2013. The IPCC report will inform negotiations at the 2021 UN Climate Change Conference, also known as COP26, beginning on October 31, 2021 in Glasgow.

Chair Gary Gensler of the Securities and Exchange Commission (SEC) has made climate change headlines of his own in recent weeks. On July 16, 2021, Chair Gensler appointed Mika Morse to the newly created role of Climate Counsel on his policy staff, further demonstrating the importance of climate policy to the SEC’s agenda. In addition, the Reg Flex Agenda includes “Climate Change Disclosure” – whether to “propose rule amendments to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities.” (See our client alert on the Reg Flex Agenda here.) Chair Gensler has also been very active on Twitter. On July 28, 2021, he posted a video on his Twitter feed addressing the question: “What does the SEC have to do with climate?”

In prepared remarks at the Principles for Responsible Investment “Climate and Global Financial Markets” webinar later that same day, Chair Gensler shared that he has “asked SEC staff to develop a mandatory climate risk disclosure rule proposal for the Commission’s consideration by the end of the year,” and offered detailed insights into potential elements of that rulemaking. Chair Gensler’s remarks began, like many conversations this summer, with a reference to the Olympics. Drawing a connection between the games and public company disclosure, he contended having clear rules to judge performance is critical in both forums. Taking the analogy further, Chair Gensler observed the events competed in at the Olympics, as well as who can compete in them, have evolved substantially since the first modern games in 1896. Likewise, he suggested, the categories of information investors require to make an informed investment decision also evolve over time and that the framework for public company disclosure must take appropriate steps to modernize.

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The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Elizabeth Ising, Lori Zyskowski, and Patrick Cowherd.

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

Washington, D.C. partner Adam M. Smith is the author of “The Humanitarian and Policy Challenges of U.S. Sanctions on the Taliban,” [PDF] published by Just Security on August 23, 2021.

On August 18, 2021, EPA released a final rule revoking tolerances for chlorpyrifos residues on food.[1] EPA took this action to “stop the use of the pesticide chlorpyrifos on all food to better protect human health, particularly that of children and farmworkers.”[2] The agency will also issue a Notice of Intent to Cancel under the Federal Insecticide, Fungicide, and Rodenticide Act to cancel registered food uses of the chemical associated with the revoked tolerances.

Chlorpyrifos is an “insecticide, acaricide and miticide used primarily to control foliage and soil-borne pests,” in a large variety of agricultural crops, including soybeans, fruit and nut trees, and other row crops.[3] EPA sets “tolerances,” which represent “the maximum amount of a pesticide allowed to remain in or on a food.”[4] Under the Federal Food, Drug, and Cosmetic Act (FFDCA), EPA “shall modify or revoke a tolerance if the Administrator determines it is not safe.”[5]

Yesterday’s revocation follows a recent order from the U.S. Court of Appeals for the Ninth Circuit instructing EPA to issue a final rule in response to a 2007 petition filed by the Pesticide Action Network North America and Natural Resources Defense Council requesting that EPA revoke all chlorpyrifos tolerances on the grounds that they were unsafe.[6] EPA previously responded to and denied the original petition and subsequent objections to its denial. A coalition of farmworker, environmental, health, and other interest groups then challenged the denials in court.[7] In April 2021, a split panel of the Ninth Circuit ruled that EPA’s failure either to make the requisite safety findings under the FFDCA or issue a final rule revoking chlorpyrifos tolerances was “in derogation of the statutory mandate to ban pesticides that have not been proven safe,” and ordered the agency to grant the 2007 petition, issue a final rule either revoking the tolerances or modifying them with a supporting safety determination, and cancel or modify the associated food-use registrations of chlorpyrifos.[8]

In response, EPA has granted the 2007 petition and issued a final rule that revokes all chlorpyrifos tolerances listed in 40 CFR 180.342.[9] In issuing this rule, EPA noted that, based on currently available information, it “cannot make a safety finding to support leaving the current tolerances” in place.[10] The final rule becomes effective 60 days after publication in the Federal Register, and the revocation of tolerances becomes effective six months thereafter.

EPA indicated it followed the Ninth Circuit’s instruction by issuing the rule under section 408(d)(4)(A)(i) of the FFDCA, which allows issuance of a final rule “without further notice and without further period for public comment.”[11] EPA indicated its intent to review comments on the previously issued proposed interim decision, draft revised human health risk assessment, and draft ecological risk assessment for chlorpyrifos.[12] The Agency also intends to review registrations for the remaining non-food uses of the chemical.[13]

Prior to EPA’s action, certain states including Hawaii, New York, and Oregon had restricted the sale or use of the pesticide.[14] California prohibited the sale, possession, and use of chlorpyrifos for nearly all uses by the end of 2020.[15]

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[1] U.S. EPA, Pre-Publication Notice of Final Rule re Chlorpyrifos (Aug. 18, 2021), https://www.epa.gov/system/files/documents/2021-08/pre-pub-5993-04-ocspp-fr_2021-08-18.pdf.

[2] U.S. EPA, News Releases from Headquarters, EPA Takes Action to Address Risk from Chlorpyrifos and Protect Children’s Health (Aug. 18, 2021), https://www.epa.gov/newsreleases/epa-takes-action-address-risk-chlorpyrifos-and-protect-childrens-health.

[3] https://www.epa.gov/ingredients-used-pesticide-products/chlorpyrifos.

[4] U.S. EPA, Regulation of Pesticide Residues on Food, https://www.epa.gov/pesticide-tolerances.

[5] See 21 U.S.C. § 346a(b)(2)(a)(i) (EPA “may establish or leave in effect a tolerance for a pesticide chemical residue in or on a food only if the Administrator determines that the tolerances is safe.”).

[6] Pre-Publication Notice of Final Rule re Chlorpyrifos at 6–7; League of United Latin Am. Citizens v. Regan, 996 F.3d 673 (9th Cir. 2021).

[7] Pre-Publication Notice of Final Rule re Chlorpyrifos at 7.

[8] League of United Latin Am. Citizens, 996 F.3d at 667, 703–04.

[9] Pre-Publication Notice of Final Rule re Chlorpyrifos at 8.

[10] Id.

[11] League of United Latin Am. Citizens, 996 F.3d at 702; 21 U.S.C. § 346a(d)(4)(A)(1).

[12] U.S. EPA, EPA Takes Action to Address Risk from Chlorpyrifos and Protect Children’s Health.

[13] Id.

[14] See Haw. S.B.3095 (Relating to Environmental Protection) (2018); N.Y. Dep’t of Environ. Conservation, Chlorpyrifos Pesticide Registration Cancellations and Adopted Regulation, https://www.dec.ny.gov/chemical/122311.html; O.A.R. 603-057-0545 (Permanent Chlorpyrifos Rule) (Dec. 15, 2020), available here.

[15] Cal. Dep’t of Pesticide Regulation, Chlorpyrifos Cancelation https://www.cdpr.ca.gov/docs/chlorpyrifos/index.htm.

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 Environmental Litigation and Mass Tort practice group, or the following authors:

Abbey Hudson – Los Angeles (+1 213-229-7954, [email protected])
David Fotouhi – Washington, D.C. (+1 202-955-8502, [email protected])
Joseph D. Edmonds – Orange County (+1 949-451-4053, [email protected])
Jessica M. Pearigen – Orange County (+1 949-451-3819, [email protected])

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

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

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

This client alert provides an overview of shareholder proposals submitted to public companies during the 2021 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.

I. Top Shareholder Proposal Takeaways from the 2021 Proxy Season

As discussed in further detail below, based on the results of the 2021 proxy season, there are several key takeaways to consider for the coming year:

Shareholder proposal submissions rose significantly. After trending downwards since 2016, the number of proposals submitted increased significantly by 11% from 2020 to 802.
The number of social and environmental proposals also significantly increased, collectively overtaking governance proposals as the most common. Social and environmental proposals increased notably, up 37% and 13%, respectively, from 2020. In contrast, governance proposals remained steady in 2021 compared to 2020 and represented 36% of proposals submitted in 2021. Executive compensation proposal submissions also declined in 2021, down 13% from the number of such proposals submitted in 2020. The five most popular proposal topics in 2021, representing 46% of all shareholder proposal submissions, were (i) anti-discrimination and diversity, (ii) climate change, (iii) written consent, (iv) independent chair, and (v) special meetings.
Overall no-action request success rates held steady, but the number of Staff response letters declined significantly. The number of no-action requests submitted to the Staff during the 2021 proxy season increased significantly, up 18% from 2020 and 19% from 2019. The overall success rate for no-action requests held steady at 71%, driven primarily by procedural, ordinary business, and substantial implementation arguments. However, the ongoing shift in the Staff’s practice away from providing written response letters to companies, preferring instead to note the Staff’s response to no-action requests in a brief chart format, resulted in significantly fewer written explanations, with the Staff providing response letters only 5% of the time, compared to 18% in 2020.
Company success rates using a board analysis during this proxy season rose modestly, while inclusion of a board analysis generally remained infrequent. Fewer companies included a board analysis during this proxy season (down from 19 and 25 in 2020 and 2019, respectively, to 16 in 2021), representing only 18% of all ordinary business and economic relevance arguments in 2021. However, those that included a board analysis had greater success in 2021 compared to 2020, with the Staff concurring with the exclusion of five proposals this year where the company provided a board analysis, compared to four proposals in 2020 and just one proposal in 2019.
Withdrawals increased significantly. The overall percentage of proposals withdrawn increased significantly to the highest level in recent years. Over 29% of shareholder proposals were withdrawn this season, compared to less than 15% in 2020. This increase is largely attributable to the withdrawal rates of both social and environmental proposals, which rose markedly in 2021 compared to 2020 (increasing to 46% and 62%, respectively).
Overall voting support increased, including average support for social and environmental proposals. Average support for all shareholder proposals voted on was 36.2% in 2021, up from the 31.3% average in 2020 and 32.8% average in 2019. In 2021, environmental proposals overtook governance proposals to receive the highest average support at 42.3%, up from 29.2% in 2020. Support for social (non-environmental) proposals also increased significantly to 30.6%, up from 21.5% in 2020—driven primarily by a greater number of diversity-related proposals voted on with increased average levels of support. Governance proposals received 40.2% support in 2021, up from 35.3% in 2020. This year also saw a double-digit increase in the number of shareholder proposals that received majority support (74 in total, up from 50 in 2020), with an increasing number of such proposals focused on issues other than traditional governance topics.
Fewer proponents submitted proposals despite the increase in the number of proposals. The number of shareholders submitting proposals declined this year, with approximately 276 proponents submitting proposals (compared to more than 300 in both 2020 and 2019). Approximately 41% of proposals were submitted by individuals and 21% were submitted by the most active socially responsible investor proponents. As in prior years, John Chevedden and his associates were the most frequent proponents (filing 31% of all proposals in 2021 and accounting for 75% of proposals submitted by individuals). This year also saw the continued downward trend in five or more co-filers submitting proposals—down to 35 in 2021, from 54 in 2020 and 58 in 2019.
Proponents continued to use exempt solicitations. Exempt solicitation filings continued to proliferate, with the number of filings reaching a record high again this year and increasing 30% over the last three years.
Amended Rule 14a-8 in Effect. With the amendments to Rule 14a-8 now in effect for meetings held after January 1, 2022, companies should revise their procedural reviews and update their deficiency notices accordingly. However, it remains to be seen whether the new rules will lead to a decrease in proponent eligibility or result in an increase in proposals eligible for procedural or substantive exclusion, based on the new ownership and resubmission thresholds. The SEC’s recently announced Reg Flex Agenda indicates that the SEC intends to revisit Rule 14a-8 as a new rulemaking item in the near term, putting into question the future of the September 2020 amendments.

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

Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael Titera – Orange County, CA (+1 949-451-4365, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])
Aaron Briggs – San Francisco, CA (+1 415-393-8297, [email protected])
Courtney Haseley – Washington, D.C. (+1 202-955-8213, [email protected])
Julia Lapitskaya – New York, NY (+1 212-351-2354, [email protected])
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, [email protected])
Geoffrey E. Walter – Washington, D.C. (+1 202-887-3749, [email protected])
David Korvin – Washington, D.C. (+1 202-887-3679, [email protected])

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

Los Angeles partners Nicola T. Hanna and James L. Zelenay Jr. and associate Sean S. Twomey are the authors of “Surge in False Claims Act enforcement continues,” [PDF] published by the Daily Journal on August 13, 2021.

Decided August 12, 2021

Chrysafis v. Marks, No. 21A8

On Thursday, August 12, 2021, the Supreme Court granted Gibson Dunn’s request for an extraordinary writ of injunction pending appeal and held that New York State’s eviction moratorium law (“CEEFPA”)—which bars landlords from commencing or continuing eviction proceedings against any tenants who self-certify that they are suffering a COVID-related “hardship,” with no opportunity for property owners to challenge those hardship claims—is inconsistent with fundamental due process principles.

Background:
CEEFPA was enacted in December 2020 and extended in May 2021. The law prohibits New York property owners from filing eviction petitions, continuing pending eviction cases, or enforcing existing eviction warrants, even in cases initiated prior to the COVID 19 pandemic, if their tenants submit a “hardship declaration.” It also requires landlords to distribute these hardship declarations, along with government-drafted notices and government-curated lists of legal service providers, to their tenants.

On May 6, 2021, Pantelis Chrysafis, Betty S. Cohen, Brandie LaCasse, Mudan Shi, Feng Zhou, and the Rent Stabilization Association of NYC, Inc. (“Plaintiffs”), represented by Gibson Dunn partners Randy M. Mastro and Akiva Shapiro, filed suit in the U.S. District Court for the Eastern District of New York. Plaintiffs alleged that CEEFPA—which shuts them out of the housing courts without a hearing and compels them to convey government messages against their own wishes and interests—violates the Due Process Clause and the First Amendment.

Despite finding, after an evidentiary hearing, that Plaintiffs had adequately alleged irreparable harm, the district court declined to enter a preliminary injunction and dismissed the case on the merits. Among other things, the district court determined that CEEFPA did not implicate property owners’ procedural due process rights; that it only compelled commercial speech and was thus subject only to rational basis review; and that the government’s interest in combatting the pandemic outweighed the irreparable harm that Plaintiffs had demonstrated. A Second Circuit panel denied Plaintiffs’ motion for an emergency injunction pending appeal.

Issues:
1. Whether Plaintiffs’ constitutional challenge to CEEFPA was likely to succeed.

2. If so, whether the eviction moratorium should be enjoined on an emergency basis pending appeal.

Court’s Holding:
Yes and yes.

“[The moratorium] violates the Court’s longstanding teaching that ordinarily ‘no man can be a judge in his own case’ consistent with the Due Process Clause.”

Per Curiam Opinion of the Court

What It Means:

CEEFPA’s prohibitions on initiating eviction proceedings, prosecuting existing eviction cases, and enforcing existing eviction warrants—along with its requirement that landlords distribute hardship declarations to tenants—cannot be enforced during the pendency of appellate proceedings in the Second Circuit and, potentially, before the Supreme Court. Six Justices agreed that the challenged “scheme”—under which, “[i]f a tenant self-certifies financial hardship,” the moratorium “generally precludes a landlord from contesting that certification and denies the landlord a hearing”—“violates the Court’s longstanding teaching that ordinarily ‘no man can be a judge in his own case’ consistent with the Due Process Clause.” Slip. op. 1 (citation omitted). While the analogy to other state and federal COVID-19 eviction moratoria is not exact, the decision suggests that government actors cannot close the courthouse doors for any extended period of time to landlords seeking to protect their property rights by prosecuting eviction actions.
The majority effectively rejected the dissenting Justices’ arguments that emergency relief was unwarranted because, inter alia, CEEFPA is set to expire in a number of weeks and courts should defer to a state government’s pandemic-based defenses or justifications. See Slip. op. 3-4 (Breyer, J., dissenting). Moreover, even those dissenting Justices acknowledged “the hardship to New York landlords” that the eviction moratorium has caused, and they signaled that they might be inclined to grant a renewed application for emergency relief if the State were to extend the moratorium beyond its current expiration date of August 31. Slip. op. 4-5 (Breyer, J., dissenting).

