The U.S. Supreme Court’s current docket is filled with high-profile cases presenting challenging questions on an array of hot-button issues, including voting rights, freedom of speech, and immigration. Among the Court’s caseload are several disputes raising critical environmental law questions, the resolution of which is certain to have significant and lasting effects across a range of industries. Below, we highlight the central issues raised by two key environmental cases pending before the Court and provide expert analysis on the potential implications of the Supreme Court’s review, along with other cases to watch raising important environmental considerations.
Guam v. United States, No. 20-382 (cert. granted Jan. 8, 2021; set for argument Apr. 26, 2021)
Background
This case involves a dispute between Guam and the United States over who will bear financial responsibility for the cleanup of a hazardous waste site—the Ordot Dump—established by the Navy on the island of Guam. The governing statute is the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), which contains two separate provisions allowing persons who clean up contaminated sites to recover some or all of their response costs from other parties. The first provision, Section 107(a), authorizes a person to recover cleanup costs from responsible parties within six years after the cleanup effort begins.[1] The second provision, Section 113(f)(3)(B), allows “a person who has resolved its liability to the United States … in an administrative or judicially approved settlement” to seek contribution from responsible parties for the cleanup costs in complying with that settlement, no later than three years after settlement is entered.[2]
In this case, filed in March 2017, Guam sued the United States under CERCLA Section 107(a) to recover money it spent remediating the Ordot Dump, an effort that began in 2013.[3] The United States moved to dismiss on the theory that Guam’s suit could only proceed as a Section 113(f)(3)(B) contribution claim, since Guam’s cleanup around the Ordot Dump was part of its obligations under a 2004 consent decree between Guam and EPA for violations of the Clean Water Act—making Guam’s CERCLA claim time-barred under the three-year limitations period for Section 113(f)(3)(B).[4] The consent decree resolved only Clean Water Act claims and neither mentioned CERCLA nor involved any CERCLA claims.
The district court rejected this argument,[5] but on interlocutory appeal from the denial of the United States’ motion to dismiss, the D.C. Circuit reversed. It concluded that Guam could not circumvent Section 113(f)(3)(B)’s statute of limitations by choosing to pursue cleanup costs under Section 107(a) instead, because the 2004 consent decree gave rise to, and started the clock for, a claim under Section 113(f)(3)(B)—the “harsh” result being that “Guam cannot now seek recoupment from the United States … because its cause of action for contribution expired in 2007.”[6]
In reaching this conclusion, the D.C. Circuit made two key findings, now the basis of Guam’s challenge before the Supreme Court. First, it held that a settlement agreement that “never mentions CERCLA” and involves no CERCLA claims can nonetheless trigger the applicability of Section 113(f)(3)(B).[7] This is because Section 113(f)(3)(B), unlike neighboring provisions, “contains no [] CERCLA-specific language” to suggest that only settlements under CERCLA can create a contribution right.[8] Second, notwithstanding certain language in the 2004 consent decree—including a disclaimer against “any finding or admission of liability against or by the Government of Guam”—the consent decree in fact “resolve[d] [Guam’s] liability to the United States” within the meaning of Section 113(f)(3)(B).[9] On the court’s view, Guam’s refusal to admit liability could not “overcome the Consent Decree’s substantive provisions,” which required Guam to engage in specific remedial conduct that was otherwise “consistent with a finding of liability.”[10]
Analysis
On January 8, 2021, the Supreme Court granted certiorari on exactly these two questions: (1) whether a settlement reached outside of the CERCLA context can nevertheless trigger Section 113(f)(3)(B), and (2) whether a settlement agreement that disclaims liability and leaves the settling party exposed to future liability can create a Section 113(f)(3)(B) right. Both are questions with which the lower courts have wrestled since CERCLA was first amended, in 1986, to include the Section 113(f) contribution provision[11]—with most courts choosing to foreclose access to cost recovery under Section 107(a) whenever a party has satisfied any one of Section 113(f)’s triggers.[12] When paired with the courts’ increasingly broad interpretations of what those triggers require,[13] the net effect has been to funnel more parties to Section 113, while reserving Section 107 (and its more forgiving limitations period) for parties that cannot be read as meeting Section 113(f)’s now-expansive requirements.
Until now, the Supreme Court has been reluctant to weigh in, having addressed the relationship between Section 107(a) and Section 113(f) only twice before.[14] The Court’s decision in Guam may provide much-needed clarity on CERCLA’s complex web of limitations periods, and ultimately on the question of which section of the Superfund law—the cost-recovery provision of Section 107(a), or the contribution provision of Section 113(f)(3)(B)—parties must use when seeking to recover cleanup costs. Depending on how the Court rules, its decision could affect whether and which PRPs can bring contribution actions related to sites currently being assessed for further remediation, and those that may be examined for additional remedial activity in the future.
HollyFrontier Cheyenne Ref. v. Renewable Fuels Ass’n, No. 20-472 (cert. granted Jan. 8, 2021; set for argument Apr. 27, 2021)
Background
At issue in this case is whether small refineries are eligible to seek a hardship exemption from the Clean Air Act’s renewable fuel standard (RFS) program if they do not have a continuous, unbroken history of prior RFS exemptions. Created in the mid-2000s, the RFS program requires refineries and other obligated parties to blend increasing amounts of renewable fuels into the transportation fuel they produce each year.[15] Regulated parties demonstrate their compliance with these requirements by retiring a certain number of “Renewable Identification Numbers” (RINs) annually, with each RIN representing a gallon of renewable fuel.[16] Parties can also satisfy their RFS obligations by retiring RINs they have purchased from others, allowing a party that itself blends less renewable fuel than the amount required under the RFS program to still meet its renewable volume obligation (RVO) for the compliance year.[17] However, parties that choose to buy RINs in the credit-based market created by Congress may be subject to substantial fluctuation in RIN prices from year to year, depending on supply and demand. In years marked by especially high RIN prices, parties seeking to offset their inability to generate sufficient RINs on their own by purchasing and retiring RINs generated by others may face difficulty in meeting their RFS obligations.
The RFS program and the variable nature of RIN prices could impose a particular burden on small refineries (defined as refineries with an annual throughput not exceeding 75,000 barrels). Congress thus granted such refineries a blanket exemption from the RFS program until 2011, and directed EPA to extend that exemption for an additional two years conditioned on a study by the Department of Energy (DOE).[18] In its initial study in 2009, DOE concluded that small refineries did not need an additional extension, because their ability to buy RINs from third parties effectively counterweighed the economic hardship they otherwise faced.[19] After members of Congress, disagreeing, asked DOE to “reassess,”[20] DOE issued a new report in 2011, reversing some of its earlier conclusions and ultimately finding that RFS compliance costs can lead to economic hardship for small refineries.[21] In the statutory provision at issue here, Congress also authorized small refineries to petition EPA “at any time” for “an extension of the exemption under subparagraph (A)” if they can show “disproportionate economic hardship” from complying with the RFS mandate.[22]
In this case, EPA granted a hardship waiver to three small refineries for compliance years 2016 or 2017 under the RFS exemption provision.[23] Although none of them had continuously received exemptions in prior years, EPA determined that these refineries were nonetheless eligible for exemptions, consistent with EPA’s longstanding statutory interpretation. A trade association representing renewable fuel producers challenged these waivers, arguing that the Clean Air Act permits only the “extension” of a small refinery exemption, and therefore only small refineries that had received exemptions in all prior years were eligible for exemptions.[24] The Tenth Circuit agreed, holding that “EPA exceeded its statutory authority” in issuing exemptions for small refineries that did not previously receive an RFS exemption “because there was nothing for the agency to ‘extend.’”[25] In short, without a predicate exemption “to prolong, enlarge, or add to,” the refineries could not qualify for a hardship waiver under RFS exemption provision.[26]
Analysis
On January 8, 2021, the Supreme Court granted certiorari on the question of whether small refineries that have not received continuous prior exemptions under the RFS program can be eligible for a hardship waiver. As noted by the refineries that petitioned for review, the Tenth Circuit’s ruling effectively precludes almost all small refineries from obtaining an exemption (regardless of their economic hardship), because it requires that they show an uninterrupted line of exemptions stretching back to 2011, when the initial blanket exemption ended. For its part, EPA has all but stopped issuing waivers in light of the Tenth Circuit’s ruling, and recently announced that it no longer agrees with its longstanding interpretation described in its brief below, and that it now supports the Tenth Circuit’s statutory interpretation.[27] If the Supreme Court were to affirm the Tenth Circuit’s decision, nearly all small refineries will no longer be eligible for exemptions from their RFS obligations. Additionally, EPA may need to revisit the 2020 RVO, which it adjusted upward based on a projection of previously granted small refinery exemptions and anticipated small refinery exemptions for the 2019 compliance year.[28] And under this scenario, refineries and other stakeholders likely will re-urge EPA to use its general waiver authority to reduce RFS volumes or seek a legislative change. If, on the other hand, the Court were to reverse the Tenth Circuit’s decision, biofuels stakeholders likely will urge EPA to strictly interpret that portion of the Tenth Circuit’s decision addressing severe economic hardship (which is not before the Supreme Court) to limit the number of small refinery exemptions and to further increase future RVOs to account for any granted exemptions.
The case comes before the Court at a tumultuous time for the RFS program. EPA has not yet proposed (let alone finalized) an RVO for 2021. EPA has proposed, but not yet finalized, an extension of RFS compliance deadlines for the 2019 and 2020 compliance years.[29] Meanwhile, nearly 50 small refinery exemption petitions for compliance years 2019 and 2020 are awaiting decision before the Agency,[30] which has announced that it will not take action on these petitions until after the Supreme Court has issued a decision in HollyFrontier.[31] EPA has also opened a public comment period on several petitions for a waiver of the 2019 and 2020 volume requirements submitted by various refineries and the governors of several states (arguing that the RFS volumes will result in “severe economic harm”) and the National Wildlife Federation (arguing that the RFS volumes will result in “severe environmental harm”).[32] EPA has also proposed, but not yet finalized, a rule to modify or remove EPA’s label requirement for E15 fuel dispensers.[33] And the Biden administration will have an opportunity to shape the future of the RFS program through the so-called “Set Rule.” CAA Section 211(o)(2)(B) provides statutory volumes for renewable fuel only through 2022, after which EPA must employ statutory criteria to set new annual volumes.[34]
The Supreme Court’s decision could affect a number of other RFS-related cases pending in the Circuit Courts, including a consolidated challenge to EPA’s decisions to grant certain small refinery exemptions for compliance year 2018 and to deny other exemption petitions for that year;[35] these cases were held in abeyance on February 17, 2021 pending the Supreme Court’s disposition of HollyFrontier.[36] Also pending are challenges to EPA’s RVO for 2019,[37] EPA’s RVO for 2020,[38] and EPA’s rule allowing for the use of E15 blend transportation fuel year-round.[39]
Other Cases to Watch
Several of the Court’s other pending cases touch upon environmental issues and should be watched closely for further developments:
- Cedar Point Nursery v. Hassid, No. 20-107 (set for argument Mar. 22, 2021) – Petitioners, a strawberry nursery, challenge a California regulation that allows union organizers limited access rights to agricultural growers’ property. They argue that a “continual, but time-limited easement” like the one created by the regulation is a physical invasion of property that, if not compensated, qualifies as an unconstitutional taking of private property under the Fifth Amendment to the U.S. Constitution. The case could have significant property rights implications, including in the environmental context, as it relates to access rights for federal and state environmental inspections and for EPA’s entry and access rights to facilities under CERCLA. However, the extent of the impact of the case is difficult to predict, as the Court could opt to take a narrow path in reaching its decision limited to the unique aspects of the California regulation at issue.
- Florida v. Georgia, No. 22o142 (argued Feb. 22, 2021) – In this long-running dispute between Florida and Georgia, the Court will evaluate whether Georgia should be required to cap its water use in the Apalachicola River system in order to allow greater flow of water downstream into Florida. The procedural bearing of the case is unusual—not only is it presented as a matter of the Court’s original jurisdiction, as a dispute between two states, but it is also being heard on objections to the findings of two different court-appointed special masters. While the unique posture of the case raises questions as to the scope of its potential impact, the resolution of the dispute is, at a minimum, certain to affect the communities and the environment in and around the Apalachicola River system.
- Montana v. Washington, No. 22o152 (bill of complaint filed Jan. 21, 2020) – In a second case invoking the Court’s rarely used original jurisdiction, Montana and Wyoming challenge a decision by Washington state denying a water quality certification under Clean Water Act (CWA) Section 401 for a proposed coal export facility on the Columbia River, which would have provided port access to ship coal mined in Montana and Wyoming to foreign markets. Montana and Wyoming argue that Washington’s denial effectively amounts to a regulation of the coal export industry, and prevents the two coal-producing states from getting their coal to market, in violation of the foreign and dormant commerce clause. For its part, Washington argues not only that Montana and Wyoming’s challenge is, essentially, a challenge involving a private project that is the subject of litigation brought by the project proponent—making it an inappropriate matter for the Court’s original jurisdiction—but also that Washington is authorized to deny certificates when the discharge from a proposed activity will not comply with the applicable sections of the CWA and appropriate requirements of state law. In October 2020, the Supreme Court asked for the federal government’s views on the case, but has not yet decided whether it will exercise its jurisdiction over the challenge. This case is the latest in a years-long battle between coastal and coal-producing states over the construction of proposed terminals that would enable U.S. coal to reach overseas markets.
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[1] 42 U.S.C. § 9607(a)(4)(B).
[3] Guam v. United States, 341 F. Supp. 3d 74, 80 (D.D.C. 2018), rev’d, 950 F.3d 104 (D.C. Cir. 2020).
[11] See Superfund Amendments & Reauthorization Act of 1986, 42 U.S.C. § 9601 et seq.
[12] See, e.g., Whittaker Corp. v. United States, 825 F.3d 1002, 1007 (9th Cir. 2016) (“[A] party who may bring a contribution action for certain expenses must use the contribution action, even if a cost recovery action would otherwise be available.”); NCR Corp. v. George A. Whiting Paper Co., 768 F.3d 682, 691 (7th Cir. 2014) (“[T]his court—like our sister circuits—restricts plaintiffs to Section 113 contribution actions when they are available.”); Hobart Corp. v. Waste Mgmt. of Ohio Inc., 758 F.3d 757, 767 (6th Cir. 2014) (“PRPs must proceed under Section 113(f) if they meet one of that section’s statutory triggers.”); Solutia, Inc. v. McWane, Inc., 672 F.3d 1230, 1237 (11th Cir. 2012) (“deny[ing] the availability of a § 107(a) remedy under these circumstances,” where the parties were “subject to a consent decree” under Section 113).
