Decided June 17, 2021

Fulton v. City of Philadelphia, No. 19-123

Today, the Supreme Court held 9-0 that Philadelphia violated the First Amendment by refusing to contract with a Catholic agency for declining to certify same-sex couples as foster parents.

Background:
Philadelphia contracts with private agencies to place children with foster parents. The city’s contracts incorporate a city ordinance prohibiting sexual-orientation discrimination in public accommodations. Catholic Social Services (“CSS”) contracted with the city to provide foster-care placement services. After learning that CSS would not certify same-sex couples as foster parents based on its religious beliefs regarding marriage, the city refused to renew its contract with CSS. CSS sued, alleging that the city had violated CSS’s First Amendment rights.

The Third Circuit, applying Employment Division v. Smith, 494 U.S. 872 (1990), held that the city’s nondiscrimination policy is a neutral, generally applicable law, and that CSS failed to show that the city either treated CSS differently than secular organizations or had ill will against religion.

Issue:
Whether the First Amendment prohibits the government from forcing a religious agency to comply with a non-discrimination requirement in order to participate in the foster-care system, where compliance requires the agency to take actions and make statements contrary to its religious beliefs.

Court’s Holding:
Yes, at least where, as here, the non-discrimination requirement is not generally applicable and the government fails to offer a compelling reason to deny the religious agency an exemption. 

“The refusal of Philadelphia to contract with CSS for the provision of foster care services unless it agrees to certify same-sex couples as foster parents cannot survive strict scrutiny, and violates the First Amendment.”

Chief Justice Roberts, writing for the Court

What It Means:

• Today’s decision reiterates that the government must have a compelling reason to enforce a nondiscrimination policy that burdens religious exercise if the policy otherwise permits exemptions.
• Because the Court determined that strict scrutiny applied regardless of Employment Division v. Smith, it “ha[d] no occasion to reconsider that decision.” The decision thus leaves the door open to further litigation involving the intersection of faith-based organizations and government nondiscrimination policies. If a nondiscrimination policy is subject to exemptions, the government’s failure to grant religious exemptions likely will be subject to strict scrutiny.
• The Court’s narrow, fact-specific ruling leaves unanswered whether the First Amendment mandates religious exemptions to nondiscrimination policies in other contexts. Any such religious objections will have to be evaluated on their own merits under the appropriate level of scrutiny.
• Although the majority declined to address the continued viability of Employment Division v. Smith, three justices (Justices Thomas, Alito, and Gorsuch) would have overruled Smith and two more (Justices Barrett and Kavanaugh) suggested that the “textual and structural arguments against Smith” were “compelling.”

---

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

Allyson N. Ho +1 214.698.3233 [email protected]

Mark A. Perry +1 202.887.3667 [email protected]

Decided June 17, 2021

Texas v. California, No. 19-1019, consolidated with California v. Texas, No. 19-840

Today, the Supreme Court rejected another challenge to the Affordable Care Act’s individual mandate because the plaintiffs lacked standing to challenge it.

Background:
In 2012, the Supreme Court rejected constitutional challenges under the Commerce Clause to the requirement in the Affordable Care Act (“ACA”) that individuals must maintain health insurance coverage. The Court reasoned that the ACA was not a command to buy health insurance—which Congress would lack the power to enact—but merely a tax for not doing so. In December 2017, Congress amended the ACA to eliminate the penalty for not buying health insurance, but Congress did not eliminate the ACA’s individual mandate to maintain health insurance coverage.

Two individuals and several states, including Texas, then challenged the individual mandate as unconstitutional, arguing that because it no longer carried a penalty, it no longer qualified as a tax. They also argued that because the individual mandate is essential to the ACA, the entire statute must be struck down. The Trump Administration refused to defend the ACA’s constitutionality. Several states, including California, intervened to defend the statute and challenge the plaintiffs’ Article III standing. The Fifth Circuit held that the plaintiffs possessed standing, held the individual mandate is unconstitutional, and directed the district court to consider an appropriate remedy on remand.

Issue:
(1) Whether the plaintiffs have Article III standing to challenge the constitutionality of the ACA’s individual mandate; (2) whether the individual mandate is unconstitutional because it no longer qualifies as a tax, and (3) if the individual mandate is unconstitutional, whether the entire ACA must be struck down.

Court’s Holding:
The individual plaintiffs do not have Article III standing to challenge the ACA’s individual mandate. Even if payments necessary to hold the insurance coverage required by the ACA were an injury, that injury is not traceable to the government, because without any penalty for noncompliance the statute is unenforceable. The states do not have Article III standing either, because they have not shown their injuries are fairly traceable to unlawful government conduct.

“Neither the individual nor the state plaintiffs have shown that the injury they will suffer or have suffered is ‘fairly traceable’ to the ‘allegedly unlawful conduct’ of which they complain.”

Justice Breyer, writing for the Court

What It Means:

• The Court’s ruling leaves unresolved the merit questions presented in the case: whether the individual mandate is constitutional or whether it is severable from the rest of the ACA. The Court will likely be asked to revisit these legal issues in the future.
• This decision is the latest of several high-profile cases this Term in which the Court has declined to reach the merits because of a lack of Article III standing. The Court similarly found a lack of Article III standing in Trump v. New York and Carney v. Adams.
• Two dissenting Justices, in an opinion written by Justice Alito and joined by Justice Gorsuch, would have held that (1) the state plaintiffs possess standing in light of the increased regulatory and financial burdens from complying with the ACA, and they did not forfeit these claims, and (2) the individual mandate is unconstitutional and not severable from the rest of the ACA.

---

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

Allyson N. Ho +1 214.698.3233 [email protected]

Mark A. Perry +1 202.887.3667 [email protected]

Ethan Dettmer +1 415.393.8292 [email protected]

Lucas C. Townsend +1 202.887.3731 [email protected]

Bradley J. Hamburger +1 213.229.7658 [email protected]

Decided June 17, 2021

Nestlé USA, Inc. v. Doe, No. 19-416, consolidated with Cargill, Inc. v. Doe, No. 19-453

Today, the Supreme Court held 8-1 that plaintiffs suing domestic corporations for aiding and abetting international law violations overseas had failed to allege a sufficient domestic nexus for the conduct to support liability under the Alien Tort Statute.

Background:
The Alien Tort Statute (“ATS”) gives federal courts jurisdiction over “any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.” 28 U.S.C. § 1350. The plaintiffs in these consolidated cases sued Nestlé USA, Inc. and Cargill, Inc.—both domestic corporations—under the ATS for allegedly aiding and abetting the use of child slavery on cocoa farms in Côte d’Ivoire. The defendants sought dismissal on the ground that the ATS reaches only domestic violations, and that the plaintiffs’ injuries were incurred entirely overseas. The defendants argued also that under Jesner v. Arab Bank, PLC, 138 S. Ct. 1386 (2018)—in which the Court held that foreign corporations may not be sued under the ATS—domestic corporations are not liable for violations of international law under the ATS.

The Ninth Circuit disagreed and permitted the plaintiffs to proceed with their claims. It held that the ATS covers any conduct that might constitute aiding and abetting, and that the plaintiffs’ claims were not extraterritorial under that standard because the plaintiffs had alleged that the defendants had provided personal spending money to Côte d’Ivoire farmers to maintain their loyalty. The Ninth Circuit further held that Jesner addressed only whether foreign corporations may be sued under the ATS, as suits against domestic corporations do not raise the same foreign affairs concerns.

Issue:
Does the ATS extend liability to domestic corporations?

Does the ATS extend to suits alleging that a domestic corporation aided and abetted illegal conduct by unidentified foreign actors based on corporate activity in the United States?

Court’s Holding:
The ATS does not extend to suits alleging that general corporate activity in the United States aided and abetted violations of the law that ultimately occurred overseas through unrelated, foreign third parties. 

“[A]llegations of general corporate activity—like decisionmaking—cannot alone establish domestic application of the ATS.”

Justice Thomas, writing for the Court

What It Means:

• Plaintiffs bringing suit under the ATS must establish a strong, domestic nexus for their claim. It is not sufficient for plaintiffs merely to allege general corporate decisionmaking in the United States.
• Domestic corporations will have strong arguments that they cannot be held liable in suits brought under the ATS simply for participating in a global supply chain in which foreign third parties may have violated international law.
• The Court did not resolve the issue whether corporations can held liable under the ATS, although five Justices indicated their view that corporations are not immune from liability under the ATS.
• Although not decided in this case, the various separate opinions indicate disagreement among the Justices as to whether courts are empowered to recognize new causes of action under the ATS, or whether they are confined to the three specific torts (violation of safe conducts, infringement of the rights of ambassadors, and piracy) identified in Sosa v. Alvarez Machain, 542 U.S. 692 (2004).

---

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

Allyson N. Ho +1 214.698.3233 [email protected]

Mark A. Perry +1 202.887.3667 [email protected]

Lucas C. Townsend +1 202.887.3731 [email protected]

Bradley J. Hamburger +1 213.229.7658 [email protected]

Related Practice: Transnational Litigation

Perlette Michèle Jura +1 213.229.7121 [email protected]

On Saturday, June 14, 2021, a federal judge in Texas dismissed the lawsuit filed by employees and former employees against Houston Methodist Hospital challenging its policy requiring all employees to be vaccinated against COVID-19. The holding may provide some degree of reassurance to employers that have decided to require employees to be vaccinated against COVID-19.

The plaintiffs claimed that (1) they were wrongfully discharged, (2) the vaccine mandate violates public policy, (3) the vaccine mandate violates the Food, Drug, and Cosmetic Act (“FDCA”) provisions on emergency use authorization (“EUA”), (4) the vaccine mandate violates federal laws on human test subjects, and (5) the vaccine mandate violates the Nuremberg Code. The plaintiffs sought damages as well as declaratory and injunctive relief.

Judge Lynn N. Hughes of the U.S. District Court for the Southern District of Texas issued a four-page order holding that the plaintiffs failed to state any claim on which relief could be granted.

First, the plaintiffs’ wrongful discharge claim failed because Texas state law “only protects employees from being terminated for refusing to commit an act carrying criminal penalties to the worker,” and “[r]eceiving a COVID-19 vaccination is not an illegal act.”

Second, the plaintiffs’ claims based on a public-policy exception to at-will employment failed because “Texas does not recognize [an] exception to at-will employment” based on “public policy,” and even if it did, the Hospital’s vaccine mandate would not qualify for an exception. This determination was based on Supreme Court precedent holding that due process is not violated by involuntary quarantine to prevent transmission of contagious diseases or by mandatory vaccination requirements, as well as non-binding guidance from the Equal Employment Opportunity Commission that employers can mandate vaccination for employees, as long as they do so subject to reasonable accommodation requirements under the Americans with Disabilities Act and Title VII.

Third, Judge Hughes rejected the plaintiffs’ arguments that the Hospital’s vaccine mandate violated the provisions of the FDCA that require the Secretary of Health and Human Services to ensure that recipients of products authorized for emergency use under § 21 U.S.C. § 360bbb-3 are informed of the “option to accept or refuse administration of the product.” (Emphasis added.) The opinion explained that there is no private right of action under Section 360bbb-3, and the provision “neither expands nor restricts the responsibilities of private employers”—and in fact “does not apply at all to private employers.”

Fourth, the opinion rejected the plaintiffs’ argument that they were being unlawfully forced to participate in a human trial and that the vaccination policy violated the Nuremberg Code. “Equating the injection requirement to medical experimentation in concentration camps is reprehensible,” Judge Hughes commented.

Finally, Judge Hughes explained that the Hospital’s vaccine mandate does not amount to coercion. Just as the FDCA provides, an employee “can freely choose to accept or refuse a COVID-19 vaccine; however, if she refuses, she will simply need to work somewhere else…. Every employment includes limits on the worker’s behavior in exchange for his remuneration. That is all part of the bargain.”

Judge Hughes’ reasoning is consistent with that of many employers who have implemented or considered a vaccination mandate. Although the order does not eliminate all risk to employers that a vaccine mandate could be found unlawful—it will not be binding precedent on other courts faced with similar challenges to employer-mandated vaccines in the future—it should provide some degree of reassurance to employers, particularly with regard to its holding that the FDCA EUA provisions do not create employment rights and are not susceptible to a private right of action.

---

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, any member of the firm’s Labor and Employment practice group, or the following authors:

Jessica Brown – Denver (+1 303-298-5944, [email protected])
Hannah Regan-Smith – Denver (+1 303-298-5761, [email protected])

Please also feel free to contact the following practice leaders:

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

© 2021 Gibson, Dunn & Crutcher LLP

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

The People’s Republic of China is clamping down on the extraction of litigation- and investigation-related corporate and personal data from China—and this may squeeze litigants and investigation subjects in the future. Under a new data security law enacted late last week and an impending personal information protection law, China is set to constrict sharing broad swaths of personal and corporate data outside its borders. Both statutes would require companies to obtain the approval of a yet-to-be-identified branch of the Chinese government before providing data to non-Chinese judicial or law enforcement entities. As detailed below, these laws could have far-reaching implications for companies and individuals seeking to provide data to foreign courts or enforcement agencies in the context of government investigations or litigation, and appear to expand the data transfer restrictions set forth in other recent Chinese laws.[1]

Data Security Law of the People’s Republic of China

On June 10, 2021, the National People’s Congress passed the Data Security Law, which will take effect on September 1, 2021. The legislation contains sweeping requirements and severe penalties for violations. It governs not only data processing and management activities within China, but also those outside of China that “damage national security, public interest, or the legitimate interests of [China’s] citizens and organizations.”[2]

The Data Security Law generally requires entities and individuals operating within China to implement systems designed to protect in-country data. For example, entities that handle “important” data—a term not yet defined by the statute—must designate personnel responsible for data security and conduct assessments to monitor potential risks.[3] Chinese authorities may issue fines up to 500,000 CNY (approximately $78,000) and mandate remedial actions if an entity does not satisfy these requirements.[4] If the entity fails to implement required remedial actions after receiving a warning and/or its failure to implement adequate controls result in a large-scale data breach, the entity may be subject to a fine of up to 2 million CNY (approximately $313,000). Under these circumstances, authorities also may revoke the offending entity’s business licenses and issue fines to responsible individuals.[5]

The Data Security Law also states that a “violation of the national core data management system or endangering China’s national sovereignty, security, and development interests” is punishable by an additional fine up to 10 million CNY (approximately $1.56 million), suspension of business, revocation of business licenses, and in severe cases, criminal liability.[6] The Data Security Law broadly defines “core data” to include “data related to national security, national economy, the people’s welfare, and major public interests.”[7]

Most notably, Article 36 of the Data Security Law prohibits “provid[ing] data stored within the People’s Republic of China to foreign judicial or law enforcement bodies without the approval of the competent authority of the People’s Republic of China.”[8] The law does not identify the “competent authority” or outline the approval process. Failure to obtain this prior approval may subject an entity to a fine of up to 1,000,000 CNY (approximately $156,000), as well as additional fines for responsible individuals.[9] Although the Data Security Law discusses different categories of covered data elsewhere in the legislative text—referring to, for example, the “core data” discussed above[10]—Article 36, as written, appears to apply to the transfer of any data, regardless of subject matter and sensitivity, so long as it is stored in China. The final legislative text also includes additional, heavier penalties for severe violations that had not been included in prior drafts, including a fine of up to 5 million CNY (approximately $780,000), suspension of business operations, revocation of business licenses, as well as increased fines for responsible individuals. The statute does not, however, define what violations would be considered “severe.”

While the legal community in and outside of China will certainly seek additional guidance from the Chinese government, it is unclear whether the Chinese government will release implementing regulations or other guidance materials before September 1, 2021, when the law takes effect. As a point of reference, the Chinese government has not issued additional guidance on the International Criminal Judicial Assistance Law, which prohibits, among other things, unauthorized cooperation of a broad nature with foreign criminal authorities, since the law was passed in 2018. Nevertheless, given that data security and privacy are one of Beijing’s areas of focus, it is possible that the Chinese government will issue regulations, statutory interpretation, or guidance to clarify certain key requirements in the Data Security Law.

Personal Information Protection Law of the People’s Republic of China

On April 29, 2021, China released the second draft of its Personal Information Protection Law, which seeks to create a legal framework similar to the European Union’s General Data Protection Regulations (“GDPR”). The draft Personal Information Protection Law, if passed, will apply to “personal information processing entities (“PIPEs”),” defined as “an organization or individual that independently determines the purposes and means for processing of personal information.”[11] The draft Personal Information Protection Law defines processing as “the collection, storage, use, refining, transmission, provision, or public disclosure of personal information.”[12] The draft Personal Information Protection Law also defines “personal information” broadly as “various types of electronic or otherwise recorded information relating to an identified or identifiable natural person,” but excludes anonymized information.[13]

The draft Personal Information Protection Law requires PIPEs that process certain volumes of personal data to adopt protective measures, such as designating a personal information protection officer responsible for supervising the processing of applicable data.[14]  PIPEs also would be required to carry out risk assessments prior to certain personal information processing and conduct regular audits.[15]

Under Article 38 of the draft Personal Information Protection Law, the Cyberspace Administration of China (“CAC”) will provide a standard contract for PIPEs to reference when entering into contracts with data recipients outside of China. The draft Personal Information Protection Law provides that PIPEs may only transfer personal information overseas if the PIPE: (1) passes a security assessment administered by the CAC; (2) obtains certification from professional institutions in accordance with the rules of the CAC; (3) enters into a transfer agreement with the transferee using the standard contract published by the CAC; or (4) adheres to other conditions set forth by law, administrative regulations, or the CAC.[16] Like the Data Security Law, the draft Personal Information Protection Law does not elaborate on this requirement, including what types of certifications would satisfy the requirement under Article 38 or what “other conditions set forth by law, administrative regulations, or the CAC” entail.

Similar to Article 36 of the Data Security Law, Article 41 of the draft Personal Information Protection Law prohibits providing personal data to judicial or law enforcement bodies outside of China without prior approval of competent Chinese authorities.[17]  As with the Data Security Law, neither the “competent Chinese authority” nor the approval process is further defined, however.

The draft Personal Information Protection Law does not include penalties specifically tied to Article 41, but does set forth general penalty provisions in Article 65, which include confiscation of illegal gains, and a basic fine of up to 1 million CNY (approximately $156,000) for companies and between 10,000 CNY and 100,000 CNY (approximately $15,600 to $156,000) for responsible persons.[18] “Severe violations,” which the statute does not define, may be punishable by a fine up to 50 million CNY (approximately $7.8 million ) or up to five percent of the company’s annual revenue for the prior financial year, as well as fines between 100,000 CNY to 1 million CNY (approximately $156,000 to $1.56 million) for responsible persons. Additionally, companies found to have violated the Personal Information Protection Law may be subject to revocation of business permits or suspension of business activities entirely.

The Data Security Law and Personal Information Protection Law in Context 

The Data Security Law and, if enacted, the Personal Information Protection Law add to a growing list of Chinese laws that restrict the provision of data to foreign governments. For example:

• The International Criminal Judicial Assistance Law bars entities and individuals in China from providing foreign enforcement authorities with evidence, materials, or assistance in connection with criminal cases without the consent of the Chinese government.[19]
• Article 177 of the China Securities Law (2019 Revision), prohibits “foreign regulators from directly conducting investigations and collecting evidence” in China and restricts Chinese companies from transferring documents related to their securities activities outside of China unless they obtain prior approval from the China Securities Regulatory Commission.
• The newly released draft amendment to China’s Anti-Money Laundering Law contains disclosure and pre-approval requirements for Chinese companies responding to data requests by foreign regulators.
• As Gibson Dunn has previously covered, the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, issued by the Ministry of Commerce of the PRC in January 2021, established a mechanism for the government to designate specific foreign laws as “unjustified extraterritorial applications,” and subsequently issue prohibitions against compliance with these foreign laws.

The Data Security Law and draft Personal Information Protection Law, however, appear to surpass these prior prohibitions in several key respects. In contrast to the International Criminal Judicial Assistance Law, for example, the Data Security Law and draft Personal Information Protection Law do not require the data to be provided in the context of a criminal investigation for the transfer prohibitions to apply. The new restrictions ostensibly apply to data transfers in connection with a civil enforcement action or investigation, such as those conducted by the U.S. Securities and Exchange Commission. (They might also create yet another impediment to the provision of audit work papers by China-based accounting firms to the SEC and the Public Company Accounting Oversight Board.) As written, the Data Security Law and draft Personal Information Protection Law prohibitions also would also apply to Chinese parties in civil litigation before foreign courts that may need to submit evidence in connection with ongoing cases. In fact, the current language could be read to prohibit non-Chinese citizens residing in China from providing information about themselves to their own government regulators, so long as the data is “stored in China.” The Data Security Law does not explain when data is “stored in China,” or how to address potential scenarios in which entities or individuals may have a legal obligation to submit information to foreign judicial or law enforcement authorities.

The Data Security Law, draft Personal Information Protection Law and earlier laws restricting data transfers create a great deal of uncertainty for companies operating in China. Because these laws do not specify the process for obtaining government approvals, the criteria for approval, or the responsible government agency, it has become increasingly difficult for companies to determine how to respond to foreign regulators’ demands to produce data that may be stored in China, conduct internal investigations in China in the context of an ongoing enforcement action or foreign government investigation, or comply with disclosure and cooperation obligations under various forms of settlement agreements with foreign authorities such as deferred prosecution agreements. Companies considering self-reporting potential legal violations in China to their foreign regulators, as well as cooperating in ensuing  investigations conducted by those regulators, also will need to consider whether any of the relevant data was previously “stored in China,” and if so, whether they are permitted to submit such data to foreign authorities without approval by Chinese authorities. The new statutes also raise concerns for professional services organizations, such as law firms, accounting and forensic firms, litigation experts, and others whose work product may reflect data that was “stored in China.” The new laws do not make clear how they might apply to work product that is simply based on, reflects or incorporates data stored in China, and whether professional services firms are required to seek approval from relevant Chinese authorities before sharing such work product in foreign judicial proceedings or with enforcement authorities.

Gibson Dunn will continue to closely monitor these developments, as should companies operating in China, in order to minimize the risks associated with being caught in the vice of inconsistent legal obligations.

________________________

   [1]   Please note that the discussions of Chinese law in this publication are advisory only.

   [2]   Data Security Law, Art. 1 and 2.

   [3]   Data Security Law, Art. 27, 29, 30.

   [4]   Data Security Law, Art. 45

   [5]   Data Security Law, Art. 45.

   [6]   Data Security Law, Art. 45.

   [7]   Data Security Law, Art. 21.

   [8]   Data Security Law, Art. 36.

   [9]   Data Security Law, Art. 48.

  [10]   Data Security Law, Art. 21.

  [11]   Draft Personal Information Protection Law Art. 4, 72.

  [12]   Draft Personal Information Protection Law, Art. 4.

  [13]   Ibid.

  [14]   Draft Personal Information Protection Law, Art. 52.

  [15]   Draft Personal Information Protection Law, Art. 54, 55.

  [16]   Draft Personal Information Protection Law, Art. 38

  [17]   Draft Personal Information Protection Law, Art. 41.

  [18]   Draft Personal Information Protection Law, Art. 65.

  [19]   International Criminal Judicial Assistance Law, Art. 4.