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 Randy M. Mastro (+1 212.351.3825, [email protected]), Akiva Shapiro (+1 212.351.3830, [email protected]), or the following practice leaders:

Appellate and Constitutional Law Practice

Allyson N. Ho
+1 214.698.3233
[email protected]

Mark A. Perry
+1 202.887.3667
[email protected]

On August 6, 2021, a divided Securities and Exchange Commission (the “SEC”) voted to approve new listing rules submitted by The Nasdaq Stock Market LLC (“Nasdaq”) to advance board diversity through a “comply or disclose” framework and enhance transparency of board diversity statistics (the “Final Rules”). The Final Rules continue the use of listing standards by Nasdaq and other securities exchanges to improve corporate governance at listed companies (e.g., requiring independent board committees) and reflect similar movement in the market (e.g., Goldman Sachs’s requirement to have at least two diverse directors, including one woman, on boards of companies it helps take public after July 1, 2021).

Overview

There are three key components of the Final Rules. Under the Final Rules, certain Nasdaq-listed companies are required to:

annually disclose aggregated statistical information about the board’s voluntary self-identified gender and racial characteristics and LGBTQ+ status in substantially the format set forth in new Nasdaq Rule 5606 (the “Board Diversity Matrix”)[1] for the current year and (after the first year of disclosure) the prior year (the “Board Diversity Disclosure Rule”); and
either include on their board of directors, or publicly disclose why their board does not include, a certain number (as discussed below) of “Diverse”[2] directors (the “Board Diversity Objective Rule”).

As discussed below, the compliance period for the Board Diversity Disclosure Rule begins in 2022, while the Final Rules take a tiered approach for the compliance period for the Board Diversity Objective Rule, which begins in 2023. These compliance periods are subject to certain phase-in-periods for companies newly listing on Nasdaq.

Third, the Final Rules provide for Nasdaq to offer certain listed companies access to a complimentary board recruiting service to help advance diversity on company boards (the “Board Recruiting Service Rule”). Companies that do not have a specified number of Diverse directors will have the opportunity to access “a network of board-ready diverse candidates” in order to help them meet the Board Diversity Objective Rule.[3]

Background and SEC Approval

Nasdaq first proposed these rules on December 1, 2020 (the “Proposed Rules”) as discussed in detail in our December client alert. On February 26, 2021, following the receipt of over 200 comment letters from Nasdaq-listed issuers, institutional investors, state and federal legislators, advocacy organizations and other parties, Nasdaq filed an amendment to the Proposed Rules, as well as a response letter to the SEC addressing the comments it received. While Nasdaq indicated that almost 85% of substantive comment letters supported the Proposed Rules, Nasdaq responded to concerns raised by commenters by: amending the Proposed Rules to provide more flexibility for boards with five or fewer directors; extending the compliance periods for newly listing Nasdaq companies; aligning the disclosure requirements with companies’ annual shareholder meetings; and adding a grace period for covered companies that fall out of compliance with applicable board diversity objectives. In its response letter, Nasdaq emphasized that the rules are not intended to impose a quota or numeric mandate on listed companies, as companies will have the choice to either meet the board diversity objectives or explain both their different approach and why it is appropriate for the company. Nasdaq also responded to commenter concerns that the Board Recruiting Service Rule could create a conflict of interest by emphasizing that companies are not required to use the complimentary recruiting service and, accordingly, Nasdaq will not penalize companies that do not utilize the service.

The SEC approved the Board Diversity Disclosure Rule and Board Objective Rule by a 3-2 party-line vote and approved the Board Recruiting Service Rule by a 4-1 vote, with only Commissioner Peirce voting against its approval.[4] The majority characterized the Final Rules as “improv[ing] the quality of information available to investors for making investment and voting decisions by providing consistent and comparable diversity metrics.”[5] As Chairman Gary Gensler explained, the Final Rules “reflect calls from investors for greater transparency about the people who lead public companies,” and will “allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders.”[6]

By contrast, Commissioners Peirce and Roisman expressed concern about the SEC’s approval of the Board Diversity Disclosure Rule and Board Diversity Objective Rule. Commissioner Roisman expressed concern that the SEC failed to “meet[] the legal standards that [it is] required to apply in evaluating rules proposed by self-regulatory organizations” and that approval of the Final Rules could result in the SEC “tak[ing] future action in which the agency must consider disclosure of the racial, ethnic, gender, or LGBTQ+ status of individual directors.”[7] Commissioner Peirce separately criticized the empirical evidence cited by Nasdaq in support of the proposed rule changes. She also argued that the Final Rules are outside of the scope of the SEC’s authority under the Securities Exchange Act of 1934, as amended, and “encourage discrimination and effectively compel speech by both individuals and issuers in a way that offends protected Constitutional interests.”[8]

Nasdaq’s Board Diversity Disclosure Rule

Under the Board Diversity Disclosure Rule, Nasdaq-listed companies, other than “Exempt Entities,”[9] are required to annually report aggregated statistical information about the Board’s self-identified gender and racial characteristics and self-identification as LGBTQ+ using the Board Diversity Matrix or in a substantially similar format. For the first year companies are required to provide only current year data, and in subsequent years companies must disclose data on both the current and prior year.

This statistical information must be provided in a searchable format (1) in the company’s proxy statement or information statement for its annual meeting of shareholders (“Proxy Materials”), (2) in an Annual Report on Form 10-K or Form 20-F (“Annual Report”), or (3) on the company’s website. If provided on its website, the company must also submit the disclosure to the Nasdaq Listing Center no later than 15 calendar days after the company’s annual shareholders meeting.

In addition to formatting and other non-substantive changes, the Final Rules reflect several changes to the matrix and related instructions initially included with the Proposed Rules.[10] The amended instructions also clarify that companies may include supplemental data in addition to the statistical information required in the Board Diversity Matrix. However, companies may not substantially alter the matrix. Nasdaq provides on its website examples of the Board Diversity Matrix and the alternative disclosure matrix for Foreign Issuers as well as examples of acceptable and unacceptable matrices.

Nasdaq’s Board Diversity Objective Rule

The Final Rules require most Nasdaq-listed companies, other than Exempt Entities and companies with boards consisting of five or fewer members (“Smaller Boards”), to:

have at least two self-identified “Diverse”[11] members of its board of directors; or
explain why the company does not have the minimum number of directors on its board who self-identify as “Diverse.”

Of the two self-identified Diverse directors, at least one director must self-identify as Female and at least one director must self-identify as an Underrepresented Minority and/or LGBTQ+.

In response to commenter concerns, the Board Diversity Objective Rule provides additional flexibility for listed companies with Smaller Boards. Specifically, Smaller Boards are required only to have at least one self-identified Diverse director. In addition, companies with Smaller Boards in place prior to becoming subject to the Board Diversity Objective Rule are permitted to add a sixth director who is Diverse in order to meet the one Diverse director requirement for Smaller Boards. However, if the company later increases its board to more than six members, it will become subject to the two Diverse director requirement.

Where a listed company determines instead to explain why it does not meet the applicable diversity objectives, Nasdaq emphasized that it will not evaluate the substance or merits of that explanation. However, companies must detail the reasons why they do not have the applicable number of Diverse directors instead of merely stating that they do not comply with the Board Diversity Objective Rule.

Compliance Periods

Under the Final Rules, the compliance periods for both the Board Diversity Disclosure Rule and the Board Diversity Objective Rule were extended.

Listed companies (other than newly listing companies) now must comply with the Board Diversity Disclosure Rule by the later of (1) August 6, 2022, or (2) the date the company files its Proxy Materials (or, if the company does not file Proxy Materials, the date it files its Annual Report) for the company’s annual shareholders meeting held during the 2022 calendar year.
Listed companies (other than newly listing companies) now must comply with the Board Diversity Objective Rule as follows:
- At Least One Diverse Director by 2023: A company listed on the Nasdaq Global Select Market, Nasdaq Global Market or Nasdaq Capital Market must have, or explain why it does not have, one Diverse director by the later of (1) August 6, 2023, or (2) the date the company files its Proxy Materials (or, if the company does not file Proxy Materials, the date it files its Annual Report) for the company’s annual shareholders meeting held during the 2023 calendar year.
- At Least Two Diverse Directors:
  - A company listed on the Nasdaq Global Select Market or Nasdaq Global Market with more than five directors must have, or explain why it does not have, at least two Diverse directors by the later of (1) August 6, 2025, or (2) the date the Company files its Proxy Materials (or, if the company does not file Proxy Materials, the date it files its Annual Report) for the company’s annual shareholders meeting held during the 2025 calendar year.
  - A company listed on the Nasdaq Capital Market with more than five directors must have, or explain why it does not have, at least two Diverse directors by the later of (1) August 6, 2026, or (2) the date the Company files its Proxy Materials (or, if the company does not file Proxy Materials, the date it files its Annual Report) for the company’s annual shareholders meeting held during the 2026 calendar year.

Phase-in Periods for Newly Listing Companies

Under the Final Rules, a company newly listing on Nasdaq will be subject to certain phase-in-periods for compliance with the Board Diversity Disclosure Rule and Board Diversity Objective Rule, as long as the company was not previously subject to a substantially similar requirement of another national securities exchange.

A company newly listing on Nasdaq must comply with the requirements of the Board Diversity Disclosure Rule within one year of its listing date.

For the Board Diversity Objective Rule, Nasdaq extended the phase-in period in response to comments. The Final Rules take a tiered approach based on the Nasdaq market on which the company is newly listing and the size of the company’s board:

A company newly listing on the Nasdaq Global Select Market or the Nasdaq Global Market must have or explain why it does not have:
- at least one Diverse director by the later of (a) one year from the listing date, or (b) the date the company files its Proxy Materials (or, if the company does not file Proxy Materials, its Annual Report) for the company’s first annual shareholders meeting after its listing; and
- at least two Diverse directors by the later of (a) two years from the listing date, or (b) the date the company files its Proxy Materials (or, if the company does not file Proxy Materials, its Annual Report) for the company’s second annual shareholders meeting after its listing.
A company newly listing on the Nasdaq Capital Market must have, or explain why it does not have, at least two Diverse directors by the later of (1) two years from the listing date, or (2) the date the company files its Proxy Materials (or, if the company does not file Proxy Materials, its Annual Report) for the company’s second annual shareholders meeting after its listing.
A company newly listing on the Nasdaq Global Select Market, Nasdaq Global Market or Nasdaq Capital Market with a Smaller Board must have, or explain why it does not have, at least one Diverse director by the later of (1) two years from the listing date, or (2) the date the company files its Proxy Materials (or, if the company does not file Proxy Materials, its Annual Report) for the company’s second annual shareholders meeting after its listing.

In addition, companies that cease to be a Foreign Issuer, a Smaller Reporting Company or an Exempt Entity will be permitted to satisfy the applicable requirements of the Board Diversity Objective Rule by the later of (1) one year from the date the company’s status changes, or (2) the date the company files its Proxy Materials (or, if the company does not file Proxy Materials, its Annual Report) during the calendar year following the date the company’s status changes.

Grace Period for Board Diversity Objective Rule

The Final Rules also provide a grace period for listed companies that fall out of compliance with the Board Diversity Objective Rule because of a board vacancy. In such a circumstance, a non-compliant company will have until the later of (1) one year from the date of the vacancy, or (2) the date the company files its Proxy Materials (or, if the company does not file Proxy Materials, its Annual Report) for its annual shareholder meeting in the calendar year after the year in which the vacancy occurs, to comply with the Board Diversity Objective Rule. During this period, the company is not required to explain why it is not compliant with the Board Diversity Objective Rule, and it may publicly disclose that it is relying on the board vacancy grace period.

Cure Period

If a listed company fails to comply with the Board Diversity Objective Rule, Nasdaq’s Listing Qualifications Department will notify the company that it has until the later of the company’s next annual shareholders meeting, or 180 days from the event that caused the deficiency, to cure the deficiency.

If a listed company fails to comply with the Board Diversity Disclosure Rule, it will have 45 days after notification of non-compliance by Nasdaq’s Listing Qualifications Department to submit a plan to regain compliance. Based on that plan, Nasdaq could provide the company with up to 180 days to regain compliance.

Practical Considerations

While Nasdaq-listed companies have some time to bring their boards into compliance with the Board Diversity Objective Rule, director recruitment is a time-consuming task that requires careful decision making. Accordingly, Nasdaq-listed companies and pre-IPO companies considering listing on Nasdaq should review the current composition of their boards in order to assess whether to make any changes in light of the Final Rules. Although both Nasdaq and the SEC have emphasized that the Final Rules do not impose a mandate on listed companies to have a certain number of Diverse directors, companies will need to carefully consider the disclosure requirements and potential investor reaction should they elect not to have the minimum number of Diverse directors required under the Board Diversity Objective Rule.

In addition, Nasdaq-listed companies should consider adding questions to their D&O questionnaires to elicit responses regarding the self-identified diversity characteristics required to be disclosed in the Board Diversity Matrix (as well as by other diversity requirements such as California’s two board diversity laws, which impose diversity quotas for women and underrepresented minorities for publicly held companies with principal executive offices in California). As noted above, the Final Rules indicate that companies may also include supplemental data on their directors’ diversity characteristics. Accordingly, companies should consider whether their D&O questionnaires should include questions about other diversity characteristics, such as a director’s military service, disability status, language and/or culture.

We note that the Final Rules may face legal challenges from activists and other interest groups that have characterized the rules’ requirements as inconsistent with the Constitution’s equal protection principles and the Civil Rights Act of 1964. State laws that mandate board representation for women and other communities are already being challenged in court. For example, in June the U.S. Court of Appeals for the Ninth Circuit revived a legal challenge to California’s board gender diversity law. In its reversal of the District Court’s dismissal for lack of standing, the Ninth Circuit held that the plaintiff “plausibly alleged that [California’s board diversity law] requires or encourages him to discriminate based on sex” and therefore has standing to challenge the law.[12] And in July the Alliance for Fair Board Recruitment, a Texas-based nonprofit that submitted comments opposing approval of the Final Rules, filed suit against the state of California over both of its board diversity laws. The organization argues that the quotas require California corporations to impermissibly discriminate based on sex and race in selecting their board members.

It also remains to be seen whether the New York Stock Exchange will follow Nasdaq’s lead and adopt its own board diversity rules. Nonetheless, the SEC’s approval of Nasdaq’s Final Rules is in keeping with increased market focus on board diversification. And, in light of statements made by the majority in its approval of the Final Rules, the SEC appears poised to take future action to support board diversity initiatives.[13]

Exhibit A

Board Disclosure Format

Board Diversity Matrix (As of [DATE])
Total Number of Directors	#
	Female	Male	Non-Binary	Did Not Disclose Gender
Part I: Gender Identity
Directors	#	#	#	#
Part II: Demographic Background
African American or Black	#	#	#	#
Alaskan Native or Native American	#	#	#	#
Asian	#	#	#	#
Hispanic or Latinx	#	#	#	#
Native Hawaiian or Pacific Islander	#	#	#	#
White	#	#	#	#
Two or More Races or Ethnicities	#	#	#	#
LGBTQ+	#
Did Not Disclose Demographic Background	#

Board Diversity Matrix (As of [DATE]) To be completed by Foreign Issuers (with principal executive offices outside of the U.S.) and Foreign Private Issuers
Country of Principal Executive Offices:	[Insert Country Name]
Foreign Private Issuer	Yes/No
Disclosure Prohibited Under Home Country Law	Yes/No
Total Number of Directors	#
	Female	Male	Non-Binary	Did Not Disclose Gender
Part I: Gender Identity
Directors	#	#	#	#
Part II: Demographic Background
Underrepresented Individual in Home Country Jurisdiction	#
LGBTQ+	#
Did Not Disclose Demographic Background	#

———

[1] The Board Diversity Matrix included in the Final Rules is reproduced as Exhibit A below and is also available at the Nasdaq Listing Center.