[13] See, e.g., Refined Metals Corp. v. NL Indus. Inc., 937 F.3d 928, 932 (7th Cir. 2019) (declining to adopt “an interpretation of section 113(f)(3)(B)” that “limit[s] covered settlements to those that specifically mention CERCLA”); Asarco LLC v. Atl. Richfield Co., 866 F.3d 1108, 1120–21 (9th Cir. 2017) (same).
[14] See United States v. Atl. Research Corp., 551 U.S. 128, 138 (2007); Cooper Indus. Inc. v. Aviall Servs. Inc., 543 U.S. 157, 163 (2004). Neither of these cases lends much guidance to the issues faced in Guam. And most circuit courts to have answered the question left open in Atlantic Research have concluded that compelled costs of response are recoverable only under Section 113(f). See supra note 12.
[15] See 42 U.S.C. § 7545(o)(9).
[16] See 40 C.F.R. §§ 80.1401, 80.1425–.1426.
[17] See 42 U.S.C. § 7545(o)(5); 40 C.F.R. §§ 80.1427(a)(6), 80.1451(c).
[18] 42 U.S.C. § 7545(o)(9)(A).
[19] See Office of Policy & Int’l Affairs, Dep’t of Energy, EPACT 2005 Section 1501: Small Refineries Exemption Study 13 (Jan. 2009).
[20] S. Rep. No. 111-45, at 109 (2009).
[21] See Office of Policy & Int’l Affairs, Dep’t of Energy, Small Refinery Exemption Study 2–3 (Mar. 2011).
[22] 42 U.S.C. § 7545(o)(9)(B).
[23] See Renewable Fuels Ass’n v. EPA, 948 F.3d 1206, 1214 (10th Cir. 2020).
[27] See Press Release, U.S. Envtl. Prot. Agency, EPA Signals New Position on Small Refinery Exemptions (Feb. 22, 2021) (“EPA Press Release”), https://www.epa.gov/renewable-fuel-standard-program/epa-signals-new-position-small-refinery-exemptions.
[28] Renewable Fuel Standard Program: Standards for 2020 and Biomass Based Diesel Fuel Volume for 2021 and Other Changes, 85 Fed. Reg. 7016, 7049–53 (Feb. 6, 2020).
[29] See Extension of 2019 and 2020 Renewable Fuel Standard Compliance and Attest Engagement Reporting Deadlines, 86 Fed. Reg. 3928 (proposed Jan. 15, 2021).
[30] See U.S. Envtl. Prot. Agency, RFS Small Refinery Exemptions, Table 2: Summary of Small Refinery Exemption Decisions Each Compliance Year, https://www.epa.gov/fuels-registration-reporting-and-compliance-help/rfs-small-refinery-exemptions (last updated Feb. 18, 2021).
[31] See EPA Press Release, supra note 27.
[32] Notice of Receipt of Petitions for a Waiver of the 2019 and 2020 Renewable Fuel Standards, 86 Fed. Reg. 5182, 5184 (Jan. 19, 2021).
[33] See E15 Fuel Dispense Labeling and Compatibility with Underground Storage Tanks, 86 Fed. Reg. 5094 (proposed Jan. 19, 2021).
[34] 42 U.S.C. § 7545(o)(2)(B)(ii).
[35] See RFS Power Coal. v. EPA, No. 20-1046 (D.C. Cir. filed Feb. 21, 2020).
[36] See also, e.g., Renewable Fuels Ass’n v. EPA, No. 21-1032 (D.C. Cir. filed Jan. 19, 2021) (challenging the grant of three small refinery exemptions for compliance years 2018 and 2019; case held in abeyance on February 20 pending outcome of HollyFrontier); Kern Oil & Ref. Co., No. 20-1456 (D.C. Cir. filed Nov. 13, 2020) (challenging denial of small refinery exemptions for various compliance years between 2011 and 2016; case held in abeyance on January 29 pending outcome of HollyFrontier).
[37] See Growth Energy v. EPA, No. 19-1023 (D.C. Cir. filed Feb. 4, 2019).
[38] See RFS Power Coal. v. EPA, No. 20-1046 (D.C. Cir. filed Feb. 21, 2020).
[39] See Am. Fuel & Petrochemical Mfrs. v. EPA, No. 19-1124 (D.C. Cir. filed June 10, 2019).
The following Gibson Dunn lawyers assisted in the preparation of this alert: David Fotouhi, Rachel Levick Corley and M.J. Kirsch.
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Gibson Dunn’s Media, Entertainment and Technology Practice Group highlights some recent notable rulings and developments that may impact future litigation in this area.
Issue: Profit Participation
Case: Nye v. The Walt Disney Co. et al., L.A. County Superior Court, Case No. BC 673736
Date: Feb. 2, 2021
Holding: SVOD/EST revenues are included within the definition of “Video Device” in a 1993 agreement regarding production and distribution of the series Bill Nye The Science Guy.
Summary: In August 2017, Bill Nye sued the Walt Disney Company and several Disney-related entities for fraudulent concealment, breach of contract, and breach of fiduciary duty, alleging that he was deprived of millions of dollars in profits for the program Bill Nye The Science Guy, which originally aired on PBS in the 1990s. At issue in Los Angeles County Superior Court Judge David Cowan’s February 2 ruling was whether Nye could present a key contract interpretation issue to a jury, or instead if the court could resolve it as a matter of law.
The parties’ dispute was over what revenues are included within “Gross Receipts,” as defined in Nye’s 1993 agreement with Buena Vista Television. Specifically, are streaming revenues arising from subscription video on demand (SVOD) (including income from Netflix) or electronic sell-through (EST) (for example, purchases through iTunes) included within gross receipts? In 1993 there was no such thing as streaming technology and SVOD/EST revenues did not exist, so the court had to interpret the agreement’s application to technology that neither party was thinking about decades ago.
Buena Vista Television argued that SVOD and EST revenues are similar to a video cassette or video disc and thus are income derived from a “Video Device,” which the 1993 agreement defined as “an audio visual cassette, video disc or any similar device.” Nye argued that income derived from a “Video Device” does not include SVOD and EST revenues. The issue was significant because if the SVOD/EST revenues were from a “Video Device,” then the 1993 agreement permitted Buena Vista Television to contribute only 20% of that income towards Gross Receipts and pay an 80% royalty to its related entity distributing the series. If EST/SVOD revenues were not video device income, then, according to Nye, 100% of the income should have been applied to gross receipts.
The 1993 agreement provided Nye and Buena Vista Television with a 50% stake of Net Profits, which the agreement defined as receipts remaining from gross receipts after certain specified deductions. So the dispute was over the size of the Net Profits pie. Roughly speaking, if EST/SVOD counted as a “Video Device,” then the Disney companies could take 80% of the revenue off the top and would only need to split the remaining 20% with Nye. Under Nye’s view, the parties’ agreement required the full 100% of EST/SVOD revenue, after deductions, to be split between them.
The court ruled that Nye could not present his argument to a jury because, even if a jury were to find his position valid, it was inconsistent with other terms of the 1993 agreement—and therefore was not a reading of the agreement to which it was reasonably susceptible.
Of particular importance to the court was language in the agreement stating that Buena Vista Television’s rights to exploit the series applied not just to technology then existing but also to any future technology still to be developed. The Nye court found that California law is “seemingly silent” on the point, but “new use cases” in other jurisdictions found that extrinsic evidence was rarely useful. The court, for example, cited the Second Circuit’s holding in Boosey & Hawkes v. Music Publishers, Ltd. v. Walt Disney Co., 145 F.3d 481 (2d Cir. 1998), that “intent is not likely to be helpful when the subject of the inquiry is something the parties were not thinking about.” Id. at 487. What mattered was the language of the agreement, which expressly contemplated future types of distribution. According to the Nye court, it could not reach a conclusion that rendered that language “superfluous.”
For similar reasons, the court also focused on Nye’s contention that SVOD/EST did not fall into any category of distribution in the 1993 agreement that would entitle Buena Vista Television to a distribution fee. Under Nye’s reading, neither Buena Vista Television nor its affiliated distributor would receive any compensation for SVOD/EST distribution; there would be no distribution fee for Buena Vista Television and no video royalty for its affiliated distributor. Whereas Buena Vista Television would receive distribution fees ranging from 10% to 40% for other means of distribution, when it came to SVOD and EST, according to Nye, it would get no fee at all. The court concluded that this would be “inconsistent with [Buena Vista Television] receiving a distribution fee under the Agreement for all other means of distribution of the Series.”
Nor could Nye rely on the fact that Buena Vista Television would receive 50% of Net Profits. To the court, that did not equate to a guaranteed distribution fee or royalty; “[r]eceiving half of net profits is not the same as a distribution fee because there might not have been any net profits.” According to the court, it was “not reasonable to infer that the party with the bargaining power – as all agreed [Buena Vista Television] had – would only provide for its compensation if the show proved to be successful.”
As a result, the court interpreted the 1993 Agreement to include SVOD/EST within its definition of “Video Device,” entitling Nye only to roughly 10% of overall SVOD/EST revenue rather than 50%.
Why It Matters: The long-term impact of the ruling will be worth watching. Some have read it broadly to mean that the court equated streaming with home video, and have questioned how a digital file streamed over the internet could be a “video device” like a physical VHS tape or disc. That is not what the court held. Rather, the court concluded that the similarity between SVOD/EST and a video cassette or video disc was “debatable,” and ruled that it “cannot hold as a matter of law that SVOD and EST are sufficiently similar to a video cassette or disc that they are a ‘video device.’”
That is not to say that the court believed a jury would agree with Nye’s view that SVOD and EST are outside the 1993 agreement’s definition of a video device. It noted, for example, that Buena Vista Television “put on evidence to suggest that even with internet distribution there were still physical devices like a Roku or Apple TV box – thereby undercutting Nye’s argument that SVOD/EST do not also have a similar physical component to make them operable.” In turn, the court acknowledged, Buena Vista Television “might still argue that the software that would be inside a smart tv screen is in some sense still a physical device – even if not a separate device.” In short, SVOD/EST might be an evolution of, and similar to, home video, even without the clunky plastic case.
In a vacuum, the dispute about similarity could have been a jury question. But the court concluded that the disputed issue was immaterial, and that Nye could not reach a jury, for two primary reasons: (1) the 1993 agreement had a “by any means or methods now or hereafter known” clause, and (2) Nye argued that all streaming and download revenue should be allocated to gross receipts, with no distribution fee or royalty going to the Disney companies. The language in these agreements will differ, particularly when they pre-date the advent of streaming by years or decades. But the lasting impact of the Nye ruling is more likely to be in elevating the importance of these two issues than in deciding whether SVOD/EST revenue is derived from a “video device.”
Issue: Anti-SLAPP Law
Case: Coleman v. Grand, E.D.N.Y. No. 18-cv-5663 (ENV) (RLM)
Date: Feb. 26, 2021
Holding: New York’s 2020 amendment of its anti-SLAPP law broadly expanded the universe of defamation plaintiffs who must show actual malice, and that expanded scope applies in federal court actions and is retroactive.
Summary: In October 2018, plaintiff Steven Coleman filed a defamation lawsuit against his former romantic partner, defendant María Grand. Grand then filed counterclaims alleging defamation and intentional infliction of emotional distress. Eastern District of New York District Judge Eric Vitaliano held that all the claims failed as a matter of law and granted the parties’ cross-motions for summary judgment. The unique aspect of Coleman was the standard the court applied in rejecting the parties’ respective defamation claims.
Coleman’s defamation claim arose from an email Grand sent to approximately 40 friends and colleagues, describing her experiences in the relationship with Coleman and her belief that Coleman had used his age and professional status to harass and take advantage of her. Grand’s counterclaim arose from, among other communications, a May 2018 email that Coleman sent to approximately 80 people saying that Grand’s accusations were false, giving his account of the events, and including explicit text messages between them.
Citing New York Times Co. v. Sullivan, 376 U.S. 254 (1964), and other authorities, the Coleman court noted that federal constitutional law requires plaintiffs who are public figures to show that libel defendants acted with actual malice (knowledge the statement was false or with reckless disregard of whether it was false or not), whereas private figures need only meet a gross negligence standard. The court further noted, however, that “for statements on matters of public concern, New York law has long required all plaintiffs to show defendants acted with gross irresponsibility and . . . recently imposed an actual malice standard in some cases.”
The court’s reference to the “recently imposed . . . actual malice standard” related to New York’s November 2020 amendments to its anti-SLAPP law targeting “Strategic Lawsuits Against Public Participation.” A component of the new law that garnered significant attention was its expansion of the types of cases that would be subject to an anti-SLAPP motion to dismiss. New York’s old anti-SLAPP statute narrowly applied only to a claim brought by someone who had sought or obtained a permit, lease, zoning change or other similar government entitlement where the claim related to the efforts by the defendant to report on that application or permission. In essence, it was limited to controversies over public permits and real estate development.
The amended anti-SLAPP law made numerous fundamental changes that better enable a defamation defendant to quickly escape a bad-faith SLAPP suit without laboring through time-consuming and expensive discovery. It expands the universe of cases subject to an anti-SLAPP motion, stays discovery while the anti-SLAPP motion is pending, requires the plaintiff to show that their libel claim has a substantial basis in law, and requires a plaintiff to pay a successful defendant’s attorneys’ fees in bringing the anti-SLAPP motion.
Coleman addressed another consequence of the amended anti-SLAPP law, which, when viewed in tandem with existing New York law, significantly raised the bar for most defamation plaintiffs to state a claim. Holding that Coleman was not a public figure, the court recognized that, prior to November 2020, New York law would have required Coleman to show that Grand acted with “gross irresponsibility” in making the purportedly defamatory statements. But, Grand argued, the amended anti-SLAPP statute imposed a new standard that required Coleman to make the higher showing that she acted with actual malice.