---

The following Gibson Dunn lawyers assisted in preparing this client update: Patrick F. Stokes, Oliver Welch, Nicole Lee, Ning Ning, Kelly S. Austin, Judith Alison Lee, Adam M. Smith, John D.W. Partridge, F. Joseph Warin, Joel M. Cohen, Ryan T. Bergsieker, Stephanie Brooker, John W.F. Chesley, Connell O’Neill, Richard Roeder, Michael Scanlon, Benno Schwarz, Alexander H. Southwell, and Michael Walther.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Anti-Corruption and FCPA, White Collar Defense and Investigations, International Trade, and Privacy, Cybersecurity and Data Innovation practice groups:

Asia:
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Connell O’Neill – Hong Kong (+852 2214 3812, [email protected])
Oliver D. Welch – Hong Kong (+852 2214 3716, [email protected])

Europe:
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Richard W. Roeder – Munich (+49 89 189 33-160, [email protected])

United States:
Judith Alison Lee – Washington, D.C. (+1 202-887-3591, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
John W.F. Chesley – Washington, D.C. (+1 202-887-3788, [email protected])
Joel M. Cohen – New York (+1 212-351-2664, [email protected])
John D.W. Partridge – Denver (+1 303-298-5931, [email protected])
Michael J. Scanlon – Washington, D.C. (+1 202-887-3668, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Patrick F. Stokes – Washington, D.C. (+1 202-955-8504, [email protected])
F. Joseph Warin – Washington, D.C. (+1 202-887-3609, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

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

London partner Penny Madden and associates Ceyda Knoebel and Besma Grifat-Spackman are the authors of “Arbitrability and Public Policy Challenges,” [PDF] an extract from the second edition of GAR’s The Guide to Challenging and Enforcing Arbitration Awards. The whole publication is available at https://globalarbitrationreview.com/guide/the-guide-challenging-and-enforcing-arbitration-awards/2nd-edition

In order to meet the technical requirements for the upcoming interconnection of the EU Member States’ national registers holding beneficial ownership information via a European central platform, the German lawmaker made some elemental changes to the provisions on the German transparency register[i], which will result in new filing requirements for numerous German legal entities and registered partnerships (see section 1. below). The new filing requirements with the German transparency register will apply in addition to any filing requirements with other public registers such as, e.g., the commercial register, and will also apply to listed companies and their subsidiaries. Moreover, the obligations of foreign entities to file beneficial ownership information for registration in the German transparency register are significantly expanded, in particular, to capture share deals involving real estate located in Germany (see section 2. below).

The new regulations will take effect as early as 01 August 2021. However, German legal entities and registered partnerships, which will have to file beneficial ownership information with the transparency register for the first time solely due to the new rules, benefit from transitional periods, with filing deadlines that – depending on the type of entity – will expire only on 31 March 2022, 30 June 2022 or even 31 December 2022. The new filing obligations for foreign entities directly or indirectly acquiring real estate located in Germany, however, will take effect immediately on 01 August 2021. German notaries are obliged to ascertain that any such filing obligations with the transparency register have been complied with, and they must refuse notarization in case of non-compliance with the filing obligations. Foreign entities planning to acquire (directly or indirectly) real estate located in Germany thus are strongly advised to ensure that the required beneficial ownership information is filed with the German transparency register in due time prior to the scheduled signing date in order not to risk a delay of their transaction because the German notary refuses notarization. Furthermore, significant administrative fines may be imposed if the filing requirement is not complied with.

1. German legal entities and registered partnerships

Current Status

Since 2017, legal entities (juristische Personen) under German private law and registered partnerships have been required to file beneficial ownership information for registration in the German transparency register. To prevent double filings to multiple registers, this filing obligation is deemed fulfilled if the relevant beneficial ownership information is available in electronic form in certain other German registers, e.g., in shareholders lists retrievable via the German commercial register (“notification fiction”) (§ 20 (2) sentence 1 of the German Anti-Money Laundering Act (Geldwäschegesetz – GwG)). In addition, with respect to corporations listed on regulated markets with adequate transparency requirements with regard to voting rights, no filing of beneficial ownership information with the transparency register is required for the listed corporation and even its subsidiaries if the chain of control up to the listed parent company is  traceable via documents and information stored in electronic form in German registers (so-called “unconditional notification fiction”, § 20 (2) sentence 2 GwG). As a result of these notification fictions, an excerpt from the German transparency register often does not reveal the names of beneficial owners, and further complex and cumbersome analysis is required in order to chase down, via various public registers, the persons ultimately owning or controlling the relevant legal entity or registered partnership.

New Regulations

Effective 01 August 2021, the notification fictions of § 20 (2) GwG will be abolished in total. As a result, every legal entity under private German law and registered partnership under German law will not only be required to collect information on their beneficial owners, to store such information and to keep such information up to date, but will also be required to file such beneficial ownership information for registration with the German transparency register. If there is no natural person who directly or indirectly ultimately owns or controls the legal entity or partnership, the legal representative, managing shareholder or partner of the legal entity or partnership must be filed as “fictional beneficial owners” for registration with the transparency register; the fact that the relevant legal representatives are already registered in the commercial register (or another recognized public register, respectively), will no longer be sufficient. There will be an exemption only for not-for-profit registered associations (such as, e.g., sport and music clubs) for which the register-keeper, the Federal Gazette, will file the beneficial ownership information based on the data available in the German association register.

The definition of a beneficial owner remains essentially unchanged – in particular, as now, in case of a legal entity (other than associations capable of holding rights) every natural person holding or controlling, directly or indirectly (via a controlled legal entity) more than 25 per cent of the capital, more than 25 per cent of the voting rights or exercising control in a comparable way qualifies as a beneficial owner. However, with regard to the beneficial ownership information, in the future not only one nationality but all nationalities of the beneficial owners must be filed for registration; according to the explanatory memorandum, however, it shall be sufficient that missing relevant information on further nationalities is filed in due course as part of updates.

The new filing obligations will affect numerous German legal entities and registered partnerships, especially including German subsidiaries of groups with listed or widely held parent holdings, which so far have often profited from the notification fictions of § 20 (2) GwG. At least, the Act provides for relatively generous staggered transitional periods for the German entities and registered partnerships that are required to file beneficial ownership information for the first time solely due to the cancellation of the notification fictions of § 20 (2) GwG:

• for stock corporations (Aktiengesellschaft – AG), European stock corporations (Societas Europaea – SE) and limited partnerships limited by shares (Kommanditgesellschaft auf Aktien – KGaA) until 31 March 2022;
• for limited liability companies (Gesellschaft mit beschränkter Haftung – GmbH), cooperatives (Genossenschaften), European cooperatives (Europäische Genossenschaften) or partnerships (Partnerschaften) until 30 June 2022; and
• for all other obliged legal entities and registered partnerships until 31 December 2022.

In addition, administrative fines for failure to file beneficial ownership information triggered by the new rules shall not be imposed for a transitional period of one year following the expiry of the corresponding filing deadlines.

2. Foreign entities directly or indirectly acquiring German real estate

The real estate sector in general is considered particularly vulnerable to money laundering, and, especially, German real estate is attractive for not only national but also international criminals.

As a consequence, since 2020 foreign entities (i.e., entities having their headquarters abroad) that undertake to acquire real estate in Germany by way of an asset deal have been required to file beneficial ownership information with the German transparency register. The German notary recording the real estate transaction must ascertain that the filing obligation has been complied with or otherwise refuse notarization, which effectively prevents the acquisition as real estate purchase agreements under German law must be notarized to be effective.

From 01 August 2021, the obligations of foreign entities to collect, keep up-to-date, and file information on their beneficial owners with the German transparency register are further expanded to also cover share deals and other transaction structures resulting in an indirect acquisition of German real estate. In the future, the obligation for foreign entities to file beneficial ownership information with the German transparency register will thus be triggered if a foreign entity

• undertakes to acquire real estate located in Germany (asset deal);
• directly or indirectly acquires at least 90 per cent of the capital of a German or foreign corporation holding real estate located in Germany (share deals triggering German real estate transfer tax in accordance with § 1 (3) German Real Estate Transfer Tax Act (Grunderwerbsteuergesetz)), or
• directly or indirectly acquires a beneficial interest of at least 90 per cent of the capital of a (German or foreign) corporation holding real estate located in Germany (transactions triggering German real estate transfer tax in accordance with § 1 (3a) German Real Estate Transfer Tax Act).

The details of the new filing obligations in case of share deals and other transaction structures are still unclear. Hopefully, explanatory guidelines concerning the interpretation of these new filing obligations will be published by the German Office of Administration (Bundesverwaltungsamt) in due time.

Exemptions from the filing obligations to the German transparency register apply if the foreign entity has already filed the relevant beneficial ownership information to another EU Member State’s register on beneficial ownership.

The new regulations provide for a similar expansion of the filing obligations for trustees with residence or legal headquarters outside of the European Union if they wish to acquire (directly or indirectly) real estate located in Germany (§ 21 (1) sentence 2 GwG new version).

__________________________

[i] Act for the European interconnection of the transparency registers and for transforming Directive (EU) 2019/1153 of the European Parliament and the Council of 20 June 2019 for the use of financial information to combat money laundering, terrorist financing and other serious crimes (Transparency Register and Financial Information Act) of 10 June 2021 (Gesetz zur europäischen Vernetzung der Transparenzregister und zur Umsetzung der Richtlinie 2019/1153 des Europäischen Parlaments und des Rates vom 20. Juni 2019 zur Nutzung von Finanzinformationen für die Bekämpfung von Geldwäsche, Terrorismusfinanzierung und sonstiger schwerer Straftaten (Transparenzregister- und Finanzinformationsgesetz) vom 10. Juni 2021).

---

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the team in Frankfurt or Munich, or the following authors:

Silke Beiter – Munich (+49 89 189 33271, [email protected])
Daniel Gebauer – Munich (+49 89 189 33216, [email protected])
Martin Schmid – Munich (+49 89 189 33290, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

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

For the past several years, life sciences companies have been a frequent target of securities class action lawsuits. These lawsuits often arise from statements regarding the development, efficacy, and/or success of an emerging drug or life sciences product. Among the key arguments that life sciences companies can make in defending against these lawsuits is that such disclosures are nonactionable statements of opinion under the Supreme Court’s decision in Omnicare.

In this hour-long, remote program, for which CLE credit will be provided, Jennifer Conn, Jane Love and Lawrence Zweifach of Gibson Dunn, as well as Yan Cao of Cornerstone Research, will provide an overview of: filing trends and developments in securities lawsuits against life sciences companies; typical factual scenarios giving rise to securities lawsuits against life sciences companies and the types of claims frequently asserted; and how the Omnicare decision has been and may be applied in life sciences cases.

View Slides (PDF)

---

---

PANELISTS:

Jennifer L. Conn is a litigation partner in the New York office of Gibson, Dunn & Crutcher. She is a member of Gibson Dunn’s Securities Litigation, Securities Enforcement, Appellate, and Privacy, Cybersecurity and Consumer Protection Practice Groups. Ms. Conn has extensive experience in a wide range of complex commercial litigation matters, including those involving securities, financial services, accounting, business restructuring and reorganization, antitrust, contracts, and information technology. In addition, Ms. Conn is an Adjunct Professor of Law at Columbia Law School, lecturing on securities litigation.

Jane M. Love, Ph.D. is Chair of the Life Sciences and the Intellectual Property Litigation Practice Groups, and is a partner in the New York office of Gibson, Dunn & Crutcher. Dr. Love is a first-chair litigator who handles high value patent litigation for pharma and biotech companies including global litigation coordination. She has extensive experience in Hatch-Waxman and BPCIA litigation in federal district courts and the Federal Circuit. As a registered patent attorney, Dr. Love is often lead counsel in disputes before the U.S. Patent and Trademark Office.  Dr. Love has handled cases spanning a wide variety of technologies including small molecules, biologics, therapeutic nucleic acids, and cell-based therapies and covering a wide variety of indications.

Lawrence J. Zweifach is a litigation partner in the New York office of Gibson, Dunn & Crutcher, and he is a member of the Firm’s Securities Litigation and Securities Enforcement Practice Groups. Mr. Zweifach is a nationally recognized trial lawyer, a Fellow of the American College of Trial Lawyers, and he has been acclaimed as one of the country’s best litigators in Lawdragon’s “500 Leading Lawyers in America Hall of Fame.” Mr. Zweifach’s practice includes defending companies in securities class actions and SEC enforcement investigations. Chambers USA: America’s Leading Lawyers for Business ranked Mr. Zweifach among the top Securities Enforcement lawyers in the country, among the leading Securities Litigators in New York, and among the leading White Collar Criminal Defense Lawyers in New York. He also has been recognized as a National and Local “Litigation Star” and has been listed in the “Top 100 Trial Lawyers in America” by Benchmark Litigation.

Yan Cao is a Vice President at Cornerstone Research’s New York office. Dr. Cao specializes in issues related to financial economics and financial reporting across a range of complex litigation and regulatory proceedings. Her experience covers securities, market manipulation, M&A, risk management, and bankruptcy matters. Dr. Cao has fifteen years of experience consulting on securities class actions that cover a wide variety of industries, with a focus on financial institutions. She has also worked on regulatory investigation and enforcement matters led by the SEC, the CFTC, the DOJ, the NY Fed, and state AGs. Dr. Cao is a Chartered Financial Analysist (CFA) and a Certified Public Accountant.

---

MCLE CREDIT INFORMATION:

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

This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an affirmation form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

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

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

On March 31, 2021, President Biden unveiled the American Jobs Plan (“Jobs Plan”), a sweeping $2.25 trillion proposal designed to create jobs through upgrading public infrastructure, revitalizing manufacturing, prioritizing workforce training, and expanding long-term health care services. The Jobs Plan, one of the most ambitious federal spending proposals in American history, is the first of a two-part package to revive the economy from the COVID-19 recession. The second portion—the American Families Plan (“Families Plan”)—which President Biden released on April 28, 2021, is a $1.8 trillion investment to expand health insurance coverage, childcare subsidies, and education access, among other proposals.[1]

The Jobs Plan and Families Plan would be historic investments. The Jobs Plan combines spending and tax credits to modernize the nation’s infrastructure, including the construction of roads, bridges, and ports, and also invests in climate change-related and racial equity priorities. The Jobs Plan encompasses four categories of investments: (1) transportation infrastructure; (2) utilities infrastructure; (3) care infrastructure; and (4) investments in manufacturing, innovation and the workforce. The Families Plan (1) adds at least four years of free education to community colleges; (2) provides direct support to children and families; and (3) extends tax cuts for families with children and American workers, restoring the highest income tax bracket to 39 percent and implementing income tax rates on capital gains for high-income earners.

To offset the costs of both proposals, the Biden administration released the Made in America Tax Plan (“Tax Plan”) on April 7, 2021. The Tax Plan generally sets forth tax proposals to pay for the infrastructure investments. It would raise the corporate tax rate and global minimum tax, measures that would largely reverse the 2017 Trump administration’s tax plan. The Tax Plan increases corporate tax rates from 21 percent to 28 percent and proposes a minimum tax on multinational corporations. The Biden administration projects that the Tax Plan’s overhaul of corporate tax policy would generate $2 trillion over the next 15 years.

Passing these Plans through Congress has been a challenge, particularly in an equally divided, Democratically controlled Senate. Republicans opposed the Jobs Plan due to its breadth, cost, and reliance on corporate tax increases. Furthermore, dueling infrastructure proposals exist after Senate Republicans released several counterproposals of their own infrastructure plan, which narrowly focus on physical infrastructure and cost less than the Jobs Plan, all of which were rejected by the Biden White House.[2] As of this week, it remains unclear which proposal could achieve the 60 votes required to overcome a filibuster in the Senate.

On June 10, 2021, a bipartisan group of Senators reached a compromise on infrastructure, which would spend $1.2 trillion over eight years, a key step towards achieving an infrastructure bill that can pass Congress and be signed into law by the President. The deal still needs to be approved by the White House and Senate Republican Conference and the legislative text must still be approved by all the parties as well. While light exists at the end of the tunnel, challenges remain as the infrastructure deal has received bipartisan criticism—Republicans are concerned about the deal’s cost being too large, its tax increases are controversial, and the prospect of a major legislative accomplishment for a Biden administration and Democrats are concerned that the deal’s cost is too small, the strategies to pay for it are problematic, and the deal fails to address climate change—and it may not achieve a filibuster-proof supermajority in the Senate.

If the bipartisan deal in the Senate breaks down, Democrats may pass the Jobs Plan on their own, using a legislative process known as reconciliation that permits the passage of certain legislation with only a majority of votes. Alternatively, Democrats may decide to move a physical infrastructure-focused bill with Republican support and use reconciliation to move their broader policy priorities, like climate change, at a later date.

1.      Overview of the American Jobs Plan

 The Jobs Plan seeks to rejuvenate the American economy by prioritizing investments in green infrastructure while addressing climate change, racial inequities, and employees’ rights.

a.   Common Themes

Consistent among the various types of investments in the Jobs Plan is a focus on green infrastructure. Indeed, around 56 percent of the Jobs Plan’s expenditures can fairly be said to relate to climate change.[3] Of the various provisions in the Jobs Plan, improvements to transportation infrastructure, including a wide-scale investment in electric power, are mostly climate-driven. Tackling both mass transit and electric vehicles, the Jobs Plan allocates $85 billion for public transit and $80 billion for Amtrak in an effort to make public transport options more reliable and accessible, thus encouraging people to transition away from single-occupancy vehicles, which are a major source of greenhouse gas emissions. The Jobs Plan also directs $174 billion to electric vehicles to build up charging infrastructure and provide point-of-sales rebates and tax incentives to customers buying electric vehicles.

Beyond transportation investments, another green infrastructure investment is the $100 billion set aside for electric grid infrastructure and the extension and expansion of renewable energy tax credits. The Jobs Plan creates a “Clean Electricity Standard,” a federal mandate requiring that a certain percentage of electricity in the United States be generated by zero-carbon energy sources, such as wind and solar. The Jobs Plan also puts aside $35 billion toward clean-energy technology, new methods for reducing emissions, and other broad-based climate research.

Also embedded throughout the Jobs Plan is an emphasis on closing racial gaps in the economy, which according to administration officials have been created or exacerbated by previous federal spending efforts, such as interstate highway developments that have cleaved communities of color or air pollution that affects a majority of Black and Latino communities near power plants. These inequities have become even more pronounced during the coronavirus pandemic. For example, Black and Latino households are less likely to have access to home broadband Internet than White households. Addressing this disparity, the Jobs Plan prioritizes building broadband infrastructure in unserved and underserved areas to ensure the country reaches comprehensive high-speed broadband coverage. The Jobs Plan’s investments in workforce development also seek to advance racial equity, setting aside $100 million in workforce development programs that specifically target support services for communities of color. And, in order to boost minority-owned manufacturing, the Jobs Plan markedly increases support for the Manufacturing Extensions Partnership, which will increase the involvement of minority-owned and rurally located small- and medium-size enterprises.

The Jobs Plan also seeks to strengthen unions and collective bargaining rights for employees, including guaranteeing union and bargaining rights for public service workers.[4] President Biden has signaled his support for the Protecting the Right to Organize (PRO) Act,[5] which would make sweeping changes to federal labor law. Moreover, the Jobs Plan invests $10 billion to strengthen the capacity of labor enforcement agencies, and imposes increased penalties for employers who violate workplace safety and health rules.[6]

b.   Transportation Infrastructure

The plurality of the $2 trillion dollar Jobs Plan package, approximately $620 billion, will be dedicated to transportation infrastructure, including:

• $174 billion in grants and other incentives to encourage state and local governments to partner with the private sector to build electric vehicle (“EV”) charging infrastructure, incentivize EV purchases, and support the transition away from diesel transit vehicles. The Jobs Plan would electrify 20 percent of the nation’s fleet of yellow school buses and would convert the entire U.S. Postal Service fleet to electric;
• $115 billion to revamp 20,000 miles of highways and roads, including improvements to 10 of the most economically important bridges across the country, as well as to thousands of smaller bridges in need of reconstruction;
• $85 billion to modernize and expand bus, rapid transit and rail services in order to reduce congestion and improve equitable access to these modes of transportation;
• $80 billion targeted to address Amtrak’s repair backlog and modernize the busy Northeast Corridor, as well as improve and expand existing corridors and enhance passenger and freight rail safety;
• $50 billion in grants and tax incentives to improve infrastructure resilience by safeguarding critical infrastructure and services from extreme weather events;
• $25 billion to upgrade airports and support a new program that aims to renovate terminals, as well as additional funding for the Airport Improvement Program, Federal Aviation Administration assets;
• $20 billion to incentivize new programs increase access and opportunity and work toward racial equity and environmental justice;
• $20 billion to improve road safety for cyclists and pedestrians, including the Safe Streets for All Program, which funds state and local “vision zero” plans to reduce crashes and fatalities; and
• $17 billion to improve inland waterways and shipping ports.

c.   Investment in “How We Live at Home”

The Jobs Plan’s second major category of investments focuses on how Americans live at home. Among other things, the President’s proposal calls upon Congress to dedicate billions to improve the nation’s affordable housing supply, power infrastructure, clean water, broadband access, schools and childcare facilities, and the manufacturing sector.

i.   Affordable Housing

With an eye towards addressing the “severe shortage of affordable housing in America,”[7] the Jobs Plan allocates $213 billion to address the nation’s affordable housing shortage using primarily a two-pronged approach: (1) building, preserving, and retrofitting more than two million commercial buildings and homes; and (2) eliminating state and local exclusionary zoning laws through a competitive grant program.

Building and Improving Housing Stock

Key to the Jobs Plan’s proposed increase in the amount of affordable housing in the nation is to build, renovate, and retrofit part of our current housing and commercial building stock. Specifically, the President’s plan calls upon Congress to pass the Neighborhood Home Investment Act (“NHIA”), which would offer $20 billion in tax credits over the next five years towards renovating or building 500,000 homes in distressed areas.

The NHIA is a centerpiece of the President’s affordable housing plan and already has bipartisan support. U.S. Senators Ben Cardin (D-Md) and Rob Portman (R-Ohio) have introduced the NHIA in the Senate as S. 98,[8] while Representative Brian Higgins has introduced the accompanying bill in the House of Representatives, H.R. 2143.[9] Under the NHIA proposal, states would establish a Neighborhood Homes Credit Agency which would allocate the tax credits to qualified home builds or renovations.[10] Project sponsors—such as developers—would be responsible for developing or rehabilitating the home, condominium, or qualified cooperative, receiving a tax credit once the home or project has been sold to a qualified buyer.[11] Qualified projects must be certified by a Neighborhood Homes Credit Agency and located in a qualified census tract where certain conditions are met.[12] Specifically, the project must be in a census tract where (1) the median gross income which does not exceed 80 percent of the applicable area median gross income; (2) the poverty rate that is not less than 130 percent of the applicable area poverty rate; and (3) a median value for owner-occupied homes does not exceed the applicable area median value for owner-occupied homes.[13] To receive the tax credit, the project must be sold to a qualified buyer, who are individuals that will use the qualified residence as their principal residence and whose income does not exceed 140 percent of the applicable area median gross income for where the home is located.[14]

The tax credit awarded would cover the gap between development cost and sales price of new homes, but is capped at 35 percent of the cost of construction or 35 percent of 80 percent of the national median sale price for new homes as determined according to the most recent census data, whichever is less.[15] For homes that are rehabilitated, the NHIA tax credit would cover the gap between the rehabilitation cost and the homeowner’s contribution, for up to 35% of the rehabilitation cost.[16]

The Jobs Plan uses block grant programs, the Department of Energy’s Weatherization Assistance Program,[17] and commercial efficiency tax credits, to renovate additional structures. The proposal also creates a $27 billion Clean Energy and Sustainability Accelerator to mobilize private investment into energy resources, retrofits of residential, commercial and municipal buildings, and clean transportation. The American Jobs Plan also tackles public housing, asking Congress to invest $40 billion to improve public housing in the country.