[2] Under the Final Rules, “Diverse” director means (1) a director who self-identifies her gender as female, without regard to the individual’s designated sex at birth (“Female”), (2) a director who self-identifies as one more or of: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities (“Underrepresented Minority”), and (3) lesbian, gay, bisexual, transgender or a member of the queer community (“LGBTQ+”).

[3] Nasdaq has provided a short primer on the Final Rules, which includes additional compliance information and related resources for listed companies.

[4] Although she voted against it, Commissioner Peirce indicated she did not object to the approval of the Board Recruiting Service Rule. See Commissioner Hester M. Peirce, “Statement on the Commission’s Order Approving Proposed Rule Changes, as Modified by Amendments No. 1, to Adopt Listing Rules Related to Board Diversity submitted by the Nasdaq Stock Market LLC” (Aug. 6, 2021) at note 3, available here.

[5] Commissioner Allison Herren Lee and Commissioner Caroline A. Crenshaw, “Statement on Nasdaq’s Diversity Proposal – A Positive First Step for Investors” (Aug. 6, 2021), available here.

[6] Chairman Gary Gensler, “Statement on the Commission’s Approval of Nasdaq’s Proposal for Disclosure about Board Diversity and Proposal for Board Recruiting Service” (Aug. 6, 2021), available here.

[7] Commissioner Elad L. Roisman, “Statement on the Commission’s Order Approving Exchange Rules Relating to Board Diversity” (Aug. 6, 2021), available here.

[8] Commissioner Hester M. Peirce, “Statement on the Commission’s Order Approving Proposed Rule Changes, as Modified by Amendments No. 1, to Adopt Listing Rules Related to Board Diversity submitted by the Nasdaq Stock Market LLC” (Aug. 6, 2021), available here.

[9] Under the Final Rules, “Exempt Entities” means: (1) acquisition companies; (2) asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); (3) cooperatives (as set forth in Rule 5615(a)(2)); (4) limited partnerships (as set forth in Rule 5615(a)(4)); (5) management investment companies (as set forth in Rule 5615(a)(5)); (6) issuers of non-voting preferred securities, debt securities, and derivative securities (as set forth in Rule 5615(a)(6)) that do not have equity securities listed on the Exchange; and (7) issuers of securities listed under the Rule 5700 series.

[10] The Board Diversity Matrix and related instructions were revised to refer to “Native American” instead of “American Indian” and include a definition of the term “Non-Binary.” For Foreign Issuers, the alternative disclosure matrix was amended to permit Foreign Issuers to note whether disclosure of the data required by the Board Diversity Disclosure Rule is prohibited under the company’s home country law.

[11] For Foreign Issuers the definition of “underrepresented individual” within the definition of “Diverse” was amended in the Final Rules to be based on identity in the country of the Foreign Issuer’s principal executive offices, as opposed to the Foreign Issuer’s home country jurisdiction.

[12] See Meland v. Weber, No. 20-15762 (9th Cir. 2021), available here.

[13] Notably, Commissioners Lee and Crenshaw emphasized their support for additional action to enhance both diversity and transparency and expressed the hope that the Final Rules are “a starting point for initiatives related to diversity, not the finish line.” Commissioner Allison Herren Lee and Commissioner Caroline A. Crenshaw, “Statement on Nasdaq’s Diversity Proposal – A Positive First Step for Investors” (Aug. 6, 2021), available here.

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

Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Brian J. Lane – Washington, D.C. (+1 202-887-3646, [email protected])
James J. Moloney – Orange County, CA (+ 949-451-4343, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael Titera – Orange County, CA (+1 949-451-4365, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])
Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])
Aaron Briggs – San Francisco, CA (+1 415-393-8297, [email protected])
Julia Lapitskaya – New York, NY (+1 212-351-2354, [email protected])
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, [email protected])
Geoffrey E. Walter – Washington, D.C. (+1 202-887-3749, [email protected])

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

After a busy start to the year, regulatory and policy developments related to Artificial Intelligence and Automated Systems (“AI”) have continued apace in the second quarter of 2021. Unlike the comprehensive regulatory framework proposed by the European Union (“EU”) in April 2021,[1] more specific regulatory guidelines in the U.S. are still being proposed on an agency-by-agency basis. President Biden has so far sought to amplify the emerging U.S. AI strategy by continuing to grow the national research and monitoring infrastructure kick-started by the 2019 Trump Executive Order[2] and remain focused on innovation and competition with China in transformative innovations like AI, superconductors, and robotics. Most recently, the U.S. Innovation and Competition Act of 2021—sweeping, bipartisan R&D and science-policy legislation—moved rapidly through the Senate.

While there has been no major shift away from the previous “hands off” regulatory approach at the federal level, we are closely monitoring efforts by the federal government and enforcers such as the FTC to make fairness and transparency central tenets of U.S. AI policy. Overarching restrictions or bans on specific AI use cases have not yet been passed at the federal level, but we anticipate (at the very least) further guidance that insists upon greater transparency and explainability to address concerns about algorithmic discrimination and bias, and, in the near term, increased regulation and enforcement of narrow AI applications such as facial recognition technology.

Our 2Q21 Artificial Intelligence and Automated Systems Legal Update focuses on these key regulatory efforts, and also examines other policy developments within the U.S. and EU that may be of interest to domestic and international companies alike.[3]

________________________

I. U.S. NATIONAL POLICY & REGULATORY DEVELOPMENTS

A. U.S. National AI Strategy

Senate Passes Bipartisan U.S. Innovation and Competition Act (S. 1260) to Bolster Tech Competitiveness with China

U.S. Launches National AI Research Resource Task Force and National Artificial Intelligence Advisory Committee

Understanding “Trustworthy” AI: NIST Proposes Model to Measure and Enhance User Trust in AI Systems

GAO Publishes Report “Artificial Intelligence: An Accountability Framework for Federal Agencies and Other Entities”

B. National Security

Artificial Intelligence Capabilities and Transparency (“AICT”) Act

C. Algorithmic Accountability and Consumer Protection

Federal Lawmakers Reintroduce the Facial Recognition and Biometric Technology Moratorium Act

Algorithmic Justice and Online Platform Transparency Act of 2021 (S. 1896)

House Approves Bill to Study Cryptocurrency and Consumer Protection (H.R. 3723)

Data Protection Act of 2021 (S. 2134)

D. Autonomous Vehicles (“AVs”)

II. EU POLICY & REGULATORY DEVELOPMENTS

A. EDPB & EDPS Call for Ban on Use of AI for Facial Recognition in Publicly Accessible Spaces

________________________

I. U.S. NATIONAL POLICY & REGULATORY DEVELOPMENTS

A. U.S. National AI Strategy

1. Senate Passes Bipartisan U.S. Innovation and Competition Act (S. 1260) to Bolster Tech Competitiveness with China

On June 8, 2021, the U.S. Senate voted 68-32 to approve the U.S. Innovation and Competition Act (S. 1260), intended to grow the boost the country’s ability to compete with Chinese technology by investing more than $200 billion into U.S. scientific and technological innovation over the next five years, listing artificial intelligence, machine learning, and autonomy as “key technology focus areas.”[4] $80 billion is earmarked for research into AI, robotics, and biotechnology. Among various other programs and activities, the bill establishes a Directorate for Technology and Innovation in the National Science Foundation (“NSF”) and bolsters scientific research, development pipelines, creates grants, and aims to foster agreements between private companies and research universities to encourage technological breakthroughs.

The Act also includes provisions labelled as the “Advancing American AI Act,”[5] 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] The AI-specific provisions mandate that the Director of the Office for Management and Budget (“OMB”) shall develop principles and policies for the use of AI in government, taking into consideration the NSCAI report, the December 3, 2020 Executive Order “Promoting the Use of Trustworthy Artificial Intelligence in the Federal Government,” and the input of various interagency councils and experts.[7]

2. U.S. Launches National AI Research Resource Task Force and National Artificial Intelligence Advisory Committee

On January 1, 2021, President Trump signed the National Defense Authorization Act (“NDAA”) for Fiscal Year 2021 into law, which included the National AI Initiative Act of 2020 (the “Act”). The Act established the National AI Initiative, creating a coordinated program across the federal government to accelerate AI research and application to support economic prosperity, national security, and advance AI leadership in the U.S.[8] In addition to creating the Initiative, the Act also established the National AI Research Resource Task Force (the “Task Force”), convening a group of technical experts across academia, government and industry to assess and provide recommendations on the feasibility and advisability of establishing a National AI Research Resource (“NAIRR”).

On June 10, 2021, the White House Office of Science and Technology Policy (“OSTP”) and the NSF formed the Task Force pursuant to the requirements in the NDAA.[9] The Task Force will develop a coordinated roadmap and implementation plan for establishing and sustaining a NAIRR, a national research cloud to provide researchers with access to computational resources, high-quality data sets, educational tools and user support to facilitate opportunities for AI research and development. The roadmap and plan will also include a model for governance and oversight, technical capabilities and an assessment of privacy and civil liberties, among other contents. Finally, the Task Force will submit two reports to Congress to present its findings, conclusions and recommendations—an interim report in May 2022 and a final report in November 2022. The Task Force includes 10 AI experts from the public sector, private sector, and academia, including DefinedCrowd CEO Daniela Braga, Google Cloud AI chief Andrew Moore, and Stanford University’s Fei-Fei Li. Lynne Parker, assistant director of AI for the OSTP, will co-chair the effort, along with Erwin Gianchandani, senior adviser at the NSF. A request for information (“RFI”) will be posted in the Federal Register to gather public input on the development and implementation of the NAIRR.

The Biden administration also announced the establishment of the National AI Advisory Committee, which is tasked with providing recommendations on various topics related to AI, including the current state of U.S. economic competitiveness and leadership, research and development, and commercial application. [10] Additionally, the Advisory Committee will assess the management, coordination and activities of the National AI Initiative, and societal, ethical, legal, safety and security matters, among other considerations. An RFI will be posted in the Federal Register to call for nominations of qualified experts to help develop recommendations on these issues, including perspectives from labor, education, research, startup businesses and more.

3. Understanding “Trustworthy” AI: NIST Proposes Model to Measure and Enhance User Trust in AI Systems

In June 2021 the National Institute of Standards and Technology (“NIST”), tasked by the Trump administration to develop standards and measures for AI, released its report of how to identify and manage biases in AI technology.[11] NIST is accepting comments on the document until September 10, 2021 (extended from the original deadline of August 5, 2021), and the authors will use the public’s responses to help shape the agenda of several collaborative virtual events NIST will hold in coming months.

4. GAO Publishes Report “Artificial Intelligence: An Accountability Framework for Federal Agencies and Other Entities”

In June 2021, the U.S. Government Accountability Office (“GAO”) published a report identifying key practices to help ensure accountability and responsible AI use by federal agencies and other entities involved in the design, development, deployment, and continuous monitoring of AI systems. In its executive summary, the agency notes that these practices are necessary as a result of the particular challenges faced by government agencies seeking to regulate AI, such as the need for expertise, limited access to key information due to commercial procurement of AI systems, as well as a limited understanding of how an AI system makes decisions.[12]

The report identifies four key focus areas: (1) organization and algorithmic governance; (2) system performance; (3) documenting and analyzing the data used to develop and operate an AI system; and (4) continuous monitoring and assessment of the system to ensure reliability and relevance over time.[13]

The key monitoring practices identified by the GAO are particularly relevant to organizations and companies seeking to implement governance and compliance programs for AI-based systems and develop metrics for assessing the performance of the system. The GAO report notes that monitoring is a critical tool for several reasons: first, it is necessary to continually analyze the performance of an AI model and document findings to determine whether the results are as expected, and second, monitoring is key where a system is either being scaled or expanded, or where applicable laws, programmatic objectives, and the operational environment change over time.[14]

B. National Security

1. Artificial Intelligence Capabilities and Transparency (“AICT”) Act

On May 19, 2021, Senators Rob Portman (R-OH) and Martin Heinrich (D-NM), introduced the bipartisan Artificial Intelligence Capabilities and Transparency (“AICT”) Act.[15] AICT would provide increased transparency for the government’s AI systems, and is based primarily on recommendations promulgated by the National Security Commission on AI (“NSCAI”) in April 2021.[16] It would establish a Chief Digital Recruiting Officer within the Department of Defense, the Department of Energy, and the Intelligence Community to identify digital talent needs and recruit personnel, and recommends that the NSF should establish focus areas in AI safety and AI ethics as a part of establishing new, federally funded National Artificial Intelligence Institutes.

The AICT bill was accompanied by the Artificial Intelligence for the Military (AIM) Act.[17] The AICT Act would establish a pilot AI development and prototyping fund within the Department of Defense aimed at developing AI-enabled technologies for the military’s operational needs, and would develop a resourcing plan for the DOD to enable development, testing, fielding, and updating of AI-powered applications.[18]

C. Algorithmic Accountability and Consumer Protection

As we have noted previously, companies using algorithms, automated processes, and/or AI-enabled applications are now squarely on the radar of both federal and state regulators and lawmakers focused on addressing algorithmic accountability and transparency from a consumer protection perspective.[19] The past quarter again saw a wave of proposed privacy-related federal and state regulation and lawsuits indicative of the trend for stricter regulation and enforcement with respect to the use of AI applications that impact consumer rights and the privacy implications of AI. As a result, companies developing and using AI are certain to be focused on these issues in the coming months, and will be tackling how to balance these requirements with further development of their technologies. We recommend that companies developing or deploying automated decision-making adopt an “ethics by design” approach and review and strengthen internal governance, diligence and compliance policies.

1. Federal Lawmakers Reintroduce the Facial Recognition and Biometric Technology Moratorium Act

On June 15, 2021, Senators Edward Markey (D-Mass.), Jeff Merkley (D-Ore), Bernie Sanders (II-Vt.), Elizabeth Warren (D-Mass.), and Ron Wyden (D-Ore.), and Representatives Pramila Jayapal (D-Wash.), Ayanna Pressley, (D-Mass.), and Rashida Tlaib, (D-Mich.), reintroduced the Facial Recognition and Biometric Technology Moratorium Act, which would prohibit agencies from using facial recognition technology and other biometric tech—including voice recognition, gate recognition, and recognition of other immutable physical characteristics—by federal entities, and block federal funds for biometric surveillance systems.[20] As we previously reported, a similar bill was introduced in both houses in the previous Congress but did not progress ut of committee.[21]

The legislation, which is endorsed by the ACLU and numerous other civil rights organizations, also provides a private right of action for individuals whose biometric data is used in violation of the Act (enforced by state Attorneys General), and seeks to limit local entities’ use of biometric technologies by tying receipt of federal grant funding to localized bans on biometric technology. Any biometric data collected in violation of the bill’s provisions would also be banned from use in judicial proceedings.

2. Algorithmic Justice and Online Platform Transparency Act of 2021 (S. 1896)

On May 27, 2021, Senator Edward J. Markey (D-Mass.) and Congresswoman Doris Matsui (CA-06) introduced the Algorithmic Justice and Online Platform Transparency Act of 2021 to prohibit harmful algorithms, increase transparency into websites’ content amplification and moderation practices, and commission a cross-government investigation into discriminatory algorithmic processes across the national economy.[22] The Act would prohibit algorithmic processes on online platforms that discriminate on the basis of race, age, gender, ability and other protected characteristics. In addition, it would establish a safety and effectiveness standard for algorithms and require online platforms to describe algorithmic processes in plain language to users and maintain detailed records of these processes for review by the FTC.