The Coleman court agreed, noting that “[i]t was an important tweak to New York law.” New York Civil Rights Law section 76-a(2) has always imposed an actual malice standard in any “action involving public petition and participation.” But New York’s amended anti-SLAPP law broadly expanded what actions satisfied that definition, and thus the universe of cases subject to the actual malice standard. Rather than just actions brought by a “public applicant or permittee,” an action involving public petition and participation now includes:
- any communication in a place open to the public or a public forum in connection with an issue of public interest; or
- any other lawful conduct in furtherance of the exercise of the constitutional right of free speech in connection with an issue of public interest, or in furtherance of the exercise of the constitutional right of petition.
The Coleman court noted that the only other court to address the amendment at that point concluded that the amendment to § 76-a applies in federal court and has retroactive effect. See Palin v. New York Times Co., ___ F. Supp. 3d ___, 2020 WL 7711593, at *3-4 (S.D.N.Y. Dec. 29, 2020). It then reached the same conclusion. According to Coleman, “[t]he anti-SLAPP provision at issue here, § 76-a, applies in federal court because it is ‘manifestly substantive,’ governing the merits of libel claims and increasing defendants’ speech protections.” And, the Coleman court held, the anti-SLAPP amendments were just the type of remedial legislation that should be given retroactive effect to effectuate its beneficial purpose. See In re Gleason (Michael Vee, Ltd.), 96 N.Y.2d 117, 122 (2001).
Because Coleman’s claim was based upon “lawful conduct in furtherance of the exercise of the constitutional right of free speech in connection with an issue of public interest,” N.Y. Civ. Rights Law § 76-a(1)(a), the court held that he had to prove that Grand acted with actual malice. Invoking a pre-existing protection in New York’s anti-SLAPP law that now also has much broader application, the Coleman court further noted that Coleman had to establish actual malice “by clear and convincing evidence.” N.Y. Civ. Rights Law § 76-a(2). The district court held that Coleman failed to meet that burden, and that Grand’s statements were protected opinion in any event, so his defamation claim was dismissed. As “for the flip side,” as the court described it, Grand failed to meet her burden to show actual malice by clear and convincing evidence, and Coleman’s statements were protected opinion, so Grand’s counterclaims failed as well. Grand’s intentional infliction of emotional distress claim also failed because the alleged acts did not meet the “exceedingly high bar required to constitute IIED.”
Why It Matters: In Palin, the Southern District of New York court recognized that former vice presidential candidate Sarah Palin was a public figure, so the court held that it “need not and does not address whether § 76-a subjects to New York’s actual malice rule a broader collection of plaintiffs than does the First Amendment.” 2020 WL 7711593, at *4 n.5. Less than two months later, Coleman reached that exact conclusion. It is the first federal court to hold that New York’s amended anti-SLAPP law requires a vastly expanded universe of defamation plaintiffs to prove actual malice, and to do so by clear and convincing evidence.
That standard does not apply to every defamation claim by a private plaintiff. But if the challenged speech is on a “matter of public interest,” the plaintiff’s burden increases significantly regardless of whether they are a public or private figure. And in defining the scope of those matters of public interest, the amended law states that “‘public interest’ shall be construed broadly, and shall mean any subject other than a purely private matter.” N.Y. Civ. Rights Law § 76-a(1)(d). Coleman thus shows both how New York has significantly increased its protections for a wide range of defamation defendants and that its now broadly applicable “actual malice” protection applies in cases filed in federal court.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Michael Dore and Marissa Moshell.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s Media, Entertainment & Technology Practice Group:
Scott A. Edelman – Co-Chair, Media, Entertainment & Technology Practice, Los Angeles (+1 310-557-8061, [email protected])
Kevin Masuda – Co-Chair, Media, Entertainment & Technology Practice, Los Angeles (+1 213-229-7872, [email protected])
Orin Snyder – Co-Chair, Media, Entertainment & Technology Practice, New York (+1 212-351-2400, [email protected])
Brian C. Ascher – New York (+1 212-351-3989, [email protected])
Michael H. Dore – Los Angeles (+1 213-229-7652, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Ilissa Samplin – Los Angeles (+1 213-229-7354, [email protected])
Nathaniel L. Bach – Los Angeles (+1 213-229-7241,[email protected])
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On March 15, 2021, the U.S. Environmental Protection Agency (“EPA”) issued a final rule that requires electric generating units (“EGUs,” i.e., power plants) in 12 states to reduce ozone season nitrogen oxides (“NOx”) emissions. This final rule, issued pursuant to a court-ordered deadline, is the first significant regulatory action finalized by the Biden EPA.
Background. In 2008, EPA set new National Ambient Air Quality Standards (“NAAQS”) for ozone (the “2008 ozone NAAQS”).[1] This action triggered a requirement for states to submit State Implementation Plans (“SIPs”) to EPA addressing, in part, obligations under the Good Neighbor Provision of the Clean Air Act, pursuant to which SIPs must:
contain adequate provisions . . . prohibiting . . . any source or other type of emissions activity within the State from emitting any air pollutant in amounts which will . . . contribute significantly to nonattainment in, or interfere with maintenance by, any other State with respect to any [NAAQS].[2]
The Good Neighbor Provision effectively “requires upwind States to eliminate their significant contributions to air quality problems in downwind States.”[3] In general, states with non-attainment areas classified as Moderate or higher must submit SIPs to EPA to bring those areas into attainment according to the statutory schedule.[4] Under the 2008 ozone NAAQS, downwind states were required to comply with the NAAQS by July 20, 2018 (for areas in Moderate non-attainment) and by July 20, 2015 (for areas in Marginal non-attainment).[5]
Section 110(c)(1) of the Clean Air Act requires EPA to promulgate a Federal Implementation Plan (“FIP”) within two years after EPA: (1) finds that a state has failed to make a required SIP submission, (2) finds an SIP submission to be incomplete, or (3) disapproves an SIP submission.[6]
In 2011, EPA promulgated the Cross-State Air Pollution Rule (“CSAPR”), identifying emissions in 28 states that significantly affected the ability of downwind states to comply with 1997 and 2008 ozone NAAQS and the 2006 NAAQS for PM2.5, and limiting these emissions by setting sulfur oxide (“SOx”) and annual and seasonal NOx “budgets.” EPA then promulgated FIPs for each of the 28 states covered by CSAPR that required EGUs in the covered states to participate in regional trading programs to achieve the necessary emission reductions.[7]
In 2016, EPA promulgated an update to CSAPR to revise seasonal ozone NOx emissions budgets for 22 states (the “CSAPR Update”).[8] The CSAPR Update implemented the budgets through FIPs requiring sources to participate in a revised CSAPR NOx ozone season trading program beginning with the 2017 ozone season, but did not require the upwind states to eliminate their significant contributions to downwind non-attainment by any specific date.[9] The CSAPR Update also did not address emissions from non-EGUs.[10] In 2018, EPA promulgated the CSAPR “Close-Out,” which determined that no further reductions in NOx emissions were required with respect to the 2008 ozone NAAQS for 20 of the states covered by the CSAPR Update.[11]
A host of environmental groups and states challenged the CSAPR Update in the D.C. Circuit, alleging that the rule either over-controlled or under-controlled upwind emissions.[12] The court upheld the CSAPR Update in most respects; however, the court rejected EPA’s argument that Clean Air Act Sections 110(a)(2)(D)(i) and 111, 42 U.S.C. §§ 7410(a)(2)(D)(i) & 7511, when read together, do not require Good Neighbor emissions reductions by a particular deadline.[13] The court held that because the rule did not require upwind states to eliminate their significant contributions to downwind ozone by the deadlines for downwind states to comply with the 2008 ozone NAAQS (or by any date at all), the CSAPR Update was inconsistent with the requirements of the Clean Air Act.[14] The court remanded the CSAPR Update to EPA without vacatur.[15] Shortly thereafter, a different panel of the D.C. Circuit vacated the CSAPR Close-Out because it “rest[ed] on an interpretation of the Good Neighbor Provision now rejected.”[16]
Following these D.C. Circuit decisions, certain downwind states filed suit against EPA in the Southern District of New York on the basis that, due to remand of the CSAPR Update and the vacatur of the Close-Out Rule, EPA had failed to perform its statutory duty to promulgate FIPs for upwind states addressing the Good Neighbor obligations for the 2008 ozone NAAQs.[17] The court agreed with the states and directed EPA to issue a final rule regarding the required FIPs by March 15, 2021.[18]
October 2020 Proposed Rule. On October 30, 2020, EPA published a proposed rule in response to these cases—the Revised Cross-State Air Pollution Rule Update for the 2008 Ozone NAAQS (the “Revised CSAPR Update Proposed Rule”).[19] The key elements of the proposed rule are:
- A finding that the projected 2021 emissions from 9 upwind states do not significantly contribute to non-attainment or maintenance problems in downwind states and that the CSAPR Update FIPs for these states fully addressed the Good Neighbor obligations of these states.
- A determination not to impose further obligations (i.e., budget reductions) on these 9 states.
- A finding that the projected 2021 emissions for 12 upwind states significantly contribute to non-attainment or maintenance problems in downwind states.
- Promulgation of new or amended FIPs to revise state NOx emission budgets reflecting additional emissions reductions from EGUs.
- No limits on ozone season NOx emissions from non-EGU sources.
Some commenters to the Revised CSAPR Update Proposed Rule have asserted that the Proposed Rule over-controls upwind emissions and requires reductions in an unreasonably short amount of time, while other commenters asserted that the Proposed Rule under-controls upwind emissions and should require emissions reductions from non-EGU sources.
Final Rule and Key Takeaways. Consistent with the deadline set by the Southern District of New York, on March 15, 2021, EPA issued its final rule (the “Revised CSAPR Update”).[20] The final rule closely tracks the October proposal. The key elements of the final rule are:
- A finding that further ozone season NOx emissions reductions to address Good Neighbor obligations as to the 2008 ozone NAAQS are necessary for 12 of the 21 states for which the CSAPR Update was found to be only a partial remedy. As such, EPA promulgated new or revised FIPs for these states that include new EGU NOx ozone season emissions budgets, with implementation of these emissions budgets beginning with the 2021 ozone season. These states are: Illinois, Indiana, Kentucky, Louisiana, Maryland, Michigan, New Jersey, New York, Ohio, Pennsylvania, Virginia, and West Virginia.[21]
- A determination that it is feasible for EGUs to comply with the enhanced stringency of the budgets and there is sufficient time before the effective date of the rule to prepare to meet these budgets by either undertaking emissions control measures (other than installation of state-of-the-art combustion controls, which take effect for the 2022 ozone season) or through a new Trading Program.[22]
- Implementation of new state-level, ozone season emissions budgets through a new CSAPR NOx Ozone Season Group 3 Trading Program comprising these 12 states. As part of establishing the Group 3 Program, EPA is permitting the creation of a limited initial bank of allowances by converting allowances banked in 2017–2020 under the existing Group 2 Trading Program at a conversion ratio of 8:1 (and certain additional conversions at a ratio of 18:1).[23]
- A conclusion that the final rule resolves the interstate transport obligations of 21 states under the Good Neighbor Provision for the 2008 ozone NAAQS.[24]
- A conclusion that limits on ozone season NOx emissions from non-EGU sources are not required to eliminate significant contribution to non-attainment or interference with maintenance in downwind states under the 2008 ozone NAAQS.[25]
The Revised CSAPR Update is likely EPA’s first use of a revised approach to calculate the social cost of carbon in a final regulatory action. According to EPA, climate benefits of the rule were based on the reductions in CO2 emissions and calculated using four different estimates of the social cost of carbon: model average at 2.5 percent, 3 percent, and 5 percent discount rates, and 95th percentile at a 3 percent discount rate.[26]
Looking to the future, the Revised CSPAR Update did not address any state’s obligations under the 2015 ozone NAAQS, which set lower primary and secondary standards for ground-level ozone.[27] EPA noted in the Revised CSAPR Update that it is working separately to address Good Neighbor obligations under the 2015 ozone NAAQS, “including consideration of any necessary control requirements for EGU and non-EGU sources.”[28] As environmental groups continue to push for emissions reductions from non-EGU sources, and as EPA continues to consider this issue (including whether emissions reductions become available at a comparable cost threshold to that of EGUs), it is possible that future rulemakings will seek to implement more stringent emissions reductions or emissions reductions from non-EGUs. Litigation challenging the Revised CSAPR Update in the D.C. Circuit appears likely, including the potential for motions seeking a stay of the rule pending judicial review based on the requirement for affected facilities to begin compliance with the more stringent emissions budgets when the rule becomes effective 60 days after publication.[29]
_____________________
[1] National Ambient Air Quality Standards for Ozone, 73 Fed. Reg. 16436 (Mar. 27, 2008).
[2] 42 U.S.C. § 7410(a)(2)(D)(i)(I). EPA has historically referred to SIP submissions made for the purpose of satisfying the applicable requirements of CAA sections 110(a)(1) and 110(a)(2), 42 U.S.C. § 7410(a)(1)–(2), as “infrastructure SIP” submissions.
[3] Wisconsin v. Envtl. Prot. Agency, 938 F.3d 303, 309 (D.C. Cir. 2019).
[5] Wisconsin, 938 F.3d at 313.
[7] Federal Implementation Plans: Interstate Transport of Fine Particulate Matter and Ozone and Correction of SIP Approvals, 76 Fed. Reg. 48208 (Aug. 8, 2011).
[8] Cross-State Air Pollution Rule Update for the 2008 Ozone NAAQS, 81 Fed. Reg. 74504 (Oct. 26, 2016).
[11] Determination Regarding Good Neighbor Obligations for the 2008 Ozone National Ambient Air Quality Standard, 83 Fed. Reg. 65878, 65921 (Dec. 21, 2018).
[12] Wisconsin, 938 F.3d at 303.
[16] New York v. Envtl. Prot. Agency, 781 F. App’x 4, 7 (D.C. Cir. 2019) (per curiam).
[17] New Jersey v. Wheeler, 475 F. Supp. 3d 308, 319 (S.D.N.Y. 2020).
[19] Revised Cross-State Air Pollution Rule Update for the 2008 Ozone NAAQS, 85 Fed. Reg. 68964 (proposed Oct. 30, 2020).