Eliminating State and Local Exclusionary Zoning Laws

The Jobs Plan also calls upon Congress to enact a new competitive grant program that awards funding to jurisdictions willing to eliminate “exclusionary zoning laws” that have prevented the creation of more homes. The Jobs Plan provides examples of such exclusionary laws, suggesting that “minimum lot sizes [requirements], mandatory parking requirements, and prohibitions on multifamily housing” have “inflated housing and construction costs and locked families out of areas with more opportunities.”[18]

ii.   Upgrading and Reorienting Power Infrastructure

Modernizing Power Infrastructure

Another key aspect of the proposal is to reenergize America’s power infrastructure. As part of this effort, the Jobs Plan calls on Congress to invest $100 billion in investment tax credits to incentivize the buildout of, at minimum, 20 gigawatts of high-voltage capacity power lines and to mobilize private capital into re-energization efforts. The Jobs Plan also establishes the Grid Deployment Authority at the Department of Energy, designed to better utilize existing right-of-ways that can help create additional transmission lines as well as support financing tools for those kinds of projects. Additionally, the Jobs Plan proposes a 10-year extension and phasedown of an expanded direct-pay investment tax credit and production tax credit for clean energy and storage. States and local governments will also have access to clean energy block grants if they prioritize power grid modernization, which can be used to support clean energy, worker empowerment, and environmental justice programs.

Eliminating Hazardous Energy-Related Sites

The proposal also makes key investments in improving energy-related sites throughout the country. For example, the proposal invests $16 billion to plug hundreds of thousands of former orphan oil and gas wells, along with abandoned mines, which pose serious safety hazards and can be a source of environmental harm. The Jobs Plan also calls for a $5 billion investment in the remediation and redevelopment of former industrial and energy sites that contain hazardous substances (known as Brownfield and Superfund sites). The Jobs Plan also calls for further aide to communities around such sites, through investments to the Economic Development Agency’s Public Works program, lifting the cap on projects. Additionally, the proposal asks for additional economic development efforts through the Appalachian Regional Commission’s Partnerships for Opportunity and Workforce and Economic Revitalization (“POWER”) grant program, which aids regions affected by job losses in coal mining, coal power plant operations, and coal-related supply chain industries. The Jobs Plan also invests in the Department of Energy’s retooling grants for idle factories through Section 132 of the Energy Independence and Security Act, which has never been funded. Section 132’s grant program was designed “to encourage domestic production and sales of efficient hybrid and advanced diesel vehicles” with “priority . . . given to the refurbishment or retooling of manufacturing facilities that have recently ceased operation or will cease operation in the near future.”[19]

Energy-Related Goals and Financial Commitments

President Biden’s proposal makes significant energy-related commitments. Among them is the creation of the Energy Efficiency and Clean Electricity Standards, aimed at cutting electricity bills and pollution, to move toward “100 percent carbon-pollution free [sic] power by 2035.” President Biden has also pledged that the federal government will purchase 24/7 clean power for federal buildings to help support these efforts.

iii.   Clean Water

The Jobs Plan also invests $111 billion to replace all of the nation’s lead pipes and service lines, to ensure that lead pipes do not deliver drinking water to any home in the country. To accomplish this goal, President Biden’s Plan calls on Congress to invest $45 billion in the Environmental Protection Agency’s Drinking Water State Revolving Fund and in Water Infrastructure Improvements for the Nation Act (“WIIN”) grants. The Jobs Plan also allocates $56 billion to help modernize the country’s aging water systems, providing grants and low-cost flexible loans to states. An additional $10 billion is dedicated to monitoring and remediating per- and polyfluoroalkyl substances (“PFAs”) in drinking water and to invest in rural small water systems and household well and wastewater systems, including drainage fields.

iv.   Expanding Broadband Access

Recognizing the Internet as “the new electricity,” the Jobs Plan also pledges $100 billion to expand broadband access to everyone, including to Americans living in areas with no broadband infrastructure with minimal access to the Internet. The money will go towards building high-speed broadband infrastructure and providing temporary, short-term subsidies to cover the costs of overpriced Internet services. However, President Biden also pledges in his proposal to work with Congress to find a permanent solution to reduce Internet prices for everyone and “hold providers accountable.”

v.   Investment in Repairs of Schools, Community Colleges, Childcare Facilities, Federal Buildings, and the Veteran Hospital System

Improvements in Public Schools and Community Colleges

The Jobs Plan also sets aside $100 billion to upgrade and build new public schools, $50 billion of which will be provided in direct grants and the other $50 billion in bonds. The funding is designed to improve school safety, make technological improvements to schools, and create more energy-efficient school buildings. The Jobs Plan also calls for $12 billion dedicated to expanding the nation’s community college infrastructure, giving states the ability to address existing physical and technological infrastructure needs.

Improvements to, and the Creation of, Childcare Facilities

The Jobs Plan dedicates $25 billion to a Child Care Growth and Innovation Fund, which states it will use to upgrade childcare facilities and build additional childcare facilities in high-need areas. The Jobs Plan also expands tax credits to encourage businesses to build childcare facilities. Under the proposal, employers will receive 50 percent of the first $1 million of construction costs per facility to create on-site childcare.

Additionally, the Jobs Plan calls for $18 billion dedicated to the modernization of Veterans Affairs hospitals and clinics. An additional $10 billion will go towards a Federal Capital Revolving Fund to support investment in a major purchase, construction or renovation of federal facilities.

vi.   Manufacturing and Strengthening of Supply Chains as Well as Increasing Access to Capital for Domestic Manufacturers

President Biden’s Plan also dedicates $300 billion to revitalize American manufacturing and supply chains. Specifically, the proposal calls for $50 billion in semiconductor manufacturing and research dollars; $30 billion in pandemic-ready-related manufacturing and research and development; and $36 billion towards the manufacture of “clean” cars, ports, pumps, along with advanced nuclear reactor sand fuel. Additionally, President Biden proposes that Congress invest more than $52 billion in domestic manufacturers, expanding their access to capital. The Jobs Plan also calls for modernizing supply chains, including the auto sector, through specific programs, such as extending the Advanced Energy Manufacturing Tax Credit Program, also known as the “48C tax credit,” which helps promote clean energy projects. The Jobs Plan also contains an additional $31 billion in investments designed to give small business manufacturers access to credit, venture capital, and R&D dollars, to increase their ability “to compete in a system that is so often titled in favor of large corporations and wealthy individuals.”

d.   Care Infrastructure

The third major category of investments focuses on expanding access to home and community-based services to bolster America’s “care economy.” The Jobs Plan sets out to address the current “caregiving crisis” by improving access to, and quality of, home care for individuals who qualify under Medicaid, creating additional home care jobs, and supporting home care workers. To do so, the Jobs Plan asks Congress to put $400 billion toward “expanding access to quality, affordable home-or community-based care for aging relatives and people with disabilities.” In addition to facilitating access to care, these investments are intended to increase the pay and benefits for those in the caregiving industry and create an opportunity for these workers “to organize or join a union and collectively bargain.”

The Jobs Plan sets forth a two-pronged approach to accomplish these objectives: (1) expand access to long-term care services under Medicaid and (2) put in place an infrastructure to create middle-class jobs with the opportunity to participate in collective bargaining. The Jobs Plan will expand access to home- and community-based services (“HCBS”) and extend existing Medicaid long-term care programs such as the “Money Follows the Person” program, which is designed to move nursing home residents out of nursing homes and back into their own homes, or the home of family members. The HCBS expansion will be designed to support well-paying caregiving jobs and permit joining a union, in an effort to “improve wages and quality of life for essential homecare workers and yield significant economic benefits for low-income communities and communities of color.”[20]

e.   Investments in Jobs, Manufacturing, and Innovation

i.   Research and Development

The Jobs Plan envisions investment in research and development (“R&D”) as serving multiple administration priorities, not the least of which is keeping pace with—and pushing back against—China on advanced and emerging technologies. That strain runs throughout this section of the Jobs Plan, which first notes, “[c]ountries like China are investing aggressively in R&D” before proposing $180 billion in investment to “win the 21st century economy” by “investing in the researchers, laboratories, and universities across our nation.” Specific to these emerging technologies, the Jobs Plan proposes $50 billion for the National Science Foundation; $30 billion for generalized innovation and job creation, including in rural areas; and $40 billion to upgrade research infrastructure across various government agencies.

It is clear that the Jobs Plan envisions investment in R&D as a way to advance other aspects of the Biden Agenda. For example, the Jobs Plan calls for “$35 billion in the full range of solutions needed to achieve technology breakthroughs that address the climate crisis and position America as the global leader in clean energy technology and clean energy jobs.” This includes launching “APRA-C,” a climate-focused counterpart to the Defense Advanced Research Projects Agency (“DARPA”), along with other projects focused on energy storage, carbon capture, hydrogen and nuclear technologies, wind, biofuel, quantum computing and electric vehicles. In addition, the Jobs Plan views R&D as a means by which to confront racial and gender inequities, stating: “Persistent inequities in access to R&D dollars and to careers in innovation industries prevents [sic] the U.S. economy from reaching its full potential.” Accordingly, the Jobs Plan proposes $10 billion in funding for R&D investment at Historically Black Colleges and Universities (“HBCUs”) and $15 billion to create research incubators at HBCUs and other minority-serving institutions.

ii.   Domestic Production

In seeking an additional $300 billion in funding for domestic manufacturing—“a critical node that helps convert research and innovation into sustained economic growth”—the Jobs Plan attempts to bolster the middle class and reinforce union support while expanding growth to rural areas. Proposed funding under this category likewise reflects the administration’s focus on the COVID-19 recovery, supply chain independence, and combating climate change. The Jobs Plan calls for $50 billion to advance semiconductor manufacturing and research along with $30 billion to address job losses caused by the pandemic and to “shore up our nation’s strategic national stockpile,” including funding for measures designed to address a future pandemic, such as prototype vaccines and therapeutic treatments.

The Jobs Plan also sees a role for clean energy manufacturing—“[t]o meet the President’s goals of achieving net-zero emissions by 2050, the United States will need more electric vehicles, charging ports, and electric heat pumps for residential heating and commercial buildings.” To these and related projects, the Jobs Plan proposes $46 billion. A further $20 billion is proposed under this category for investment in regional innovation hubs to “leverage private investment to fuel technology development, link urban and rural economics, and create new business in regions beyond the current handful of high-growth centers.” The Jobs Plan also specifically addresses rural and Tribal communities, proposing $5 billion for a Rural Partnership Program to “build on their unique assets and realize their vision for inclusive community and economic development.”

iii.   Workforce Development

The Jobs Plan seeks a further $100 billion for a range of workforce development initiatives. This would include next-generation training programs, $40 billion to address sector-based and dislocated worker training and $12 billion in targeted workforce development in underserved communities, $5 billion of which would go toward community violence prevention programs. The Jobs Plan also calls for $48 billion for apprenticeships, career pathway programs in middle and high schools prioritizing STEM careers, and community college partnerships.

f.   Strengthening Employee Rights

The Jobs Plan guarantees that public service workers will have collective bargaining rights.[21] Moreover, the Jobs Plan calls upon Congress to pass the Protecting the Right to Organize (“PRO”) Act.[22]  A version of the PRO Act has already passed the House of Representatives, with five Republicans joining Democrats in favor of it.[23] If enacted, the House version of the PRO Act would make significant changes to federal labor law. Some of these changes include invalidating state right-to-work laws and limiting arbitration agreements between employers and employees.[24] While an increasing number of Senate Democrats have come out in support of the PRO Act, it is unlikely that bill can generate enough support to overcome a filibuster and ultimately pass in the Senate.[25]

II.     Made in America Corporate Tax Reform Plan

The Tax Plan overhauls corporate and international taxation.[26] The Tax Plan includes proposals to raise the U.S. federal corporate income tax rate, establish an international agreement on global taxation, dis-incentivize inversions and offshore profit shifting to low-tax countries, incentive domestic spending, and enact minimum corporate taxes.[27] The Tax Plan is expected to raise over $2 trillion over the next 15 years,[28] which would fully fund the American Jobs Plan.[29]

a.   Increase Federal Corporate Income Tax Rate to 28 Percent

One of the most noteworthy aspects of the Tax Plan is the increase in the U.S. federal corporate income tax rate. The Tax Plan would raise the corporate income tax rate from 21 percent to 28 percent.[30] This proposal would reverse the reduction in the corporate income tax rate in the 2017 Tax Cuts and Jobs Act (“TCJA”), which lowered the rate from 35 percent to 21 percent.[31] Revenues from the tax increase would help fund investments in infrastructure, clean energy, and research and development.[32]

The Tax Plan’s proposed tax hike on corporate income tax is drawing resistance, even from members of President Biden’s own political party. Senator Joe Manchin of West Virginia, who holds a key moderate vote in a 50-50 Senate, has come out in opposition of the proposal.[33] A compromised corporate income tax rate increase to 25 percent will likely appease the White House and moderate Democrats.[34]

b.   Strengthen the Global Minimum Tax on U.S. Multinational Corporations

The Tax Plan would revise the “global intangible low taxed income” (“GILTI”) regime that was enacted as part of the TCJA.[35] The GILTI regime was intended to discourage moving intangible assets and related profits outside the United States.[36] U.S.-controlled foreign corporations are given a tax exemption on the first 10 percent of returns on foreign tangible assets,[37] and GILTI is taxed at approximately half of the corporate tax rate (10.5 percent).[38] Under the current regime, GILTI tax liabilities are currently calculated on a global basis.[39]

President Biden’s Tax Plan would revise the GILTI regime in the following manner:

• Eliminate the tax exemption on the first ten percent of returns on foreign tangible assets;[40]
• Increase the GILTI minimum tax on U.S. corporations to 21 percent;[41] and
• Calculate the GILTI minimum tax on a country-to-country basis to prevent corporations from shifting profits to low-tax countries.[42]

c.   Negotiating Multilateral Agreement on International Minimum Taxes

The Tax Plan indicates that the United States will lead a multilateral effort to impose a global minimum tax and strengthen anti-inversion provisions.[43] Pursuant to the Organisation for Economic Co-operation and Development/G20 Inclusive Framework on Base Erosion and Profit, the United States and the international community are negotiating a global agreement that would enact minimum tax rules worldwide.[44] This agreement would allow home countries of multinational corporations to apply a minimum tax when offshore affiliates are taxed below an agreed-upon minimum tax rate.[45] Foreign corporations based in countries that do not adopt a strong minimum tax would be denied deductions on payments that could allow them to strip profits out of the United States.[46] These proposals would repeal and replace the Base Erosion and Anti-Abuse Tax (“BEAT”),[47] which was enacted under the TCJA.[48]

The Tax Plan would also strengthen anti-inversion provisions to prevent U.S. corporations from inverting.[49] Corporations that merge while retaining management and operations in the United States would be treated and taxed as a U.S. company.[50] More specific details regarding anti-inversion provisions will likely emerge as negotiations on the proposed legislation continue.

d.   Eliminate Deductions for “Offshoring” Jobs and Credit Expenses for “Onboarding” Jobs

The Tax Plan would eliminate deductions for expenses arising from offshoring jobs and provide tax credits for on-shoring jobs.[51] Currently, the Tax Plan does not provide additional details on this proposal.

e.   Repeal TCJA’s Foreign Derived Intangible Income (“FDII”) Deduction

The FDII deduction was introduced as part of the 2017 TCJA.[52] FDII is income that comes from exporting products tied to intangible assets held in the United States.[53] FDII is currently taxed at a reduced rate of 13.125 percent, rather than the regular 21 percent.[54] This reduced rate was meant to encourage U.S. corporations to export more goods and services, and locate more intangible assets in the United States.[55]

The Tax Plan would repeal the FDII regime in its entirety,[56] and use the generated revenues to incentivize research and development directly,[57] which would include providing stronger tax-based incentives to increase research and development in the United States.[58]

f.   Corporate Minimum Taxation

The Tax Plan would enact a 15 percent minimum tax on the income corporations use to report to their investors—which the Tax Plan refers to as “book income.”[59] Under this proposal, corporations that report high profits would be required to make an additional payment to the IRS for the excess of up to 15 percent on their book income over their regular tax liability.[60] This tax would “apply only to the very largest corporations”[61]—but there is currently no further guidance on which corporations would be subjected to this tax.

III.     The American Families Plan

President Biden’s Families Plan provides billions of dollars designed to improve childcare opportunities, expand access to early-childhood education and higher education, create a national paid leave program, improve school nutrition, and modernize the unemployment system. The Jobs Plan also makes key revisions to the tax code, restoring the highest income tax bracket to 39 percent and ending capital gains rates for high-income earners, among other things. Specifically, the Jobs Plan calls for $200 billion for free universal preschool for all three- and four-year-olds; $109 billion for two years of free community college; $80 billion towards Pell Grants; $62 billion to strengthen retention rates at community colleges; $46 billion in Historically Black Colleges and Universities (“HBCUs”), Tribal Colleges and Universities (“TCU”), and Minority Serving Institutions (“MSIs”); and $9 billion to train, equip, and diversify teachers.

a.   Direct Support to Children and Families

Under President Biden’s plan, low- and middle-income families will pay no more than seven percent of their income on high-quality childcare. Specifically, the Jobs Plan invests $225 billion so that low-income families pay nothing for childcare while those families earning 1.5 times their state median income will pay no more than seven percent of their income to childcare. The Jobs Plan also invests in childcare providers to help them cover the costs associated with early childhood care and provide inclusive curriculums. The Jobs Plan also ensures a $15 minimum wage for early childhood staff.

b.   Paid Leave

President Biden’s plan calls for the creation of a national paid family and medical leave program, that will build over ten years. By year 10, the program will guarantee twelve weeks of paid parental, family, and personal illness leave. The Jobs Plan also ensures that workers get three days of bereavement leave per year starting in year one. The leave will provide workers with up to $4,000 a month, with a minimum of two-thirds of average weekly wages replaced, rising to 80 percent for the lowest-wage workers. The Jobs Plan is projected to cost $225 billion over a decade.

c.   Nutrition

President Biden’s plan is also calling upon Congress to invest $45 billion to expand summer EBT Demonstrations. Seventeen billion of this will go towards expanding free meals for children in the highest-poverty districts. Another $1 billion will go towards launching a healthy-foods incentive demonstration to help schools expand healthy food offerings, allowing schools that adopt specified measures that exceed current school meal standards to receive an enhanced reimbursement rate.

d.   Unemployment Insurance Reform

President Biden’s plan also calls upon the Rescue Plan’s $2 billion allocation that was put towards Unemployment Insurance system modernization. The Jobs Plan also calls for investments to ensure equitable access to the unemployment insurance system, along with fraud prevention efforts. President Biden also calls upon Congress to automatically adjust the length and amount of unemployment insurance benefits unemployed workers receive depending on economic conditions.

e.   Tax Reforms

i.   Expanding Tax Credits

President Biden’s plan also makes changes to the current tax code, expanding certain credits and revising tax rates in key areas. Specifically, President Biden’s plan would:

• Invest $200 billion in health care premium reductions;
• Extend the Child Tax Credit, allowing for $3,000 per child (6 years old and above), and $3,600 per child for children under 6; make 17-year-olds eligible for the first time; and make the credit fully refundable to be paid on a regular basis;
• Make permanent the temporary Child and Dependent Care Tax Credit (“CDCTC”) expansion enacted in the American Rescue Plan. Families will receive a tax credit for as much as half of their spending on qualified childcare for children under age 13, up to a total of $4,000 for one child, or $8,000 for two or more. A 50 percent reimbursement will also be available to families making less than $125,000 a year, with families making between $125,000 and $400,000 receiving a partial credit;
• Make the Earned Income Credit Expansion for childless workers permanent; and
• Give IRS the authority to regulate paid tax preparers.

ii.   Tax Code Revisions

In an effort to ensure more oversight over the tax liability of higher earners, President Biden’s plan also requires financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting more like wages. The Jobs Plan also increases investment in the IRS to help ready enforcement “against those with the highest incomes, rather than Americans with actual income less than $400,000.” The Jobs Plan is projected to raise $700 billion over 10 years.

In a key change, President Biden’s plan also returns the top income tax rate to 39.6 percent from the current 37 percent rate. With respect to capital income, households making over $1 million will pay the 39.6 percent rate on all their income, equalizing the rate paid on investment returns and wages. Additionally, the Jobs Plan ends the ability of accumulated gains to be passed down across generations untaxed, ending the practice of “stepping-up” the basis for gains in excess of $1 million. Additionally, hedge fund partners will be required to pay ordinary income rates on their income. Finally, the Jobs Plan ends the special real estate tax break that allows real estate investors to defer taxation when they exchange property.

IV.     Political Landscape

Infrastructure has long been a bipartisan issue in Washington, but the parties differ over the scope of what should be included in an infrastructure package and how to pay for it. President Biden’s Jobs Plan represents a sprawling, ambitious proposal to overhaul the country’s infrastructure, from how electricity is generated to the quality of the country’s drinking water, to the breadth and speed of Internet connectivity. The Families Plan is also a massive package that extends or makes permanent federal investments in education, childcare and paid family leave. While the Jobs Plan includes major physical infrastructure improvements that both major political parties have long supported, it is far from certain the Jobs Plan will be signed into law.

As detailed below, a bipartisan deal has been struck in principle that may allow for an infrastructure bill to move in Congress, at least on physical infrastructure. But if that deal breaks down for any reason, which remains a real possibility given the bipartisan concerns about the compromise, then President Biden will need to overcome a host of challenges in order to achieve a legislative win on infrastructure this year.

First, the President will have to navigate the challenges of moving legislation via the budget process of reconciliation, which would allow him to pass a bill through Congress by a majority vote and avoid Republican support. But adopting that path requires navigating complex, and time-consuming procedural rules that make reconciliation a difficult option to choose.

Second, the President will have to negotiate a deal that allows him to keep his caucus together and pursue a one-party bill that may be difficult to achieve given the intra-party ideological concerns from his own party and from industry. Or the President will have to pursue a bipartisan option that may cause him to lose support from his own party.

Third, given the reality of a 50-50 Senate and bipartisan concerns over the Senate deal, moving the infrastructure plan through reconciliation may be a realistic option for Democrats to achieve a major legislative victory on infrastructure.

a.   Reconciliation Challenges

President Biden has stated a desire for the Jobs Plan to garner bipartisan support.  While the President campaigned on restoring bipartisanship to Washington, D.C., garnering Republican support would also obviate the need for Democrats to use budget reconciliation to pass the infrastructure package. Most legislation requires 60 votes to advance in the Senate, which is a substantial hurdle. Reconciliation is a procedural maneuver that allows Congress to fast-track, via a simple majority vote, revenue and spending measures to align with the annual budget resolution. In practice, this means Congress can pass legislation on taxes, spending, and the debt limit with only a majority (51 votes, or 50 votes if Vice President Harris breaks a tie) in the Senate, avoiding a filibuster, which would require 60 votes to overcome.[62]

Democrats now control the political branches—the Executive Branch and both chambers of Congress by a slim majority—which unlocks the reconciliation tool as a potential vehicle to pass legislation along partisan lines. Hence, Democrats could use reconciliation to push through the infrastructure package, which is a major part of President Biden’s Build back Better agenda, thus it is not surprising Congressional Democrats are eyeing the budget process once again to pass major legislation.

Even so, in order to pass the infrastructure package via reconciliation, Democrats would need to revise portions of the bill to ensure it complies with the complex reconciliation procedures. The Byrd Rule limits legislation that can be passed under reconciliation. The “Byrd Rule,” named after then-Senator Robert C. Byrd (D-WV), was intended to prevent majority parties from abusing the reconciliation process by ramming through non-budgetary legislation that could not otherwise pass under regular order and prevent major policy changes from being undertaken through the use of this filibuster-circumventing maneuver. Specially, the Byrd Rule prohibits a reconciliation bill from containing proposals that are “extraneous” to the budget.[63]

The Byrd Rule’s ban on extraneous policy language outlines six possible violations, including having no budgetary impact, having a “merely incidental” budget impact, or being outside the reporting committees’ jurisdiction.[64] Policy proposals in the infrastructure plan that may be considered extraneous—and thus be unable to pass through reconciliation procedures—include the PRO Act and strengthening collective bargaining rights for employees, since these proposals are not budgetary in nature.