3. House Approves Bill to Study Cryptocurrency and Consumer Protection (H.R. 3723)

On June 22, 2021, the House voted 325-103 to approve the Consumer Safety Technology Act, or AI for Consumer Product Safety Act (H.R. 3723), which requires the Consumer Product Safety Commission to create a pilot program that uses AI to explore consumer safety questions such as injury trends, product hazards, recalled products or products that should not be imported into the U.S.[23] This is the second time the Consumer Safety Technology Act has passed the House. Last year, after clearing the House, the bill did not progress in the Senate after being referred to the Committee on Commerce, Science and Transportation.[24]

4. Data Protection Act of 2021 (S. 2134)

In June 2021, Senator Kirsten Gillibrand (D-NY) introduced the Data Protection Act of 2021, which would create an independent federal agency to protect consumer data and privacy.[25] The main focus of the agency would be to protect individuals’ privacy related to the collection, use, and processing of personal data.[26] The bill defines “automated decisions system” as “a computational process, including one derived from machine learning, statistics, or other data processing or artificial intelligence techniques, that makes a decision, or facilitates human decision making.”[27] Moreover, using “automated decision system processing” is a “high-risk data practice” requiring an impact evaluation after deployment and a risk assessment on the system’s development and design, including a detailed description of the practice including design, methodology, training data, and purpose, as well as any disparate impacts and privacy harms.[28]

D. Autonomous Vehicles (“AVs”)

The second quarter of 2021 saw new legislative proposals relating to the safe deployment of autonomous vehicles (“AVs”). As we previously reported, federal regulation of CAVs has so far faltered in Congress, leaving the U.S. without a federal regulatory framework while the development of autonomous vehicle technology advances. In June 2021, Representative Bob Latta (R-OH-5) again re-introduced the Safely Ensuring Lives Future Deployment and Research Act (“SELF DRIVE Act”) (H.R. 3711), which would create a federal framework to assist agencies and industries to deploy AVs around the country and establish a Highly Automated Vehicle Advisory Council within the National Highway Traffic Safety Administration (“NHTSA”). Representative Latta had previously introduced the bill in September 23, 2020 and in previous sessions.[29]

Also in June 2021, the Department of Transportation (“DOT”) released its “Spring Regulatory Agenda,” and proposed that the NHTSA establish rigorous testing standards for AVs as well as a national incident database to document crashes involving AVs.[30] The DOT indicated that there will be opportunities for public comments on the proposals, and we stand ready to assist companies who wish to participate with submitting such comments.

Further, NHTSA issued a Standing General Order on June 29, 2021 requiring manufacturers and operators of vehicles equipped with certain automated driving systems (“ADS”)[31] to report certain crashes to NHTSA to enable the agency to exercise oversight of potential safety defects in AVs operating on publicly accessible roads.[32]

Finally, NHTSA extended the period for public comments in response to its Advance Notice of Proposed Rulemaking (“ANPRM”), “Framework for Automated Driving System Safety,” until April 9, 2021.[33] The ANPRM acknowledged that the NHTSA’s previous AV-related regulatory notices “have focused more on the design of the vehicles that may be equipped with an ADS—not necessarily on the performance of the ADS itself.”[34] To that end, the NHTSA sought input on how to approach a performance evaluation of ADS through a safety framework, and specifically whether any test procedure for any Federal Motor Vehicle Safety Standard (“FMVSS”) should be replaced, repealed, or modified, for reasons other than for considerations relevant only to ADS. NHTSA noted that “[a]lthough the establishment of an FMVSS for ADS may be premature, it is appropriate to begin to consider how NHTSA may properly use its regulatory authority to encourage a focus on safety as ADS technology continues to develop,” emphasizing that its approach will focus on flexible “performance-oriented approaches and metrics” over rule-specific design characteristics or other technical requirements.[35]

II. EU POLICY & REGULATORY DEVELOPMENTS

On April 21, 2021, the European Commission (“EC”) presented its much-anticipated comprehensive draft of an AI Regulation (also referred to as the “Artificial Intelligence Act”).[36] It remains uncertain when and in which form the Artificial Intelligence Act will come into force, but recent developments underscore that the EC has set the tone for upcoming policy debates with this ambitious new proposal. We stand ready to assist clients with navigating the potential issues raised by the proposed EU regulations as we continue to closely monitor developments in that regard.

A. EDPB & EDPS Call for Ban on Use of AI for Facial Recognition in Publicly Accessible Spaces

On June 21, 2021, the European Data Protection Board (“EDPB”) and European Data Protection Supervisor (“EDPS”) published a joint Opinion calling for a general ban on “any use of AI for automated recognition of human features in publicly accessible spaces, such as recognition of faces, gait, fingerprints, DNA, voice, keystrokes and other biometric or behavioral signals, in any context.”[37]

In their Opinion, the EDPB and the EDPS welcomed the risk-based approach underpinning the EC’s proposed AI Regulation and emphasized that it has important data protection implications. The Opinion also notes the role of the EDPS—designated by the EC’s AI Regulation as the competent authority and the market surveillance authority for the supervision of the EU institutions—should be further clarified.[38] Notably, the Opinion also recommended “a ban on AI systems using biometrics to categorize individuals into clusters based on ethnicity, gender, political or sexual orientation, or other grounds on which discrimination is prohibited under Article 21 of the Charter of Fundamental Rights.”

Further, the EDPB and the EDPS noted that they “consider that the use of AI to infer emotions of a natural person is highly undesirable and should be prohibited, except for very specified cases, such as some health purposes, where the patient emotion recognition is important, and that the use of AI for any type of social scoring should be prohibited.”

________________________

[1] For more information on the EU’s proposed regulations, please see our Artificial Intelligence and Automated Systems Legal Update (1Q21).

[2] For more details, please see our previous alerts: Fourth Quarter and 2020 Annual Review of Artificial Intelligence and Automated Systems; and President Trump Issues Executive Order on “Maintaining American Leadership in Artificial Intelligence.”

[3] Note also, for example, the Government of Canada’s “Consultation on a Modern Copyright Framework for Artificial Intelligence and the Internet of Things.” The consultation seeks public comment on the interplay between copyright, AI, and the “Internet of Things.” With respect to AI, the consultation paper covers three potential areas of reform: (1) text and data mining (TDM), also known as “Big Data”; (2) authorship and ownership of works generated by AI; and (3) copyright infringement and liability regarding AI. With respect to IoT, the paper outlines twin concerns of repair and interoperability of IoT devices. The comment period is open until September 17, 2021. There have also been several recent policy developments in the UK, including the Government’s “Ethics, Transparency and Accountability Framework for Automated Decision-Making” (available here), and the UK Information Commissioner’s Opinion and accompanying blog post on “The Use of Live Facial Recognition Technology in Public Places.”

[4] S. 1260, 117th Cong. (2021).

[5] Id., §§4201-4207.

[6] Id., §4202.

[7] Id., §4204. For more details on the NSCAI report and 2020 Executive Order, please see our Fourth Quarter and 2020 Annual Review of Artificial Intelligence and Automated Systems.

[9] The White House, Press Release, The Biden Administration Launches the National Artificial Intelligence Research Resource Task Force (June 10, 2021), available at https://www.whitehouse.gov/ostp/news-updates/2021/06/10/the-biden-administration-launches-the-national-artificial-intelligence-research-resource-task-force/.

[10] Id.

[11] Draft NIST Special Publication 1270, A Proposal for Identifying and Managing Bias in Artificial Intelligence (June 2021), available at https://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.1270-draft.pdf?_sm_au_=iHVbf0FFbP1SMrKRFcVTvKQkcK8MG.

[12] U.S. Government Accountability Office, Artificial Intelligence: An Accountability Framework for Federal Agencies and Other Entities, Highlights of GAO-21-519SP, available at https://www.gao.gov/assets/gao-21-519sp-highlights.pdf.

[13] Id.

[14] U.S. Government Accountability Office, Artificial Intelligence: An Accountability Framework for Federal Agencies and Other Entities, Full Report GAO-21-519SP, available at https://www.gao.gov/assets/gao-21-519sp.pdf.

[15] S. 1705, 117th Cong. (2021); see also Press Release, Senator Martin Heinrich, ‘Heinrich, Portman Announce Bipartisan Artificial Intelligence Bills To Boost AI-Ready National Security Personnel, Increase Governmental Transparency’ (May 12, 2021), available at https://www.heinrich.senate.gov/press-releases/heinrich-portman-announce-bipartisan-artificial-intelligence-bills-to-boost-ai-ready-national-security-personnel-increase-governmental-transparency.

[16] For more information, please see our Artificial Intelligence and Automated Systems Legal Update (1Q21).

[17] S. 1776, 117th Cong. (2021).

[18] S. 1705, 117th Cong. (2021).

[19] See our Artificial Intelligence and Automated Systems Legal Update (1Q21).

[20] S. _, 117th Cong. (2021); see also Press Release, Senators Markey, Merkley Lead Colleagues on Legislation to Ban Government Use of Facial Recognition, Other Biometric Technology (June 15, 2021), available at https://www.markey.senate.gov/news/press-releases/senators-markey-merkley-lead-colleagues-on-legislation-to-ban-government-use-of-facial-recognition-other-biometric-technology.

[21] For more details, please see our previous alerts: Fourth Quarter and 2020 Annual Review of Artificial Intelligence and Automated Systems.

[22] S. 1896, 117th Cong. (2021); see also Press Release, Senator Markey, Rep. Matsui Introduce Legislation to Combat Harmful Algorithms and Create New Online Transparency Regime (May 27, 2021), available at https://www.markey.senate.gov/news/press-releases/senator-markey-rep-matsui-introduce-legislation-to-combat-harmful-algorithms-and-create-new-online-transparency-regime.

[23] H.R. 3723, 117th Cong. (2021).

[24] Elise Hansen, House Clears Bill To Study Crypto And Consumer Protection, Law360 (June 23, 2021), available at https://www.law360.com/articles/1396110/house-clears-bill-to-study-crypto-and-consumer-protection.

[25] S. 2134, 117th Cong. (2021); see also Press Release, Office of U.S. Senator Kirsten Gillibrand, Press Release, Gillibrand Introduces New And Improved Consumer Watchdog Agency To Give Americans Control Over Their Data (June 17, 2021), available at https://www.gillibrand.senate.gov/news/press/release/gillibrand-introduces-new-and-improved-consumer-watchdog-agency-to-give-americans-control-over-their-data.

[26] Under the proposed legislation, “personal data” is defined as “electronic data that, alone or in combination with other data—(A) identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular individual, household, or device; or (B) could be used to determine that an individual or household is part of a protected class.” Data Protection Act of 2021, S. 2134, 117th Cong. § 2(16) (2021).

[27] Id., § 2(3) (2021).

[28] Id., § 2(11)-(13) (2021).

[29] As we addressed in previous legal updates, the House previously passed the SELF DRIVE Act (H.R. 3388) by voice vote in September 2017, but its companion bill (the American Vision for Safer Transportation through Advancement of Revolutionary Technologies (“AV START”) Act (S. 1885)) stalled in the Senate. For more details, see our Fourth Quarter and 2020 Annual Review of Artificial Intelligence and Automated Systems.

[30] U.S. Department of Transportation, Press Release, U.S. Department of Transportation Releases Spring Regulatory Agenda (June 11, 2021), available at https://www.transportation.gov/briefing-room/us-department-transportation-releases-spring-regulatory-agenda.

[31] For a full description of the Society of Automotive Engineers (“SAE”) levels of driving automation, see SAE J3016 Taxonomy and Definitions for Terms Related to Driving Automation Systems for On-Road Motor Vehicles (April 2021), available at https://www.nhtsa.gov/technology-innovation/automated-vehicles-safety#topic-road-self-driving.

[32] See NHTSA, Standing General Order on Crash Reporting for Levels of Driving Automation 2-5, available at https://www.nhtsa.gov/laws-regulations/standing-general-order-crash-reporting-levels-driving-automation-2-5.

[33] 49 CFR 571, available at https://www.nhtsa.gov/sites/nhtsa.gov/files/documents/ads_safety_principles_anprm_website_version.pdf

[34] Id., at 6.

[35] Id., at 7-8.

[36] For a fulsome analysis of the draft AI Regulation, please see our Artificial Intelligence and Automated Systems Legal Update (1Q21).

[37] Joint Opinion 5/2021 on the proposal for a Regulation of the European Parliament and of the Council laying down harmonised rules on artificial intelligence, available at https://edpb.europa.eu/system/files/2021-06/edpb-edps_joint_opinion_ai_regulation_en.pdf.

[38] EDPS, Press Release, EDPB & EDPS Call For Ban on Use of AI For Automated Recognition of Human Features in Publicly Accessible Spaces, and Some Other Uses of AI That Can Lead to Unfair Discrimination (June 21, 2021), available at https://edps.europa.eu/press-publications/press-news/press-releases/2021/edpb-edps-call-ban-use-ai-automated-recognition_en?_sm_au_=iHVWn7njFDrbjJK3FcVTvKQkcK8MG.

The following Gibson Dunn lawyers prepared this client update: H. Mark Lyon, Frances Waldmann, Samantha Abrams-Widdicombe, Tony Bedel, Emily Lamm, Prachi Mistry, and Derik Rao.

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])

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

On August 5, 2021, U.S. Senate Finance Committee Chairman Ron Wyden (D-Oregon) and U.S. Senate Finance Committee member Sheldon Whitehouse (D-Rhode Island) introduced legislation entitled the “Ending the Carried Interest Loophole Act.”[1] According to a summary released by the Finance Committee, the legislation is intended to close “the entire carried interest loophole.” While this legislation is very similar to a previous proposal introduced by Chairman Wyden[2], this legislation appears to have a greater likelihood of passage given the Democratic party’s control of both chambers of Congress and the election of President Biden. The legislation may have an even greater chance of passage if it secures the support of moderate Democratic Senators who will be key to its passage through reconciliation, which is a technical procedure that would permit Democrats to pass the bill through a majority vote in the Senate.

The “Ending the Carried Interest Loophole Act” would require partners who hold carried interests in exchange for providing services to investment partnerships to recognize a specified amount of deemed compensation income each year regardless of whether the investment partnership recognizes income or gain and regardless of whether and when the service providers receive distributions in respect of their carried interests. This deemed compensation income would be subject to income tax at ordinary income rates and self-employment taxes.

This legislation goes well beyond many previously proposed bills that attempted to recharacterize certain future income from investment partnerships as ordinary income instead of capital gain. In addition, it would replace section 1061 of the Internal Revenue Code of 1986, as amended (the “Code”), which was enacted as part of the 2017 tax act,[3] and lengthened the required holding period from one year to three years for service providers to recognize long-term capital gain in respect of carried interests.

Current Treatment of “Carried Interest” Allocations

Under current law, a partnership generally can issue a partnership “profits interest” to a service provider without current tax. The service provider holds the interest as a capital asset, with both the timing of recognition and character of the partner’s share of profits from the partnership determined by reference to the timing of recognition and character of profits made by the partnership. Thus, if the partnership recognizes capital gain, the service provider’s allocable share of the gain generally would be capital gain and recognized in the same year as the partnership’s recognition of the capital gain. These partnership “profits interests” are referred to as “carried interests” in the private equity context, “incentive allocations” in the hedge fund context, or “promotes” in the real estate context. As noted above, Code section 1061 generally treats gain recognized with respect to certain partnership interests held for less than three years as short-term capital gain.

“Ending the Carried Interest Loophole Act”

The legislation introduced by Chairman Wyden and Senator Whitehouse generally would require a taxpayer who receives or acquires a partnership interest in connection with the performance of services in a trade or business that involves raising or returning capital and investing in or developing securities, commodities, real estate and certain other assets to recognize annually, on a current basis – (1) a “deemed compensation amount” as ordinary income and (2) an equivalent amount as a long-term capital loss.