[20] Revised Cross-State Air Pollution Rule Update for the 2008 Ozone NAAQS (March 15, 2021) (“Revised CSAPR Update”), prepublication version available at https://www.epa.gov/csapr/final-rule-revised-cross-state-air-pollution-rule-update.
[27] National Ambient Air Quality Standards for Ozone, 80 Fed. Reg. 65292 (Oct. 26, 2015).
[28] Revised CSAPR Update at 40.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Environmental Litigation and Mass Tort practice group, or the following authors in Washington, D.C.:
David Fotouhi (+1 202-955-8502, [email protected])
Mia Donnelly (+1 202-887-3617, [email protected])
Please also feel free to contact the following practice group leaders:
Environmental Litigation and Mass Tort Group:
Stacie B. Fletcher – Washington, D.C. (+1 202-887-3627, [email protected])
Daniel W. Nelson – Washington, D.C. (+1 202-887-3687, [email protected])
Energy, Regulation and Litigation Group:
William S. Scherman – Washington, D.C. (+1 202-887-3510, [email protected])
Power and Renewables Group:
Peter J. Hanlon – New York (+1 212-351-2425, [email protected])
Nicholas H. Politan, Jr. – New York (+1 212-351-2616, [email protected])
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On March 15, 2021, the Acting Chair of the Securities and Exchange Commission (SEC), Allison Herren Lee, gave a speech entitled “A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC,” in which she sets forth a near-term regulatory agenda for the SEC that centers on climate and Environmental, Social, and Governance (ESG) topics. On the same day, she also jump-started the regulatory process toward adopting potentially extensive new disclosure requirements for public companies on climate-change matters by issuing a request for comments on 15 broad issues.
The following Gibson Dunn attorneys assisted in preparing this update: Elizabeth Ising, Hillary Holmes, James Moloney, Ronald Mueller, Thomas Kim, Lori Zyskowski, and Michael Scanlon.
This webcast focuses on steps that a company should take when it plans to sell a business unit in a carve-out transaction. The webcast will also address how buyers in these transactions should protect their interests and increase the likelihood of success.
View Slides (PDF)
PANELISTS:
Stephen Glover is a partner in the Washington, D.C. office and Co-Chair of the firm’s Mergers and Acquisitions Practice Group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, including spin-offs and related transactions, as well as other corporate matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others.
Pamela Endreny is a partner in the New York office and represents clients in a broad range of U.S. and international tax matters. Ms. Endreny’s experience includes mergers and acquisitions, spin-offs, joint ventures, financings and restructurings. She has obtained private letter rulings from the IRS on tax-free spin-offs and other corporate transactions, and she has represented clients on matters relating to audits and tax controversies before the IRS. She also advises on all types of transactions undertaken by private equity funds, hedge funds and family offices, as well as transactions involving asset managers, and she has experience with financial instruments and other derivatives and a wide variety of capital markets transactions.
Sean Feller is a partner in the Century City office, and a member of the firm’s Executive Compensation and Employee Benefits Practice Group. Mr. Feller’s practice focuses on all aspects of executive compensation and employee benefits, including tax, ERISA, accounting, corporate, and securities law aspects of equity and other incentive compensation plans; qualified and nonqualified retirement and deferred compensation plans and executive employment and severance arrangements. He also regularly advises companies, boards and management teams on compensation and benefits in mergers and acquisitions.
James A. Cox is a partner in the London office, where he serves as Co-Partner-in-Charge of the office. He is a member of the firm’s Labor and Employment Practice Group. Mr. Cox has extensive experience in contentious and non-contentious labor and employment matters, with an emphasis on the employment aspects of public and private mergers and acquisitions and outsourcing arrangements, corporate governance matters, cross-border employment issues, redundancies and workforce restructurings, boardroom appointments and removals, contractor and directorship matters, enforcing and resisting post-employment restrictive covenants, protecting confidential information from misuse by current and former employees, and other key labor and employment legal issues.
Evan M. D’Amico is a partner in the Washington, D.C. office, where his practice focuses primarily on mergers and acquisitions. Mr. D’Amico advises companies, private equity firms, boards of directors and special committees in connection with a wide variety of complex corporate matters, including mergers and acquisitions, asset sales, leveraged buyouts, spin-offs and joint ventures. He also has experience advising issuers, borrowers, underwriters and lenders in connection with financing transactions and public and private offerings of debt and equity securities. Mr. D’Amico has particular expertise in advising special purpose acquisition companies (SPACs), operating companies and investors in connection with SPAC business combinations and financing transactions.
Candice Choh is a partner in the Century City office, where she practices in the firm’s Corporate Transactions Practice Group. Ms. Choh has a broad-based practice encompassing public and private company mergers and acquisitions across a wide variety of industries and other private equity transactions, including investment fund formation, co-investments, secondary transactions, and investments in sponsors. Ms. Choh regularly counsels private equity sponsors on firm structuring and internal governance matters.
David H. Kennedy is a partner in the Palo Alto office and a member of the Corporate Department. Mr. Kennedy regularly assists with intellectual property issues arising out of M&A transactions and joint ventures and has extensive experience involving a wide range of commercial transactions, including financing, distribution, supply, manufacturing, and services agreements, and with preserving intellectual property rights in a bankruptcy context.
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New York of counsel Karin Portlock and associate Jabari Julien are the authors of “The Case For Diversity In Internal Investigation Teams,” [PDF] published by Law360 on March 10, 2021.
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Part Two: National Developments In this two-part alert, we examine key global legislative developments and proposals in the bourgeoning field of mandatory corporate human rights due diligence. In Part One (published on 8 February 2021), we looked at very recent steps taken by the institutions of the EU towards implementation of legislation at a pan-European level. In this Part Two, we consider developments within the EU and in the UK, and we also look beyond Europe, to APAC, the US and Canada. |
| Developments within Europe |
France
In 2017, France introduced a pioneering piece of legislation: the Loi de Vigilance[1] (the “LDV”), which inserted provisions into the French Commercial Code imposing substantive requirements on companies in relation to human rights and environmental due diligence.
Pursuant to the LDV, companies with more than 5,000 employees in France (or 10,000 employees in France or abroad) must establish, implement and publish a “vigilance plan”, in order adequately to address risks within their supply chains or which arise from the activities of direct or indirect subsidiaries or subcontractors.
Each vigilance plan should include appropriate measures to identify, analyse and map the risks to human rights, the environment, fundamental freedoms and the health and safety of individuals. The vigilance plan should also include action plans to mitigate those risks and prevent any such damage, as well as a monitoring system to ensure that the plan is effectively implemented.
Critically, the LDV provides a route for third parties (such as trade unions and NGOs) to seek an injunction forcing compliance where a company is deemed to be failing to comply with the plan. Penalties may also be imposed if the injunction is granted, but the LDV does not provide any guidance as to what those might be: they remain matters for the judge’s discretion.
Further, the LDV sets out a civil cause of action such that companies can be sued in tort by any third party for any damage caused in relation to the activity of a subsidiary, a subcontractor or a supplier, if it can be proven that the proper implementation of that company’s vigilance plan could have prevented the damage suffered by the relevant third party. The LDV itself is unclear on the level of recoverable damages, and it remains to be seen how the courts will treat such claims.
The initial draft legislation also provided for the ability to impose fines of up to EUR30 million on companies in breach of the LDV. However, given the broad drafting and the lack of clarity of these punitive provisions, the French Conseil constitutionnel censored and effectively suppressed these sanctions for breach of the principle of legality of penalties[2].
The LDV has slowly but steadily been implemented by the largest French corporations as part of their corporate social responsibility programs, with vigilance plans and other non-financial reporting now published by most listed companies in their annual reports. Clearly these reports are coming under intense scrutiny by civil society, with a number of formal notices by NGOs against multinationals gaining widescale publicity. A handful of notices have so far led to the commencement of injunctive proceedings.
Over the past year in particular, the French courts have been grappling with how best to approach injunctive proceedings under the LDV as a matter of procedure. On 10 December 2020 the Court of Appeal of Versailles handed down two decisions which confirmed for the first time that commercial courts (and not general civil courts) should have exclusive jurisdiction over such injunctions. These decisions may well be subject to judicial review before the French Cour de cassation and it may take several months, if not years, until the procedural regime for such proceedings is fully clarified. In addition, on 11 February 2021 the tribunal judiciaire of Nanterre handed down a strongly worded judgment which recognised the exclusive jurisdiction of civil courts instead of commercial courts to assess whether or not companies should comply with their vigilance plans[3]; a decision which appears to extend to both injunctive proceedings and claims for damages. It remains to be seen how the courts will resolve these conflicting positions.
As recently as 3 March 2021, the first substantive claim for damages under the LDV was filed against a French company by 11 French and American NGOs. The claim was filed against Casino (a French mass-market retailer with activities in Brazil and Colombia) in front of the tribunal judiciaire of Saint Étienne (where the company has its head office), seeking damages in relation to its alleged involvement in the deforestation of the Amazon rainforest. The claimants are seeking damages of EUR3 million in respect of alleged breaches of the LDV, on the basis that Casino allegedly purchased meat from providers involved with the clearing of the rainforest. The meat was allegedly offered for sale in supermarkets through Casino’s subsidiaries Pao de Açucar in Brazil and Exito in Columbia[4].
As somewhat of a test case for the French court on the civil liability remedy under the LDV, these proceedings will inevitably be monitored closely by NGOs and companies alike, and could take some 12-18 months to reach a conclusion.
Germany
Just this year, Germany has also taken important steps towards the implementation of mandatory human rights due diligence standards akin to the French LDV model.
In February, a first official legislative proposal on a Human Rights Supply Chain Duty of Care Act was published. This followed months of negotiations by the coalition parties, with key points of the draft law proposed by the conservative-led German Federal Ministry for Economic Cooperation and Development (BMZ), alongside the social democrat-led German Federal Ministry of Labour and Social Affairs (BMAS).
While the draft legislation may still be subject to further minor amendments, it is now treated as agreed, and is expected to be passed this year.
Starting in January 2023, German companies with more than 3,000 employees across their group structure (reducing to 1,000 employees from 2024) will be obliged to take action to protect human rights across their own activities and their supply chains. Corporates must conduct adequate due diligence in relation to human rights and certain environmental risks. A risk analysis should be conducted at least annually, with a requirement for regular reporting and the implementation of preventative measures where risks are identified. Pursuant to the Act, corporates must also establish an operational-level grievance mechanism, and provide for remedial measures for human rights abuses.
Obligations under the Act are imposed in respect of a company’s own business operations and its first tier of suppliers. Lower tier suppliers are expected to be considered on an ad-hoc basis where appropriate (for example, if the company becomes aware of potential human rights violations by a supplier at that level).
Under the Act, a state inspection authority will be established to investigate reported violations at companies on-site. In cases of non-compliance, companies face sanctions such as fines of up to two per cent. of average worldwide turnover, and the exclusion from public sector contracts for up to three years.
The imposition of civil liability – which was strongly opposed by the German Federal Ministry of Economics (BMWI) as companies feared unpredictable legal consequences and mass litigation – has not been included the draft legislation. However, the Act does create a right for NGOs and trade unions to litigate before a German court on behalf of affected individuals, if human rights violations are suspected.
The Netherlands
Legislation in the Netherlands also focuses on substantive due diligence standards. The Child Labour Due Diligence Act 2019 (Wet Zorgplicht Kinderarbeid) introduces a duty of care on companies to investigate whether their goods or services have been produced using child labour, and to devise a “plan of action” (plan van aanpak) if there is “a reasonable suspicion” (redelijk vermoeden) of such issues arising. In addition, relevant companies are expected to submit a declaration to a regulatory body (yet to be appointed) affirming that they have exercised an appropriate level of supply chain due diligence.
Notably, the law applies to all companies that sell or supply goods or services to Dutch consumers, regardless of where the company is based or registered: there are no exemptions for legal form or size. There will be regulatory oversight of a company’s implementation of measures and compliance with the law, with potential fines of up to EUR870,000 or 10 per cent. of total worldwide turnover. Further, the law envisages potential director-level criminal liability (with up to two years of imprisonment) if a company receives two fines for breaching the law within a five-year period. As a result, the Netherlands was one of the first jurisdictions to attach criminal sanctions in the context of mandatory human rights due diligence.
The Child Labour Due Diligence Act 2019 is due to come into effect in mid-2022. Before then, the government intends to prepare a General Administrative Order nominating the regulatory body for the Act, and providing further information on companies’ specific obligations.
Switzerland
Switzerland also recently considered a more substantive regime which would impose mandatory due diligence obligations on corporates, akin to the LDV in France (the “Responsible Business Initiative” or “RBI”). However, in a national referendum on 29 November 2020, the motion to adopt the RBI received insufficient votes. As such, a counterproposal from the Swiss Parliament, which concentrates on transparency and reporting rather than substantive due diligence requirements, looks set to be adopted in the first half of 2021.
Under the proposed law, certain Swiss companies would be required to report publicly on measures taken to ensure compliance with human rights and environment laws in the company’s areas of activity, including abroad and with third parties. This would include identifying and minimising risks, and ensuring effective remedies are available. Non-compliance may result in the payment of damages.
The UK
By contrast with France, Germany and the Netherlands, the primary UK regime is modelled on transparency and reporting requirements, rather than substantive due diligence obligations regarding human rights.
At inception, the Modern Slavery Act 2015 was celebrated as one of the first initiatives of its kind: requiring entities with a UK business and a global turnover of more than £36 million to publish a statement on their website which sets out the steps taken to ensure no slavery in their supply chains (or, in the event that no due diligence is undertaken, to acknowledge that fact expressly). Critically, while the preparation of a statement on these issues is mandatory for eligible companies, the content of the Statement is set out in the Act as guidance only, and the Act has been heavily criticized because many companies simply fail to comply with the Act at all, and there is no enforcement regime to compel compliance (according to a UK government report in 2020, approximately 40 per cent. of organisations are failing to comply with the provisions of the Act[5]).