Even if Senate Democrats resign themselves to using the reconciliation procedures, there reconciliation is by no means a quick process. While the Senate floor consideration of an infrastructure bill under reconciliation can be expedited with debate limited to 20 hours on the bill and 10 hours on the conference report, actually getting legislation to the floor is a multi-stage process that can take months. First, Congress must pass a budget resolution that instructs specific committees to produce legislation that either increases or reduces the deficit. Second, committees then markup their reconciliation text in business meetings and report it to the Budget Committee. Third, the Budget Committee compiles the committee approved bills and reports the combined legislation to the chamber floor. Fourth, the House and Senate debate and pass their respective reconciliation bills. Fifth, the chambers convene a conference committee to reach agreement on legislative text.  Sixth, the House and Senate must pass identical versions of the resulting conference report. And lastly, the measure is sent to the President for signature. This is a time-consuming, complex process that can drag on for months and cause delay.[65]

Furthermore, a recent decision by the Senate Parliamentarian has added an additional barrier that may make it difficult for Democrats to pass an infrastructure bill through reconciliation and without the support of Senate Republicans. Generally, Congress can only use reconciliation twice in a two-year Congress, one for each fiscal year.[66] Senate Democrats already used one reconciliation vehicle associated with one fiscal year to pass the $1.9 trillion COVID relief package earlier this year. So Congress could use only the second reconciliation for the upcoming fiscal year for infrastructure. But passing a budget resolution this year in an equally divided Senate is not an easy task.

Senate Democrats came up with an unprecedented solution. Because the plain text of Section 304 of the Budget Act, which governs reconciliation, says that Congress “may” include reconciliation directives, such as “revises” the budget “concurrent resolution for the fiscal year already agreed to,”[67] Senate Democrats asked the Senate Parliamentarian if they could use the same reconciliation vehicle that passed earlier this year on multiple occasions to trigger the fast-track reconciliation process rather than deal with a new reconciliation package for infrastructure. No prior Congress has ever tried to use a reconciliation measure twice in one year.

On April 5, 2021, the Senate Parliamentarian reportedly advised Senate Democrats that the Budget Act could be used to create multiple reconciliation bills within one fiscal year,[68] which would allow Senate Democrats multiple bites at the apple to pass legislation, like infrastructure, through the Senate on a majority vote.

On May 28, 2021, the Senate Parliamentarian made a second decision that could effectively thwart Senate Democrats from using reconciliation to achieve its infrastructure goals. The Senate Parliamentarian reportedly advised that a revised budget reconciliation measure must pass through “regular order,” meaning it must go through committee and have floor amendment votes during a “vote-a-rama.”[69]  A “vote-a-rama” is a lengthy process that forces Senators to take challenging partisan votes on a wide variety of issues.

The effect of both rulings by the Senate Parliamentarian mean that, even though Senate Democrats may revamp the old reconciliation vehicle used for the coronavirus relief package, the process will be just as onerous for two reasons.

First, by the Senate Parliamentarian ruling that a revised budget resolution must go through committee (as opposed to being automatically discharged from committee) that means Senate Democrats would need at least one Republican on the evenly divided, 11-11, Senate Budget Committee to vote with them, which is not an easy task.

Second, by the Senate Parliamentarian signaling that Senate Democrats must go through a “vote-a-rama” that means potentially exposing moderate Democrats who are up for re-election next year to tough votes on politically charged amendments, which is a major consideration given the balance of power in the Senate for a Democratic majority hangs by a single vote (50-50 Senate, with the Vice President breaking the tie). Third, it means that Senate Democrats can only use one more reconciliation vehicle to pass Biden’s key legislative priorities this year, so they will not be able to divide up the Jobs and Families Plans as they had originally intended.

Another implication of the Senate Parliamentarian’s ruling poses an equally challenging barrier for the infrastructure Plans to move in Congress. Reportedly, the Senate Parliamentarian ruled that reasons beyond “political expediency” must be present to trigger the majority vote threshold of reconciliation, such as an economic downturn.[70] It is unclear how the Senate Parliamentarian would determine the meaning of “political expediency,” but this decision poses an obstacle for using reconciliation to pass an infrastructure bill.

b.   Ideological Challenges

Another challenge for Senate Democrats is that even if they choose to use reconciliation, no guarantee exists that they will successfully keep their caucus together on a historically expensive and expansive proposal. Moderate Democrats like Senator Joe Manchin (D-WV) have raised their concerns with the proposed hike of the corporate tax rate. Indeed, Senator Manchin went so far as to say that increasing the corporate tax rate to 28 percent is a nonstarter and that “this whole thing here has to change.”[71] Senator Manchin has also expressed his preference for a bill that targets physical infrastructure, rather than the “soft infrastructure” spending currently in the President’s infrastructure proposals.[72]

Furthermore, it is unclear if Senate Democratic Moderates will want to break with a party-only bill that defies the Senate’s traditional process of “regular order,” the idea that a bill should move through a hearing, a committee vote, and a floor vote with the possibility of a filibuster proof 60-vote threshold.[73] Rather than use the fast-track, one-party rule vehicle of reconciliation, Senator Manchin, for example, has expressed his preference for a bipartisan bill that moves through regular order, saying “If the place works . . . let it work.”[74] Given the 50-50 Senate, the loss of even one Democratic Senator’s vote will bar reconciliation as an option. Thus, although Leader Schumer seeks to move the infrastructure package in July, that timeline may depend upon whether moderate Democratic Senators, like Senator Manchin, will agree that a bipartisan approach is no longer viable.

Progressive Democrats, on the other hand, are concerned the Jobs Plan doesn’t go far enough, citing President Biden’s campaign promise to spend $2 trillion over four years on infrastructure. Progressive Democrats worry that “bipartisanship” may be a cloak for cutting a deal on moving the Jobs Plan, legislation on physical infrastructure only, rather than the Families Plan, a human infrastructure proposal, that progressives view as a once in a generation opportunity to secure legislative victories for families by expanding family leave and child tax credits and for climate change by investing in green energy. Indeed, House Progressives like Rep. Ruben Gallego (D-AZ) have questioned whether Republicans are being “even players” and noted that now is the time to “just move on without them.”[75]

To achieve the votes needed to pass the Jobs Plan in both chambers of Congress, Democrats will rely on the votes of Progressives who are requiring human infrastructure as the price for their support, which makes a deal with Republicans who oppose human infrastructure politically tricky. As a result, Progressives will have leverage in shaping what infrastructure plan passes in Congress as Democratic Leadership will count on votes from Progressives in order to pass infrastructure legislation, via a majority vote in the House and Senate (via reconciliation), if a bipartisan deal is not reached. Indeed, in the strongest sign yet that Progressives are willing to use their leverage, House Progressives sent a letter to Speaker Pelosi and Majority Leader Schumer, noting that Democrats should pursue a multi-billion dollar omnibus bill combining the Jobs and Families Plans together because now is the time for “a single ambitious package combing physical and social investments [to go] hand in hand.”[76]

Republicans, however, believe President Biden’s infrastructure Plan goes too far. Republicans have already criticized the Jobs Plan’s cost and the Tax Plan’s proposal to raise corporate taxes to cover the cost as non-starters. Republicans have also emphasized that any bipartisan deal can only focus on physical infrastructure, like roads and bridges, similar to bills that usually make up a surface transportation reauthorization bill. Republicans have significant leverage in the negotiations due to the narrow Democratic majority in the House and the 50-50 Senate, which, when combined with rifts in the Democratic caucus, make it harder for Democrats to have the votes to move forward with their own unilateral approach like they did last March with enacting into law the trillion dollar coronavirus relief bill.  Also, even if Democrats lose a couple of Senate Democrats they can still achieve a win on infrastructure if they pick up enough Republican votes, which is why the White House has engaged in negotiations with Senate Republicans in the hopes of achieving a compromise.

c.   Road to Achieving a Compromise

The path to achieving a bipartisan deal in Congress has been long and, while there is now light at the end of the tunnel, challenges still remain and the deal “in principle” must still be agreed to by various political actors leaving the final status of infrastructure legislation possible, but still not fully guaranteed.

How did this we get here? Taking advantage of their leverage, Senate Republicans, through their main negotiator Senator Shelley Moore Capito (R-WV), released their first counteroffer to President Biden’s infrastructure Plans. On April 22, Senator Capito issued a $568 billion infrastructure proposal, which costs only about a quarter of President Biden’s $2 trillion package costs.[77] Consistent with Republican criticism of the Jobs Plan’s broad interpretation of what is considered infrastructure, this proposal did not address policies such as care for elderly and disabled people or funding for affordable housing. Instead, the Republican framework focuses on roads and bridges, public transit systems, rail, water infrastructure, airports, and broadband infrastructure. The Republican proposal also diverged from the Jobs Plan in its approach to funding, prioritizing joint spending from state and local governments and encouraging private-sector investments and financing. Republicans also called for funding offsets to cover the cost of the programs and did not propose any corporate or international tax increases. The proposal also leaves in place the 2017 tax cuts passed under President Trump.

On May 21, 2021, President Biden issued a counter-offer to the Republican proposal, cutting his original proposal by $550 billion down to $1.7 trillion. To add pressure on Republicans, President Biden insisted that if a bipartisan deal cannot be reached, Democrats were prepared to move forward on a one-party legislative solution. Indeed, White House senior advisor Cedric Richmond noted that President Biden “wants a deal . . . But again, he will not let inaction be the answer. And when he gets to the point where it looks like that is inevitable, you’ll see him change course.”[78]

On May 27, 2021 Senate Republicans, through Senator Capito, released a second counteroffer, totaling $928 billion. The second Republican counteroffer included $604 billion for physical infrastructure, including roads, bridges, transit systems, rail, water infrastructure, airports and broadband, an increase in funding of almost $40 billion more in funding than the $568 billion for physical infrastructure in Senate Republicans’ first counteroffer.[79] An agreement was still not reached.

On June 4, 2021, President Biden rejected the third counteroffer from Senate Republicans, proposed by Senator Capito, to add about $50 billion to the Senate Republicans’ $928 billion infrastructure plan. White House Press Secretary Jen Psaki said that Senate Republicans’ third counteroffer “did not meet [President Biden’s] objectives to grow the economy, tackle the climate crisis, and create new jobs,” but that the President would continue negotiations with bipartisan Senators on a “more substantial package.”[80] One challenge for President Biden, who cut the size of his infrastructure package to $1.7 trillion during the negotiations, was that he requested at least $1 trillion in new spending over current levels, but Senator Capito’s third proposal increased new investments by only $150 billion.

On June 8, 2021, President Biden ended his infrastructure negotiations with Senator Capito,[81] and started new negotiations with a separate bipartisan group of Senators who drafting their own infrastructure proposal (“Group of Ten”).[82]  Members of the Group of Ten include Senators Rob Portman (R-Ohio) Kyrsten Sinema (D-AZ), the leaders of the group, which also includes Senators Bill Cassidy (R-LA), Lisa Murkowski (R-AK), Susan Collins (R-ME), Mitt Romney (R-UT) on the Republican side and Senators Jon Tester (D-MT), Joe Manchin (D-WV), Jeanne Shaheen (D-NH), and Mark Warner (D-VA) on the Democratic side.[83] The Group of Ten had been drafting an $880 billion infrastructure bill, which would be circulated to a broader group of about 20-centrist Senators for their support.[84] Senator Manchin, a moderate and key Senate swing vote, has said he is “very confident” a bipartisan compromise on infrastructure can still be worked out.[85]

While the first three Republican counteroffers signal that Senate Republicans remain interested in pursuing a bipartisan path forward with the White House and Senate Democrats, but significant challenges remained in achieving a deal, even with the new Group of Ten negotiations. First, the third Republican counteroffer of $978 billion and the bipartisan bill of $880 billion are both significantly less than the President Biden’s $1.7 trillion initial proposal, so Senate Republicans remain far apart from the White House on how much to spend on physical. Second, the third Republican counteroffer did not deliver on the key priorities that Progressives seek, most prominently, it failed to include human infrastructure and it is doubtful the bipartisan group’s proposal will include human infrastructure too. Third, the Republican counteroffers were silent on how to pay for an infrastructure bill, which will be key for reaching a deal.

In sum, both parties are about $700 billion apart on a deal, they lack a common definition of infrastructure, and an open question remains on how to pay for an infrastructure bill.[86] And finally, even with the Group of Ten discussions ongoing it may be difficult for 10 or more Senate Republicans—the threshold needed to overcome a filibuster—to support and vote for an infrastructure bill that goes too far beyond Senator Capito’s negotiations with the White House.

On June 10, 2021, the Group of Ten announced a bipartisan deal on a “compromise framework” to invest $1.2 trillion in physical infrastructure over the next eight years, including $974 billion over five years invested in physical infrastructure.[87]  Importantly, the deal reportedly would not increase taxes even though it does include an option to index the gas tax to inflation.[88] Additionally, the deal includes a new energy section, which President Biden called for Congress to include in an infrastructure deal.[89] Furthermore, the deal would provide $579 billion in new funding, meaning funding over what would otherwise be spent without any new legislation. [90]Hence, the deal would be fully paid for without any tax increases, which is makes the deal likely to be able in theory to pass both chambers of Congress.

However, the deal must still be signed off on by the Biden White House and the Senate Republican Conference in order to guarantee its safe passage, none of which are guarantees. And the option to index the gas tax for inflation may be a tough sale for the broader Senate Democratic Caucus. And the $1.2 trillion spending figure may also raise cost concerns, at least insofar as finding broad agreement in the Senate on how to pay for that spending, but the $1.2 trillion figure is similar to the $1.25 trillion in infrastructure spending proposed by the bipartisan House Problem Solvers Caucus, which could help smooth the path.  And of course the devil may be in the details, so the actual legislative text would need to be acceptable to the White House and both parties in Congress as well. So the bipartisan agreement among the Group of 10 is a significant step, but far from a guarantee that the deal will pass in a divided Senate, even though it creates more optimism that an infrastructure legislative victory is possible. The next step is to sale the deal to the White House and the broader Senate Republican and Democratic caucuses.

The final remaining question is whether the White House would pursue a bipartisan compromise strategy that would require at least 10 Republican votes to overcome a filibuster or if it will decide on a reconciliation strategy to pass a Democratic-only bill that may satisfy the Democratic base, but lose Republican support. Given the push from Progressives for the Families Plan in addition to the Jobs Plan to be included in any deal to retain their support, the Biden administration has a thin-line to walk. The consequences of which path it chooses could risk alienating either Republicans or Progressive Democrats.

The other key interest to watch that may shape how Washington’s negotiations on infrastructure turn out is the business community, which both moderate Democrats and Republicans court. The business community has generally supported the infrastructure spending promised by the Jobs Plan, but has criticized the Tax Plan intended to cover its costs. Some companies may be able to tolerate an increase of the corporate tax rate from 21 percent to up to 25 percent, which Democrats support. But most companies, including small businesses, may prefer the alternative financing plans proposed by Republicans, such as user fees and the creation of a federal infrastructure bank, as more palatable. Indeed, business trade associations have noted that raising the corporate tax rate may harm the business community because it will simply reduce the amount of private investment into infrastructure.

In response, the Biden administration has reportedly had conversations with business leaders to pitch the President’s infrastructure Plans as beneficial to companies, emphasizing the importance of the “soft infrastructure” such as job-training programs, as well as physical infrastructure like better roads.[91] But the question of whether the business community will support the Tax Plan needed to pay for the infrastructure package, and how that will impact what infrastructure legislation will come out of Washington, will be a key issue to watch closely.

d.   Path Forward

The easiest path forward now would be for the Group of 10 to persuade the White House and Senate Democratic Caucus, and at least enough Republicans to achieve 60 votes in the Senate for a physical infrastructure bill. If that is achieved, then the Senate will likely move this bill through the committees of jurisdiction and vote on the Senate floor with enough votes to overcome a filibuster. The Group of 10 would also need the House Democrats to pass a mirror image of the Senate bill in order to for legislation to arrive on the President’s desk for him to sign, which of course the White House would have to support.

If the deal breaks down, Senate Democrats have a way forward by using reconciliation to push the President’s infrastructure Plans through Congress, significant political and procedural challenges remain if Democrats attempt a one-party solution. A partisan infrastructure bill is still possible, but these conditions are making it much harder to actually do it.

Democrats can navigate this political landscape and pass President Biden’s infrastructure Plans by choosing one of three alternate paths. First, Democrats can pass the entire package through budget reconciliation. This path requires that Democrats garner 50 votes in the evenly-divided Senate, with Vice President Kamala Harris casting the tie-breaking vote in favor of the plan. Second, Democrats can attempt to break up the infrastructure plan and pass three separate reconciliation bills. However, as stated above, it is now unlikely that Senate Democrats will be permitted to pass three reconciliation bills in a single fiscal year. If Democrats pursue this path, Senate Majority Leader Chuck Schumer will have to persuade the Senate Parliamentarian to allow the Democrats to amend the 2021 fiscal year resolution to include instructions for an additional reconciliation bill,[92] which given the latest ruling of the Senate Parliamentarian, seems unlikely. Third, Democrats can pass a bipartisan bill with Republican support on portions of the infrastructure plan that has bipartisan support, and then use the reconciliation process to pass other elements of the infrastructure plan. If the Group of Ten can achieve broader Republican support for the infrastructure deal, which as stated above may be difficult to achieve, then this may be the best path forward for Democrats to pass the President’s infrastructure Plans.

Congress must still introduce legislative text to track the Jobs, Families, and Tax Plans’ broad contours. The extent to which that legislative text will mirror the Biden administration’s policy goals will undoubtedly be shaped by the political reality on Capitol Hill, especially if the bipartisan Group of Ten’s compromise breaks down. If Senate Democrats pursue reconciliation, they will need to receive at least 50 votes in the evenly-divided Senate—as opposed to 60 votes to defeat a filibuster—with Vice President Kamala Harris casting the tie-breaking vote in the Democrats’ favor. The infrastructure bill would then have to pass in House of Representatives, where the Democrats hold a slight majority (218 Democrats and 212 Republicans). The infrastructure bill would only become law after it passes both chambers of Congress and is signed by President Biden.  Currently, Senate Majority Leader Schumer (D-NY) has proposed an infrastructure vote in July[93] and House Speaker Pelosi (D-CA) has set the Fourth of July as a deadline for a House floor vote on infrastructure.[94]

As detailed above, if Democrats and Republicans in Congress pass the compromise on infrastructure, then a bill will likely arrive on the President’s desk before the August recess. Otherwise, if a deal breaks down, Senate Democrats will need to go back to the drawing board and likely move a one-party bill through a Democratic Congress. Facing opposition from Republicans, the Biden White House has already attempted to redefine the meaning of “bipartisanship” as a concept that does not require support of Congressional Republicans.[95] Even if an infrastructure bill ultimately passes without a single Republican vote in Congress, the Biden White House is expected to herald it as “bipartisan” legislation with broad support from the American public.[96] But passing a one-party bill is not easy, and the political and procedural conditions have made it harder to do, but if the bipartisan compromise breaks down, it may be the best option for Democrats to move the infrastructure Plans this year through a 50-50 Senate.

____________________

   [1]   Siegel, R., What’s in Biden’s $1.8 trillion American Families Plan?, The Washington Post, https://www.washingtonpost.com/us-policy/2021/04/28/what-is-in-biden-families-plan/ (last visited April 29, 2021).

   [2]   Snell, K., Countering Biden, Senate Republicans Unveil Smaller $568 Billion Infrastructure Plan, NPR, https://www.npr.org/2021/04/22/989841527/countering-biden-senate-republicans-unveil-smaller-568-billion-infrastructure-pl (last visited Feb. 28, 2021)

   [3]   Carey, L. et al., “The American Jobs Plan Gets Serious about Infrastructure and Climate Change,” Center for Strategic & International Studies (Apr. 2, 2021), available at https://www.csis.org/analysis/american-jobs-plan-gets-serious-about-infrastructure-and-climate-change.

   [4]   FACT SHEET: The American Jobs Plan Empowers and Protects Workers, THE WHITE HOUSE (Apr. 23, 2021) [hereinafter EMPLOYEE FACT SHEET].

   [5]   Alex Gangitano, Biden calls for passage of PRO Act, $15 minimum wage in joint address, THE HILL (Apr. 28, 2021), https://thehill.com/homenews/administration/550845-biden-calls-for-passage-of-pro-union-pro-act-and-15-minimum-wage.

   [6]   EMPLOYEE FACT SHEET, supra note 4.

   [7]   FACT SHEET: The American Jobs Plan, THE WHITE HOUSE (Mar. 31, 2021) [hereinafter JOBS PLAN FACT SHEET].

   [8]   S. 98, 117th Cong. (2021).

   [9]   H.R. 2143, 117th Cong. (2020).

[10]   S. 98, 117th Cong. § 42A (2021).

[11]   Id.

[12]   Id.

[13]   Id. Qualified census tracts also include projects located in a city with: (1) a population of more than 50,000; (2) a poverty rate not less than 150 percent of the applicable poverty rate; (3) a median gross income that does not exceed the applicable area median gross income; and (4) a median value for owner-occupied homes that does not exceed 80 percent of the applicable area median value for owner-occupied homes. Qualified projects may also be located in a nonmetropolitan county which has a median gross income that does not exceed the applicable area median gross income, and has been designated by a neighborhood comes credit agency as such.

[14]   Id.

[15]   Id.

[16]   Id.

[17]   The Department of Energy’s Weatherization Assistance Program is designed “to increase the energy efficiency of dwellings owned or occupied by low-income persons, reduce their total residential energy expenditures, and improve their health and safety, especially low-income persons who are particularly vulnerable, such as the elderly, the disabled, and children.” Department of Energy, About the Weatherization Assistance Program, https://www.energy.gov/eere/wap/about-weatherization-assistance-program (last accessed Apr. 21, 2021).

[18]   JOBS FACT SHEET, supra note 7.

[19]   Energy Independence and Security Act of 2007, 121 Stat. 1511 (2007) (codified and amended at 42 U.S.C. § 16062).

[20]   EMPLOYEE FACT SHEET, supra note 4.

[21]   EMPLOYEE FACT SHEET, supra note 4.

[22]   Id.

[23]   Don Gonyea, House Democrats Pass Bill that Would Protect Worker Organizing Efforts, NPR (Mar. 9, 2021), https://www.npr.org/2021/03/09/975259434/house-democrats-pass-bill-that-would-protect-worker-organizing-efforts.

[24]   Philip B. Phillips, The Protecting the Right to Organize (PRO) Act Gains Momentum, The National Law Review (Mar. 9, 2021), https://www.natlawreview.com/article/protecting-right-to-organize-pro-act-gains-momentum.

[25]   Eleanor Mueller & Holly Otterbein, Unions warn Senate Democrats: Pass the PRO Act, or else, POLITICO (Apr. 22, 2021), https://www.politico.com/news/2021/04/22/unions-senate-democrats-pro-act-484280.

[26]   JOBS PLAN FACT SHEET, supra note 7; THE MADE IN AMERICA TAX PLAN, U.S. DEPT. OF TREAS. 1-2 (Apr. 2021) [hereinafter TAX PLAN].

[27]   TAX PLAN, supra note 26.

[28]   JOBS PLAN FACT SHEET, supra note 7.

[29]   Id.

[30]   TAX PLAN, supra note 26.

[31]   Id.

[32]   Id. at 10.

[33]   Thomas Franck, Biden says higher corporate tax won’t hurt economy; Manchin opposes 28% rate, CNBC (Apr. 5, 2021), https://www.cnbc.com/2021/04/05/biden-higher-corporate-tax-would-not-hurt-economy-manchin-opposes-28-percent-rate.html.

[34]   Hans Nichols, Senate Democrats settling on 25% corporate tax rate, Axios (Apr. 18, 2021), https://www.axios.com/senate-democrats-tax-rate-biden-63190a59-0436-40d9-a8a3-fa21ef616412.html.

[35]   Id. at 8.