The “deemed compensation amount” generally would equal the product of (a) an interest charge, referred to as the “specified rate,”[4] (b) the service provider’s maximum share of partnership profits, and (c) the partnership’s invested capital as of certain measurement dates.[5] Conceptually, the partnership is viewed as investing a portion of its capital on behalf of the service provider via an interest free loan to the service provider. The service provider is deemed to recognize ordinary self-employment income in an amount equal to the foregone interest, calculated at the “specified rate.” Although not clear, the “specified rate” appears designed to approximate the economics of the typical preferred return rate often paid to limited partners on their contributed capital before the service provider receives any distributions from the partnership.

The offsetting long-term capital loss appears to be a proxy for tax basis that is designed to avoid a “double-counting” of income when the service provider ultimately receives allocations of income from the partnership attributable to the sale or disposition of partnership assets (or income or gain attributable to the sale or disposition of the partnership interest itself).[6] The long-term capital loss generally would only be usable in the tax year of deemed recognition if the individual taxpayer recognizes other capital gain that is available to be offset (otherwise, the long-term capital loss would be available to be carried forward to subsequent tax years).

For example, if a service provider is entitled to receive up to 20 percent of an investment fund’s profits, the investment fund receives $1 billion in capital contributions, and the “specified return” for the tax year is 12 percent, the service provider’s “deemed compensation amount” for that tax year would be $24,000,000, and the service provider would recognize an offsetting long-term capital loss of $24,000,000. Assuming relevant income thresholds are already met and that the service provider has sufficient long-term capital gain in the year of inclusion against which the long-term capital loss may be offset, based on maximum individual rates under current law, the service provider would expect to incur an incremental U.S. federal income tax rate of 17% on the “deemed compensation amount” (that is, 37 percent ordinary income tax rate less the 20 percent long-term capital gain tax rate).[7] Any long-term capital gain recognized by the service provider in excess of the “deemed compensation amount” that is attributable to the sale or disposition of partnership assets (or income or gain attributable to the sale or disposition of the partnership interest itself) would be taxed at 20 percent (or 23.8 percent if the net investment income tax is applicable).

To prevent a work-around, the legislation also would apply to any service provider who has received a loan from the partnership, from any other partner of the partnership, or from any person related to the partnership or another partner, unless the loan is fully recourse or fully secured and requires payments of interest at a stated rate not less than the “specified return.”

Other Proposed Changes and Contrast with Recent Biden Proposal

Besides the current inclusion of “deemed compensation amounts” at ordinary income rates, the legislation would alter existing law in several ways. As background, current Code section 1061 generally requires a partnership to hold capital assets for three years in order for the related capital gain to be taxed at preferential long-term capital gain rates. Earlier this year, the Administration released its fiscal year 2022 Budget, including a Greenbook with detailed proposals for changes to the federal tax law.[8] Among other things, the Greenbook proposal would eliminate the ability for partners whose taxable income (from all sources) exceed $400,000 to recognize long-term capital gain with respect to these partnership “profits interests,” but partners whose taxable income do not exceed $400,000 would continue to be subject to Code section 1061.

Under the bill, Code section 1061 would be repealed. In other words, ordinary income treatment would apply regardless of holding period and regardless of the service provider’s level of taxable income. Second, like the Greenbook proposal, under this legislation – (1) the recharacterized amount would be treated as ordinary income rather than short-term capital gain (there is currently no rate differential, but there could be sourcing and other differences), and (2) the “deemed compensation amount” would be subject to self-employment tax.

In addition, this bill also would provide for a deemed election under Code section 83(b) in the event of a transfer of a partnership interest in connection with the performance of services, unless the taxpayer makes a timely election to not have the deemed election apply. Unless a service provider elects out of the deemed election, the service provider would be required to recognize taxable income at the time of the transfer of a partnership interest in connection with the performance of services in an amount equal to the partnership interest’s fair market value. Importantly, fair market value for this purpose would equal the distributions that the service provider would receive in the event of a hypothetical liquidation of the partnership’s assets for cash (after satisfying applicable liabilities) at the time of transfer. This valuation methodology is broadly consistent with current law.

____________________________

[1] Ending the Carried Interest Loophole Act, S. 2617, 117th Cong. (2021).

[2] Ending the Carried Interest Loophole Act, S. 1639, 116th Cong. (2019).

[3] The 2017 tax act, commonly known as the Tax Cuts and Jobs Act, is formally titled “An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” Pub. L. No. 115-97, 131 Stat. 2045.

[4] The “specified rate” for a calendar year means the par yield for “5-year High Quality Market corporate bonds” for the first month of the calendar year (currently 1.21%), plus 9 percentage points.

[5] According to a summary prepared by the Senate Finance Committee, the legislation is not intended to treat an applicable percentage as higher in a given taxable year due to the application of a “catch-up” provision in the partnership agreement. In addition, a partner’s “invested capital” is intended to equal the partner’s book capital account maintained under the regulations under Code section 704(b) with certain modifications, including that invested capital is to be calculated without regard to untaxed gain and loss resulting from the revaluation of partnership property.

[6] Even though the long-term capital loss may be used to offset other capital gain income of the service provider, the legislation would still fulfill its intended purpose of ensuring that the “deemed compensation amount” is subject to tax at ordinary income rates.

[7] For simplicity, we have omitted self-employment tax from the computation of the “deemed compensation amount” and omitted net investment income tax from the offsetting capital loss benefit on the assumption that these will generally offset.

[8] The proposed changes are described here: https://www.gibsondunn.com/biden-administration-releases-fiscal-year-2022-budget-with-greenbook-and-descriptions-of-proposed-changes-to-federal-tax-law/.

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

Evan M. Gusler – New York (+1 212-351-2445, [email protected])
Jennifer L. Sabin – New York (+1 212-351-5208, [email protected])
Michael J. Desmond – Los Angeles/Washington, D.C. (+1 213-229-7531, [email protected])
Pamela Lawrence Endreny – New York (+1 212-351-2474, [email protected])
Eric B. Sloan – Co-Chair, New York (+1 212-351-2340, [email protected])
Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224 /+1 212-351-2344), [email protected])
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])

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

On July 28, 2021, the proxy advisory firm Institutional Shareholder Services (“ISS”) opened its Annual Benchmark Policy Survey (available here), covering a broad range of topics relating to non-financial environmental, social and governance (“ESG”) performance metrics, racial equity, special purpose acquisition corporations (“SPACs”) and more. In addition, noting that climate change “has emerged as one of the highest priority ESG issues” and that “many investors now identify it as a top area of focus for their stewardship activities,” this year ISS also launched a separate Climate Policy Survey (available here) focused exclusively on climate-related governance issues.

The Annual Benchmark Policy Survey includes questions regarding the following topics for companies in the U.S. and will inform changes to ISS’s benchmark policy for 2022:

Non-financial ESG performance metrics. Citing an “upward trend” of inclusion of non-financial ESG-related metrics in executive compensation programs, a practice ISS notes “appears to have been fortified by the recent pandemic and social unrest,” the survey asks whether incorporating such metrics into executive compensation programs is an appropriate way to incentivize executives. The survey then asks which compensation components (long-term incentives, short-term incentives, both, or other) are most appropriate for inclusion of non-financial ESG-related performance metrics.
Racial equity audits. Noting increased shareholder engagement on diversity and racial equity issues in the wake of social unrest following the death of George Floyd and others, the survey asks whether and when companies would benefit from independent racial equity audits (under any set of circumstances, only depending on certain company-specific factors, or not at all). The survey then asks respondents who indicated that a company would benefit depending on company-specific factors which factors would be relevant, including, for example, whether the company has been involved in significant racial and/or ethnic diversity–related controversies or does not provide detailed workforce diversity statistics, such as EEO-1 type data.
Virtual-only shareholder meetings. This year’s survey seeks information on the types of practices that should be considered problematic in a virtual-only meeting setting. This question follows a “vast majority” of investor respondents indicating last year that they prefer a hybrid meeting approach absent COVID-19-related health and social restrictions. Among the potentially problematic practices ISS identifies in the survey are: the inability to ask live questions at the meeting; muting of participants during the meeting; the inability of shareholders to change votes at the meeting; advance registration requirements or other unreasonable barriers to registration; preventing shareholder proponents from presenting and explaining a shareholder proposal considered at the meeting; and management unreasonably “curating” questions to avoid addressing difficult topics. The survey also asks what would be an appropriate way for shareholders to voice concerns regarding any such problematic practices, including casting votes “against” the chair of the board or all directors or engaging with the company and/or communicating concerns.
CEO pay quantum and mid-cycle changes to long-term incentive programs. For companies in the U.S. and Canada, ISS’s quantitative pay-for-performance screen currently includes a measure that evaluates one-year CEO pay quantum as a multiple of the median of CEO peers. The survey asks whether this screen should include a longer-term perspective (e.g., three years). The survey also seeks respondents’ views on mid-cycle changes to long-term incentive programs for companies incurring long-term negative impacts from the pandemic. ISS noted that such changes were generally viewed by ISS and investors as problematic given the view that long-term incentives should not be adjusted based on short-term market disruptions (i.e., less than one year), but it acknowledged that some industries continue to experience significant negative impacts from the pandemic.
Companies with pre-2015 poor governance provisions – multi-class stock, classified board, supermajority vote requirements. ISS’s policy since 2015 has been to recommend votes “against” directors of newly public companies with certain poor governance provisions, including multiple classes of stock with unequal voting rights and without a reasonable sunset, classified board structure, and supermajority vote requirements for amendments to governing documents. Companies that were publicly traded before the 2015 policy change, however, were grandfathered and so are not subject to this policy. The survey asks whether ISS should consider issuing negative voting recommendations on directors at companies maintaining these provisions regardless of when the company went public, and if so, which provisions ISS should revisit and no longer grandfather.
Recurring adverse director vote recommendations – supermajority vote requirements. For newly public companies, ISS currently recommends votes on a case-by-case basis on director nominees where certain adverse governance provisions – including supermajority voting requirements to amend governing documents – are maintained in the years subsequent to the first shareholder meeting. The survey asks whether, if a company has sought shareholder approval to eliminate supermajority vote requirements, but the company’s proposal does not receive the requisite level of shareholder support, ISS should continue making recurring adverse director vote recommendations for maintaining the supermajority vote requirements, or whether a single or multiple attempts by the company to remove the supermajority requirement would be sufficient (and if multiple attempts are sufficient, how many).
SPAC deal votes. ISS currently evaluates SPAC transactions on a case-by-case basis, with a main driver being the market price relative to redemption value. ISS notes that the redemption feature of SPACs may be used so long as the SPAC transaction is approved; however, if the transaction is not approved, the public warrants issued in connection with the SPAC will not be exercisable and will be worthless unless sold prior to the termination date. Acknowledging that investors may redeem shares (or sell them on the open market) if they do not like the transaction prospects, and noting that these mechanics may result in little reason for an investor not to support a SPAC transaction, the survey asks whether it makes sense for investors to generally vote in favor of SPAC transactions, irrespective of the merits of the target company combination or any governance concerns. The survey also asks what issues, “dealbreakers,” or areas of concern might be reasons for an investor to vote against a SPAC transaction.
Proposals with conditional poor governance provisions. ISS notes that one way companies impose poor governance or structural features on shareholders is by bundling or conditioning the closing of a transaction on the passing of other voting items. This practice is particularly common in the SPAC setting where shareholders are asked to approve a new governing charter (which may include features such as classified board, unequal voting structures, etc.) as a condition to consummation of the transaction. In light of these practices, the survey asks about the best course of action for a shareholder who supports an underlying transaction where closing the transaction is conditioned on approval of other ballot items containing poor governance.

The Climate Policy Survey includes questions regarding the following topics and will inform changes to both ISS’s benchmark policy as well as its specialty climate policy for 2022:

Defining climate-related “material governance failures.” The survey seeks input on what climate-related actions (or lack thereof) demonstrate such poor climate change risk management as to constitute a “material governance failure.” Specifically, the survey asks what actions at a minimum should be expected of a company whose operations, products or services strongly contribute to climate change. Among the “minimum actions” identified by ISS are: providing clear and appropriately detailed disclosure of climate change emissions governance, strategy, risk mitigation efforts, and metrics and targets, such as that set forth by the Task Force on Climate-Related Financial Disclosure (“TCFD”); declaring a long-term ambition to be in line with Paris Agreement goals for its operations and supply chain emissions (Scopes 1, 2 & 3 targets); setting and disclosing absolute medium-term (through 2035) greenhouse gas (“GHG”) emissions reductions targets in line with Paris Agreement goals; and reporting that demonstrates that the company’s corporate and trade association lobbying activities align with (or do not contradict) Paris Agreement goals. The survey also asks whether similar minimum expectations are reasonable for companies that are viewed as not contributing as strongly to climate change.
Say on Climate. In 2021, some companies put forward their climate transition plans for a shareholder advisory vote (referred to as “Say on Climate”) or committed to doing so in the future. The survey asks whether any of the “minimum actions” (referred to above) could be “dealbreakers” for shareholder support for approval of a management-proposed Say on Climate vote. The survey then asks whether voting on a Say on Climate proposal is the appropriate place to express investor sentiment about the adequacy of a company’s climate risk mitigation, or whether votes cast “against” directors would be appropriate in lieu of, or in addition to, Say on Climate votes. Finally, the survey asks when a shareholder proposal requesting a regular Say on Climate vote would warrant support: never (because the company should decide); never (because shareholders should instead vote against directors); case-specific (only if there are gaps in the current climate risk mitigation plan or reporting); or always (even if the board is managing risk effectively, the vote is a way to test efficacy of the company’s approach and promote positive dialogue between the company and its shareholders).
High-impact companies. Noting that Climate Action 100+ has identified 167 companies that it views as disproportionately responsible for GHG emissions, the survey asks whether under ISS’s specialty climate policy these companies (or a similar list of such companies) should be subject to a more stringent evaluation of indicators compared to other companies that are viewed as having less of an impact on climate change.
Net Zero initiatives. Citing increased investor interest in companies setting a goal of net zero emissions by 2050 consistent with a 1.5°C scenario (“Net Zero”), the survey asks whether the specialty climate policy should assess a company’s alignment with Net Zero goals. The survey also asks respondents to rank the importance of a number of elements in indicating a company’s alignment with Net Zero goals, including: announcement of a long-term ambition of Net Zero GHG emissions by 2050; long-term targets for reducing its GHG emissions by 2050 on a clearly defined scope of emissions; medium-term targets for reducing its GHG emissions by between 2026 and 2035 on a clearly defined scope of emissions; short-term targets for reducing its emissions up to 2025 on a clearly defined scope of emissions; a disclosed strategy and capital expenditure program in line with GHG reduction targets in line with Paris Agreement goals; commitment and disclosure showing its corporate and trade association lobbying activities align with Paris Agreement goals; clear board oversight of climate change; disclosure showing the company considers impacts from transitioning to a lower-carbon business model on its workers and communities; and a commitment to clear and appropriately detailed disclosure of its climate change emissions governance, strategy, risk mitigation efforts, and metrics and targets, such as that set forth by the TCFD framework.

While the two surveys cover a broad range of topics, they do not necessarily address every change that ISS will make in its 2022 proxy voting policies. That said, the surveys are an indication of changes ISS is considering and provide an opportunity for interested parties to express their views. Public companies and others are urged to submit their responses, as ISS considers feedback from the surveys in developing its policies.

Both surveys will close on Friday, August 20, at 5:00 p.m. ET. ISS will also solicit more input in the fall through regionally based, topic-specific roundtable discussions. Finally, as in prior years, ISS will open a public comment period on the major final proposed policy changes before releasing its final 2022 policy updates later in the year. Additional information on ISS’s policy development process is available at the ISS policy gateway (available here).