Public scrutiny and criticism of the Act led to a public consultation in 2020, to which the UK Government responded in September 2020, setting out various options to strengthen the reporting requirements and to enhance enforcement. The UK Government now intends to mandate the areas that modern slavery statements must cover, set a uniform reporting period for all entities (1 April to 31 March) and a single reporting deadline (30 September), extend the reporting requirement to public bodies with a budget of £36 million or more, and establish a central public repository for modern slavery statements. The Government is also considering options for civil penalties for non-compliance, and has committed to set up a regulatory body with the authority to impose such penalties.[6]
More recently, there have been two separate legislative developments which focus on substantive corporate due diligence connected with human rights issues. On 25 August 2020, the Department for Environment, Food & Rural Affairs announced a proposal to prohibit larger businesses operating in the UK from using products grown on land that was deforested illegally. The proposals would require businesses to carry out due diligence on key commodities in their supply chains to ensure they were produced in line with local laws protecting forests, with fines (as yet undefined in terms of scale) for non-compliance. After a six-week consultation period which ended at the beginning of October, the proposal was introduced in the Environment Bill on 11 November 2020, and is now progressing through Parliament.
Further, on Tuesday 12 January 2021, the UK Foreign Secretary announced new measures to mitigate the risk of importing goods linked to human rights abuses in China; driven by concerns over treatment of the Uighur population in China’s Xinjiang province.[7] As part of these measures, the UK Government has issued new, robust and detailed guidance to British firms setting out the specific risks faced by companies with links to Xinjiang and underlining the challenges of effective due diligence.[8] The Government has expressed an intention to publish public procurement rules (for central government, non-departmental bodies and executive agencies) which would prohibit those agencies from contracting with suppliers when there is evidence of rights violations in their supply chains. The Government has also expressed an intention to review export controls to prevent the shipping of any goods and technology to China that could contribute to such violations and repression in Xinjiang.
| The United States and Canada |
The United States
While the US has been a global leader in the sanctions space on human rights related issues (the so-called “Magnitsky sanctions” are an example), with the exception of California, it is less advanced on human rights reporting and / or substantive corporate human rights due diligence.[9]
The California Transparency in Supply Chains Act 2010 (the “California Act”) was the first legal enactment of its kind to address modern slavery through transparency and reporting obligations, and was the inspiration for the UK Modern Slavery Act. Focused on reporting and disclosure , the California Act requires companies doing business in California, with annual worldwide “gross receipts” in excess of USD100 million, to disclose information regarding their efforts to eradicate human trafficking and slavery within their supply chains. Such disclosures (typically delivered in the form of a company transparency statement) must cover what actions the company is taking in areas such as verification of product supply chains, audits of suppliers, and maintenance of appropriate standards and training.
The exclusive remedy for a violation of the California Act is an action brought by the California Attorney General for an injunction. However, such action has been infrequent to date.
At the federal level, several bills have been proposed that would require publicly-listed companies to conduct human rights diligence and / or disclose the diligence measures they have taken, but these have gained little traction before Congress.
- In 2015, against the backdrop of the California Act and the UK Modern Slavery Act, a draft Business Supply Chain Transparency on Trafficking and Slavery Act (“BSCTA”) was introduced, to be overseen by the SEC. The draft envisaged disclosure of information by public companies as to the measures taken to identify and address conditions of forced labour, slavery, human trafficking and child labour within their supply chains. The draft legislation quickly gained support of investors, with 112 faith-based investors, sustainable and responsible shareholders, pension funds and research organisations (representing over USD1 trillion in assets under management globally) expressing strong support for the legislation in an open letter in September 2015. Progress has, however, been slow. In March 2020 the BSCTA was referred to the House Committee on Financial Services, but it failed to receive a vote when heard before Congress[10].
- In parallel, the draft Corporate Human Rights Risk Assessment, Prevention, and Mitigation Act of 2019 (in the form of an amendment to the Securities Exchange Act of 1934) was opened for debate by the US House of Representatives Committee on Financial Services in July 2019. This Act would require publicly-listed companies to conduct human rights due diligence (both upstream and downstream) and report on their findings and responses, with oversight by the SEC. The bill notes that while certain countries have leveraged ESG regulation to mandate risk assessment of human rights violations, the US has not, and the bill seeks to fill this gap. That said, the future of the Act is somewhat uncertain, given a lack of progress since July 2019.
- A third piece of draft legislation, the draft Slave-Free Business Certification Act, would require every “covered business entity” (defined as any issuer under section 2(a) of the Securities Act of 1933 that has annual, worldwide gross receipts of USD500 million) to audit and report on instances of forced labour in their supply chains, under the supervision of the Department of Labor. As drafted, companies that deliberately violate the Act could be liable for civil damages of up to USD100 million, and punitive damages of up to USD500 million. The Slave-Free Business Certification Act was referred to certain House and Senate committees for their consideration in 2020. It was anticipated that this bill would gain bipartisan support, both from Republicans focused on anti-trafficking and anti-slavery initiatives and Democrats focused on broader human rights concerns and corporate accountability. However, the bill did not receive a vote when heard before Congress on 21 July 2020[11] and has not progressed any further for now.
Canada
In Canada, Bill S-216 (“An Act to enact the Modern Slavery Act and to amend the Customs Tariff”) was introduced to the Senate on 29 October 2020. This bill proposes a similar regime to that which was set out in the UK Modern Slavery Act and the California Act. It imposes supply chain reporting requirements on businesses which (subject to a few discrete exceptions) meet at least one of the following conditions for at least one of the two most recent financial years as shown on their consolidated statements: (i) the entity has at least CAD20 million in assets; (ii) the entity has at least CAD40 million in revenue; or (iii) the entity employs an average of at least 250 employees. Unlike the laws of the UK and California, however, the Bill provides for fines and far-reaching investigative powers in the event of non-compliance, with scope for fines of up to CAD250,000 per offence. The Bill also envisages director, officer and agent liability for certain breaches. One key distinguishing feature of the proposed Act lies in its amendment to the Customs Tariff. Similar to provisions of federal US trade law, this amendment means that goods will be wholly excluded from entering Canada if they are manufactured by forced labour or child labour.
While a predecessor of Bill S-216 was unsuccessful, this iteration has the support of an All-Party Parliamentary Group to End Modern Slavery and Human Trafficking, and so its prospects are stronger. Following its debate at a second reading in the Senate on 5 November 2020, it appears that the Bill is advancing steadily.
Regionally, the Canada-United States-Mexico Agreement (“CUSMA”) came into effect on 1 July 2020 and contains modern slavery-related prohibitions. Under CUSMA, Canada must prohibit the importation of goods produced by forced or compulsory labour, including child labour. Failure to comply could result in exclusion or seizure of goods, reputational risks, Administrative Monetary Penalties, and potentially additional legal consequences, including criminal investigation, depending on the particulars of a situation.
| APAC |
Many jurisdictions within APAC, such as Hong Kong and Singapore, have focused more on the criminalisation of human trafficking or modern slavery in recent years, rather than the concept of mandatory corporate human rights due diligence or reporting requirements.
Hong Kong
In Hong Kong, efforts to introduce a draft Crimes (Amendment) (Modern Slavery) Bill 2019, which would have imposed a requirement on corporates to disclose their efforts (if any) in tackling modern slavery in their supply chains – similar to the UK’s Modern Slavery Act – did not receive the government’s support, and ultimately were discontinued in September 2019. In fact, the Bill was prepared with the expectation that it would not be passed into law. As indicated by the formal legislator responsible for preparation of the Bill, it was one “that would incur public spending, and requires the Government’s consent when the bill is not in line with current government policies”[12]. As it stands there is therefore no human rights due diligence reporting or substantive mandatory due diligence legislation in the pipeline, and while the listing rules of the Hong Kong Stock Exchange envisage disclosure of information on policies and compliance with relevant laws and regulations relating to prevention of child and forced labour, this is not mandatory, but only recommended.
Singapore
Singapore is in a similar position: the listing rules of the Singapore Exchange require listed issuers to prepare annual sustainability reports, describing the issuer’s sustainability practices with reference to, inter alia, material environmental, social and governance factors. There are, however, no general corporate mandatory reporting requirements relating to human trafficking or modern slavery as yet.
Australia
Inspired by the UK’s Modern Slavery Act 2015, Australia introduced its own mandatory human reporting regime in 2018, with a Modern Slavery Act which entered into force on 1 January 2019. The Act imposes mandatory modern slavery reporting requirements on large businesses and other entities in the Australian market with annual consolidated revenue of at least AUD100 million. Such entities are required to prepare modern slavery statements on an annual basis, setting out relevant actions to assess and address modern slavery risks in the entity’s operations. The Act goes further than its UK cousin, by stipulating what topics a company’s modern slavery statement must cover (for example, the risks of modern slavery practices in a company’s operations and supply chains, and the actions that the company has taken to assess and address those risks), and by implementing a central repository of statements housed by the Government. However, the Act has faced similar criticism to the UK Act in that it is considered to lack teeth, evidenced by a paucity of enforcement for non-compliance. Critics have also noted that the Act only imposes reporting requirements (and not requirements to take substantive action), which may simply encourage a ‘tick-the-box’ form of reporting.
With regulators and investors in the region paying increasing attention to these issues, and with multinationals facing heightened expectations globally in any event as a result of developments in Europe, it may be only a matter of time before APAC legislatures start seriously considering mandatory reporting standards, even if not substantive due diligence requirements.
| International law |
No international round up would be complete without referring to the ongoing preparation of a draft UN Treaty on Business and Human Rights, which has been in development since 2014 and is now in its third iteration. As it stands, the draft envisages imposing obligations on states to “ensure that their domestic law provides for a comprehensive and adequate system of legal liability” for businesses domiciled or operating within their territory which have abused human rights.[13] Such mechanisms would include requiring business enterprises “to undertake human rights due diligence proportionate to their size, risk of severe human rights impacts and the nature and context of their operations” and would require State Parties to impose sanctions for non-compliance with those due diligence duties.[14] Notably, the draft Treaty requires states to ensure that businesses “respect all internationally recognized human rights and prevent and mitigate human rights abuses throughout their operations.” It also requires states to ensure that their domestic law holds businesses accountable for “failure to prevent another legal or natural person with whom it has a business relationship, from causing or contributing to human rights abuses” where there is an element of control.[15]
The draft Treaty recently underwent its sixth round of discussions by the Open-Ended Intergovernmental Working Group, and this project looks set to continue for some time, with scepticism among some critics that it will ever be adopted.
|
Conclusion Given the momentum in human rights due diligence and transparency / reporting legislation internationally, companies are well advised to consider their existing risk management frameworks and to reflect on the depth of their understanding and oversight of human rights issues in their operations. The array of different legislative initiatives and approaches, coupled with the inevitable complexity and multi-layered nature of corporate supply chains, means that the position is by no means straightforward. Early engagement on these issues is therefore key. |
_________________________________
[2] Conseil constitutionnel, Decision n°2017-750 DC 23rd March 2017 Loi relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre. We note that the public law department of GDC Paris led by Nicolas Baverez represented several professional organisations in the context of this constitutional dispute.
[5] Available here.
[6] https://www.gov.uk/government/news/new-tough-measures-to-tackle-modern-slavery-in-supply-chains.
[7] https://www.gov.uk/government/news/uk-government-announces-business-measures-over-xinjiang-human-rights-abuses.
[8] https://www.gov.uk/government/publications/overseas-business-risk-china/overseas-business-risk-china.
[9] While not the focus of this alert, there has been legislation in respect of “conflict minerals”. At a federal level, the US Congress mandated in Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that the US Securities and Exchange Commission should enact rules requiring public companies to determine whether they are subject to reporting any “conflict minerals” used in their products. The disclosure requirements are intended to bring greater public awareness and transparency of the human rights abuses caused by armed groups in the Democratic Republic of Congo and promote responsibility with regard to conflict mineral supply chains. For further information, please see our client alert on this topic: here.
[12] https://www.iias.asia/the-newsletter/article/legislation-and-other-tactics-combatting-human-trafficking-hong-kong
[14] Articles 6.2-6.6 of the Draft Treaty (Second Revised Version). Available here.
[15] Available here.
The following Gibson Dunn lawyers assisted in preparing this client update: Eric Bouffard, Susy Bullock, Andrew Cheng, Harriet Codd, Clara di Tuoro, Pierre-Emmanuel Fender, Brian Gilchrist, Dorothee Herrmann, Perlette Jura, Celine Leung, Michael Murphy, Kyle Neema Guest, Allan Neil, Alexa Romanelli, Oliver Welch, and Finn Zeidler.
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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn lawyer with whom you usually work or any of the following authors:
London
Susy Bullock (+44 (0) 20 7071 4283, [email protected])
Allan Neil (+44 (0) 20 7071 4296, [email protected])
Frankfurt
Finn Zeidler (+49 69 247 411 530, [email protected])
Paris
Eric Bouffard (+33 (0) 1 56 43 13 00), [email protected])
Pierre-Emmanuel Fender (+33 (0) 1 56 43 13 00), [email protected])
Hong Kong
Brian Gilchrist (+852 2214 3820, [email protected])
Oliver D. Welch (+852 2214 3716, [email protected])
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Perlette M. Jura (+1 213-229-7121, [email protected])
Washington, D.C.
Michael K. Murphy (+1 202-955-8238, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
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Denver partner Jessica Brown and New York partner Lauren Elliot are the authors of “An Employer Playbook for the COVID ‘Vaccine Wars’: Strategies and Considerations for Workplace Vaccination Policies,” [PDF] published by The Practical Lawyer in February 2021.
On March 5, 2021, regulators and industry groups provided market participants with much anticipated clarity by announcing the dates for the cessation of publication of, and non-representativeness of, various settings of the London Interbank Offered Rate (“LIBOR”)[1] which will allow market participants to identify the date that their financial instruments and commercial agreements that reference LIBOR will transition to an alternative reference rate (e.g., a risk free rate).
The March 5th announcement is not only critical in providing certainty for the financial markets regarding timing for the replacement of LIBOR, but the announcement will also fix the spread adjustment contemplated under certain industry-standard documents as of March 5, 2021—thereby providing greater clarity around the economic impact of the transition from LIBOR to a risk free rate, like the Standard Overnight Financing Rate (“SOFR”) or the Sterling Overnight Index Average (“SONIA”).
LIBOR Announcement
The ICE Benchmark Administration Limited (“IBA”), the authorized administrator of LIBOR, published on March 5, 2021 a feedback statement on its consultation regarding its intention to cease the publication of LIBOR (the “IBA Feedback Statement”).[2] The IBA Feedback Statement comes in response to the consultation published by IBA on December 4, 2020 (the “Consultation”)[3] and confirmed IBA’s intention to cease the publication of:
- EUR, CHF, JPY and GBP LIBOR for all tenors after December 31, 2021;
- one week and two month USD LIBOR after December 31, 2021; and
- all other USD LIBOR tenors (e.g., overnight, one month, three month, six month and twelve month) after June 30, 2023.