[36]   Tax Policy Center, What is global intangible low-taxed income and how is it taxed under the TCJA, Briefing Book, https://www.taxpolicycenter.org/briefing-book/what-global-intangible-low-taxed-income-and-how-it-taxed-under-tcja.

[37]   Id.

[38]   Id.

[39]   TAX PLAN, supra note 26.

[40]   Id. at 11.

[41]   Id.

[42]   Id.

[43]   Id. at 12.

[44]   Id.

[45]   Id.

[46]   Id.

[47]   The BEAT limits the ability of multinational corporations to shift profits by making deductible payments to their affiliates in low-tax countries. Tax Policy Center, What is the TCJA base erosion and anti-abuse tax and how does it work?, Briefing Book, https://www.taxpolicycenter.org/briefing-book/what-tcja-base-erosion-and-anti-abuse-tax-and-how-does-it-work.

[48]   Id. at 11.

[49]   Id.

[50]   Id.; JOBS PLAN FACT SHEET, supra note 7.

[51]   JOBS PLAN FACT SHEET, supra note 7.

[52]   Tax Policy Center, What is foreign-derived intangible income and how is it taxed under the TCJA, Briefing Book, https://www.taxpolicycenter.org/briefing-book/what-foreign-derived-intangible-income-and-how-it-taxed-under-tcja.

[53]   Id.

[54]   Id.

[55]   Id.

[56]   TAX PLAN, supra note 26.

[57]   Id.

[58]   Id.

[59]   Id.

[60]   Id.

[61]   JOBS PLAN FACT SHEET, supra note 7.

[62]   Congressional Research Service, “The Budget Reconciliation Process: Stages of Consideration,” R44058 (Jan. 25, 2021), available at https://fas.org/sgp/crs/misc/R44058.pdf [hereinafter Budget Reconciliation Process].

[63]   2 U.S.C. § 644.

[64]   See id.

[65]   See Budget Reconciliation Process, supra note 62.

[66]   Tonja Jacobi and Jeff VanDam, “The Filibuster and Reconciliation: The Future of Majoritarian Lawmaking in the U.S. Senate at 30 (2013), available at file:///C:/Users/22855/Downloads/SSRN-id2221712.pdf.

[67]   Section 304 of the Congressional Budget Act (1974) (Pub. L. 97-344), codified at 2 U.S.C. 635.

[68]   Kelsey Snell, “Ruling by Senate Parliamentarian Opens Up Potential Pathway for Democrats,” NPR, available at https://www.kpbs.org/news/2021/apr/05/ruling-by-senate-parliamentarian-opens-up/.

[69]   Erik Wasson, “Schumer’s Infrastructure Path May Get Trickier After Ruling,” Bloomberg, available at https://www.bloomberg.com/news/articles/2021-06-02/senate-ruling-may-complicate-democrats-infrastructure-push.

[70]   Igor Derysh, “Senate parliamentarian’s surprise decision threatens to derail Democrats’ infrastructure plans,” Salon (June 2, 2021), available at https://www.salon.com/2021/06/02/senate-parliamentarians-surprise-decision-threatens-to-derail-democrats-infrastructure-plans/.

[71]   Everett, Burgess, “2 Dem senators balk at Biden’s new spending plan,” Politico (Apr. 5, 2021), available at https://www.politico.com/news/2021/04/05/manchin-biden-spending-plan-479058.

[72]   “Pivotal U.S. Senate Democrat wants ‘more targeted’ infrastructure bill,” Reuters (Apr. 25, 2021), available at https://www.reuters.com/world/us/key-us-senate-democrat-favors-smaller-infrastructure-bill-2021-04-25/.

[73]   Id.

[74]   Seung Min Kim & Tony Romm, “Bipartisan group of senators prepares new infrastructure plan as talks stall between White House and GOP,” Washington Post (May 25, 2021), available at https://www.washingtonpost.com/us-policy/2021/05/25/white-house-republicans-infrastructure-talks/.

[75]   Burgess Everett & Sarah Ferris, “Liberals to Biden: Ditch the infrastructure talks with Republicans,” Politico, (May 19, 2021), available at https://www.politico.com/news/2021/05/19/biden-liberals-republicans-infrastructure-489418.

[76]   Letter from Rep. Pramila Jayapal et al., to Rep. Nancy Pelosi & Sen. Chuck Schumer (May 17, 2021), available at https://jayapal.house.gov/wp-content/uploads/2021/05/Jayapal_Size-Scope-Speed-Letter.pdf.

[77]   Snell, supra note 2.

[78]   Devan Cole, “Biden adviser: President will ‘change course’ in infrastructure talks if inaction seems inevitable,” CNN (May 23, 2021), available at https://www.cnn.com/2021/05/23/politics/cedric-richmond-infrastructure-bill-biden-cnntv/index.html.

[79]   Alexander Bolton, “Senate Republicans Pitch $928 billion infrastructure offer,” The Hill (May 27, 2021), available at https://thehill.com/homenews/senate/555700-senate-republicans-pitch-928-billion-infrastructure-offer.

[80]   Jacob Pramuk and Christina Wilkie, “Biden rejects new GOP infrastructure offer but will meet with Sen. Capito again Monday,” CNBC (June 4, 2021), available at https://www.cnbc.com/2021/06/04/joe-biden-and-shelly-moore-capito-to-hold-more-infrastructure-talks.html.

[81]   Brett Samuels, “Biden ends infrastructure talks with key Republican,” The Hill (June 8, 2021), available at https://thehill.com/homenews/administration/557417-white-house-to-end-infrastructure-talks-with-capito-shift-focus-to.

[82]   Id.

[83]   Id.

[84]   Jordan Carney, “Bipartisan group prepping infrastructure plan as White House talks lag,” The Hill (June 7, 2021), available at https://thehill.com/homenews/senate/557263-bipartisan-group-prepping-infrastructure-plan-as-white-house-talks-lag.

[85]   Id.

[86]   Jacob Pramuk and Christina Wilkie, supra n. 75.

[87]   Alexander Bolton, “Bipartisan Senate group announces infrastructure deal,” The Hill (June 10, 2021), available at https://thehill.com/homenews/senate/557816-romney-tentative-deal-on-key-elements-of-bipartisan-infrastructure-package.

[88]   Id.

[89]   Id.

[90]   Id.

[91]   Alex Leary & Emily Glazer, “Business Leaders Push for Infrastructure Deal, Minus the Corporate Tax Hikes,” Wall Street Journal (May 13, 2021), available at https://www.wsj.com/articles/business-leaders-push-for-infrastructure-deal-minus-the-corporate-tax-hikes-11620907204.

[92]   Li Zhou & Ella Nilsen, “Democrats’ new plan for passing more bills with 51 votes, explained,” Vox (Mar. 29, 2021), available at https://www.vox.com/2021/3/29/22356453/chuck-schumer-budget-reconciliation-filibuster.

[93]   Morgan Chalfant, “Biden talks reconciliation with Schumer as infrastructure negotiations falter,” The Hill (June 2021), available at https://thehill.com/homenews/administration/557435-biden-talks-reconciliation-with-schumer-as-infrastructure.

[94]   Christopher Wilson, “Senate group tries one last-ditch attempt at bipartisan infrastructure deal,” Yahoo (June 9, 2021), available at https://www.yahoo.com/news/infrastructure-bipartisan-senate-negotiations-biden-cassidy-manchin-174623680.html.

[95]   Ashley Parker, “Facing GOP opposition, Biden seeks to redefine bipartisanship,” Washington Post (Apr. 11, 2021), available at https://www.washingtonpost.com/politics/biden-bipartisan/2021/04/11/65b29ad8-96f0-11eb-b28d-bfa7bb5cb2a5_story.html.

[96]   Id.

---

The following Gibson Dunn lawyers assisted in preparing this client update: Michael D. Bopp, Roscoe Jones, Jr., Chantalle Carles Schropp, Christopher Wang, Amanda Sadra, and Brian Williamson.

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, or any member of the firm’s Public Policy practice group:

Public Policy Group:

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

© 2021 Gibson, Dunn & Crutcher LLP

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

1.   Introduction 

When calculating interest rates for floating rate loans or other instruments, the interest rate has historically been made up of (i) a margin element, and (ii) an inter-bank offered rate (IBOR) such as the London Inter-Bank Offered Rate (LIBOR) as a proxy for the cost of funds for the lender. As a result of certain issues with IBORs, the loan market is shifting away from legacy IBORs and moving towards alternative benchmark rates that are risk free rates (RFRs) that are based on active, underlying transactions. Regulators and policymakers around the world remain focused on encouraging market participants to no longer rely on the IBORs after certain applicable dates (the Cessation Date) – 31 December 2021 is the Cessation Date for CHF LIBOR, GBP LIBOR, EUR LIBOR, JPY LIBOR and the 1 week and 2 month tenors of USD LIBOR, while 30 June 2023 is the Cessation Date for the remaining tenors of USD LIBOR (overnight, 1, 3, 6 and 12 month tenors). Other IBORs in other jurisdictions may have different cessation dates (e.g. SIBOR) while others may continue (e.g. EIBOR). Market participants should be aware of these forthcoming changes and make appropriate preparations now to avoid uncertainty in their financing agreements or other contracts.

2.   What will replace IBORs?

Regulators have been urging market participants to replace IBORs with recommended RFRs which tend to be backward-looking overnight reference rates – in contrast to IBORs which are forward-looking with a fixed term element (for example, LIBOR is quoted as an annualised interest rate for fixed periods e.g. 1 month, 3 months, 6 months etc), however, in the US, the Alternative Reference Rates Committee (ARRC) will be recommending a Term SOFR rate as well which would be forward looking. Additionally, some market participants are seeking to use a credit sensitive rate (USD-BSBY). As a result, when RFRs are used, it may not be possible to calculate in advance the floating rate that would be applicable for a particular interest period depending on which RFR is used – creating some uncertainty as to the interest amount due at the end of that interest period. To combat this uncertainty (and help CFOs and accounting teams):

1. forward-looking term rates for RFRs are being developed (but it is unclear if they will be available prior to the Cessation Date);
2. the market has developed an approach which averages the RFRs on a compounded or simple average basis over an interest period to produce a term interest rate and introduce a mechanism to shift the observation period backwards by a short (typically 5 day) period so that the interest amount for the interest period is known five days prior to the payment date; and
3. for certain products, market participants may seek to utilise the averaged RFR from the prior period for the current period so that the RFR rate is known at the beginning of the period (known as compounding in advance).

Regulators recommend market participants to amend IBOR provisions in contracts with a suitable alternative rate and/or to use robust fall-back options which enable the contract to move to a suitable alternative rate. For new facilities, industry bodies (such as the LMA) have published suggested language to facilitate a change in the relevant IBOR and to make consequential amendments upon the occurrence of the relevant Cessation Date.

3.   Tough Legacy Contracts

“Tough legacy contracts” are contracts with a term extending beyond the discontinuance of IBORs that contain problematic fall-back options (i.e. rates that are uneconomic or cannot be calculated) or do not contain any fall-back language at all; and are for one reason or another, difficult to amend (or there is no realistic ability for the contracts to be renegotiated or amended).

Tough legacy contracts are at risk of becoming unworkable if they cannot be transitioned to a suitable alternative reference rate prior to IBORs being discontinued. This issue is not limited to the world of finance as IBOR rates are also commonly used in other contracts such as sale and purchase agreements, shareholders agreements, inter-company agreements, joint-venture agreements and other commercial contracts to determine payment amounts due – each of these contracts should also be considered well in advance of the relevant Cessation Date to ascertain and, where necessary, implement appropriate amendments.

There has been some recognition by market participants that it may be advisable in certain circumstances to amend legacy documents so that consequential amendments may be made at a later date once an alternative has been broadly settled in the market – i.e. a two stage amendment process. However, certain regulators have favoured a more definitive approach (i.e. a hardwired approach) that sets forth the specific fall-back provisions for what the rate will be following the Cessation Date.

Certain governments are also introducing legislation to combat the issue of tough legacy contracts for the purpose of providing the regulators with the authority to change the calculation methodology and extend the publication for critical benchmarks for a limited time period (among other powers) to avoid economic risk and wider market disruption. It waits to be seen if similar legislation will be implemented in the UAE.

In the UK financing space, the market has settled on SONIA (compounded daily on a look back basis) as the replacement reference rate to GBP LIBOR (which is a look forward rate). However, as SONIA is a fluctuating overnight rate – there is no such thing as a SONIA term rate – it will not be a practical alternative to LIBOR for most commercial contracts.  For most commercial contracts, it may be possible to use an alternative rate such as the Bank of England’s base rate as an alternative to GBP LIBOR, this might constitute a much more practical solution because this rate is widely understood and moves relatively infrequently (and when it does move, any change will be well publicised).  In addition, this rate is unlikely to fall foul of any “unfair terms” legislation. Alternatively, a reasonable and agreed numeric rate could be included if counterparties are worried about unforeseen spikes e.g. a Black Wednesday event.

Although most LIBOR rates will cease to be published from 31 December 2021, certain GBP LIBOR rates may continue on a non-representative basis after that date.  Any such continuing rates are likely to be “synthetic” in nature.  Whilst, it is possible that “replacement LIBOR” wording in an existing commercial contract could, as a purely contractual matter, pick up a non-representative GBP LIBOR rate – in most cases – contract counterparties will not be able to rely on any such drafting. In the United Kingdom, we are still awaiting full details of the primary and secondary legislation to deal with this but – to the extent introduced – the intention is that all such non-representative rates will only be available for the purposes of “tough legacy contracts” where it is impossible and/or impractical to amend such contracts to deal with LIBOR cessation. As such, in most cases, it will be necessary to amend existing commercial contracts that extend beyond the end of 2021 and which reference GBP LIBOR. For documents that are not governed by English law but reference GBP LIBOR (e.g. a New York law governed bond), it will be a question of the governing law of the applicable non-English law contract as to whether the courts in that jurisdiction will enforce any limitations in such UK legislation on the use of “synthetic GBP LIBOR” as a fall back in contracts governed by that law.

We previously discussed the developments in the United Kingdom in our Client Alert dated 9 March 2021 and the newly adopted New York State LIBOR legislation in our earlier Client Alert dated 8 April 2021[1].

4.   Islamic Transactions and IBOR complexities

From a Shari’a perspective, the replacement of IBORs with an RFR may cause further issues as (in accordance with the Shari’a principle of gharar) Shari’a transactions require that the calculation of the profit element must be certain. Historically the floating rate is set at the start of a profit period creating the necessary certainty – this was possible when using legacy IBORs but may become more challenging with backward-looking RFRs. Additional work will be required to align the IBOR transition approach to the needs of both the Islamic and the conventional finance markets but some possible solutions are:

1. On or prior to the Cessation Date, conventional and Shari’a compliant corporate facilities should contain appropriate fall-back provisions. To the extent there are conventional and Shari’a compliant facilities as part of one transaction, the fall-back provisions should be considered alongside one another and structured and priced accordingly.
2. Utlising the averaged RFR from the prior period for the current period so that the RFR is known at the beginning of the period – though in situations where there are conventional and Shari’a compliant facilities the compounding in advance method would have to be used for both facilities to avoid any pricing mis-match. Market participants will also need to consider whether using the compounding in advance method would put Shari’a financing at a competitive disadvantage (or advantage).
3. Forward-looking term RFRs could be adopted in respect of Islamic transactions (e.g. Term Sterling Overnight Index Average or term sterling overnight index average reference rates (TSSR)) – this would require the fewest changes to the documentation and structure, however TSSRs are only intended to be used in certain circumstances (Islamic finance qualifies for this according to a paper published by the SONIA Working Group in January 2020) but this may lead to pricing gaps / other issues between conventional and Islamic facilities if forward-looking term RFRs (once developed) are to be widely used in Islamic finance while the conventional finance market use RFRs compounded in arrears.
4. Effectively converting what was a floating rate transaction into a fixed rate transaction – though market participants will have to consider how to price these transactions to ensure that they remain competitive whilst still providing protection to the lenders. Participants should also consider that if fixed rate loans become the norm this would have a knock on impact to the derivatives market.
5. The IBOR transition could be a motivating factor for market participants to develop alternative Islamic benchmarks which could avoid reliance on interest-based conventional benchmarks such as RFRs.

5.   UAE Guidance

The following regulatory authorities in the UAE have provided guidance on the transition away from IBOR benchmarks to other alternative solutions.

UAE Central Bank

Emirates Interbank Offered Rate (EIBOR) is the benchmark interest rate, stated in UAE Dirhams, for lending between banks within the UAE market. While the relevant IBOR for the UAE is EIBOR, a number of contracts in the UAE use GBP and USD LIBOR as the reference rate (among others), therefore, GBP and USD LIBOR changes will also be relevant in the UAE. At present, we are not aware of any plans for the discontinuation of EIBOR. As the UAE Dirham is not a LIBOR currency, we do not anticipate EIBOR to be directly impacted by the discontinuation of certain IBORs. However, the UAE Central Bank may in the future adopt reforms to EIBOR. We understand that UAE banks have been asked to provide consultation on the migration to a new open currency rate. It waits to be seen if the UAE Central Bank will mandate a similar transition away from EIBOR, we will be following developments closely in this regard.

Dubai Financial Services Authority (DFSA)

Given the DFSA authorised firms frequently use other IBORs as the reference rate in their contracts, the transition away from certain IBORs is likely to impact the Dubai International Financial Centre (DIFC) market. As a result, the DFSA is engaging with those authorised firms on an individual basis on the progress of the transition arrangements. There is an expectation on DFSA authorised firms to consider how the challenges affect their DIFC operations by identifying and deciding, if necessary, subject to timelines, how they plan to:

1. deal with existing IBOR-referencing securities or products with maturities or rolling over arrangements beyond the end of the relevant LIBOR phase-out deadline;
2. negotiate with counterparties and include conversion clauses in legacy contracts referencing IBORs;
3. measure exposures, and adapt to new valuation methods;
4. adapt internal and third-party managed systems, processes and documentation to factor in the transition; and
5. conduct appropriate awareness and outreach with the firm’s clients on the impact of the transition.

Further consultations between the DFSA and the authorised firms in the coming months will draw out the concerns and highlight the key areas where there is a need for more transition preparation.

6.   Conclusion

Given the Cessation Date is fast approaching and industry bodies are taking an increasingly hard-line approach to the discontinuance of IBORs, market participants should focus on the agreements which will be impacted by these changes as a matter of urgency.

Existing contracts that reference IBORs should be reviewed (and amended) to ensure that appropriate provisions that accommodate the discontinuance of IBORs are included where appropriate and new transactions entered into prior to the discontinuance of IBORs should contain appropriate provisions to adopt an alternative benchmark rate, including RFRs, if appropriate.

___________________________

   [1] See, The End Is Near: LIBOR Cessation Dates Formally Announced (March 9, 2021) and New York Adopts LIBOR Legislation (April 8, 2021).

---

Gibson Dunn’s lawyers are available to help with any of these issues and with the review of any contracts that may be impacted by these changes. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets, Derivatives, Financial Institutions, Global Finance or Tax practice groups, or the following authors of this client alert:

Aly Kassam – Dubai (+971 (0) 4 318 4641, [email protected])
Galadia Constantinou – Dubai (+971 (0) 4 318 4663, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
Linda L. Curtis – Los Angeles (+1 213-229-7582, [email protected])
Ben Myers – London (+44 (0) 20 7071 4277, [email protected])
Bridget English – London (+44 (0) 20 7071 4228, [email protected])

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

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

Derivatives Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
Darius Mehraban – New York (+1 212-351-2428, [email protected])
Erica N. Cushing – Denver (+1 303-298-5711, [email protected])

Financial Institutions Group:
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
M. Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, [email protected])

Global Finance Group:
Aaron F. Adams – New York (+1 212 351 2494, [email protected])
Linda L. Curtis – Los Angeles (+1 213 229 7582, [email protected])
Aly Kassam – Dubai (+971 (0) 4 318 4641, [email protected])
Ben Myers – London (+44 (0) 20 7071 4277, [email protected])
Michael Nicklin – Hong Kong (+852 2214 3809, [email protected])
Jamie Thomas – Singapore (+65 6507 3609, [email protected])

Tax Group:
Sandy Bhogal – London (+44 (0) 20 7071 4266, [email protected])
Benjamin Fryer – London (+44 (0) 20 7071 4232, [email protected])
Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224/+1 212-351-2344), [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

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

On June 11, 2021, the Second Circuit issued its decision in 1-800 Contacts, Inc. v. FTC,[1] an appeal of an administrative litigation brought by the Federal Trade Commission against 1-800 Contacts. The decision—which rejected the FTC’s claim that several trademark settlements by 1-800 Contacts violated the antitrust laws —found that the trademark settlement agreements at issue were “typical” and procompetitive, and provides crucial guidance for parties considering settling trademark disputes. The decision also has broader implications for antitrust claims involving the enforcement of intellectual property rights and will likely serve as an important precedent in such cases. From a substantive trademark perspective, the decision also confirms that the law over the use of another party’s trademarks as search engine keywords remains “unsettled.”

The FTC’s Case Against 1-800 Contacts

The FTC’s case challenged thirteen agreements that 1-800 Contacts had signed with competitors to settle trademark infringement claims where it alleged that those competitors’ online advertisements infringed 1-800 Contacts’ trademarks.[2] The settlements restricted competitors’ use of search advertising by requiring them (1) to refrain from bidding on 1-800 Contacts’ trademarks in search-engine auctions, and (2) to affirmatively bid on negative keywords that would prevent their ads from being displayed when a consumer searched for a 1-800 Contacts trademark. The FTC alleged that these agreements restricted competition in violation of Section 5 of the FTC Act because they “prevent[ed] [1-800 Contacts’] competitors from disseminating ads that would have informed consumers that the same contact lenses were available at a cheaper price from other online retailers,” and reduced “price competition in search advertising auctions.”[3] An Administrative Law Judge (ALJ) upheld the FTC’s case, and the Commission affirmed the ALJ’s decision, classifying the agreements in question as “inherently suspect” under the antitrust laws.[4]

The Second Circuit’s Decision

1-800 Contacts appealed the Commission’s decision to the Second Circuit, and the appeals court reversed. As an initial matter, the court agreed with the FTC that trademark settlements are not categorially immune from antitrust scrutiny.[5] Consistent with FTC v. Actavis,[6] the Second Circuit held that trademark settlements can, under certain circumstances, violate the antitrust laws. But the court rejected the Commission’s characterization of the trademark settlements as “inherently suspect” and its application of a truncated rule of reason analysis.[7] Because trademark settlements have “cognizable procompetitive justifications” and have not “been widely condemned” by courts, the court found that application of the full rule of reason approach was required.[8]

The court found that 1-800 Contacts had shown that its settlements had procompetitive justifications. The court reasoned that the “[t]he protection of [1-800 Contacts’] trademark interests constitutes a valid procompetitive justification,”[9] that “agreements to protect trademark interests are ‘common, and favored, under the law,’” and that courts “should ‘presume’ that trademark settlement agreements are procompetitive.”[10] In response to the FTC’s claim that these procompetitive justifications did not justify the restrictions in the settlements because those benefits could be achieved through a “less restrictive alternative,” the court adopted a very narrow view of that doctrine.  In language deferential to the settling parties, the court held that “what is ‘reasonably necessary’” to achieve the procompetitive benefits of protecting a trademark interest “is likely to be determined by competitors during settlement negotiations.”[11] The court then found that the FTC’s proposed alternative—a “disclosure requirement”—was not shown to be a less restrictive alternative because, among other things, the FTC failed to address the practical difficulties with its proposal, e.g., how the disclosure requirement could be enforced.[12] As a result, the court found that the FTC’s proposed alternative might not as be as effective in promoting the “parties’ ability to protect and enforce their trademarks.”[13] The court, accordingly, found that the FTC failed to show that the settlement agreements violated the antitrust laws and ordered the FTC’s case dismissed.