The following Gibson Dunn lawyers assisted in the preparation of this client update: Elizabeth Ising, Lori Zyskowski, and Cassandra Tillinghast.

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

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Ron Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael Titera – Orange County, CA (+1 949-451-4365, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])
Aaron Briggs – San Francisco, CA (+1 415-393-8297, [email protected])
Courtney Haseley – Washington, D.C. (+1 202-955-8213, [email protected])
Julia Lapitskaya – New York, NY (+1 212-351-2354, [email protected])
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, [email protected])

Executive Compensation and Employee Benefits Group:
Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, [email protected])
Sean C. Feller – Los Angeles (+1 310-551-8746, [email protected])
Krista Hanvey – Dallas (+ 214-698-3425, [email protected])

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

Gibson, Dunn & Crutcher LLP is pleased to announce that the firm has launched a Global Financial Regulatory Practice, which provides comprehensive advice to financial institutions on all aspects of regulatory compliance, enforcement and transactions.

The launch of this practice draws together our market-leading regulatory lawyers across the world’s leading financial centers, and will be led by three of the firm’s most experienced leaders in this field:

William Hallatt joined Gibson Dunn’s Hong Kong office in May 2021 from Herbert Smith Freehills along with an experienced financial services regulatory team comprised of associates Emily Rumble, Becky Chung and Arnold Pun. Michelle Kirschner joined Gibson Dunn’s London office in October 2019 while Jeffrey Steiner was promoted to partner in the firm’s Washington, DC office in January of the same year. Our broader practice group includes attorneys across the globe who have significant in-house experience within financial institutions or have worked in senior positions within the world’s most prominent regulatory and policy agencies.

The practice’s core services include:

advising on complex conduct and governance issues, including the implementation of senior management accountability regimes and advising senior management and boards of directors on culture and conduct risk;
handling regulatory issues which arise in merger and acquisition transactions, including on a cross-border basis;
representing end users that are impacted by financial regulation;
preparing applications for licenses and registrations, and engagement with regulators to seek relief, exemptions and interpretations in connection with regulatory compliance matters;
advising on financial policy matters, including helping to shape the policies that impact our clients;
advising fintech and cryptocurrency businesses on the operation of their businesses inside and outside of the regulatory perimeter;
defending clients in relation to their most significant regulatory investigations and enforcement matters on high profile issues such as market misconduct, governance failings, anti-money laundering and counter-terrorist financing compliance, cybersecurity breaches, and systems and controls failures; and
conducting internal reviews and investigations, including at the request of regulators or in parallel with their inquiries.

We are trusted advisers to our clients, providing strategic advice in relation to regulatory change and the implementation of new requirements across the jurisdictions in which we operate. We regularly represent our clients before regulators on a formal and informal basis on a range of matters. We also work closely with regulators and leading industry associations and have led industry responses to high profile proposed reforms in a range of jurisdictions.

Stay Tuned!
The practice’s co-chairs will be accompanied by other senior members of the practice to provide a comprehensive overview of recent financial regulatory trends globally in a webinar coming this Fall.

London partner Sandy Bhogal and associate Bridget English are the authors of “United Kingdom,” [PDF] published in Global Legal Insights – Corporate Tax 2021, Ninth Edition in August 2021.

In March of 2020, as the COVID-19 pandemic and the consequent government shutdown orders forced business closures and event cancellations across the United States, we provided a four-step checklist and flowchart on evaluating contracts’ force majeure provisions in order to aid contracting parties in understanding their options. Force majeure (or “act of god”) provisions are the most common terms in commercial contracts that address parties’ obligations when they become unable to comply with contract terms. These provisions generally set forth limited circumstances under which a party may suspend performance, fail to perform or, in some cases, terminate the contract, without liability due to the occurrence of an unforeseen event.[1]

In the months since March 2020, as commercial disputes over these clauses have wended their way through the courts, some patterns have emerged regarding litigants’ and courts’ treatment of force majeure clauses in light of the pandemic. The courts’ discussions of these clauses in decisions over the past sixteen months provide supplemental guidance regarding the four steps of analysis of the application of force majeure clauses.

STEP 1: Does COVID-19 trigger the force majeure clause? The first step is to review the triggering events enumerated in the force majeure clause.

First, as we explained back in March 2020, force majeure clauses pre-COVID tended to be interpreted narrowly and therefore COVID-19 might not be a covered event under the general rubric of “acts of God” absent reference in the relevant clause to a specific triggering event.[2] Among those triggering events can be events relating to diseases, including “epidemic,” “pandemic,” or “public health crisis.” At the onset of the 2020 crisis, there was general consensus that COVID-19 would be covered under any of these categories, and that has not changed. Likewise, other clauses referring to government actions also seemed likely to be triggered by the restrictive executive orders regulating the size of gatherings or shuttering certain businesses, and our guidance has not altered on this point. “Catch all” language invoking other events or causes “outside the reasonable control of a party” seemed likely to broaden the interpretation of such clauses to reach COVID-19 and its derivative impacts, except in the case where such language is qualified by an exclusion of events of general applicability.

The great majority of the early published decisions on force majeure continue to adhere to the principles in our early guidance; however, litigants in cases to date appear to have primarily engaged the courts to resolve disputes over the effect of triggering their force majeure provisions and therefore have not engaged in litigation over whether COVID-19 triggered the relevant force majeure clause in the first place.

For example, in Future St. Ltd. v. Big Belly Solar, LLC, 2020 WL 4431764 (D. Mass. July 31, 2020), the issue confronting the court was whether the difficulties in making certain minimum purchases and payments under the parties’ contract was caused by COVID-19 or not; there did not appear to be a dispute that the relevant force majeure provision would have been triggered if COVID-19 had indeed been the precipitating cause. The court in that case held, consistent with the prior case law, that the plaintiff failed to establish causation but assumed without discussion that “the pandemic and effects of same” were a valid triggering event under the relevant force majeure clause, which excused failure to perform “occasioned solely by fire, labor disturbance, acts of civil or military authorities, acts of God, or any similar cause beyond such party’s control.” Id. at *6.

Similarly, in Palm Springs Mile Assocs., Ltd. v. Kirkland’s Stores, Inc., 2020 WL 5411353 (S.D. Fla. Sept. 9, 2020), the parties raised the issue of whether the defendant (who was seeking to excuse its failure to pay rent) had adequately demonstrated that county regulations restricting non-essential business operations “directly affect[ed] [its] ability to pay rent.” Id. (emphasis added).[3] The court concluded he had not. And in something of a “split the baby” decision, In re Hitz Rest. Grp., 616 B.R. 374 (Bankr. N.D. Ill. 2020), held that the triggering of a force majeure clause only “partially excuse[d]” a restaurant tenant’s obligation to pay rent after Illinois’ executive order suspending in-person dining services went into effect. Examining the factual record, the Hitz court held that the restaurant could have used approximately 25% of its space to conduct activities that were still permitted following the executive order, including food pick-up and delivery services. Accordingly, the court held that the tenant was still on the hook for 25% of the rent. See, id. at 377 (finding force majeure clause to have been “unambiguously triggered” by an executive order).

Thus, because litigants generally have not disputed that COVID-19 falls within one or more of the enumerated events in the clauses to have been considered by courts thus far, most courts have not had occasion to opine on whether COVID-19 would trigger a clause that listed only “acts of god” without specific triggering events such as pandemic. The one outlier appears to be a single case from a New York federal court, which concluded that COVID-19 qualifies as a “national disaster” based on a number of factors, including Black’s Law Dictionary’s definition of “natural” and “disaster”; the Oxford English Dictionary’s definition of “natural disaster”; and the fact that “the Second Circuit has identified ‘disease’ as an example of a natural disaster.” See JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020 WL 7405262, at *7 and n.7 (S.D.N.Y. Dec. 16, 2020) (“It cannot be seriously disputed that the COVID-19 pandemic is a natural disaster.”). Interestingly, the generic “acts of God” category in a force majeure clause has been interpreted to include “national disasters” even as it has been interpreted to exclude public health events like pandemics. What the Southern District of New York decision does not clarify is whether the Court now views COVID-19 as covered by a generic “acts of God” provision even if that provision does not specifically enumerate “national disasters.” It also remains to be seen whether other courts will follow in the footsteps of the federal court’s expansion of jurisprudence or whether other courts will continue to adhere to the notion that force majeure provisions should be interpreted narrowly.

STEP 2: What is the standard of performance? The second step is to review what specifically the force majeure clause excuses.

As described above, a number of early cases have tackled the causation component of force majeure, concluding that, consistent with prior cases, a litigant must establish a direct relationship between the alleged triggering event and the performance he or she alleges should be excused. A review of COVID-19 force majeure cases also reveals that courts have taken a narrow approach when analyzing the related question of whether the remedy sought by the litigant invoking force majeure is available under the express language of the contract. For example, in MS Bank S.A. Banco de Cambio v. CBW Bank, 2020 WL 5653264 (D. Kan. Sept. 23, 2020), the plaintiff sought to delay the defendant’s termination of a service agreement based on force majeure, but the court analyzed the agreement and held that “nothing in the Services Agreement” allowed the plaintiff “to forestall termination based on force majeure.”

Similarly, in NetOne, Inc. v. Panache Destination Mgmt., Inc., 2020 WL 6325704, (D. Haw. Oct. 28, 2020), the plaintiff argued that the defendant had breached its agreement by refusing to refund a deposit after the plaintiff terminated its event contract based on the agreement’s force majeure provision. The court held for the defendant, finding no language in the contract that obligated the defendant to refund deposits based on a triggering of the force majeure clause. In contrast, the force majeure clause in the contract at issue in Sanders v. Edison Ballroom LLC, No. 654992/2020, 2021 WL 1089938, at *1 (N.Y. Sup. Ct. Mar. 22, 2021), expressly stated that defendant would “refund all payments made by” the plaintiff in the event that the clause was triggered. The court in Sanders therefore awarded summary judgment to the plaintiff, requiring defendant to refund the full deposit previously paid by plaintiff on an event space due to the fact that the act of a “governmental authority” had made it “illegal or impossible” for the defendant to hold the event, thus triggering the force majeure clause. Id. at *3.

Ultimately, as we cautioned in March 2020, it is vital to understand not just whether or when your force majeure clause has been triggered, but what happens next. Often, such a clause provides an excuse for delaying performance, but only if that failure is directly caused by the force majeure event, as in many of the cases discussed herein. Other contracts provide that that performance may be delayed in light of a force majeure event, but only so long as the force majeure event continues.

It is worth noting that all of the foregoing cases were analyzing contracts entered into before COVID-19 came to dominate all of our lives. It will be interesting to see how courts analyze force majeure clauses in contracts executed after March 2020 and whether that context will make a difference in terms of how narrowly courts read such provisions.

Does the force majeure clause broadly cover events caused by conditions beyond the reasonable control of the performing party without enumerating specific events?	No ☐	Yes ☐	If yes, proceed to Step 2. Inquiry should also be made into what additional elements a party may need to demonstrate based on the applicable law. Some courts may require a party invoking a force majeure provision to demonstrate that the triggering event was beyond its control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event.
Does the force majeure clause specifically reference an “epidemic,” “pandemic,” “disease outbreak,” or “public health crisis”?	No ☐	Yes ☐	If yes, proceed to Step 2. Inquiry should also be made into what additional elements a party may need to demonstrate based on the applicable law. Some courts may require a party invoking a force majeure provision to demonstrate that the triggering event was beyond its control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event.
Does the force majeure clause refer specifically to “acts of civil or military authority,” “acts, regulations, or laws of any government,” or “government order or regulation”?	No ☐	Yes ☐	If yes, proceed to Step 2. Inquiry should also be made into what additional elements a party may need to demonstrate based on the applicable law. Some courts may require a party invoking a force majeure provision to demonstrate that the triggering event was beyond its control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event.
Does the force majeure clause cover only “acts of God”?	No ☐	Yes ☐	If yes, proceed to Step 2. While some courts have interpreted the phrase “act of God” in a force majeure clause in a limited manner, encompassing only natural disasters like floods, earthquakes, volcanic eruptions, tornadoes, hurricanes, and blizzards, one court to consider the question head-on has found that COVID-19 clearly constitutes a “natural disaster,” suggesting that COVID-19 may trigger provisions covering only “acts of God.”
Does the force majeure clause have a catchall provision that covers “any other cause whatsoever beyond the control of the respective party” and contains an enumeration of specific events that otherwise do not cover the current situation?	No ☐	Yes ☐	If yes, the force majeure clause may not have been triggered because courts generally interpret force majeure clauses narrowly and may not construe a general catch-all provision to cover externalities that are unlike those specifically enumerated in the balance of the clause. But depending on the jurisdiction, courts may look at whether the event was actually beyond the parties’ reasonable control and unforeseeable and the common law doctrine of impossibility or commercial impracticability may still apply, depending on the jurisdiction.

Step 2a. What is the standard of performance?

Does the force majeure clause require performance of obligations to be “impossible” (often, as a result of something outside the reasonable control of a party) before contractual obligations are excused?	No ☐	Yes ☐		If yes, the force majeure clause may have been triggered if the current government regulations specifically prohibit the fulfillment of contractual obligations. Proceed to Step 2b.
Does the force majeure clause require only that performance would be “inadvisable” or “commercially impractical”?	No ☐	Yes ☐		If yes, the force majeure clause may have been triggered due to the extreme disruptions caused by COVID-19. Proceed to Step 2b.

Step 2b. What remedy is available when the force majeure clause is triggered?

Does the contract clearly provide that the remedy sought is available upon the triggering of the force majeure clause?

No ☐

Yes ☐

If yes, then proceed to Step 3.

For example, a party seeking to terminate an agreement, to obtain a refund of a deposit, or to obtain some other remedy will need to demonstrate that such remedy is expressly contemplated by the contract upon the occurrence of a force majeure event.

Step 3. When must notice be given?

Does the contract require notice?

No ☐

Yes ☐

If yes, proceed to Step 4.

Timely notice must be provided in accordance with the notice provision, or termination may not be available even though a triggering event has occurred. Some notice provisions required notice in advance of performance due. Others required notice within a certain number of days of the triggering event. Still others require notice within a specified number of days from the date that a party first asserts the impact of force majeure, without regard to when the triggering event occurred.

Step 4. Are there requirements for the form of notice?

Does the contract contain specific provisions for the method of notice?	No ☐	Yes ☐	If yes, notice provisions may specify the form of the notice, to whom it must be sent, and the manner in which it must be sent. Specific notice language may also be required.
Does the contract require specific language to give notice of a force majeure event?	Yes ☐	No ☐	If yes, determine whether required wording is present in any notice. Some contracts may even have form of notices attached as exhibits to the contract.
Does the contract specify a specific method for delivery of such notice?	No ☐	Yes ☐	If yes, notice may be required by email, priority mail, or through use of a particular form addressed to specific people.

________________________

[1] The COVID-19 pandemic ultimately thrust these clauses to the mainstream, with prominent media outlets covering the effect of force majeure clauses on sports league cancellations and broadcast contracts. See, e.g., https://www.espn.com/nba/story/_/id/29050090/under-plan-nba-players-receive-25-less-paychecks-starting-15; https://nypost.com/2020/04/28/dish-demands-disney-pay-for-espn-refund-over-no-live-sports/

[2] See, e.g., Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902-03 (1987) (“[O]nly if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.”).

[3] The force majeure clause at issue in Palm Springs excused delays that were “due to” the force majeure event.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Coronavirus (COVID-19) Team or Litigation, Real Estate, or Transactional groups, or the authors:

Shireen A. Barday – New York (+1 212-351-2621, [email protected])
Nathan C. Strauss – New York (+1 212-351-5315, [email protected])

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

Washington, D.C. partner Mark Perry and San Francisco associate Jaysen Chung are the authors of “Alice at Six: Patent Eligibility Comes of Age,” [PDF] published by the Chicago-Kent Journal of Intellectual Property on August 2, 2021.