Concurrent with the publication of the IBA Feedback Statement, the UK Financial Conduct Authority (the “FCA”) announced the future cessation or loss of representativeness of the 35 LIBOR settings published in five currencies (the “FCA Announcement”) from the above mentioned dates.[4]
Summary of FCA Announcement and IBA Feedback Statement:
|
Last Date of Publication or Representativeness is December 31, 2021: | |||
|
Currency |
Tenors |
Spread Adjustment Fixing Date |
Result |
|
EUR LIBOR |
All Tenors (Overnight, 1 Week, 1, 2, 3, 6 and 12 Months) |
March 5, 2021 |
Permanent Cessation. |
|
CHF LIBOR |
All Tenors (Spot Next, 1 Week, 1, 2, 3, 6 and 12 Months) |
March 5, 2021 |
Permanent Cessation. |
|
JPY LIBOR |
Spot Next, 1 Week, 2 Month and 12 Month |
March 5, 2021 |
Permanent Cessation. |
|
JPY LIBOR |
1 Month, 3 Month and 6 Month |
March 5, 2021 |
Non-Representative. “Synthetic” rate possible for one additional year. |
|
GBP LIBOR |
Overnight, 1 Week, 2 Month and 12 Month |
March 5, 2021 |
Permanent Cessation. |
|
GBP LIBOR |
1 Month, 3 Month and 6 Month |
March 5, 2021 |
Non-Representative. “Synthetic” rate possible for a “further period” after end-2021. |
|
USD LIBOR |
1 Week and 2 Month |
March 5, 2021 |
Permanent Cessation |
|
Last Date of Publication or Representativeness is June 30, 2023: | |||
|
Currency |
Tenors |
Spread Adjustment Fixing Date |
Result |
|
USD LIBOR |
Overnight and 12 Month |
March 5, 2021 |
Permanent Cessation. |
|
USD LIBOR |
1 Month, 3 Month and 6 Month |
March 5, 2021 |
Non-Representative. “Synthetic” rate possible for a “further period” after end-June 2023. |
The FCA Announcement and the IBA Feedback Statement are critical as they make clear the dates on which certain LIBOR settings will cease to exist or become non-representative (as described in more detail above), and they will serve as a “trigger event” for the fallback provisions in industry standard or recommended documentation, including those fallback provisions recommended by the Alternative Reference Rates Committee (“ARRC”) with respect to USD LIBOR and the fallback provisions in the International Swaps and Derivatives Association (“ISDA”) documentation.[5]
The FCA Announcement drew attention in markets around the globe. For example, the Asia Pacific Loan Market Association (“APLMA”) issued a statement on March 8, 2021 in which it clarified the APLMA’s understanding of the FCA Announcement: The APLMA stated that the FCA Announcement indicates that the most widely used USD LIBOR settings in Asia, such as 1, 3 and 6 Month USD LIBOR, will continue to be published until June 30, 2023 and will continue to be representative until that date. The APLMA also confirmed that based on undertakings received from the panel banks, the FCA does not expect that any LIBOR settings will become unrepresentative before the relevant dates set out above.
ISDA Index Cessation Event Announcement
Relatedly, shortly after the publication of the IBA Feedback Statement and the FCA Announcement, ISDA announced that these statements constitute an “Index Cessation Event” under the IBOR Fallbacks Supplement (Supplement Number 70 to the 2006 ISDA Definitions) and the ISDA 2020 IBOR Fallbacks Protocol, which in turn triggers a “Spread Adjustment Fixing Date” under the Bloomberg IBOR Fallback Rate Adjustments Rule Book for all LIBOR settings on March 5, 2021.[6] The ARRC has stated[7] that its recommended spread adjustments for fallback language in non-consumer cash products referencing USD LIBOR (e.g., business loans, floating rate notes, securitizations) will be the same as the spread adjustments applicable to fallbacks in ISDA’s documentation for USD LIBOR.[8] For further information on why a spread adjustment is necessary, see our previous alert from May 2020.[9]
This ISDA announcement provides market participants holding legacy contracts with greater clarity regarding the economic impact of the transition from LIBOR to risk free rates; however, even though the spread adjustment is now fixed, a value transfer is nonetheless expected to occur as a result of transition. This is because the spread adjustment looks backwards to the median difference between the risk free rate and LIBOR over the previous five years, which is unlikely to be equivalent to what the net present value of the relevant instrument would have been at the time of transition, had LIBOR not been discontinued / ceased to be representative. For example, in the case of USD LIBOR, when all tenors cease to be published or are deemed non-representative (at the end of December 2021 or June 2023, as the case may be) fallbacks for swaps will shift to SOFR, plus the spread adjustment that has now been fixed as of March 5, 2021. The fallback replacement rate of SOFR plus the spread adjustment that was fixed over two years prior is unlikely to match what would, absent transition, have been the net present value of such swap on the applicable LIBOR end date, thereby ultimately resulting in a value transfer to one party. However, the extent to which such value transfer will impact a particular financial instrument on the relevant LIBOR end date is unclear, as markets have been pricing in, and will continue to price in, the expected transition when valuing legacy instruments referencing LIBOR.
Potential “Synthetic” LIBOR for Limited Use
The IBA Feedback Statement explains that in the absence of sufficient bank panel support and without the intervention of the FCA to compel continued panel bank contributions to LIBOR, IBA is required to cease publication of the various LIBORs after the dates described above.[10] Importantly, the IBA Feedback Statement and the FCA Announcement note that the UK government has published draft legislation (in proposed amendments to the UK Benchmarks Regulation set out in the Financial Services Bill 2019-21)[11] proposing to grant the FCA the power to require IBA to continue publishing certain LIBOR settings for certain limited (yet to be finalized) purposes, using a changed methodology known as a “synthetic” basis.
Specifically, the FCA has advised IBA that “it has no intention of using its proposed new powers to require IBA to continue publication of any EUR or CHF LIBOR settings, or the Overnight/Spot Next, 1 Week, 2 Month and 12 Month LIBOR settings in any other currency beyond the intended cessation dates for such settings.” However, for the nine remaining LIBOR benchmark settings, the FCA has advised IBA that it will consult on using its proposed new powers to require IBA to continue publishing, on a synthetic basis, 1 Month, 3 Month and 6 Month GBP and JPY LIBOR (for certain limited periods of time) and will continue to consider the case for the “synthetic” publication of 1 Month, 3 Month and 6 Month USD LIBOR. On March 5, 2021, the FCA also published statements of policy regarding some of the proposed new powers that the UK government is considering granting to the FCA. These statements of policy include more detail on why the FCA is making these distinctions (e.g., to reduce disruption and resolve recognized issues around certain “tough legacy” contracts) and explain the intended methodology for the publication of the identified LIBORs on a synthetic basis (i.e., a forward looking term rate version of the relevant risk free rate, plus a fixed spread adjustment calculated over the same period, and in the same way as the spread adjustment implemented in the IBOR Fallbacks Supplement and the 2020 IBOR Fallbacks Protocol published by ISDA).[12]
If the FCA is granted the power to, and decides to require IBA to continue the publication of any LIBOR setting on a “synthetic” basis, the FCA Announcement makes clear that the synthetic LIBOR settings will no longer be deemed “representative of the underlying market and economic reality the setting is intended to measure”[13] (notwithstanding that the FCA may be able to compel the publication of a “synthetic” LIBOR rate for one or more of the 1 Month, 3 Month or 6 Month tenors for JPY LIBOR, GBP LIBOR and/or USD LIBOR beyond the set cessation date).
Notably, if the UK government decides to grant the FCA the power to, and the FCA decides to compel IBA to publish “synthetic” LIBOR for certain settings, the intent would be to assist only holders of certain categories of legacy contracts that have no or inappropriate alternatives and cannot practically be renegotiated or amended (so called “tough legacy” contracts, such as notes which may require up to 90% or 100% noteholder consent to amend the relevant terms of the note).[14] As such, the powers are intended to be of limited use, and regulators have consistently stressed the need for market participants to actively transaction their legacy contracts. For example, under the proposals in the UK Financial Services Bill, UK regulated firms would be prohibited from using such “synthetic” LIBOR settings in regulated financial instruments. The FCA plans to consult on the “tough legacy” contracts that will be permitted to use “synthetic” LIBOR in the second quarter of this year.
Conclusion
The announcements on March 5th bring us one step closer to the cessation of LIBOR. The announcements are likely to offer market participants much needed clarity regarding the timing, and economics, of the transition of LIBOR to alternative reference rates. They also provide a reminder to, and increase pressure on, market participants to actively transition their financial instruments and commercial agreements that reference LIBOR to risk free rates.
______________________
[1] LIBOR is the index interest rate for tens of millions of contracts worth hundreds of trillions of dollars, ranging from complex derivatives to residential mortgages to bilateral and syndicated business loans to commercial agreements.
[2] ICE LIBOR® Feedback Statement on Consultation on Potential Cessation (March 5, 2021), available here.
[3] ICE LIBOR® Consultation on Potential Cessation (December 2020), available here.
[4] “FCA announcement on future cessation and loss of representativeness of the LIBOR benchmarks,” Financial Conduct Authority (March 5, 2021), available here.
[5] We note that although the FCA Announcement and IBA Feedback Statement would constitute ”trigger events” under ARRC standard fallback language (e.g., a “Benchmark Transition Event”) and under ISDA standard fallback language (e.g., an “Index Cessation Event”), such financial instruments would continue to reference LIBOR until the date that LIBOR ceases to be published or is deemed non-representative (i.e., after December 31, 2021 or after June 30, 2023). In other words, the date on which LIBOR changes to a risk free rate and the “trigger event” will likely be two distinct events as a result of the announcement.
[6] See Future Cessation and Non-Representativeness Guidance on FCA announcement on future cessation and loss of representativeness of the LIBOR benchmarks, ISDA (March 5, 2021), available here; see also IBOR Fallbacks, Technical Notice – Spread Fixing Event for LIBOR, Bloomberg, available here.
[7] See “ARRC Commends Decisions Outlining the Definitive Endgame for LIBOR,” Alternative Reference Rates Committee (March 5, 2021), available here; “ARRC Announces Further Details Regarding Its Recommendation of Spread Adjustments for Cash Products,” Alternative Reference Rates Committee (June 30, 2020), available here.
[8] The ARRC followed ISDA’s announcement stating that the IBA Feedback Statement and the FCA Announcement constitute a “Benchmark Transition Event” with respect to all USD LIBOR settings pursuant to the ARRC’s recommended fallbacks for new issuances of LIBOR floating rate notes, securitizations, syndicated business loans and bilateral business loans. See “ARRC Confirms a “Benchmark Transition Event” has occurred under ARRC Fallback Language,” ARRC (March 8, 2021), available here.
[9] See Tax implications of benchmark reform: UK tax authority weighs in, Gibson Dunn (May 2020) available here.
[10] IBA received 55 responses to the Consultation which are summarized in the IBA Feedback Statement. IBA notes that it shared and discussed the feedback received on the Consultation with the FCA.
[11] The text and status of the Financial Services Bill 2019-21 are available here.
[12] See “Proposed amendments to the Benchmarks Regulation,” Policy Statement, FCA (March 5, 2021) available here.
[13] FCA Announcement at footnote 3.
[14] See “Paper on the identification of Tough Legacy issues,” The Working Group on Sterling Risk-Free Reference Rates (May 2020), available here.
The following Gibson Dunn lawyers assisted in preparing this client update: Linda Curtis, Arthur Long, Jeffrey Steiner, Jamie Thomas, Bridget English, and Erica Cushing.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following practice group leaders and members:
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On Monday, February 22, 2021, the United States Supreme Court declined to resolve a prominent split between federal Courts of Appeal regarding the False Claims Act (“FCA”).[1] In denying petitions for writs of certiorari in Care Alternatives v. United States[2] and RollinsNelson LTC Corp. v. U.S. ex rel. Winters,[3] the Court left unresolved whether FCA liability must be predicated on a claim that is objectively false based on verifiable facts, or whether dueling expert opinions based on judgment can suffice to establish falsity. Unfortunately, this issue now joins a host of other questions on which the federal courts have been unable to provide uniform answers in connection with this powerful law enforcement tool. Accordingly, companies doing business with, or seeking payment from, the government must continue awaiting further clarification on a number of crucial issues concerning the enforcement of FCA claims, an ongoing source of legal uncertainty that provides good reason to engage experienced counsel at an early stage of disputes over government contracts and payments.
The False Claims Act
Enacted in 1863 in response to fraud by government contractors during the Civil War, the FCA imposes civil liability on “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment” to the federal government or who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”[4] Violators are liable for treble damages plus per-violation penalties linked to inflation.[5] The FCA incentivizes private citizens to file suits on behalf of the government in so-called qui tam actions by allowing these private plaintiffs, known as “relators,” to receive a portion of the government’s recovery.[6] The FCA also provides protections for whistleblowers who report a violation under the statute.[7]
The number of FCA actions filed has increased substantially in recent years, with more than 4,100 new cases opened since 2015.[8] In 2020 alone, the government and qui tam relators opened 922 new FCA matters, the largest single-year total ever by a substantial margin, and obtained more than $2.2 billion in payments.[9] And looking forward, the Department of Justice has publicly announced it will focus on investigating and prosecuting fraud against the United States in connection with various COVID-19 recovery-related programs.[10]
Denial of Certiorari in Care Alternatives and Winter
To prevail on an FCA claim, the plaintiff generally must prove the elements of a claim for government payment, falsity, knowledge (scienter), and materiality.[11] Crucially, there are different ways in which claims can be deemed false or fraudulent, however. The Supreme Court’s denials of certiorari in Care Alternatives and RollinsNelson make it difficult for businesses to predict what conduct might result in FCA liability in light of ongoing uncertainty as to whether expert opinion testimony stating that an FCA defendant’s claims were false can itself produce a genuine dispute of material fact as to the element of falsity. The United States Courts of Appeal have now issued conflicting answers to this pressing question.