Practical Implications for Trademark Settlements

The 1-800 Contacts decision has numerous practical implications for parties seeking to settle trademark disputes and otherwise protect their trademark interests. The decision provides some very useful guidance on how companies may settle trademark disputes with minimal antitrust risk, but companies should continue to take care to consider antitrust concerns in crafting such settlements. While the court dismissed the FTC’s case against 1-800 Contacts, it did find that trademark settlements can raise antitrust issues in certain circumstances. Overall, there are several key takeaways from the decision, including:

• The Second Circuit decision includes language that is deferential to the settling parties in trademark disputes. As a result, the FTC and private plaintiffs will face significant hurdles if they attempt to bringing new antitrust cases challenging trademark settlements. Notably, a respondent in an FTC administrative proceeding can appeal an adverse decision in any Circuit in which the respondent does business,[14] which means that the Second Circuit’s decision will effectively set the legal standard for any future FTC administrative enforcement actions.
• While the Second Circuit did not expressly define the situations in which a trademark settlement might raise greater antitrust risk, it did mention an agreement entered “under duress” “between parties with unequal bargaining power” as a potential example of where a trademark settlement might be entitled to lesser deference in an antitrust challenge.[15]
• The court also left open the possibility that the requirement that competitors use negative keywords could be higher risk than agreements not to bid on each other’s trademarks. The court stated that it had “no reason to consider” the issue of whether the requirement to use negative keywords went “beyond any legitimate claim of trademark infringement” because the FTC had not made a finding of anticompetitive effects specific to “this narrow aspect of the settlement agreements.”[16]

• The court stated that the merits of the trademark claims that led to the settlement agreements in the 1-800 Contacts case were “unsettled.”[17] Although the court’s overall holding implies that courts will be reluctant to second guess the merits of a claim that the parties have elected to settle, aggressive antitrust plaintiffs will likely continue to argue that a lower level of deference should apply if the trademark claims are extremely weak.
• The decision’s reasoning also appears to extend to agreements between competitors that do not arise out of pending trademark infringement litigation. While the FTC had argued that one of the agreements was particularly suspect because the parties’ agreement to limit their bidding on trademark terms was not based on an asserted infringement claim, the court found that the FTC had not offered “direct evidence differentiating” that agreement from the others and that the court did not need to do so in its decision because “protecting trademarks is a valid procompetitive justification for the restrictions.”[18]

Given the risk that regulators or private plaintiffs will continue to pursue similar claims, it remains crucial for companies considering settling trademark disputes with restrictions on search advertising to analyze the antitrust risk of such arrangements.

Broader Implications for Other Types of IP Enforcement and Settlements

The decision also has important implications for non-trademark cases. The court found, as noted, that protecting one’s intellectual property rights constitutes a legitimate business interest that can justify restrictions on an allegedly infringing party’s conduct in a settlement agreement. Although the decision emphasizes the unique features of trademarks, its reasoning is likely to apply, at least to some extent, to antitrust claims challenging settlements of other types of IP disputes. For example, we expect that this decision will be cited by parties in antitrust cases based on alleged reverse-payment settlement agreements in the pharmaceutical industry. Similarly, the court’s narrow interpretation of the “less restrictive alternative” doctrine is also likely applicable outside of the trademark context. For that doctrine to apply, the court required the plaintiff to do more than just speculate about potentially less restrictive alternatives: the plaintiff “needs to show more than the mere possibility” of a less restrictive alternative.[19] And the court also stated that not any proposed alternative will do—the proposed alternative must be practical to apply, as well as “substantially less restrictive” than the arrangement challenged.[20]

Finally, the decision in 1-800 Contacts also serves as a reminder that, in an era in which commentators are encouraging more aggressive and novel antitrust enforcement, the federal judiciary remains the ultimate arbiter of federal antitrust policy. Enforcers seeking to expand the scope of U.S. antitrust law must do more than bring novel cases—they must also prove their cases with hard facts in a court of law.

* Gibson Dunn partner Howard S. Hogan served as an expert witness for 1-800 Contacts in this case, and offered the opinion that the settlement agreements at issue were standard trademark settlements, as courts continue to determine the bounds of trademark claims arising from the use of trademarks as search engine keywords.

____________________________

   [1]   — F.3d —, 2021 WL 2385274 (2d Cir. June 11, 2021).

   [2]   Id. at *2-3.

   [3]   Id. at *3.

   [4]   Id.

   [5]   Id. at *4.

   [6]   570 U.S. 136 (2013).

   [7]   1-800 Contacts, 2021 WL 2385274, at *7. The “inherently suspect” framework is also known as the “abbreviated rule of reason analysis” or a “quick-look” approach.  Id. at *6 (quoting Cal. Dental Ass’n v. FTC, 526 U.S. 756, 770 (1999)).

   [8]   Id. at *7.

   [9]   Id. at *9.

  [10]   Id. at *9 (first quoting Clorox, 117 F.3d at 55; and then quoting id. at 60).

  [11]   Id. at *10 (quoting United States v. Brown Univ., 5 F.3d 658, 679 (3d Cir. 1993)).

  [12]   Id. at *11.

  [13]   Id.  The panel also held that the FTC failed to offer “direct” evidence of anticompetitive effects. Id. at *8.

  [14]   15 U.S.C. § 45(c).

  [15]   1-800 Contacts, 2021 WL 2385274, at *10 n.14.

  [16]   Id. at *11 n.17.

  [17]   Id. at *9 n.13.

  [18]   Id. at *9 n.12.

  [19]   Id. at *11 (emphasis added).

  [20]   Id. (quoting Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 1502 (3rd & 4th eds., 2019 Cum. Supp. 2010-2018)).

---

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 Antitrust and Competition, Intellectual Property, Fashion, Retail and Consumer Products, or Media, Entertainment and Technology practice groups, or the authors:

Eric J. Stock – New York (+1 212-351-2301, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Stephen Weissman – Washington, D.C. (+1 202-955-8678, [email protected])
Michael J. Perry – Washington, D.C. (+1 202-887-3558, [email protected])

Please also feel free to contact the following U.S. practice leaders:

Antitrust and Competition Group:
Rachel S. Brass – San Francisco (+1 415-393-8293, [email protected])
Stephen Weissman – Washington, D.C. (+1 202-955-8678, [email protected])

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])

Fashion, Retail and Consumer Products Group:
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])

Media, Entertainment and Technology Group:
Scott A. Edelman – Los Angeles (+1 310-557-8061, [email protected])
Kevin Masuda – Los Angeles (+1 213-229-7872, [email protected])
Benyamin S. Ross – Los Angeles (+1 213-229-7048, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

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

In several recent announcements, the Biden Administration has signaled that the United States is going on the offensive to root out global corruption. Though new administrations regularly communicate an intention to fight corruption—with varying success in outcomes—closely timed statements from both the White House and the Department of Justice (“DOJ”) in recent weeks suggest this Administration is prioritizing anti-corruption enforcement and may usher in substantial changes to the regulatory landscape—changes that raise important questions about the reach of regulators’ enforcement mechanisms and the potential risks facing companies.

Earlier this month, the White House released a memorandum identifying corruption as a core national security threat and announcing the Administration’s intent to use the full arsenal of its enforcement, financial, foreign policy, and intelligence tools to detect and combat corruption.[1] Likewise, DOJ Criminal Division leadership emphasized their prosecutors are continuing to build out capabilities to detect and proactively investigate Foreign Corrupt Practices Act (“FCPA”) violations, for example through innovative data mining techniques, in addition to rewarding self-reporting. These announcements, along with the recent enactment of the Anti-Money Laundering Act of 2020 (“AMLA”) and the anticipated implementing regulations, highlight the Administration’s interest in establishing an even more aggressive enforcement environment through the use of broadened detection efforts and strengthened enforcement tools [2]

1. White House Statements Establishing the Fight Against Corruption as a Core United States National Security Interest

On June 3, 2021, the U.S. government demonstrated its renewed commitment to combating corruption when the White House published a National Security Study Memorandum that explicitly “establish[es] countering corruption as a core United States national security interest.”[3] In the memorandum, President Biden emphasized the serious costs of corruption, explaining that it “threatens United States national security, economic equity, global anti-poverty and development efforts, and democracy itself” and drains “between 2 and 5 percent of global gross domestic product.”[4]

To combat the risks associated with global corruption, President Biden directed Assistants to the President on National Security, Economic Policy, and Domestic Policy to conduct an interagency review process within 200 days and submit strategic recommendations.[5] Significantly, the interagency review involves a wide array of agencies with different tools, perspectives, and focuses on corruption, including the regular players like DOJ, the Department of State, and the Department of the Treasury, to key players in the defense and intelligence apparatus like the Department of Defense and the Central Intelligence Agency. It remains to be seen how the Biden Administration will coordinate future anti-corruption efforts, particularly where information sharing between enforcement and intelligence agencies is limited by law, but the Administration appears ready to employ an aggressive multi-front strategy to combat corruption as a national security issue.

The recommendations from the interagency review process will aim to significantly bolster the U.S. government’s efforts to, for example, require United States companies “to report their beneficial owner[ship] to the Department of Treasury”;[6] “hold accountable corrupt individuals, criminal organizations, and their facilitators” by identifying, freezing, or returning stolen assets;[7] improve frameworks in domestic and international institutions to prevent corruption and to combat “money laundering, illicit finance, and bribery”;[8] and develop international partnerships to “counteract strategic corruption by foreign leaders” by closing loopholes.[9]  Though the specific recommendations resulting from the study remain to be seen, its aims are directionally consistent with past efforts to increase interagency coordination, explore use of additional enforcement and intelligence tools, and increase focus on corruption as a national security threat.

Vice President Harris’s remarks this week during her trip to Guatemala further demonstrate the White House’s focus on anti-corruption measures and its concerted effort to show the seriousness of its commitment to fighting global corruption.[10] While her remarks centered on immigration, Vice President Harris took the opportunity to emphasize that the United States is working vigorously to combat corruption by creating “an anti-corruption task force — the first of its kind,” which will combine the forces of DOJ, the Department of Treasury, and the State Department “to conduct investigations and train local law enforcement to conduct their own.”[11]

2. Statements from Senior DOJ Officials

Consistent with President Biden’s call for increased focus on combating corruption, DOJ officials announced at the June 2, 2021 American Conference Institute’s FCPA Conference that DOJ is developing “groundbreaking policies” and taking an “entirely new” approach to FCPA enforcement.[12] While many FCPA investigations historically originated from company self-reporting, Acting Assistant Attorney General Nicholas McQuaid, who oversees the Criminal Division, announced at the conference that DOJ is now developing FCPA cases “as much, if not more” through proactive investigation methods. Fraud Section Acting Chief Daniel Kahn added, “we have upped our detection, and we are learning of cases through a number of different ways.”[13] This messaging suggests DOJ may move to a more aggressive posture in corporate investigations and away from the last administration’s perceived approach, which had encouraged corporate America to engage in “self-policing” and to regard law enforcement “as an ally.”[14]

Acting Assistant Attorney General McQuaid emphasized that DOJ is using its independent authority to gather evidence in corruption cases through law enforcement sources and cooperators, “proactive and innovative” data mining, and partnerships with foreign governments. He suggested that DOJ increasingly is “covertly” developing evidence before ever engaging with target companies and that the public can expect an increase in DOJ-driven FCPA investigations before the end of the year.[15] McQuaid assured the audience that DOJ will produce FCPA enforcement results on par with the “size, scope, and significance” of previous years.[16]

McQuaid further warned that companies should not attempt to game DOJ’s anti-piling on policy “to get lower penalties for foreign corruption violations.”[17] The policy is designed to encourage coordination in parallel investigations to avoid unfair and duplicative penalties by multiple agencies for the same misconduct.[18] Despite DOJ’s anti-piling on policy, the inefficiencies and lack of coordination at the investigation and resolution stages continue in large part because DOJ’s policy only binds DOJ. McQuaid cautioned that DOJ will “not restrict the scope of our enforcement actions in response to tactically front-loaded resolutions.”[19] In other words, companies may be wise to coordinate with DOJ if they wish to seek credit for resolving related claims by other agencies and prosecuting authorities.

DOJ has long claimed to rely less on self-disclosures as the genesis of its investigations and to be exploring new investigatory mechanisms. It remains to be seen whether McQuaid’s recent statements signal a real shift in DOJ’s investigatory approach and will lead to a proportional increase in cases originating from DOJ-driven investigations. Gibson Dunn will continue to closely track the FCPA docket to monitor these enforcement trends.

3. Anti-Money Laundering Act of 2020

The recent enactment of the AMLA gives the Biden Administration another mechanism to fight corruption, and the U.S. government can be expected to use its new found powers under the AMLA to target certain conduct that is typically regulated through FCPA enforcement.[20] Prosecutors have increasingly used money laundering criminal statutes and investigatory powers to investigate and bring enforcement actions for corrupt conduct. While the AMLA is not primarily focused on anti-corruption measures, it does provide the U.S. government with enhanced investigatory tools that likely will similarly be used by the Biden Administration to identify and punish corruption.

As one of its many goals, the AMLA seeks to prevent criminals from using shell companies in the U.S. to launder illegally obtained money, such as proceeds from corrupt activities.[21] To curtail this practice and to “assist national security, intelligence, and law enforcement agencies with the pursuit of crimes,” the AMLA calls for regulations that will require certain legal entities that are formed within the U.S. or registered to do business within the U.S. to disclose to the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) their beneficial ownership and that will require FinCEN to maintain a non-public, federal registry of that information.[22] Many types of entities are excluded from this reporting requirement, including public companies, entities subject to significant U.S. regulatory oversight, and other types of entities that are not typically shell companies that pose heightened AML risk. Although FinCEN’s registry will be non-public, law enforcement agencies will be able to request access to information for national security, law enforcement, and intelligence purposes.[23]

Other portions of the AMLA similarly grant the U.S. government enhanced investigatory powers to assist in identifying corruption. For example, the AMLA expands prosecutors’ foreign subpoena powers by authorizing them to subpoena any foreign bank that maintains a correspondent account in the United States for records, including those maintained outside of the United States, relating to any account at the foreign bank that are the subject of “any investigation of a violation of a criminal law of the United States.”[24] Once the implementing regulations are promulgated, the Biden Administration is likely to utilize FinCEN’s corporate registry and the U.S. government’s heightened subpoena powers to help identify and investigate companies and individuals engaged in corrupt activities, whether through the FCPA, money laundering, or other criminal statutes.

In addition to expanding investigatory powers, the AMLA also expanded penalties for certain financial activities, which can assist the U.S. government in its enforcement efforts against international corruption and bribery.[25] The AMLA creates a new prohibition on knowingly concealing or misrepresenting a material fact from or to a financial institution concerning the ownership or control of assets involved in transactions entailing at least $1 million of assets and  assets belonging to or controlled by a senior foreign political figure or an immediate family member or close associate of a senior foreign political figure.[26]

The AMLA also drastically increases penalties for certain violations of the Bank Secrecy Act, which imposes money laundering regulatory requirements on financial institutions, with particularly enhanced penalties for repeat offenders.[27] The Secretary of Treasury will be able to impose civil penalties on recurring offenders in an amount either triple the profit lost due to the violation or “two times the maximum penalty” under the new provision.[28]

Accordingly, the AMLA’s implementing regulations may solidify the Administration’s objective of increasing the U.S. government’s ability to combat all forms of corruption by providing additional investigatory and enforcement powers to pursue such activity when related financial transactions fall under the broad scope of the AMLA.

Conclusion

These developments suggest we may see important shifts to the anti-corruption enforcement landscape under the Biden Administration, with a heightened focus on combatting corruption, including through expanded detection and enforcement mechanisms. Though the recent announcements from the White House and DOJ are directionally consistent with the messaging we have seen from previous administrations—insofar as they emphasize corruption as a national security focus, the need for inter-agency cooperation, and the development of new investigatory tools—the timing of these announcements, along with the recent enactment of AMLA, puts us on notice that real change may be afoot. For companies and senior executives, some of these changes may make it more difficult to anticipate regulatory risks. While it remains to be seen how the Biden Administration’s interagency review effort will change the enforcement landscape, DOJ’s claims of success with data mining and other enforcement tools to identify and proactively investigate cases, along with the enhanced anti-money laundering powers coming online, may signal an era of heightened anti-corruption enforcement risks. Companies and practitioners will want to keep a keen eye on how the enforcement landscape changes over time, particularly when considering the benefits and risks of self-disclosure. In this new enforcement regime, companies may find the outcomes of regulatory investigations harder to predict.  We also note that these shifts come at a time of increasing anti-corruption enforcement action by regulators around the globe. Navigating in this new environment will require close attention to these changes.

______________________________

   [1]   The White House, Memorandum on Establishing the Fight Against Corruption as a Core United States National Security Interest (June 3, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/06/03/memorandum-on-establishing-the-fight-against-corruption-as-a-core-united-states-national-security-interest/ (“National Security Study Memorandum”).

   [2]   One columnist identified the new anti-corruption plans as a step toward challenging “kleptocrats” and “klepto-dictators around the world.” See David Ignatius, Biden’s Anti-corruption Plan Appears to Have Some Teeth. Here’s Hoping They Bite., Wash. Post (June 3, 2021), https://www.washingtonpost.com/opinions/2021/06/03/bidens-trying-crack-down-international-corruption-lets-hope-it-works-this-time/.

   [3]   See National Security Study Memorandum, supra fn. 1.

   [4]   Id. § 1.

   [5]   Id. § 2.

   [6]   Id. § 2(b).

   [7]   Id. § 2(c).

   [8]   Id. § 2(d).

   [9]   Id. § 2(f).

  [10]   U.S. Embassy in Guatemala, Remarks by Vice President Harris and President Giammattei of Guatemala in joint Press Conference (June 7, 2021), https://gt.usembassy.gov/remarks-by-vice-president-harris-and-president-giammattei-of-guatemala-in-joint-press-conference/.

  [11]   Id.

  [12]   Nicholas McQuaid, Acting Assistant Attorney General, Dep’t of Justice, Keynote Address at the Foreign Corrupt Practices Act New York (June 2, 2021); See also Clara Hudson, FCPA Enforcement is “In An Entirely New” Place, Says Acting Criminal Division Chief, Global Investigations Rev. (June 2, 2021), https://globalinvestigationsreview.com/just-anti-corruption/fcpa/fcpa-enforcement-in-entirely-new-place-says-acting-criminal-division-chief.

  [13]   Id.

  [14]   Dep’t of Justice, Deputy Attorney General Rod J. Rosenstein Delivers Keynote Address on FCPA Enforcement Developments (Mar. 7, 2019), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-keynote-address-fcpa-enforcement.

  [15]   See Hudson, FCPA Enforcement is “In An Entirely New” Place, Says Acting Criminal Division Chief, supra fn. 12.

  [16]   Id.

  [17]   U.S. Official to Firms: Don’t Game DOJ Policy Against Multiple Penalties, Reuters (June 2, 2021), https://www.reuters.com/business/us-official-firms-dont-game-doj-policy-against-multiple-penalties-2021-06-02/.

  [18]   See Dep’t of Justice, Deputy Attorney General Rod Rosenstein Delivers Remarks to the New York City Bar White Collar Crime Institute (May 9, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-rosenstein-delivers-remarks-new-york-city-bar-white-collar (“Today, we are announcing a new Department policy that encourages coordination among Department components and other enforcement agencies when imposing multiple penalties for the same conduct. The aim is to enhance relationships with our law enforcement partners in the United States and abroad, while avoiding unfair duplicative penalties.”).

  [19]   See U.S. Official to Firms: Don’t Game DOJ Policy Against Multiple Penalties, supra fn. 17.

  [20]   William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, H.R. 6395. Division F of the National Defense Authorization Act is the Anti-Money Laundering Act of 2020 (“AMLA “).

  [21]   Id. §§ 6002, 6403.

  [22]   Id.

  [23]   Id.

  [24]   Id. § 6308(a)(3)(A)(i).

  [25]   For more information on the AMLA, please see Gibson Dunn’s previous client alert titled The Top 10 Takeaways for Financial Institutions from the Anti-Money Laundering Act of 2020, https://www.gibsondunn.com/the-top-10-takeaways-for-financial-institutions-from-the-anti-money-laundering-act-of-2020/.

  [26]   AMLA § 6313.

  [27]   Id. § 6102, 6309.

  [28]   Id. § 6309.

---

The following Gibson Dunn lawyers assisted in preparing this client update: Joel M. Cohen, F. Joseph Warin, Nicola T. Hanna, Stephanie Brooker, Chuck Stevens, Partick F. Stokes, David Burns, Kelly S. Austin, Benno Schwarz, Alina R. Wattenberg, Nina Meyer, and Kevin Reilly, a recent law graduate working in the Firm’s New York office who is not yet admitted to practice law.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 110 attorneys with anti-corruption and FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm’s domestic and international offices. Please contact the Gibson Dunn attorney with whom you work, or any of the following:

Washington, D.C.
F. Joseph Warin (+1 202-887-3609, [email protected])
Richard W. Grime (+1 202-955-8219, [email protected])
Patrick F. Stokes (+1 202-955-8504, [email protected])
Judith A. Lee (+1 202-887-3591, [email protected])
David Debold (+1 202-955-8551, [email protected])
Michael S. Diamant (+1 202-887-3604, [email protected])
John W.F. Chesley (+1 202-887-3788, [email protected])
Daniel P. Chung (+1 202-887-3729, [email protected])
Stephanie Brooker (+1 202-887-3502, [email protected])
David P. Burns (+1 202-887-3786, [email protected])
M. Kendall Day (+1 202-955-8220, [email protected])
Adam M. Smith (+1 202-887-3547, [email protected])
Oleh Vretsona (+1 202-887-3779, [email protected])
Christopher W.H. Sullivan (+1 202-887-3625, [email protected])
Courtney M. Brown (+1 202-955-8685, [email protected])
Jason H. Smith (+1 202-887-3576, [email protected])
Ella Alves Capone (+1 202-887-3511, [email protected])
Pedro G. Soto (+1 202-955-8661, [email protected])

New York
Zainab N. Ahmad (+1 212-351-2609, [email protected])
Matthew L. Biben (+1 212-351-6300, [email protected])
Reed Brodsky (+1 212-351-5334, [email protected])
Joel M. Cohen (+1 212-351-2664, [email protected])
Lee G. Dunst (+1 212-351-3824, [email protected])
Mark A. Kirsch (+1 212-351-2662, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])
Karin Portlock (+1 212-351-2666, [email protected])

Denver
Robert C. Blume (+1 303-298-5758, [email protected])
John D.W. Partridge (+1 303-298-5931, [email protected])
Ryan T. Bergsieker (+1 303-298-5774, [email protected])
Laura M. Sturges (+1 303-298-5929, [email protected])

Los Angeles
Nicola T. Hanna (+1 213-229-7269, [email protected])
Debra Wong Yang (+1 213-229-7472, [email protected])
Marcellus McRae (+1 213-229-7675, [email protected])
Michael M. Farhang (+1 213-229-7005, [email protected])
Douglas Fuchs (+1 213-229-7605, [email protected])

San Francisco
Winston Y. Chan (+1 415-393-8362, [email protected])
Thad A. Davis (+1 415-393-8251, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
Michael Li-Ming Wong (+1 415-393-8333, [email protected])

Palo Alto
Benjamin Wagner (+1 650-849-5395, [email protected])

London
Patrick Doris (+44 20 7071 4276, [email protected])
Charlie Falconer (+44 20 7071 4270, [email protected])
Sacha Harber-Kelly (+44 20 7071 4205, [email protected])
Michelle Kirschner (+44 20 7071 4212, [email protected])
Matthew Nunan (+44 20 7071 4201, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Steve Melrose (+44 20 7071 4219, [email protected])

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

Munich
Benno Schwarz (+49 89 189 33-110, [email protected])
Michael Walther (+49 89 189 33-180, [email protected])
Mark Zimmer (+49 89 189 33-130, [email protected])

Hong Kong
Kelly Austin (+852 2214 3788, [email protected])
Oliver D. Welch (+852 2214 3716, [email protected])

São Paulo
Lisa A. Alfaro (+5511 3521-7160, [email protected])
Fernando Almeida (+5511 3521-7093, [email protected])

Singapore
Joerg Bartz (+65 6507 3635, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

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

Washington, D.C. partner Howard Hogan and New York associate Laura Mumm are the authors of “How Trade Dress Law Has Evolved During COVID,” [PDF] published by Law360 on June 11, 2021.