Colorado Department of Labor and Employment (“CDLE”) has released new guidance on the Equal Pay for Equal Work Act (“EPEW”), taking a much harder line on Colorado employers whose remote job postings exclude Colorado applicants. Previously, some employers tried to avoid the most challenging aspects of the EPEW’s compensation-and-benefits posting requirements by stating that remote positions could be performed from anywhere but Colorado.

On July 21, 2021, the CDLE issued new guidance clarifying that all Colorado employers’ postings for remote jobs must comply with the EPEW’s compensation-and-benefits posting requirements, even if the postings state that the position cannot be performed in or from Colorado. See CDLE Interpretive Notice & Formal Opinion #9 (“INFO #9”). The CDLE also announced that it was sending “Compliance Assistance Letters” to all Colorado employers with remote job postings that exclude Colorado applicants and that do not include the compensation-and-benefits information required by the EPEW. See CDLE Compliance Assistance Letter (the “Letter”). The Letter gives such employers until August 10, 2021, to advise the CDLE by what date their covered job postings will include the compensation-and-benefits information the EPEW requires.

Finally, the CDLE also provided minor updates to its guidance about the compensation-and-benefits information the EPEW requires. The CDLE clarified that covered job postings need only provide a brief general description of the position’s benefits, but cannot use “open-ended” phrases such as “etc.” or “and more” to describe the position’s benefits. The CDLE also explained that, while employers can post a good-faith compensation range, the range’s bottom and top limits cannot be left unclear or open-ended. Additionally, the CDLE noted that the compensation posting requirements do not apply to “Help Wanted” signs or similar communications that do not refer to any specific positions for which the employer is hiring. Finally, the CDLE noted that job postings need not include the employer’s name to comply with the compensation posting requirements, if the employer wants to be discrete in its external job posting process.

This guidance indicates the CDLE’s “officially approved opinions and notices to employers … as to how [the CDLE] applies and interprets various statutes and rules.” INFO #9. It is not binding, for example, on a court of law. Moreover, although the prior lawsuit challenging the EPEW’s posting requirements and other “transparency rules” was voluntarily dismissed after the Colorado federal district court denied the plaintiff’s motion for a preliminary injunction, it is possible that the CDLE’s tough new stance on postings for remote jobs will lead to new challenges to these requirements.

This Client Alert expands on these issues, first addressing the CDLE’s new guidance regarding job posting requirements for remote jobs, then discussing the Compliance Assistance Letters the CDLE sent employers excluding Colorado applicants from remote jobs, and finally providing further detail on INFO #9’s updates regarding the compensation-and-benefits information the EPEW requires.

The EPEW’s Posting Requirements

The EPEW covers all public and private employers that employ at least one person in Colorado. Under the EPEW’s compensation-and-benefits posting requirements, employers are required to “disclose in each posting for each job the hourly or salary compensation, or a range of the hourly or salary compensation, and a general description of all of the benefits and other compensation to be offered to the hired applicant.” C.R.S. § 8-5-201(2). This requirement does not reach postings for “jobs to be performed entirely outside Colorado.” 7 CCR 1103-13 (4.3)(B).

Additionally, the EPEW also requires employers to “make reasonable efforts to announce, post, or otherwise make known all opportunities for promotion to all current employees on the same calendar day and prior to making a promotion decision.” C.R.S. § 8-5-201(1). This requirement applies broadly and includes only a few, very narrow exceptions.

The EPEW Posting Requirements Apply to Remote Jobs, Even If the Job Posting Excludes Colorado Applicants

The CDLE’s newly revised guidance states that the EPEW applies to “any posting by a covered employer for either (1) work tied to Colorado locations or (2) remote work performable anywhere, but not (3) work performable only at non-Colorado worksites.” INFO #9. The posting requirements’ “out-of-state exception … applies to only jobs tied to non-Colorado worksites (e.g., waitstaff at restaurant locations in other states), but not to remote work performable in Colorado or elsewhere.” Id. (emphasis added). Thus, a “remote job posting, even if it states that the employer will not accept Colorado applicants, remains covered by the [EPEW’s] transparency requirements.” Id.

The CDLE Sent “Compliance Assistance Letters” to Employers Excluding Coloradans from Remote Jobs

Consistent with INFO #9’s guidance regarding remote jobs, the CDLE announced it was sending a “Compliance Assistance Letter” to “all covered employers with remote job postings lacking pay disclosure and excluding Coloradans.” Compliance Assistance Letter. The Letter explained that, for “any employer with any Colorado staff,” “[r]emote jobs are clearly covered by the [EPEW’s] pay disclosure requirement, regardless of an employer’s expressed intent not to hire Coloradans.” Thus, “when employers covered by the [EPEW] post remote jobs covered by the Act, declaring a preference not to hire Coloradans does not eliminate the Act’s pay disclosure duty.”

The Letter goes on to provide general, high-level guidance on how to comply with the EPEW’s compensation-and-benefits posting requirements, including the following:

“The required pay information can be brief,” such as just saying “$50,000 – $55,000, health insurance, and IRA.”
“No special form, or format” of posting “is required — as long as the posting includes the required pay and benefits information.”
“Pay information can be included or linked in a posting, if the employer prefers.”
A “flexible” compensation range “from the lowest to the highest the employer genuinely may offer for that particular position can be posted.”
An “out-of-range offer is allowed if the range was a good-faith expectation, but then unanticipated factors required higher or lower pay.”
“The employer’s name need not be included [in the posting], if it wants discretion and is posting in a third-party site or publication.”

This guidance largely conforms to the CDLE’s prior guidance on these issues.

The CDLE Has Not Imposed Any Penalties … Yet

Consistent with its prior public stances, the CDLE indicated that it is currently focused on compliance through education, rather than fines. The Letter notes that, thus far, all of the employers that the CDLE has contacted about EPEW violations have agreed to fix their postings “promptly,” and the CDLE “happily exercised its discretion to waive all potential fines in each case, believing each employer to have acted in good faith.”

In addition, the CDLE stated that it is first sending the Compliance Assistance Letter to each employer excluding Colorado applicants from remote jobs, “rather than immediately launching investigations of each” employer. The Letter also offers these employers “individualized advice” from the CDLE by phone or email about how to comply with the EPEW posting requirements. Finally, the CDLE gives each employer who receives the Letter until “Tuesday, August 10, 2021, to indicate by what date all covered job postings will include the required pay and benefits disclosures.”

Additional CDLE Guidance Regarding the Required Contents of Job Postings

In addition to explaining the posting requirements for remote jobs, the CDLE provided a few other clarifications of its prior EPEW guidance:

In providing the required “general description of all of the benefits the employer is offering for the position,” employers “cannot use an open-ended phrase such as ‘etc.,’ or ‘and more.’” INFO #9. However, consistent with its prior guidance, employers can simply say something brief like “$50,000 – $55,000, health insurance, and IRA.” Compliance Assistance Letter.
Employers continue to be allowed to post a good-faith compensation range (which employers may ultimately depart from, in limited circumstances). INFO #9. But the compensation range’s “bottom and top cannot be left unclear with open-ended phrases such as ‘[$]30,000 and up’ (with no top of the range), or ‘up to $60,000’ (with no bottom of the range).”
The compensation posting requirements do not apply to “Help Wanted” signs or “similar communication indicating only generally, without reference to any particular positions, that an employer is accepting applications or hiring.” INFO #9. In contrast, a job posting that must comply with the compensation-and-benefits posting requirements is “any written or printed communication (whether electronic or hard copy) that the employer has a specific job or jobs available or is accepting job applications for a particular position or positions.”
Job postings need not include the employer’s name, if the employer “wants discretion and is posting in a third-party site or publication — as long as the posting includes the required pay and benefits information.” Compliance Assistance Letter. The Letter does not clarify whether a no-name posting would also comply with the EPEW’s promotion posting requirements, or just the compensation posting requirements.

Key Takeaways

This new guidance indicates that the CDLE is focused on foreclosing the methods that some employers were using to try to avoid the more challenging aspects of the EPEW’s compensation-and-benefits posting requirements. In contrast, little of the new CDLE guidance relates to the EPEW’s internal, promotion posting requirements (which in some ways may be even more challenging for Colorado employers).

Finally, the CDLE continues to indicate that it is focused on encouraging EPEW compliance through education, rather than fines, at least for now. Nonetheless, given the CDLE’s (and the public’s) continued scrutiny of compliance with this law, employers with any Colorado employees should ensure that their job postings are compliant as soon as possible. In particular, whether or not they have yet received a Compliance Assistance Letter from the CDLE, employers that had been relying on excluding Colorado applicants from remote jobs should revise their job postings to bring them into compliance with the EPEW, as interpreted by the CDLE.

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

Jessica Brown – Denver (+1 303-298-5944, [email protected])
Marie Zoglo – Denver (+1 303-298-5735, [email protected])

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

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

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

This edition of Gibson Dunn’s Federal Circuit Update discusses recent Federal Circuit decisions concerning pleading requirements, obviousness, and more Western District of Texas venue issues. Also this month, the U.S. Senate voted to confirm Tiffany P. Cunningham to be United States Circuit Judge for the Federal Circuit and Federal Circuit Judge Kathleen O’Malley announced her retirement.

Federal Circuit News

Supreme Court:

The Court did not add any new cases originating at the Federal Circuit.

The following petitions are still pending:

Biogen MA Inc. v. EMD Serono, Inc. (U.S. No. 20-1604) concerning anticipation of method-of-treatment patent claims. Gibson Dunn partner Mark A. Perry is counsel for the respondent.
American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20‑891) concerning patent eligibility under 35 U.S.C. § 101, in which the Court has invited the Solicitor General to file a brief expressing the views of the United States.
PersonalWeb Technologies, LLC v. Patreon, Inc. (U.S. No. 20-1394) concerning the Kessler

Other Federal Circuit News:

On July 19, 2021, the U.S. Senate voted to confirm Tiffany P. Cunningham as United States Circuit Judge for the Federal Circuit by a vote of 63-33. Judge Cunningham was a partner at Perkins Coie LLP and was previously a partner at Kirkland & Ellis LLP. Ms. Cunningham is a graduate of Harvard Law School and she earned a Bachelor of Science in chemical engineering from the Massachusetts Institute of Technology. Ms. Cunningham clerked for Judge Dyk of the Federal Circuit.

Federal Circuit Judge Kathleen O’Malley announced her plans to retire from the bench on March 11, 2022. Judge O’Malley was appointed to the Federal Circuit by President Obama in 2010. Prior to her elevation to the Federal Circuit, Judge O’Malley was appointed to the U.S. District Court for the Northern District of Ohio by President Clinton in 1994.

Upcoming Oral Argument Calendar

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

Live streaming audio is available on the Federal Circuit’s new YouTube channel. Connection information is posted on the court’s website.

The court will resume in-person arguments starting with the September 2021 court sitting.

Key Case Summaries (July 2021)

Bot M8 LLC v. Sony Corporation of America (Fed. Cir. No. 20-2218): Bot M8 LLC (“Bot M8”) sued Sony Corporation of America (“Sony”) for infringement of various patents. The district court sua sponte directed Bot M8 to file an amended complaint requiring Bot M8 to specify how every element of every claim is infringed and to reverse engineer the PS4 (the accused product) if it was able to. Bot M8 agreed to do so. After Bot M8 filed its First Amended Complaint (“FAC”), Sony filed a motion to dismiss, which the court granted. In a discovery hearing two days later, Bot M8 raised for the first time that in order to reverse engineer the PS4 and view the underlying code, it would have to “jailbreak” the system, which is a violation of the Digital Millennium Copyright Act (“DMCA”) and other anti-hacking statutes. In response, Sony gave Bot M8 permission to jailbreak the system. Bot M8 then sought leave of the court to file its Second Amended Complaint (“SAC”). The court denied Bot M8’s request citing lack of diligence. Bot M8 appealed the district court’s dismissal.

The panel (O’Malley, J., joined by Linn and Dyk, J.J.) affirmed-in-part, reversed-in-part, and remanded, holding that the district court was correct in dismissing two of the patents, but that it required “too much” with respect to the other two patents. The panel reaffirmed that “[a] plaintiff is not required to plead infringement on an element-by-element basis.”

For the first two patents, the panel affirmed the district court finding it did not err in dismissing the claims for insufficiently pleading a plausible claim because (1) the factual allegations were inconsistent and contradicted infringement, and (2) the allegations were conclusory. With respect to the second two patents, the panel reversed the district court determining that Bot M8 had supported its “assertions with specific factual allegations” and that the district court “demand[ed] too much” by dismissing these claims. The panel also affirmed the district court’s decision to deny Bot M8’s motion for leave to amend for lack of diligence. The panel noted that although it may have granted Bot M8’s motion if deciding it in the first instance, it found no abuse of discretion. While the district court should not have required reverse engineering of Sony’s products, Bot M8 waived its objections by telling the court it was happy to undertake the exercise. Moreover, Bot M8 failed to raise any concerns regarding its ability to reverse engineer the PS4 under the DMCA until after the court had issued its decision on Sony’s motion to dismiss.

Chemours Company v. Daikin Industries (Fed. Cir. No. 20-1289): The case involved two IPR final written decisions of the PTAB, which determined that claims directed to a polymer with a high melt flow rate are obvious. The Board relied on a prior art patent (“Kaulbach”) that disclosed a lower melt flow rate and a “very narrow molecular weight distribution.” The Board concluded that a POSA would be motivated to increase Kaulbach’s melt flow rate to the claimed range, even though doing so would broaden molecular weight distribution.

A majority of the panel (Reyna, J., joined by Newman, J.) reversed, holding that Kaulbach taught away from broadening molecular weight distribution and that, therefore, the Board’s proposed modification would necessarily alter Kaulbach’s inventive concept. Judge Dyk dissented in part on this issue, arguing that Kaulbach did not teach away from broadening molecular weight distribution, but only offered better alternatives. According to Judge Dyk, the Court’s precedent makes clear that an inferior combination may still be used for obviousness purposes. Judge Dyk also noted that increasing Kaulbach’s melt flow rate to the claimed range would not have necessarily broadened the molecular weight distribution beyond levels Kaulbach taught were acceptable.

In the unanimous part of the opinion, the panel also rejected the Board’s commercial success analysis, holding that the Board made three errors. First, the panel held that the Board erred by concluding that there could be no nexus between the claimed invention and the alleged commercial success because all elements of the challenged claims were present in Kaulbach or other prior art. The Court explained that where an invention is a unique combination of known elements, “separate disclosure of individual limitations . . . does not negate a nexus.” Next, the Court disagreed with the Board’s decision to require market share data, holding that sales data alone may be sufficient to show commercial success. Lastly, the Court rejected the Board’s finding that the proffered commercial success evidence was weak because the patents at issue were “blocking patents.” The Court held that “the challenged patent, which covers the claimed invention at issue, cannot act as a blocking patent.”

In re: Uber Technologies, Inc. (Fed Cir. No. 21-150) (nonprecedential): Uber sought a writ of mandamus ordering the United States District Court for the Western District of Texas to transfer the underlying actions to the United States District Court for the Northern District of California. The panel (Dyk, J., joined by Lourie and Reyna, J.J.) granted the petition. Gibson Dunn is counsel for Uber.

The panel explained that it had recently granted mandamus to direct the district court to transfer in two other actions filed by the plaintiffs asserting infringement of two of the same patents against different defendants, in In re Samsung Electronics Co., Nos. 2021-139, -140 (see our June 2021 update). In that case, the Federal Circuit rejected the district court’s determination that the plaintiffs’ actions could not have been brought in the transferee venue because the presence of the Texas plaintiff “is plainly recent, ephemeral, and artificial—just the sort of maneuver in anticipation of litigation that has been routinely rejected.” Noting that the district court itself recognized that the issues presented here are identical to those in plaintiffs’ other cases, the panel held that, as in Samsung, the district court erred in concluding that Uber had failed to satisfy the threshold question for venue.