In 2019, in United States v. AsercaCare, Inc., the Court of Appeals for the Eleventh Circuit held, in a dispute concerning certifications that patients were eligible for hospice care, that claims cannot be “deemed false” under the FCA based solely on “a reasonable disagreement between medical experts” as to a medical provider’s clinical judgment because the FCA requires proof of an “objective falsehood” in a claim for payment.[12] The Third Circuit Court of Appeals subsequently rejected AsercaCare’s objective falsity standard in Care Alternatives, however, concluding that it improperly conflated the elements of falsity and scienter.[13] There, as in AseraCare, the hospice care provider Care Alternatives was alleged to have submitted false hospice-reimbursement claims for ineligible patients to Medicare and Medicaid in violation of the FCA. During discovery, the parties produced extensive evidence addressing whether Care Alternatives admitted ineligible patients, including conflicting expert reports. In light of that battle of the experts, the Third Circuit held that “medical opinions may be ‘false’ and an expert’s testimony challenging a physician’s medical opinion can be appropriate evidence for the jury to consider on the question of falsity” for purposes of the FCA.[14]
The Ninth Circuit reached a similar result in Winter, in which the health care management company RollinsNelson was alleged to have submitted Medicare claims falsely certifying that certain inpatient hospitalizations were medically necessary.[15] The Ninth Circuit concluded that “the FCA does not require a plaintiff to plead an ‘objective falsehood’” because a “physician’s certification . . . can be false or fraudulent for the same reasons any opinion can be false or fraudulent,” including “if the opinion is not honestly held.”[16] Both Care Alternatives and RollinsNelson petitioned the Supreme Court for writs of certiorari.
The circuit split is problematic because it creates confusion about the types of conduct for which businesses could face liability under the FCA. As Care Alternatives explained in its petition for a writ of certiorari, rejecting an “objective falsehood” standard potentially implicates good-faith professional judgments that are “notoriously difficult and inexact.”[17] This uncertainty could deter certain businesses from contracting with the government and participating in government funding programs, such as Medicaid and Medicare,[18] and it is likely having a chilling effect causing certain defendants to settle unmeritorious FCA claims to avoid litigation risk—particularly in light of the FCA’s severe penalty provisions. The U.S. Chamber of Commerce and the Pharmaceutical Research and Manufacturers of America jointly submitted an amicus brief highlighting the potentially wide-ranging implications of the Third Circuit’s ruling, similarly arguing that an “objective falsity” standard is the appropriate approach. They argued that the “objective falsity” standard cabins liability by providing a bright line rule and warned of the risks businesses face whenever “self-interested relators with a hired ‘expert’ second-guesses a subjective judgment or offers a different interpretation of a provision subject to several reasonable interpretations.”[19]
Other Circuit Splits
What must be shown to establish falsity under the FCA is hardly the only area of uncertainty that government contractors must navigate. Over the years, the FCA has generated several other circuit splits that still remain unresolved.
For instance, there is no nationwide standard for dismissal of an FCA claim by the government. Pursuant to § 3730(c)(2)(A), the government may dismiss what it believes to be an unmeritorious action over the objections of the relator bringing suit. Because the FCA does not provide a standard of review for such motions to dismiss, somewhat similar albeit conflicting rules have emerged between an “unfettered right” approach of granting absolute deference to the government,[20] and a “rational relation” approach under which the government must show some rational relation between dismissal and a valid government purpose, such as protecting classified information from disclosure,[21] after which the burden shifts to the relator to show that the dismissal is “fraudulent, arbitrary and capricious, or illegal.”[22] The Supreme Court denied a petition for certiorari requesting an answer to this question in April 2020,[23] shortly before the Seventh Circuit articulated a third approach that falls between those two.[24]
Another circuit split concerns the specificity of the pleadings necessary to establish a false claim. While some circuits do not require that a complaint allege particular details concerning a submitted false claim,[25] finding it sufficient that “particular details of a scheme to submit false claims [be] paired with reliable indicia that lead to a strong inference that claims were actually submitted,”[26] others impose a stricter standard under which plaintiffs must “plead representative samples of false claims.”[27] The Supreme Court declined to resolve whether a relator must plead the factual details of specific false claims in order to survive a motion to dismiss on several occasions, including, most recently, when it denied certiorari in United States ex rel. Strubbe v. Crawford County Memorial Hospital in November 2019.[28]
There are also conflicting decisions regarding the first-to-file rule, which bars the filing of related actions based on the same facts underlying a pending, previously filed FCA action.[29] At issue is whether this provision presents a jurisdictional bar, under which the first to file rule can be raised at any time to defeat a later lawsuit, or whether it is a defense to an FCA claim that is waived if not properly raised at an early stage in the litigation. The First, Second, Third and D.C. Circuit Courts of Appeal have concluded that the first to file rule is not jurisdictional and therefore must be raised in a motion to dismiss,[30] while the Fourth, Fifth, Sixth, Ninth and Tenth Circuit Courts of Appeal have held that the first to file rule is not a waivable defense.[31]
Another split concerns whether the relator bringing suit must have actually participated in or observed the alleged conduct,[32] for purposes of application of the FCA’s public disclosure bar, or whether the relator need only know “of the information on which the allegations are based.”[33] In addition, there are also differing opinions regarding how strongly the anti-retaliation provision under § 3730(h) protects whistleblowers who are fired for reporting a false claim under the statute. The Eleventh Circuit held that an employee must satisfy a “but-for” causation standard, whereby the employee must show that the claimed retaliation would not have occurred absent the employee’s protected action.[34] In so doing, it rejected the less stringent “motivating factor” standard followed by the Sixth, Seventh, and D.C. Circuits.[35]
Takeaways
The persistence of numerous conflicts among the federal Courts of Appeals on key questions of FCA liability frustrates the uniform application of a national statute. The absence of nationwide rules introduces uncertainty for businesses that contract with, or request payment from, the government because they cannot know ahead of time which standards will be applied to their allegedly liable conduct, particularly if they do business across multiple jurisdictions where the elements of the FCA are applied differently. Moreover, these conflicts encourage opportunistic qui tam actions and forum-shopping, as relators strategically file their lawsuits in jurisdictions with more plaintiff-friendly rules on the weakest aspects of their cases. The prospect of having to accommodate different rules in different jurisdictions, and to prepare for potential litigation in multiple forums, can impose significant costs on businesses. These issues will hopefully be resolved in time, either by Supreme Court or Congressional action, providing much needed clarity to this powerful statute. Until then, businesses should engage experienced counsel at an early stage to advise on disputes over government contracts and payments.
_______________________
[2] — S. Ct. —, 2021 WL 666386 (Feb. 22, 2021).
[3] — S. Ct. —, 2021 WL 666435 (Feb. 22, 2021).
[4] 31 U.S.C. § 3729(a)(1)(A)–(B).
[8] See, e.g., 2020 Year-End False Claims Act Update, Gibson Dunn (Jan. 27, 2021), https://www.gibsondunn.com/wp-content/uploads/2021/01/2020-year-end-false-claims-act-update.pdf.
[10] See, e.g., Eastern District of California Obtains Nation’s First Civil Settlement for Fraud on Cares Act Paycheck Protection Program, Dep’t of Justice (Jan, 12, 2021), https://www.justice.gov/usao-edca/pr/eastern-district-california-obtains-nation-s-first-civil-settlement-fraud-cares-act.
[11] See, e.g., United States v. Care Alternatives, 952 F.3d 89, 94 (3d Cir. 2020), cert. denied, No. 20-371, 2021 WL 666386 (U.S. Feb. 22, 2021).
[12] 938 F.3d 1278, 1281 (11th Cir. 2019).
[13] Care Alternatives, 952 F.3d at 94. FCA claims generally must be pleaded under the heightened pleading standard of Federal Rule of Civil Procedure 9(b), but the element of scienter can be pleaded under the liberal pleading standard of Federal Rule of Civil Procedure 8(a). See, e.g., Adomitis ex. rel. United States v. San Bernardino Mountains Cmty. Hosp. Dist., 816 F. App’x 64, 66 (9th Cir. 2020).
[15] Winter ex rel. United States v. Gardens Regional Hosp. & Med. Ctr., Inc., 953 F.3d 1108 (9th Cir. 2020), cert. denied sub nom. Rollinsnelson LTC Corp. v. U.S. ex rel. Winters, No. 20-805, 2021 WL 666435 (U.S. Feb. 22, 2021).
[16] Id. It bears noting that certain of these cases were at distinct procedural postures. Care Alternatives was decided on a motion for summary judgment, 952 F.3d at 94, and Asera Care was decided on a summary judgment after a part of a bifurcated trial had already been completed, 938 F.3d at 1289-90, while Winter was decided on a motion to dismiss, 953 F.3d at 1116.
[17] Petition for Writ of Certiorari at 2, Care Alternatives v. United States, et al. ex rel. Druding, et al., No. 20-371 (Sept. 16, 2020).
[19] Brief of the Chamber of Commerce of the United States of America and the Pharmaceutical Research and Manufacturers of America (PhRMA) as Amici Curiae in Support of Petitioner at 10, Care Alternatives v. United States, et al. ex rel. Druding, et al., No. 20-371 (Oct. 23, 2020).
[20] See, e.g., Hoyt v. Am. Nat’l Red Cross, 518 F.3d 61 (D.C. Cir. 2008).
[21] Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 936 (10th Cir. 2005).
[22] U.S. ex rel., Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998); see also, e.g., Ridenour, 397 F.3d at 936.
[23] United States ex rel. Schneider v. JPMorgan Chase Bank, N.A., 2019 WL 4566462 (D.C. Cir. Aug. 22, 2019), cert. denied Case. No. 19-678 (April 6, 2020).
[24] United States v. UCB, Inc., 970 F.3d 835, 839 (7th Cir. 2020).
[25] See, e.g., United States ex rel. Heath v. AT&T, 791 F.3d 112, 126 (D.C. Cir. 2015); Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 998-99 (9th Cir. 2010).
[26] United States ex rel. Chorches for Bankr. Estate of Fabula v. Am. Med. Response, 865 F.3d 71, 89 (2d Cir. 2017).
[27] United States ex rel. Strubbe v Crawford County Mem. Hosp., 915 F.3d 1158 (8th Cir. 2019); see also United States ex rel. Grant v. United Airlines, 912 F.3d 190 (4th Cir. 2018); United States ex rel. Clausen v. Lab. Corp. of Am., 290 F.3d 1301 (11th Cir. 2002).
[28] 140 S. Ct. 553, 205 L. Ed. 2d 356 (2019). Notably, the respondents in Crawford argued that there is, in fact, no circuit split on this issue. See Brief of Crawford County Memorial Hospital & Bill Bruce, Strubbe, No. 19-225 (Oct. 23, 2019).
[30] United States v. Millennium Labs., Inc., 923 F.3d 240, 249 (1st Cir. 2019); United States ex rel. Hayes v. Allstate Ins. Co., 853 F.3d 80 (2d Cir. 2017); In re Plavix Mktg., Sales Practices & Prod. Liab. Litig. (No. II), 974 F.3d 228, 231 (3d Cir. 2020); United States ex rel. Heath v. AT&T, Inc., 791 F.3d 112 (D.C. Cir. 2015).
[31] See United States ex rel. Carter v. Halliburton Co., 710 F.3d 171, 181 (4th Cir. 2013); United States ex rel. Branch Consultants v. Allstate Ins. Co., 560 F.3d 371, 376–77 (5th Cir. 2009); Walburn v. Lockheed Martin Corp., 431 F.3d 966, 970 (6th Cir. 2005); United States ex rel. Lujan v. Hughes Aircraft Co., 243 F.3d 1181, 1187–89 (9th Cir. 2001); Grynberg v. Koch Gateway Pipeline Co., 390 F.3d 1276, 1278 (10th Cir. 2004).
[32] See, e.g., United States ex rel. Schumann v. Astrazeneca Pharm. L.P., 769 F.3d 837, 847 (3d Cir. 2014) (“[K]nowledge of a scheme is not direct when it is gained by reviewing files and discussing the documents therein with individuals who actually participated in the memorialized events.”); United States ex rel. Newell v. City of St. Paul, Minn., 728 F.3d 791, 797 (8th Cir. 2013) (“[A] person who obtains secondhand information from an individual who has direct knowledge of the alleged fraud does not himself possess direct knowledge and therefore is not an original source under the [FCA].” (quoting United States ex rel. Barth v. Ridgedale Elec., Inc., 44 F.3d 699, 703 (8th Cir. 1995)).
[33] United States ex rel. Banigan v. PharMerica, Inc., 950 F.3d 134 (1st Cir. 2020).
[34] Nesbitt v. Candler Cty., 945 F.3d 1355 (11th Cir. 2020).
[35] See McKenzie v. BellSouth Telecomms., Inc., 219 F.3d 508, 518 (6th Cir. 2000); United States ex rel. Ziebell v. Fox Valley Workforce Dev. Bd., Inc., 806 F.3d 946, 953 (7th Cir. 2015); Singletary v. Howard Univ., 939 F.3d 287, 293 (D.C. Cir. 2019).
The following Gibson Dunn lawyers assisted in the preparation of this alert: Reed Brodsky, Jonathan Phillips, Michael Nadler, David Salant and Maxwell Peck.
Gibson Dunn lawyers regularly counsel clients on the False Claims Act issues. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s False Claims Act/Qui Tam Defense Group:
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])
Alexander H. Southwell (+1 212-351-3981, [email protected])
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F. Joseph Warin (+1 202-887-3609, [email protected])
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Nicola T. Hanna (+1 213-229-7269, [email protected])
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On March 2, 2021, Governor Ralph Northam signed the Virginia Consumer Data Protection Act (“VCDPA”) into law.[1] Virginia is only the second state to enact a comprehensive state privacy law, following California, yet its substance draws from both California’s laws—the California Consumer Privacy Act (“CCPA”), and the newly enacted California Privacy Rights and Enforcement Act (“CPRA”)—and a number of recently proposed state privacy bills. The Virginia legislature, however, is the first to enact such a law of its own accord – the California Legislature enacted the CCPA to preempt a ballot initiative in 2018 (and the CPRA was passed as a ballot initiative by California voters).