On 4 June 2021, the European Commission adopted two implementing decisions containing standard contractual clauses for the processing and transfer of personal data in compliance with the General Data Protection Regulation (“GDPR”).[1] In particular, these decisions adopt:

• standard contractual clauses (“New SCCs”) for controllers and processors to provide appropriate safeguards regarding personal data transfers out of the European Economic Area (“EEA”) to third countries not recognised by the European Commission as ensuring an adequate level of protection for personal data (and which replace the standard contractual clauses adopted in 2001 and 2010 under the Data Protection Directive 95/46/EC, the “Old SCCs”);[2] and
• standard contractual clauses for the protection of personal data in the context of data processing agreements under Article 28 of the GDPR (“DPAs”) between controllers and processors (including within the European Economic Area, or “EEA”).[3]

These decisions aim to provide more complete contractual instruments for companies to execute prior to processing or transferring personal data from within the EEA, in line with the new requirements contained in the GDPR. Unlike the Old SCCs, which only applied to controller-to-controller (“C2C”) and controller-to-processor (“C2P”) transfers outside of the EEA, the New SCCs include different modules that parties may select and complete depending on the circumstances of the transfer (C2C, C2P, P2P, and P2C). Furthermore, the New SCCs applicable to transfers of personal data outside the EEA take into account the ruling of the Court of Justice of the EU (“CJEU”) of 16 July 2020 in the Schrems II judgment.

The New SCCs are of particular interest for European or U.S. companies and organisations, in particular those who could not rely on the Old SCCs to transfer data outside the EEA (because transfers did not occur in the C2C or C2P context addressed by the Old SCCs), or those companies and organisations whose transfers of personal data were compromised since the annulment of the EU-U.S. Privacy Shield.

Although the new standard contractual clauses can be used as of 27 June 2021, the European Commission has put in place two grace periods for the New SCCs applicable to transfers of personal data outside of the EEA. The first grace period allows controllers and processors to execute the Old SCCs until 27 September 2021. The second grace period allows controllers and processors to rely on Old SCCs executed before 27 September 2021, until 27 December 2022. As of the latter date, companies that relied on Old SCCs to transfer personal data outside of the EEA are expected to have fully transitioned to the New SCCs.

This Client Alert aims to help explain the potential uses of these new standard contractual clauses.

I.  Context

Under the GDPR, the European Commission has the power to adopt implementing acts, in particular: (i) creating standard contractual clauses for DPAs between controllers and processors and between processors and sub-processors (Article 28(7) of the GDPR), and (ii) creating standard contractual clauses as an appropriate safeguard for transfers of personal data to third countries (Article 46(2)(a) of the GDPR).

The implications of the adoption of these standard contractual clauses by the European Commission are different for both scenarios.

On one side, the standard contractual clauses for DPAs aim to provide an optional set of clauses that controllers and processors may use to execute contracts in compliance with Article 28 of the GDPR. However, any DPA is directly subject to Article 28 of the GDPR, and does not require the use of clauses approved by the European Commission or by EU supervisory authorities to be valid. Furthermore, numerous supervisory authorities have published and issued similar sample or template DPAs to give guidance to controllers and processors.[4] However, the standard contractual clauses for DPAs adopted by the European Commission may give additional comfort to companies and organisations that engage in cross-border processing of personal data and could not rely on any guidance offered by their (lead) supervisory authority.

On the other hand, like the Old SCCs adopted under Directive 95/46/EC, the New SCCs adopted for transfers of personal data outside of the EEA have a greater importance for companies and organisations. They may be considered to be de facto binding in most circumstances, as they are the most accessible and affordable framework from those available under the GDPR to transfer personal data to third countries. The execution and application of New SCCs allows entities to transfer personal data to third countries without the direct and immediate intervention of or notification to any EU supervisory authority.[5]

Since last year, the adoption of the New SCCs had become a pressing political and legal issue at the EU level. On 16 July 2020, the CJEU adopted the Schrems II judgment, which invalidated the EU-U.S. Privacy Shield. Numerous companies had relied on this framework to transfer personal data from the EEA to the U.S. and to provide assurances that this data would be protected after the transfer. The CJEU’s ruling confirmed the validity of the Old SCCs adopted under Directive 95/46/EC (before the GDPR), but required companies to verify, prior to any transfer of personal data pursuant to the SCCs, whether data subjects would be granted a level of protection in the receiving country essentially equivalent to that guaranteed  within the EU. These requirements have been addressed and explained by the European Data Protection Board (“EDPB”) in two recommendations issued on 10 November 2020, and were discussed in a previous client alert.

Against this backdrop, the European Commission initiated the process for the adoption of these standard contractual clauses on 12 November 2020, when it adopted draft implementing decisions for the New SCCs and for standard contractual clauses for DPAs. The decisions adopted on 4 June 2021 take into account the joint opinion of the EDPB and the European Data Protection Supervisor (“EDPS”), the feedback of stakeholders, and the opinion of Member States’ representatives.

II.  The implementation of the New SCCs under Articles 46(1) and (2)(c) of the GDPR

The New SCCs adopted by the European Commission for transfers of personal data outside of the EEA put in place a different and more comprehensive approach to data transfers than the Old SCCs adopted under Directive 95/46/EC in 2001 and 2010.

The Old SCCs were specific contractual instruments adopted by the European Commission to address specific situations: C2C transfers (the 2001 SCCs) and C2P transfers (the 2010 SCCs).

Under the New SCCs, the European Commission has adopted a single set of clauses within a contract, composed of three kinds of provisions: (i) fixed clauses, which are intended to remain unmodified regardless of the parties that execute the New SCCs; (ii) modules, which are intended to be added/removed from the final contract depending on the parties that execute the New SCCs (C2C, C2P, P2C, and P2P) and their choice among the options available; and (iii) blank clauses and annexes, which are to be filled in and completed by the parties with relevant information (e.g., the categories of data transferred, the data subjects concerned, etc.).

As can be seen, the New SCCs are intended to be live and adaptive instruments that can be tailored as needed. First, this modular approach allows the parties to address various transfer scenarios and the complexity of modern processing chains. Second, the New SCCs enable the possibility of adding more than two parties to the contractual arrangement, both at its execution and during its lifetime.

It should be noted that, where the data importer is a processor or a sub-processor, the New SCCs include the DPA requirements of Article 28(2) to (4) of the GDPR. This should make the execution of two instruments (DPAs and the New SCCs) unnecessary in data transfer scenarios, as the use of the New SCCs alone would cover both requirements under Article 28 and Article 46 of the GDPR. Where two or more parties execute a DPA and the New SCCs to govern a controller-processor relationship, the terms of the latter will prevail over those of the former or over any other instrument governing the data processing terms applicable to the parties.

From a substantive perspective, the New SCCs bring along a series of novelties compared to the Old SCCs adopted under Directive 95/46/EC. The New SCCs reinforce data subjects’ rights, by entitling them to be informed about data processing operations, to have a means to contact foreign controllers, to receive a copy of the New SCCs, and to be compensated for damages occurred in relation to their personal data.

In order to ensure the effective application and enforcement of the New SCCs against data importers established in third countries, the New SCCs provide that data importers shall submit to the jurisdiction of relevant EU supervisory authorities and courts, and shall commit to abide by any decision under the applicable Member State law. Also, by entering into the New SCCs, data importers agree to respond to enquiries, submit to audits (including inspections at its premises or physical facilities), and comply with the measures adopted by the relevant supervisory authority.

In light of the abovementioned Schrems II ruling of the CJEU, the European Commission has supplemented the New SCCs with a number of specific measures that aim to address any effects of the laws of the third country on the data importer’s ability to comply with the New SCCs. In particular, data exporters and importers that execute the New SCCs will warrant that “they have no reason to believe” that the laws and practices in the third country of destination prevent the data importer from fulfilling its obligations under the New SCCs. This representation is intended to be based on an assessment that needs to be documented, and whose disclosure may be requested by EU supervisory authorities.[6]

Furthermore, data importers entering into the New SCCs commit to the following main obligations:[7]

• To notify the data exporter if it has reason to believe that it is not able to meet the New SCCs’ requirements and, in such case, add complementary measures to address the situation, or, if not possible, suspend the transfer.
• To notify the data exporter and the data subject when receiving legally binding requests from public authorities, or if not possible, provide the data exporter with as much relevant information as possible and aggregated information at regular intervals.
• To challenge the legally binding request if it has reasonable grounds to consider that request unlawful.

III.  The implementation of the new standard contractual clauses for DPAs under Article 28(7) of the GDPR

The GDPR mandates that, when a controller engages a processor to process personal data on its behalf, this relationship shall be governed by a contract or other written legal act, that is binding on the processor vis-a-vis the controller, and that contains the elements listed in Articles 28(2) to (4) of the GDPR. These requirements are further explained in the EDPB Guidelines 07/2020, that are still under public consultation.[8]

The standard contractual clauses for DPAs adopted by the European Commission on 4 June 2021 therefore aim to provide a single and prima facie lawful DPA that companies and organisations can rely upon and execute to govern their controller-processor relationship.

As indicated above, since the GDPR was adopted, a number of EU supervisory authorities had issued their own DPA drafts and templates in order to provide an easy-to-implement tool for entities to comply with the GDPR. Although the European Commission’s standard contractual clauses arrive some years after these national DPA templates have been adopted, they are expected to enhance the consistent application of the GDPR within the EU.

The standard contractual clauses for DPAs contain all elements referred to by Article 28 of the GDPR for controller-processor agreements to be valid. In some sections, they allow parties some margin of maneuver, for example, by providing two options for the use of sub-processors (i.e., prior specific authorisation or general written authorisation). Also, the implementing decision of the European Commission specifies that the standard contractual clauses laid can be used in whole or in part by the parties as part of their own DPAs, or within a broader contract.

The use of these standard contractual clauses for DPAs will give to controllers and processors a level of additional certainty regarding their compliance with Article 28 of the GDPR, in particular vis-à-vis supervisory authorities or before national courts in case of litigation. Although DPAs that do not follow the standard contractual clauses of the European Commission or of supervisory authorities are not per se illegal, they are expected to be subject to detailed scrutiny if they are subject to dispute or if they come under the authorities’ cross-hairs.

IV.  The timeline

The decisions on the standard clauses for DPAs and the New SCCs were adopted by the European Commission on 4 June and published in the EU’s Official Journal on 7 June 2021. They  will enter into force 20 days after their publication, i.e., on 27 June 2021.

The decision relating to the New SCCs for transfers of personal data to third countries provide for two transitional (or grace) periods in order to allow stakeholders to change their contractual frameworks.

• First, the Old SCCs adopted under Directive 95/47/EC will be valid for an additional period of three months, until 27 September 2021, when they will be repealed. This means that, until 27 September 2021, companies and organisations can continue executing the Old SCCs to cover their data transfers outside the EEA. After this date, entities are meant to only execute the New SCCs.
• Second, the Old SCCs executed before 27 September 2021 will be considered to be valid for an additional period of 15 months, until 27 December 2022. After this date, companies are expected to have transitioned the Old SCCs governing their data transfers outside the EEA to the New SCCs.

V.  Consequences

The publication of the final version the standard contractual clauses and, especially, the New SCCs on personal data transfers to third countries, were widely anticipated.

The update and upgrade brought about by the New SCCs was considered by many to be necessary, given the importance attached by numerous EU supervisory authorities to ensuring the protection of personal data transferred outside the EEA. The New SCCs are subject to the strictures of being fixed (i.e., any changes would need to be authorised by the competent EU supervisory authority) and requiring significant substantial obligations on the data importer. Notwithstanding this, they remain a preferred cost-effective option to govern data transfers outside of the EEA, as other options for entities to continue transferring personal data are generally more burdensome or costly.

EU companies, in particular those dealing with U.S. companies and that have been in a stand-by situation since the Schrems II ruling in July 2020, are advised to consider initiating agreement renewals using the New SCCs. Companies in the U.S. and in other countries not recognised by the EU as granting an adequate level of protection are also recommended to review and become acquainted with the New SCCs, as they may need to implement in their offerings the new terms and the many new obligations that data importers will have to comply with by 27 September 2021. By 27 December 2022, all agreements executed under the Old SCCs will need to have been transitioned to the New SCCs.

________________________

      [1]     See Commission Implementing Decision (EU) 2021/915 of 4 June 2021 on standard contractual clauses between controllers and processors under Article 28(7) of Regulation (EU) 2016/679 of the European Parliament and of the Council and Article 29(7) of Regulation (EU) 2018/1725 of the European Parliament and of the Council; and Commission Implementing Decision (EU) 2021/914 of 4 June 2021 on standard contractual clauses for the transfer of personal data to third countries pursuant to Regulation (EU) 2016/679 of the European Parliament and of the Council.

      [2]     See Article 46(1) and (2)(c) of the GDPR.

      [3]     See Artic le 28(7) of the GDPR.

      [4]     See Article 28(8) of the GDPR, which also enabled EU supervisory authorities to adopt standard contractual clauses for DPAs.  See, for example, the French CNIL (https://www.cnil.fr/fr/sous-traitance-exemple-de-clauses); the Spanish AEPD (https://www.aepd.es/sites/default/files/2019-10/guia-directrices-contratos.pdf). Denmark, Slovenia and Lithuania have also submitted to the European Data Protection Board (“EDPB”) draft standard contractual clauses for DPAs under Article 28 of the GDPR.

      [5]     Unlike other frameworks for the transfer of personal data outside the EEA, foreseen by Articles 46 and 47 of the GDPR, such as Binding Corporate Rules (“BCRs”), approved codes of conduct and certification mechanisms, or even ad hoc contractual clauses negotiated privately among controllers and/or processors. All these mechanisms require or assume the intervention of a supervisory authority or a certified/approved third party to supervise and authorise the transfer of personal data outside of the EEA.

      [6]     See New SCCs, Clause 14.

      [7]     See New SCCs, Clause 15.

      [8]     See Guidelines 07/2020 on the concepts of controller and processor in the GDPR, available at: https://edpb.europa.eu/our-work-tools/documents/public-consultations/2020/guidelines-072020-concepts-controller-and_en.

---

The following Gibson Dunn lawyers prepared this client alert: Ahmed Baladi, Ryan T. Bergsieker, Kai Gesing, Alejandro Guerrero, Vera Lukic, Adelaide Cassanet, and Clemence Pugnet.

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

Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, [email protected])
James A. Cox – London (+44 (0) 20 7071 4250, [email protected])
Patrick Doris – London (+44 (0) 20 7071 4276, [email protected])
Kai Gesing – Munich (+49 89 189 33-180, [email protected])
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, [email protected])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Alejandro Guerrero – Brussels (+32 2 554 7218, [email protected])
Vera Lukic – Paris (+33 (0)1 56 43 13 00, [email protected])
Sarah Wazen – London (+44 (0) 20 7071 4203, [email protected])

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

United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, [email protected])
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, [email protected])
Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])
Matthew Benjamin – New York (+1 212-351-4079, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
David P. Burns – Washington, D.C. (+1 202-887-3786, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Robert K. Hur – Washington, D.C. (+1 202-887-3674, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
Kristin A. Linsley – San Francisco (+1 415-393-8395, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Ashley Rogers – Dallas (+1 214-698-3316, [email protected])
Deborah L. Stein – Los Angeles (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

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

Last week, the New York Court of Appeals issued an important decision clarifying the reach of New York’s consumer protection statute, which broadly prohibits any deceptive, “consumer-oriented” business conduct.[1] The Court’s holding confirms the expansive reach of what constitutes “consumer-oriented” conduct, making clear that it extends beyond products and services directed to individuals for personal or home use, and includes sales and marketing directed to businesses and professionals. The Court went on to hold that the alleged deception in the case was not actionable because it would not have deceived a reasonable consumer under the circumstances, particularly in light of the parties’ contract and the language in a disclaimer, and the Court avoided a question relating to what constitutes a cognizable injury under the statute.

New York’s Consumer Protection Statute

Several provisions of New York’s consumer protection statute protect consumers from deceptive and fraudulent practices,[2] including General Business Law (“GBL”) § 349(a), which prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce in the furnishing of any service in the state.” This statute was intended to provide “authority to cope with the numerous, ever-changing types of false and deceptive business practices” that  impact New York consumers,[3] and it “seeks to secure an honest market place where trust, and not deception, prevails.”[4] Accordingly, much like its federal counterpart, the Federal Trade Commission Act, GBL § 349 “is intentionally broad, applying to virtually all economic activity.”[5]

Nevertheless, the broad provision “does not apply to every improper action”[6] and is “directed at wrongs against the consuming public” at large rather than private individuals.[7] “Private contract disputes, unique to the parties, for example, would not fall within the ambit of the statute.”[8] Moreover, “whether a representation or an omission, the deceptive practice must be ‘likely to mislead a reasonable consumer acting reasonably under the circumstances.’”[9]

Although initially only the New York Attorney General’s Office could sue to enforce the consumer protection statute, the Legislature subsequently added a private right of action in 1980 for any person who has been injured by reason of a violation, allowing injunctive relief, damages, and attorney’s fees.[10] To state a claim under GBL § 349, a plaintiff bringing such a cause of action must allege that: (1) the defendant has engaged in “consumer-oriented” conduct (2) that conduct was materially misleading; and (3) the plaintiff suffered an injury as a result.[11]  Each of these elements was at issue in the Court of Appeals case.

The Court of Appeals Ruling

In Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Company, Inc., a law firm and various tenant advocates brought an action on behalf of themselves and other purchasers of “the Tanbook,” a compilation of New York materials discussing landlord-tenant law, against Matthew Bender & Company, the Tanbook’s publisher.[12] Plaintiffs alleged that Matthew Bender engaged in deceptive business practices under GBL § 349 because the company had materially misrepresented that part of the Tanbook contained a complete and accurate compilation of the statutes and regulations governing rent-controlled and rent-stabilized apartments in New York City, when in fact, key portions were omitted or inaccurate.[13] The Court affirmed the grant of Matthew Bender’s motion to dismiss, but on different grounds from those accepted by the trial and intermediate appellate courts.[14] 

     A. Consumer Oriented Conduct

The Court held that Matthew Bender’s actions were “consumer-oriented” because the alleged misrepresentations were “contained in a manual that was then marketed to and available for purchase by consumers.”[15] The Court reasoned that Matthew Bender allegedly “advertised the Tanbook and made it available for sale to the general public, including through its website and a public, online shopping service.”[16] Moreover, Matthew Bender’s conduct was “not unique to the parties,” as its “marketing and sale of the Tanbook [was] not limited to a single transaction,” and it was sold “to a robust consumer base, including through a subscription plan whereby purchasers (including plaintiffs) automatically received new annual editions and updates.”[17] “Nor [was] the sales agreement designed to the specifications of a particular buyer”; rather, the company had relied “on a form contract with its customers.”[18]

Notably, the Court rejected the argument—endorsed by the trial court, pursuant to precedent from the Appellate Division, First Department—that GBL § 349 did not apply to the sale and marketing of the Tanbook because the treatise “could only be used by businesses” and was “not directed at consumers at large for personal, family, or household use.”[19] The Court explained that the “text and purpose” of the statute broadly prohibit deceptive acts or practices in the conduct of business or services, and that practices can be “consumer-oriented” when they have “a broader impact on consumers at large.”[20] Thus, although the consumer-oriented element precludes a GBL § 349 claim based on “[p]rivate contract disputes, unique to the parties,” it does not “depend on the use to be made of the product, and “what matters is whether the defendant’s allegedly deceptive act or practice is directed to the consuming public and the marketplace.”[21]

The Court similarly rejected the argument that GBL § 349 did not apply because the Tanbook was marketed and sold to businesses and “legal professionals” such as lawyers, judges, and tenant advocates, rather than to the general consuming public.[22] The Court explained that “persons and businesses working in the legal field purchase the Tanbook to assist in their professional endeavors,” but legal professionals “are merely a subclass of consumers,” and “‘consumer-oriented conduct’ need not ‘be directed to all members of the public.’”[23]  

     B. Deception and Injury

Despite this ruling, the Court held that the complaint was properly dismissed on the second element of GBL § 349—the requirement that conduct be “materially misleading.”[24] The Court explained that the Tanbook’s susceptibility to revision at any time based on legislative developments, coupled with the fact that a disclaimer in the parties’ contract had “addresse[d] the precise deception alleged in the complaint,” left no possibility that a reasonable consumer would have been misled by the treatise’s content.[25] Ultimately, “that a purchaser might not buy the Tanbook without an accurate and complete reproduction of the statutes and regulations—because, as plaintiffs allege, that would render the Tanbook unreliable—[went] to whether the defendant [was] offering an item worth buying,” not whether consumers were deceived.[26]

Finally, the Court did not reach the ground on which the Appellate Division had affirmed dismissal in the court below—namely, that prior Court of Appeals precedent in Small v. Lorillard Tobacco Co., which had rejected an injury theory claiming that consumers bought a product they would not have purchased because such a theory amounted to “deception as both act and injury,”[27] could be read to foreclose the plaintiffs in this case from claiming that they were injured in the “amount that plaintiffs paid for the book” because they would not have paid for it but for the acts and omissions that rendered the Tanbook inaccurate.[28] The parties had disputed, among other things, the extent to which broad language in Small should be revisited or limited to certain facts.

Judge Fahey dissented in part. Although he agreed that Matthew Bender’s marketing and sale of the Tanbook was consumer-oriented conduct,[29] he believed that plaintiffs adequately pleaded that the Tanbook was materially misleading.[30] Turning to the injury requirement, he would have re-examined the Court’s precedent in Small, explaining that “[t]he underlying legislative purpose behind GBL § 349, as well as common sense, require the conclusion that when a consumer would not have purchased a product but for the defendant’s deceptive conduct, that consumer has suffered a cognizable injury, i.e., the price that the consumer paid for the product.”[31]

Conclusion

The Court’s ruling in Himmelstein signals a willingness to read the consumer protection statute expansively, especially as to what constitutes “consumer-oriented” behavior—a key requirement that appears to be of recent interest to the Court and serves to distinguish a violation from common law fraud. Savvy practitioners may find this development unsurprising, as just last year, the Court decided two additional cases interpreting the scope of “consumer-oriented” behavior and appeared to take an expansive view of the statute’s reach in those cases as well.[32]

Nevertheless, the Court’s ruling contains language that could be read to restrict these claims in the future, suggesting that the Court will vigorously examine allegations of deception, even at the motion to dismiss stage. Indeed, the Court ultimately dismissed plaintiffs’ cause of action, finding that documentary evidence such as a disclaimer “refuted” plaintiffs’ allegations that a reasonable consumer would be deceived under the circumstances, despite the fact that the Tanbook was allegedly inaccurate at various times. And the Court has previously expressed caution at reading GBL § 349 too broadly, lest the statute be permitted to result in “a tidal wave of litigation against businesses that was not intended by the Legislature.”[33]

The future of such claims also remains unclear in several respects. The Court left open what constitutes a cognizable injury under the statute, even though plaintiffs in Himmelstein had expressly sought leave to appeal in part on that issue.[34] Moreover, Judge Fahey made clear in his dissent that he believed the Court’s precedent “should be corrected . . . at the appropriate opportunity, or, alternatively, by the legislature,” because broad language in Small was incorrect,[35] and he would have held that “[t]he use of deception to induce a consumer to buy a product is precisely the kind of conduct the legislature sought to prohibit with GBL § 349.”[36]

How the Court will apply GBL § 349 in future cases is all the more unclear in light of the rapidly changing composition of the Court. Judge Fahey is set to leave the Court at the end of this year, and Judges Singas and Cannataro have already replaced Judges Feinman and Stein. It remains to be seen how the new judges will impact these types of challenges moving forward, but the Himmelstein decision is likely to have an impact on this area for years to come.