With respect to the district court’s analysis of the traditional public and private factors, the court explained that this case involved very similar facts to those in Samsung, where the Court found that the district court erred by 1) “giving little weight to the presence of identified party witnesses in the Northern District of California despite no witness being identified in or near the Western District of Texas”; 2) “simply presuming that few, if any, party and non-party identified witnesses will likely testify at trial despite the defendants’ submitting evidence and argument to the contrary”; and 3) finding that “there was a strong public interest in retaining the case in the district based on Ikorongo’s other pending infringement action against Bumble Trading, LLC.” The court concluded that there was no basis for a disposition different from the one reached in Samsung. It noted that the reasons for not finding that judicial economy to override the clear convenience of the transferee venue apply with even more force here, given that the court had already directed the Samsung and LG actions to be transferred to Northern California in In re Samsung. The panel also found that the district court clearly erred in negating the transferee venue’s strong local interest by relying merely on the fact that the plaintiffs alleged infringement in the Western District of Texas.

In re: TCO AS (Fed. Cir. No. 21-158) (nonprecedential): NCS Multistage, Inc., a Canadian corporation, and NCS Multistage LLC, its Houston, Texas based subsidiary, sued TCO AS, a Norwegian company, for patent infringement in the Western District of Texas. TCO moved to transfer the case to the Southern District of Texas pursuant to 28 U.S.C. § 1404(a). The district court denied the motion, finding that TCO had failed to show the transferee venue was clearly more convenient.

TCO petitioned for a writ of mandamus, which the Federal Circuit (Taranto, Hughes, Stoll, JJ.) denied. Stressing the “highly deferential standard” for resolving a mandamus petition, the Federal Circuit could not “say that TCO has a clear and indisputable right to relief, particularly in light of the fact that several potential witnesses are located out-side of the proposed transferee venue, including some in the Western District of Texas, and the fact that the only party headquartered in the proposed transferee venue elected to litigate this case in the Western District of Texas.”

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:

Blaine H. Evanson – Orange County (+1 949-451-3805, [email protected])
Jessica A. Hudak – Orange County (+1 949-451-3837, [email protected])

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

Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, [email protected])
Mark A. Perry – Washington, D.C. (+1 202-887-3667, [email protected])

Intellectual Property Group:
Kate Dominguez – New York (+1 212-351-2338, [email protected])
Y. Ernest Hsin – San Francisco (+1 415-393-8224, [email protected])
Josh Krevitt – New York (+1 212-351-4000, [email protected])
Jane M. Love, Ph.D. – New York (+1 212-351-3922, [email protected])

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

On July 28, 2021, certain Democratic members of Congress, primarily in response to the $4.325 billion contribution made by the Sackler family to fund the settlement underpinning Purdue Pharma’s chapter 11 plan, introduced the Nondebtor Release Prohibition Act of 2021 (the “NRPA”), which proposes to amend the Bankruptcy Code to (i) prohibit the use of non-consensual third party releases in chapter 11 plans, (ii) limit so-called “Section 105” injunctions to stay lawsuits against third parties to a period no greater than 90 days after the commencement of a bankruptcy case, and (iii) provide a ground for dismissing a bankruptcy case commenced by a debtor that was formed within 10 years prior to such case via a divisional merger that separated material assets from liabilities.

The proposed elimination of the important bankruptcy tools of non-consensual third party releases and Section 105 injunctions – each of which is extraordinary in nature and only permitted in the rarest of circumstances – is a blunt force measure that threatens to vitiate the longstanding bankruptcy policy of favoring settlements over interminable value-destructive litigation. Moreover, the loss of these tools may cause inequitable disruption in currently pending cases and stymie the implementation of critical creditor-supported strategies to resolve the most difficult cases going forward. Additionally, while the disincentive against divisional mergers would affect a far more limited set of cases, it appears that the harm raised by some divisional mergers that are followed by bankruptcy may be adequately addressed through clarifying the applicability of fraudulent transfer law to challenge these transactions.

I. Bankruptcy Tools Impacted by the Proposed Legislation

At the heart of corporate chapter 11 bankruptcies are an array of tools that serve to preserve the value of a debtor’s estate for the benefit of all stakeholders. Certain tools promote the “breathing spell” necessary for a debtor to formulate and propose a plan, while others, such as the power to reject executory contracts, allow debtors to restructure their operations to emerge from bankruptcy stronger and with greater prospects to succeed than when it filed for bankruptcy.

a. Non-Consensual Third Party Releases

Non-consensual releases of third parties are not common and typically arise as a provision in a chapter 11 plan in which the release of the applicable third party in question is essential to a reorganization in light of, among other considerations, the identity of interest of such third party and the debtor and the substantial economic contribution made to the chapter 11 plan by such third party.

Section 105 of the Bankruptcy Code is often cited as a statutory basis for such releases. Section 105 permits a bankruptcy court to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions” of the Bankruptcy Code.

These releases are distinct from voluntary releases that are commonly featured in corporate chapter 11 plans, whereby creditors are given an opportunity to “opt out” of such releases. A key contextual distinction between these two types of releases is that in the rarer instances in which non-consensual third party releases are sought, the economic contribution of the released third party is so substantial and vital to a chapter 11 plan as to require as a condition to such contribution that all claims against such third party be released, without regard to whether a subset of holdout creditors desire not to provide the release.

Currently, there is a federal circuit split among the courts that have ruled on the permissibility of non-consensual third party releases in connection with a chapter 11 plan. Notably, the Ninth and Tenth Circuits prohibit such releases, while the Second, Third, Fourth, Sixth, Seventh, and Eleventh Circuits permit such releases, with the Fifth Circuit taking a more restrictive approach short of a flat prohibition.

In the circuits where non-consensual third party releases are permitted, a debtor must satisfy a high evidentiary bar to obtain approval of such releases. The factors a bankruptcy court must consider in such circuits include (i) the identity of interests between the debtor and the third party, such that a suit against the non-debtor is akin to a suit against the debtor due to, for example, an indemnity obligation that may deplete the debtor’s assets; (ii) whether the non-debtor has contributed substantial assets to the reorganization; (iii) whether the release is essential to reorganization; (iv) whether the impacted classes of claims have overwhelmingly accepted the plan in question; and (v) whether the bankruptcy court has made a record of specific factual findings to support such releases.

The application of this standard typically requires the released third party to make a substantial financial contribution to a chapter 11 plan, which, in turn, has received extensive creditor support. In essence, these releases serve as an integrated component of a comprehensive economic settlement of claims accepted widely by the creditor body and without which a debtor likely could not reorganize.

Notably, the American Bankruptcy Institute’s exhaustive 2014 report and recommendations on bankruptcy reform recommended the use of non-consensual third party releases based on a consideration of the above-referenced fact-intensive standard and discouraged the imposition of a blanket prohibition against such releases.

b. Injunctions Against Third-Party Lawsuits

Similar to non-consensual third party releases, bankruptcy courts have used their authority under Section 105 of the Bankruptcy Code to preliminarily stay lawsuits against third parties in furtherance of the debtor’s reorganizational efforts. These injunctions constitute extraordinary relief and thus are not routine in corporate chapter 11 cases.

When such injunctions are requested, a debtor must satisfy a multi-factor standard that in most jurisdictions requires consideration of the likelihood of a successful reorganization, the balance of harms, and the public interest in the injunction. These injunctions are typically limited to 60 to 90 days, but have been of longer duration in certain limited cases. For example, the Section 105 injunction in the Purdue Pharma case enjoining litigation against the Sacklers has persisted for a longer period given the central role such injunction has played in fostering the global multi-billion dollar settlement that was ultimately reached.

II. Commentary

While the NRPA may be the product of valid frustrations some parties may have experienced in certain contentious and emotionally charged bankruptcy cases, its passage will likely do more harm than good.

Implicit in the testimony supporting passage of the NRPA is the premise that litigation against third parties should be preserved in all cases despite substantial creditor support that may otherwise exist for the settlement of such claims and the resulting emergence of the debtor from chapter 11. Eliminating the judicial discretion available in certain jurisdictions to implement this tool and elevating the rights of holdout creditors in its stead could lead to value-destructive liquidation outcomes in difficult cases that could otherwise be salvaged through settlements supported by a supermajority of the creditor body that include non-consensual releases of contributing third parties.

The NRPA’s policy preference for preserving litigation claims against third parties who may play a role in plan formulation means that, in cases where a financial contribution is no longer viable due to such mandatory preservation of litigation claims, tort claimants may receive less of a recovery than they would have under the current state of the law and possibly no recovery at all in many cases.

When viewed against the backdrop of current complex chapter 11 practice, this proposed legislation is misguided and elevates the interests of a minority of creditors in contravention of the vaunted bankruptcy principle of binding intransigent holdout creditors through supermajority support for a chapter 11 plan.

Moreover, the bankruptcy tool of preliminary “Section 105” injunctions similarly must satisfy a high evidentiary bar, and bankruptcy courts in practice do not grant these injunctions lightly. These injunctions, which stay suits against individuals and entities that are vital to ongoing reorganization efforts, serve a valuable function in providing the debtor with a limited temporal window within which to negotiate comprehensive settlements with protected parties and, thereby, maximize the chances of a successful reorganization. These injunctions are usually relatively short in duration and subject to dissolution in the event the ultimate reorganization purpose underpinning them is no longer being served.

The NRPA’s disincentivizing of divisional mergers, such as are available under Texas law, is a creative attempt at curbing a perceived abuse in a limited subset of cases. Contrary to the rhetoric of the bill’s supporters, such divisional mergers, which are actually more akin to reverse mergers, are not exclusively followed by bankruptcy and have independent purposes under state law, which include providing a measure of successor liability protection to entities implementing such mergers.

Notably, a divisional merger is not the only means of corporate separation. Companies frequently separate assets and liabilities in corporate “spinoffs” and “splitoffs.” Indeed, when these types of separation transactions are followed by bankruptcy, they have frequently come under vigorous attack. In such cases, fraudulent transfer law has played a vital role in preserving the claims related to such transactions, either as a means of fostering settlement (e.g, Peabody Energy’s spinoff of Patriot Coal) or through post-confirmation litigation (e.g., Kerr-McGee’s spinoff of Tronox, which resulted in fraudulent transfer litigation that led to a multi-billion dollar damages award). In order to neuter any argument that a divisional merger is immune from fraudulent transfer law, clarifying language to the Bankruptcy Code to that effect may be a more direct solution than permitting dismissal of any case filed by a debtor within 10 years of its formation via divisional merger.

Procedurally, the NRPA still needs to move through the Congressional committee process and, based on the current composition of the Senate, will ultimately require some measure of Republican support in order to become law.

Gibson Dunn lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization practice group, or the following authors:

Michael J. Cohen – New York (+1 212-351-5299, [email protected])
Michael A. Rosenthal – New York (+1 212-351-3969, [email protected])
Matthew J. Williams – New York (+1 212-351-2322, [email protected])

Please also feel free to contact the following practice leaders:

Business Restructuring and Reorganization Group:
David M. Feldman – New York (+1 212-351-2366, [email protected])
Scott J. Greenberg – New York (+1 212-351-5298, [email protected])
Robert A. Klyman – Los Angeles (+1 213-229-7562, [email protected])

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

Last week the Department of Labor published a notice of proposed rulemaking to increase the minimum wage for federal contractors to $15.00 per hour, starting on January 30, 2022. This represents an approximately 37 percent increase over the current minimum wage for federal contractors of $10.95 per hour. The proposal follows President Biden’s April 27th Executive Order, titled “Increasing the Minimum Wage for Federal Contractors,” which directed the Department to undertake the rulemaking. The notice provides for a 32-day comment period that will close on August 23rd. Under President Biden’s Order, the Department has until November 24th of this year to issue a final regulation.

Under the proposed rule, the increased minimum wage would apply only to new contracts, including renewals and extensions of existing contracts, and to workers who are employed on or in connection with a federal contract. Beginning on January 1, 2023, and annually thereafter, the minimum wage would be increased in line with the annual percentage increase of the Consumer Price Index. Like President Biden’s Executive Order, the proposed rule offers as justification for the wage increase the purported efficiency benefits that come with a higher wage, including “enhance[d] worker productivity” and “higher quality work” due to increased worker health, morale, and effort. The proposal also reasons that a higher wage will reduce absenteeism and turnover, and lower supervisory and training costs.

Federal contractors concerned about the $15 minimum wage can participate in the rulemaking by submitting comments explaining how the wage requirement may increase, rather than decrease, their costs and their contract prices with the government.

The Executive Order, and by extension the proposed rule, rely on the President’s authority under the Federal Property and Administrative Services Act (the “Procurement Act”) to establish contracting practices that promote economy and efficiency in federal procurement. It is the latest in a long line of executive orders issued by presidents of both parties to use the procurement authority to influence contractors’ employment practices. Past orders addressed paid sick leave, use of the E-Verify system, mandatory postings about union members’ rights, and non-discrimination in hiring and employment. In the 1970s, President Carter cited efficiency in contracting as the reason to impose maximum wage requirements, in the form of wage controls.

The new $15 per hour wage requirement could be legally vulnerable if a court challenge is brought to the final rule. Courts have recognized that policies adopted under the Procurement Act must be connected to cost savings or other efficiency gains that benefit the federal government. A policy that has more to do with effecting a president’s domestic policy priorities than with saving the government money could be held to exceed the president’s authority. The wage requirement, insofar as its rationale is that increased labor costs will ultimately save federal funds, may be particularly vulnerable to such a challenge.

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

Eugene Scalia – Washington, D.C. (+202-955-8210, [email protected])
Blake Lanning* – Washington, D.C. (+1 202-887-3794, [email protected])

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

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

* Mr. Lanning is admitted only in Indiana and practicing under the supervision of members of the District of Columbia Bar.

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


William R. Hallatt Partner, Hong Kong	Michelle M. Kirschner Partner, London	Jeffrey L. Steiner Partner, Washington, D.C.

Table of Contents

I. U.S. NATIONAL POLICY & REGULATORY DEVELOPMENTS

A. U.S. National AI Strategy

1. Senate Passes Bipartisan U.S. Innovation and Competition Act (S. 1260) to Bolster Tech Competitiveness with China

2. U.S. Launches National AI Research Resource Task Force and National Artificial Intelligence Advisory Committee

3. Understanding “Trustworthy” AI: NIST Proposes Model to Measure and Enhance User Trust in AI Systems

4. GAO Publishes Report “Artificial Intelligence: An Accountability Framework for Federal Agencies and Other Entities”

B. National Security

1. Artificial Intelligence Capabilities and Transparency (“AICT”) Act

C. Algorithmic Accountability and Consumer Protection

1. Federal Lawmakers Reintroduce the Facial Recognition and Biometric Technology Moratorium Act

2. Algorithmic Justice and Online Platform Transparency Act of 2021 (S. 1896)

3. House Approves Bill to Study Cryptocurrency and Consumer Protection (H.R. 3723)

4. Data Protection Act of 2021 (S. 2134)

D. Autonomous Vehicles (“AVs”)

II. EU POLICY & REGULATORY DEVELOPMENTS

A. EDPB & EDPS Call for Ban on Use of AI for Facial Recognition in Publicly Accessible Spaces

The EPEW’s Posting Requirements

Federal Circuit News

Upcoming Oral Argument Calendar

Key Case Summaries (July 2021)

I. Bankruptcy Tools Impacted by the Proposed Legislation

a. Non-Consensual Third Party Releases

b. Injunctions Against Third-Party Lawsuits

II. Commentary