_______________________

   [1]   Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc., — N.Y.3d —, 2021 WL 2228800 (N.Y. Ct. App. June 3, 2021).

   [2]   See, e.g., Plavin v. Group Health Inc., 35 N.Y.3d 1, 9 (2020); City of New York v. Smokes-Spirits.Com, Inc., 12 N.Y.3d 616, 621 (2009).

   [3]   Karlin v. IVF Am., Inc., 93 N.Y.2d 282, 291 (1999).

   [4]   Goshen v. Mutual Life Ins. Co. of N.Y., 98 N.Y.2d 314, 324 (2002).

   [5]   Id. (quotation marks omitted); see City of New York, 12 N.Y.3d at 205.

   [6]   Collazo v. Netherland Prop. Assets, 35 N.Y.3d 987, 992 (2020) (quotation marks omitted).

   [7]   Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, 85 N.Y.2d 20, 24-25 (1995).

   [8]   Id. at 25.

   [9]   Stutman v. Chemical Bank, 95 N.Y.2d 24, 29 (2000) (quoting Oswego, 85 N.Y.2d at 26).

  [10]   See, e.g., Plavin, 35 N.Y.3d at 9; Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris USA Inc., 3 N.Y.3d 200, 205 (2004); Stutman, 95 N.Y.2d at 29.

  [11]   Plavin, 35 N.Y.3d at 10.

  [12]   2021 WL 2228800, at *1.

  [13]   Id.

  [14]   See id. at *2; see also Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc., 172 A.D.3d 405, 406 (1st Dep’t 2019);.Himmelstein v. Matthew Bender & Co. Inc., 2018 WL 984850, at *5-6 (Sup. Ct. N.Y. County Feb. 6, 2018).

  [15]   Himmelstein, 2021 WL 2228800, at *1.

  [16]   Id. at *3.

  [17]   Id. at *4.

  [18]   Id.

  [19]   Id. at *3-4.

  [20]   Id. at *3.

  [21]   Id.

  [22]   Id. at *3-4.

  [23]   Id. at *4 (quoting Plavin, 35 N.Y.3d at 13).

  [24]   Id. at *1, *4, *6.

  [25]   Id. at *4-6.

  [26]   Id. at *5.

  [27]   See Small v. Lorillard Tobacco Co., 94 N.Y.2d 43, 56 (1999).

  [28]   Himmelstein, 172 A.D.3d at 406; see Himmelstein, 2021 WL 2228800, at *6 n.4.

  [29]   Himmelstein, 2021 WL 2228800, at *6 (Fahey, dissenting).

  [30]   Id.

  [31]   Id. at *8.

  [32]   See Plavin, 35 N.Y.3d 1 (2020) (finding consumer-oriented conduct even where there was an underlying insurance contract negotiated by sophisticated entities, and explaining that the statute does not impose a requirement that consumer-oriented conduct be directed to all members of the public); Collazo, 35 N.Y.3d 987 (2020) (assuming without deciding that a claim may lie for a landlord’s representation about an apartment’s exemption from rent regulation);  id. at 991-92 (Rivera, J., dissenting in part) (rejecting a per se rule adopted by lower courts); see also Mylan L. Denerstein, Akiva Shapiro, Seth M. Rokosky & Genevieve Quinn, New York Court of Appeals Roundup & Preview (2020), https://www.gibsondunn.com/new-york-court-of-appeals-round-up-december-2020/.

  [33]   City of New York, 12 N.Y.3d at 622 (quotation marks omitted).

  [34]   See Mot. for Lv. to Appeal to the N.Y. State Ct. of App. at 18-20, Himmelstein, 2021 WL 2228800 (dated Sept. 4, 2019).

  [35]   Himmelstein, 2021 WL 2228800, at *8-9 (Fahey, J., dissenting).

  [36]   Id. at *8.

---

Gibson, Dunn & Crutcher’s 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, or the authors:

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

© 2021 Gibson, Dunn & Crutcher LLP

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

Los Angeles partner Jennifer Bellah Maguire and Palo Alto associate Samantha Abrams-Widdicombe are the co-authors of “The Fashion Industry’s Challenges and Innovations in Sustainability,” [PDF] published in the PLI Chronicle: Insights and Perspectives for the Legal Community, https://plus.pli.edu, in May 2021.

This edition of Gibson Dunn’s Federal Circuit Update summarizes a new petition for certiorari in a case originating in the Federal Circuit concerning anticipation of method-of-treatment claims. It also discusses recent Federal Circuit decisions concerning assignment agreements, personal jurisdiction, and more Western District of Texas venue issues.

Federal Circuit News

Supreme Court:

This month, the Supreme Court did not add any new cases originating at the Federal Circuit. United States v. Arthrex, Inc. (U.S. Nos. 19-1434, 19-1452, 19-1458) and Minerva Surgical Inc. v. Hologic Inc. (U.S. No. 20-440) are still pending. Decisions in both cases are expected this month.

Noteworthy Petitions for a Writ of Certiorari:

A newly filed certiorari petition challenges the Federal Circuit’s longstanding approach to anticipation in the context of recombinant biological products (see Amgen Inc. v. Hoffman-La Roche Ltd., 580 F.3d 1340 (Fed. Cir. 2009)):

Biogen MA Inc. v. EMD Serono, Inc. (U.S. No. 20-1604): “Whether courts may disregard the express claim term ‘recombinant’ so as to render a method-of-treatment patent anticipated—and thus invalid—in light of prior-art treatments that used the naturally occurring human protein, where it is undisputed that the recombinant protein was not used in the prior art?” Gibson Dunn partners Mark A. Perry, Wayne M. Barsky, and Timothy P. Best represented Serono in the Federal Circuit.   

Other updates include:

On May 3, in American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20‑891), concerning patent eligibility under 35 U.S.C. § 101, the Court invited the Acting Solicitor General to file a brief expressing the views of the United States.

On May 25, the Court requested a response in PersonalWeb Technologies, LLC v. Patreon, Inc. (U.S. No. 20-1394), which concerns the Kessler doctrine.

The petition in Warsaw Orthopedic v. Sasso (U.S. No. 20-1284) concerning state versus federal court jurisdiction is still pending.  The petition in Sandoz v. Immunex (U.S. No. 20-1110), which concerns obviousness-type double patenting, was denied. The petition in Ariosa Diagnostics, Inc. v. Illumina, Inc. (U.S. No. 20-892), concerning patent eligibility under 35 U.S.C. § 101, was dismissed by the parties.

Other Federal Circuit News:

On May 22, 2021, the Honorable Kimberly A. Moore assumed the duties of Chief Circuit Judge of the Federal Circuit.   

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.

Key Case Summaries (May 2021)

Trimble Inc. v. PerDiemCo LLC (Fed. Cir. No. 19-2164): Trimble appealed a district court’s order finding that it lacked personal jurisdiction over PerDiemCo in Trimble’s declaratory judgment noninfringement action. Over the course of several months, PerDiemCo (a Texas company whose only employee worked in Washington, D.C.) communicated with Trimble (a Delaware company headquartered in California) twenty-two times about Trimble’s alleged infringement of PerDiemCo’s assigned patents. Trimble then filed a declaratory judgment action in the Northern District of California seeking a declaration of noninfringement. The district court dismissed the case for lack of jurisdiction under Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355, 1361 (Fed. Cir. 1998), which stated that “[a] patentee should not subject itself to personal jurisdiction in a forum solely by informing a party who happens to be located there of suspected infringement” because “[g]rounding personal jurisdiction on such contacts alone would not comport with principles of fairness.”

The Federal Circuit (Dyk, J., joined by Newman, J. and Hughes, J.) reversed and remanded. The court found that “[t]hree subsequent developments have clarified the scope of Red Wing”: (1) “the Supreme Court cases following Red Wing have made clear that the analysis of personal jurisdiction cannot rest on special patent policies”; (2) “the Supreme Court has held that communications sent into a state may create specific personal jurisdiction, depending on the nature and scope of such communications”; and (3) “the Supreme Court’s recent decision in [Ford Mo-tor Co. v. Mont. Eighth Jud. Dist. Ct., 141 S. Ct. 1017, 1024 (2021)] has established that a broad set of a defendant’s contacts with a forum [is] relevant to the minimum contacts analysis.” The court concluded that, under these three principles, Red Wing remains correctly decided on its facts due to the limited number of communications in that case. But the court held that exercising personal jurisdiction over PerDiemCo here would comport with due process because PerDiemCo’s communications with Trimble were “far more extensive than those in Red Wing” and went beyond solely informing Trimble of suspected infringement. As such, the five-factor balancing test from Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985), and World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980), was satisfied.

Bio-Rad Laboratories, Inc. v. ITC (Fed. Cir. No. 20-1785): Bio-Rad appealed a final determination of the International Trade Commissions finding that Bio-Rad was not a co-owner of three patents directed to methods for tagging small DNA segments in microfluidics using droplets asserted against it in a complaint by 10X Genomics Inc. Two of the inventors of the asserted patents previously worked for Bio-Rad before leaving and starting 10X. Although the applications that led to the asserted patents were filed after those inventors departed Bio-Rad, Bio-Rad asserted that those inventors developed “ideas” that contributed to the inventions described in the asserted patents while still employed by Bio-Rad. Because the inventors were contractually obligated to assign their ideas to it, Bio-Rad argued that it could not be liable for infringement because it co-owned the asserted patents. The ALJ rejected that argument, and found that Bio-Rad infringed all three of the asserted patents. The Commission agreed and Bio-Rad appealed.

The Federal Circuit (Taranto, J., joined by Chen, J. and Stoll, J.) affirmed. The court held that substantial evidence supported the Commission’s finding that Bio-Rad infringed all three of the asserted patents, rejecting each of Bio-Rad’s arguments challenging that finding. The court also rejected Bio-Rad’s indefiniteness and lack of domestic industry arguments. Lastly, the court held that the Commission correctly determined that Bio-Rad did not have any ownership interest in the asserted patents. The court held that substantial evidence supported the Commission’s finding that the co-inventors’ work while employed at Bio-Rad amounted to no more than general ideas and concepts known in the art. The court explained that work that “might one day turn out to contribute significantly to a later patentable invention” is not itself intellectual property, which “does not exist until at least conception of” a patentable invention. Accordingly, the court rejected Bio-Rad’s co-ownership argument, explaining that Bio-Rad’s assignment agreement was limited to “intellectual property” that was invented during an employee’s employment period with Bio-Rad, and no such invention occurred with respect to the asserted patents until after the co-inventors left Bio-Rad’s employ.

In Re Bose Corp. (Fed. Cir. No. 21-145) (nonprecedential): Bose Corporation petitioned for a writ of mandamus directing the United States District Court for the Western District of Texas to stay all non-venue-related proceedings until the district court resolves Bose’s pending motion to dismiss or transfer.

The panel (Dyk, J., joined by Lourie, J. and Reyna, J.) denied the petition, explaining that, under the district court’s March 23, 2021 standing order, the district court would not conduct a Markman hearing until after resolution of Bose’s pending motion to dismiss or transfer the case. The Court expected the district court to “promptly” decide Bose’s motion.

In Re Western Digital Technologies, Inc. (Fed. Cir. No. 21-137) (nonprecedential): Western Digital (“WDT”) petitioned for a writ of mandamus instructing Judge Albright in the Western District of Texas to transfer the patent infringement case to the Northern District of California. The district court had found the Western District of Texas more convenient because it could compel the testimony of non-party witnesses, the Western District had a local interest, and that the Northern District had a more congested docket.

The panel (Prost, C.J., joined by O’Malley, J. and Wallach, J.) denied the petition and determined that WDT had not met the demanding standard for mandamus relief. The panel noted that the district court incorrectly overstated the burden on WDT to show transfer is more convenient as “heavy” and “significant,” and that they “may have evaluated some of the factors differently.” The panel did not find that the district court’s ultimate conclusion amounted to a clear abuse of discretion.

---

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])

© 2021 Gibson, Dunn & Crutcher LLP

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

On June 3, 2021, the United States Court of Appeals for the Second Circuit issued an important decision dismissing a lawsuit by the New York State Department of Financial Services (“DFS”), which was challenging the authority of the federal Office of the Comptroller of the Currency (“OCC”) to grant special purpose national bank (“SPNB”) charters.[1] Such non-depository charters have attracted the attention of financial technology (“fintech”) companies. The decision reversed a holding of the United States District Court for the Southern District of New York that had placed greater power in state regulators’ hands in holding that the OCC lacked such authority because such non-depository institutions are not engaged in the “business of banking.” The Second Circuit’s decision, which was based on threshold standing and ripeness grounds, maintains ambiguity in the federal-state balance with respect to regulation of SPNBs and threatens to narrow DFS’s regulatory and supervisory reach over cutting-edge financial products and services, which the agency has sought to expand in recent years.

DFS Challenges Special Purpose National Bank Charters

The lawsuit centered around the National Bank Act of 1864, which provides for OCC regulation and supervision of federally chartered national banks in their “business of banking.” The statute provides that if “it appears that [an entity applying for a federal banking charter] is lawfully entitled to commence the business of banking,” the Comptroller shall “give to such association a certificate . . . that such association has complied with all the provisions required to be complied with before commencing the business of banking, and that such association is authorized to commence such business.[2] Once a bank receives a federal charter,

It shall have power . . . [t]o exercise . . . all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes . . . .[3]

In 2003, the OCC amended federal regulations to provide for authority to issue SPNB charters, or charters for a national bank that engages in a limited range of banking activities, “including one of the core banking functions [i.e., paying checks or lending money], but does not take deposits.”[4] In amending these regulations, the OCC thus asserted that it had authority to charter entities that pay checks or lend money, among other activities, but that do not receive deposits. These regulations, however, were largely ignored until then-Comptroller of the Currency Thomas Curry announced in late 2016 that the OCC would consider such charters for fintech firms.[5]

This announcement met vigorous resistance by DFS, New York’s chief financial regulator. According to DFS, the decision to issue federal SPNB charters would lead to a preemption of state law for newly chartered entities and would reduce “critical financial protections” provided in New York, weakening the state’s “regulatory controls on usury, payday loans, and other predatory lending practices.”[6] DFS also claimed it would lose revenue from assessments levied against fintech companies that do not take deposits, because such companies, which are currently governed primarily by state law, could convert to a federal charter.[7]

In 2017, DFS challenged the OCC’s regulatory regime, but that lawsuit was dismissed for lack of standing and ripeness.[8] In 2018, the OCC announced that it would accept applications for SPNB charters under the new regulation.[9]  Soon thereafter, the OCC allegedly  invited “Fintech startup companies to come to [its] office in New York to discuss . . . the new [SPNB] charter.”[10]  Fintech companies are “non-bank companies that leverage recent technological innovations to provide financial services and/or products to customers in new ways,” such as mobile payment services, distributed ledger technology, marketplace lending, and crowdfunding sites.[11] DFS responded to the OCC’s efforts by bringing an action against the OCC in the United States District Court for the Southern District of New York, claiming among other things that the OCC exceeded its authority under the National Bank Act by authorizing itself to grant SPNB charters to institutions that do not accept deposits and that the OCC’s regulation is null and void.[12]

The District Court’s Decision

The District Court set aside the OCC’s decision to accept SPNB charter applications and held that the OCC had exceeded its authority under the National Bank Act. In particular, the District Court found that the term the “business of banking” in the statute unambiguously requires receiving deposits as an aspect of the banking business.[13] In reaching that conclusion, the District Court looked to the statute’s text, framework, and history, as well as the history of federal banking law, the long history of the OCC not asserting charting power over special purpose institutions, and the “dramatic disruption of federal-state relationships in the banking industry” sought by the OCC on “a question of deep economic and political significance.”[14]

Following that ruling, the parties submitted proposed judgments setting aside the OCC’s regulation “with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” but the OCC sought a narrower judgment setting aside the regulation only as to fintech companies that “have a nexus to New York State, i.e., applicants that are chartered in New York or that intend to do business in New York (including through the internet) in a manner that would subject them to regulation by DFS.”[15] The District Court rejected the OCC’s proposal and set aside the regulation regardless of fintech companies’ location nationwide.[16]

The Second Circuit’s Ruling

Last week, the Second Circuit reversed the district court’s judgment and instructed the court to dismiss the case without prejudice. The Court concluded that DFS’s claims were unripe and without standing because DFS failed to allege that the OCC’s decision caused it to suffer an actual or imminent injury.[17] Having determined that the case was not justiciable, the Court did not address the District Court’s holding on the merits that the “business of banking” under the federal banking statute unambiguously requires receipt of deposits.[18]

The Court concluded that DFS lacked standing because its concerns about the effects of preemption were “too speculative,” given that the OCC’s actions would not implicate such concerns until the OCC received an SPNB charter application from or granted such a charter to a non-depository fintech that would otherwise be subject to DFS’s jurisdiction.[19] As the Court explained, there is “currently no non-depository fintech that can claim federal preemption engaging in any practice that may give rise to the regulatory harms that DFS alleges, such as charging interest rates that exceed New York’s statutory cap.”[20] The Court was likewise unpersuaded that DFS faced a “substantial risk” of losing revenue acquired through annual assessments under New York law.[21] The Court explained that DFS has “yet to lose out on any revenue acquired through its assessments . . . because the OCC has not received, let alone approved, an application for an SPNB charter from a non-depository fintech within DFS’s jurisdiction.”[22] The Court declined to “decide the precise point at which DFS’s claims may become justiciable in the future,” whether it be when a non-depository fintech formally applies for an SPNB charter, when the OCC grants such an application, or some other time.[23]

Conclusion

This decision represents a setback for DFS and other state regulators who may perceive the OCC’s assertion of authority over non-depository institutions as an incursion into an area that has traditionally fallen within the states’ ambit. Indeed, as New York’s primary financial regulator, DFS has jurisdiction over approximately 1,500 financial institutions and 1,800 insurance companies, and it supervises approximately $7 trillion in assets across the insurance, banking, and financial services industries.[24]

The OCC’s ability to press forward with fintech companies is of special concern to DFS, which has been actively flexing authority in recent years with respect to contemporary trends in financial services, implementing new initiatives designed to foster innovation in a wide range of services and products, such as cryptocurrencies, while also focusing on consumer protection and bringing fintechs within an expanded regulatory scheme.[25] The future of regulation over these cutting-edge industries, many of which have close connections to New York, could be impacted by the Second Circuit’s ruling.

The effects of the decision, however, should not be overstated. The Court of Appeals made clear that it expressed no opinion on the ultimate issue of whether the OCC has authority to grant national bank charters to non-depository institutions, and it likewise expressed no view on whether the OCC’s amended regulation (if unlawful) must be set aside only as to companies applying within a particular jurisdiction such as New York or more broadly nationwide. These important issues are likely to be resolved through future litigation, and indeed, a similar case is pending in the United States District Court for the District of Columbia.[26] In addition, the new Acting Comptroller of the Currency, Michael Hsu, a longtime member of the supervisory staff of the Federal Reserve Board, has indicated that he intends to take a close look at whether to continue some of the OCC’s initiatives launched under the Trump Administration.[27]

__________________________

   [1]   See Lacewell v. Office of Comptroller of Currency, — F.3d —, 2021 WL 2232109 (2d Cir. June 3, 2021).

   [2]   12 U.S.C. § 27(a) (emphasis added).

   [3]   Id. § 24 (Seventh) (emphasis added).

   [4]   Lacewell, 2021 WL 2232109, at *2 (quoting 12 C.F.R. § 5.20(e)(1)(i)); see Vullo v. Office of Comptroller of Currency, 378 F. Supp. 3d 271, 279 (S.D.N.Y. 2019), rev’d, Lacewell, 2021 WL 2232109.

   [5]   See “Remarks By Thomas J. Curry Comptroller of the Currency Regarding Special Purpose National Bank Charters for Fintech Companies,” Georgetown University Law Center (December 2, 2016), available at https://www.occ.gov/news-issuances/speeches/2016/pub-speech-2016-152.pdf.

   [6]   Lacewell, 2021 WL 2232109, at *8; see Vullo, 378 F. Supp. 3d at 286.

   [7]   Lacewell, 2021 WL 2232109, at *8, *11; see Vullo, 378 F. Supp. 3d at 286.

   [8]   Vullo, 378 F. Supp. 3d at 280.

   [9]   Id. at 279.

  [10]   Lacewell, 2021 WL 2232109, at *4.

  [11]   Vullo, 378 F. Supp. 3d at 378 n.2; see Lacewell, 2021 WL 2232109, at *3.

  [12]   Vullo, 378 F. Supp. 3d at 278, 280.

  [13]   Id. at 292.

  [14]   Id. at 292-98 (emphasis added).

  [15]   Lacewell, 2019 WL 6334895, at *1 (S.D.N.Y. Oct. 21, 2019), rev’d, Lacewell, 2021 WL 2232109.

  [16]   Id. at *2.

  [17]   Id. at *7-13.

  [18]   Id. at *13.

  [19]   Id. at *8-11.

  [20]   Id. at *9.

  [21]   Id. at *11-12.

  [22]   Id. at *12.

  [23]   Id. at *6 n.11.

  [24]   See N.Y. Dep’t of Fin. Servs., About Us, https://www.dfs.ny.gov/our_mission; Vullo, 378 F. Supp. 3d at 278.

  [25]   See, e.g., Mylan L. Denerstein, Akiva Shapiro & Seth M. Rokosky, New York State Dep’t of Fin. Servs. Roundup (2021), https://www.gibsondunn.com/wp-content/uploads/2021/02/NY-Department-of-Financial-Services-Round-Up-February-2021.pdf; Denerstein, Shapiro & Rokosky, Webcast: Recent Developments at the New York State Dep’t of Fin. Servs. (2020), https://www.gibsondunn.com/webcast-recent-developments-at-the-new-york-state-department-of-financial-services/; Denerstein, Shapiro & Rokosky, New York State Dep’t of Fin. Servs. Roundup (2020), https://www.gibsondunn.com/wp-content/uploads/2020/02/NY-Department-of-Financial-Services-Round-Up-February-2020.pdf.

  [26]   See, e.g., Press Release, “Conference of State Banking Supervisors Files New Complaint Against OCC,” December 22, 2020, available at https://www.csbs.org/newsroom/csbs-files-new-complaint-against-occ.

  [27]   See, e.g., Statement of Michael J. Hsu, Acting Comptroller of the Currency, Committee on Financial Services, United States House of Representatives, May 19, 2021 (Hsu Statement).

---

Gibson, Dunn & Crutcher’s 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, or the authors:

Mylan L. Denerstein – Co-Chair, Public Policy Practice, New York (+1 212-351-3850, [email protected])
Akiva Shapiro – New York (+1 212-351-3830, [email protected])
Seth M. Rokosky – New York (+1 212-351-6389, [email protected])

Please also feel free to contact the following leaders and members of the firm’s Financial Institutions practice group:

Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
M. Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])

© 2021 Gibson, Dunn & Crutcher LLP

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

Century City partner Scott Edelman, Los Angeles associate Jillian London and San Francisco associate Zach ZhenHe Tan are the authors of “Proposed ghost gun rules would leave room for state regulation,” [PDF] published by the Daily Journal on May 26, 2021.

Los Angeles partner Bradley Hamburger and associate Jeremy Smith are the authors of “A modest proposal: Amend FRAP to permit reply briefs in support of petitions for permission to appeal” [PDF] published by the Daily Journal on May 26, 2021.