The VCDPA, which will go into effect on January 1, 2023, still differs from other enacted or proposed comprehensive state privacy laws in important respects, and companies doing business in Virginia or marketing to Virginians will need to reassess their collection and use of consumer personal information and modify their compliance efforts accordingly. The VCDPA will grant Virginia residents the rights to access, correct, delete, know, and opt-out of the sale and processing for targeted advertising purposes of their personal information, similar to the CCPA and CPRA. However, the VCDPA departs from its California counterparts and aligns with the European Union’s General Data Protection Regulation (“GDPR”) in a few key respects, including with respect to the adoption of data protection assessment requirements, and “controller” and “processor” terminology. The VCDPA also departs from the CCPA and CPRA by leaving enforcement entirely up to the Attorney General and not providing even a private right of action for consumers.
I. Background and Context
At the end of January and beginning of February, Virginia’s House of Delegates and Senate overwhelmingly approved nearly identical versions of the VCDPA. Though Virginia was rarely mentioned among the states considering privacy legislation (such as Washington and New York) before 2021, state legislators managed to introduce and pass the VCDPA before the end of one of the country’s shortest legislative sessions.[2]
Without the time to lengthily debate controversial issues that caused similar proposals in other states to die – such as the scope of a private right of action – the VCDPA focuses on privacy rights and obligations, over which there has been general consensus. Though the VCDPA does not call for the Attorney General to adopt regulations on how companies should implement it (whereas the CCPA and CPRA do), Senator David Marsden (D-Fairfax) told a Senate subcommittee that there would be sufficient time to “deal and field any tweaks to the bill or difficulties that someone figures out” before it takes effect on January 1, 2023.[3]
II. VCDPA’s Key Rights and Provisions
A. Scope of Covered Businesses, Personal Data, and Exemptions
1. Who Must Comply with the VCDPA?
VCDPA applies to all entities “who conduct business in the commonwealth of Virginia or produce products or services that are targeted to residents of the Commonwealth” and, during a calendar year, either:
(1) control or process personal data of at least 100,000 Virginia residents, or
(2) derive over 50% of gross revenue from the sale of personal data (though the statute is unclear as to whether the revenue threshold applies to Virginia residents only) and control or process personal data of at least 25,000 Virginia residents.[4]
In other words, the VCDPA will likely apply to for-profit and business-to-business companies that interact with Virginia residents, or process personal data of Virginia residents on a relatively larger scale. Just like the CCPA does not define “doing business” in California, the VCDPA does not define “conduct[ing] business in Virginia.” However, businesses likely can assume that economic activity that similarly triggers tax liability or personal jurisdiction in Virginia will trigger VCDPA applicability.
Notably, unlike the CCPA, the statute does not include a standalone revenue threshold for determining applicability separate from the above thresholds regarding contacts with Virginia. Therefore, even large businesses will not be subject to VCDPA unless they fall within one of the two categories above, which focus on the number of Virginia residents affected by the business’s processing of personal data.
The VCDPA contains a number of significant exclusions similar to, but broader than, those in the CCPA, with both entity-level and data-specific exemptions. For instance, the VCDPA exempts the following five types of entities (as opposed to just the data subject to certain laws): 1) Virginia state bodies and agencies; 2) financial institutions or data subject to the Gramm-Leach-Bliley Act (“GLBA”); 3) covered entities or business associates under the Health Insurance Portability and Accountability Act (“HIPAA”) and the Health Information Technology for Economic and Clinical Health Act; 4) non-profit organizations; and 5) institutions of higher education.[5]
2. Definition of “Personal Data” – Employment and Public Data Excluded
As noted above, the Virginia law adopts GDPR terminology, referring to “personal data” (instead of “personal information,” like the CCPA and CPRA), in addition to “controllers” and “processors.” The statute defines “personal data” broadly to include “any information that is linked or reasonably linkable to an identified or identifiable natural person,” but excludes employment data, pseudonymous data (a GDPR-borrowed term to mean personal data that cannot be attributed to an individual “without the use of additional information”), and “de-identified data or publicly available information.”[6] Unlike the CCPA, the VCDPA extends the definition of “publicly available information” to information that has been “made available to the general public through widely distributed media,” similar to the CPRA.[7]
B. Consumer Rights Mirror Those Granted Under the CPRA, But Go A Step Further
The term “consumer” includes Virginia residents and expressly excludes “any person acting in a commercial or employment context.”[8] This represents a departure from the CCPA and GDPR and means that controlling or processing personal data in the business-to-business or employment context falls outside the scope of the law.
1. Access, correction, deletion, data portability, and anti-discrimination rights
The VCDPA grants Virginia residents similar rights to those granted Californians under the CPRA, including the right to access, correct, and delete their personal information. Additionally, like the CCPA and CPRA, controllers must establish, as well as describe in their privacy notice, a secure means by which consumers can exercise such rights.[9] However, the VCDPA provides fewer exceptions than the CCPA/CPRA that controllers can leverage to deny consumers’ request to delete their personal information.[10]
Though controllers cannot be required to re-identify de-identified or pseudonymous data to authenticate consumer requests, controllers can request additional information from the consumer without requiring them to create an account for authentication purposes.[11] The VCDPA, additionally, grants consumers the right to data portability, like the CCPA/CPRA and the GDPR. The VCDPA also grants consumers the right to not be discriminated against for exercising any of the rights granted thereunder, but explicitly exempts loyalty programs from this prohibition, like the CPRA.[12]
2. Right to opt-out of sale of personal data, targeting advertising, and profiling
Like the CCPA, the VCDPA grants consumers the right to opt-out of the sale of personal information but limits the definition of “sale” to the exchange of personal data for “monetary” (as opposed to “valuable”) consideration by the controller to a third party, and does not include transfers to affiliates and processors.[13] Though the CPRA provides Californians with the right to opt-out of the sharing of their personal information for the purpose of cross-context behavioral advertising, the VCDPA goes a step further and grants Virginians the right to opt-out of any processing of their personal data for targeted advertising. The VCDPA also provides Virginians with the right to opt-out of any processing of personal data for the purposes of profiling for decisions that produce legal effects.[14] However, the VCDPA does not specify how controllers must present consumers with these rights to opt-out – thus, companies likely can leverage the “clear and conspicuous link” that it must provide to Californians on their homepages.
3. New rights to opt-in to the processing of “sensitive” data and to appeal
a) Right to opt-in to the processing of “sensitive” data”
The VCDPA requires that controllers obtain consent before processing a consumer’s sensitive data,[15] defined as including “personal data revealing racial or ethnic origin, religious beliefs, mental or physical health diagnosis, sexual orientation, or citizenship or immigration status”; genetic or biometric data processed for the purpose of uniquely identifying a natural person; the personal data collected from a known child; and precise geolocation data (as defined by the VCDPA).[16] Consent is defined as a “clear affirmative act signifying a consumer’s freely given, specific, informed and unambiguous agreement to process personal data relating to the consumer” and may include “a written statement, including a statement written by electronic means, or any other unambiguous affirmative action.”[17] The definition of “sensitive data” under the VCDPA is narrower than the equivalent “sensitive personal information” under the CPRA, although notably the processing of such data does not require express consent under the CPRA, and there is merely a right to limit processing of sensitive personal information (a limited opt-out).
Biometric data is defined as “data generated by automatic measurements of an individual’s biological characteristics, such as a fingerprint, voiceprint, eye retinas, irises, or other unique biological patterns or characteristics that is used to identify a specific individual.” This definition is reminiscent of the Illinois Biometric Information Privacy Act (“BIPA”), but potentially broader since the VCDPA does not limit its scope to specific types of biometric information. BIPA defines two regulated categories: biometric identifiers and biometric information. Biometric identifiers are “retina or iris scan[s], fingerprint[s], voiceprint[s], or scan[s] of hand or face geometry,” and a number of items, such as written signatures and photographs are specifically excluded.[18] Biometric information under BIPA is defined to include any information based on an individual’s biometric identifier that is used to identify an individual. The VCDPA also expressly excludes from the definition of biometric data physical or digital photographs, a video or audio recording or data generated therefrom, or information collected, used, or stored for health care treatment, payment, or operations under HIPAA.[19]
b) Right to appeal
Like the CCPA and CPRA, the VCDPA provides that controllers must respond to requests to exercise the consumer rights granted by the statute within 45 days, which period the controller may extend once for an additional 45-day period if it provides notice to the requesting consumer explaining the reason for the delay.[20] The VCDPA also grants consumers the right to appeal a controller’s refusal of such a request through a novel “conspicuously available” appeal process to be established by the controller.[21] Within 60 days of receiving an appeal, a controller must inform the consumer in writing of its response to the appeal, including a written explanation of the reasons for the decision. If the controller denies the appeal, it must also provide the consumer with an “online mechanism (if available) or other method” through which the consumer can submit a complaint to the Attorney General.[22]
C. Business Obligations – Some New, Some Old
1. Data minimization and technical safeguards requirements
Like the CCPA/CPRA, the VCDPA limits businesses’ collection and use of personal data and requires the implementation of technical safeguards. The VCDPA explicitly limits the collection and processing by controllers of personal data to that which is reasonably necessary and compatible with the purposes previously disclosed to consumers.[23] Relatedly, controllers must obtain consent from consumers before processing personal data collected for another stated purpose.[24] Also, like the CPRA and the New York Stop Hacks and Improve Electronic Data Security (“SHIELD”) Act, the VCDPA requires that businesses establish, implement, and maintain reasonable administrative, technical, and physical data security practices to protect the confidentiality, integrity, and accessibility of personal data,” as appropriate to the volume and nature of the personal data at issue.[25]
2. GDPR-like requirements – data protection assessments and data processing agreements
The VCDPA requires controllers to conduct “data protection assessments,” similar to the data protection impact assessments required under the GDPR, to evaluate the risks associated with processing activities that pose a heightened risk – such as those related to sensitive data and personal data for targeted advertising and profiling – and the sale of personal data.[26] Unlike the GDPR, however, the VCDPA does not specify the frequency with which these assessments must occur.
Like Article 28 of the GDPR, the VCDPA also requires that the controller-processor relationship be governed by a data processing agreement.[27] These agreements require certain confidentiality and retention provisions, among others, and must “clearly set forth instructions for processing data, the nature and purpose of processing, the type of data subject to processing, the duration of processing, and the rights and obligations of both parties.”[28]
The VCDPA does not displace or amend businesses’ existing obligations under Virginia law to report data breaches.[29]
D. Enforcement – No Private Right of Action
The statute grants the Attorney General exclusive authority to enforce its provisions, subject to a 30-day cure period for any alleged violations. The Attorney General may seek injunctive relief and damages for up to $7,500 for each violation, as well as “reasonable expenses incurred in investigating and preparing the case, including attorney fees.”
Notably, the VCDPA does not grant consumers a private right of action, unlike the CCPA/CPRA which grants a limited private right of action for consumers whose nonencrypted and nonredacted personal information was subject to unauthorized access and exfiltration.
* * * *
As we continue to counsel our clients through CCPA, and now CPRA, compliance, we understand what a major undertaking it is and has been for many companies. Some of the privacy rights and related obligations in the CCPA and CPRA are also featured in the VCDPA – companies can thus leverage their CCPA/CPRA compliance efforts in complying with the VCDPA. However, the VCDPA does grant Virginia residents new rights to consent to processing of “sensitive data” and to appeal decisions by companies to deny consumer requests. It also imposes new GDPR-type obligations on controllers – namely, the requirement to conduct data protection assessments and implement data processing agreements.
In light of this sweeping new law, we will continue to monitor developments, and are available to discuss these issues as applied to your particular business.
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[1] The Virginia House of Delegates adopted the VVCDPA, H.B. 2307, on January 29, and the Virginia Senate approved an identical companion bill, S.B. 1392, on February 5.
[2] The legislative session was originally scheduled to end on February 11, 2021, but Governor Northam ordered a special session that ran through March 1, 2021.
[3] Hyung Jun Lee, Virginia Lawmakers Advance Consumer Data Protection Act (Feb. 18, 2021), available at https://www.washingtonpost.com/local/virginia-lawmakers-advance-consumer-data-protection-act/2021/02/18/a0cb8dba-7250-11eb-8651-6d3091eac63f_story.html.
[7] Id. The CPDA also excludes 14 categories of datasets, including data subject to the GLBA, Fair Credit Reporting Act, Drivers Privacy Protection Act, Farm Credit Act, and Family Education Rights and Privacy Act.
[11] Id.; S.B. 1392 § 59.1-573(B)(4).
[12] S.B. 1392 § 59.1-574(A)(4).
[14] S.B. 1392 § 59.1-573(A)(5).
[15] S.B. 1392 § 59.1-57(A)(5).
[20] S.B. 1392 § 59.1-573(B)(1).
[23] S.B. 1392 § 59.1-574(A)(1)-(2).
[25] S.B. 1392 § 59.1-574(A)(3).
[29] S.B. 1392 § 59.1-575(A)(2); Va. Code Ann. § 18.2-186.6.
This alert was prepared by Alexander H. Southwell, Ryan T. Bergsieker, Cassandra L. Gaedt-Sheckter, Frances A. Waldmann, and Lisa V. Zivkovic.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s Privacy, Cybersecurity and Data Innovation practice group:
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])
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Washington, D.C. partner David Fotouhi is the author of “Clean Water Act Ruling Could Obstruct Future Permitting,” [PDF] published by Law360 on March 1, 2021.
On March 4, 2021, the Securities and Exchange Commission (SEC) announced the creation of the “Climate and ESG Task Force” in the SEC’s Division of Enforcement. The purpose of the Task Force is to “develop initiatives to proactively identify ESG-related misconduct.” The Task Force’s initial focus will be to identify “any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.” The Task Force will also “analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.”
The following Gibson Dunn attorneys assisted in preparing this update: Hillary H. Holmes, Elizabeth Ising and Ronald Mueller.
Happy New Year of the Ox! Despite the COVID-19 pandemic, China’s antitrust enforcement remained robust in 2020. On the merger front, the State Administration for Market Regulation (“SAMR”) unconditionally approved more than 99 percent of the 458 deals reviewed and only imposed conditions in four transactions. SAMR also issued a flurry of new guidelines in the antitrust space that provide more guidance on its enforcement priorities and its interpretation of the law.
2021 could be a pivotal year as the Chinese government is considering changes to the PRC Anti-Monopoly Law (“AML”), including increased fines for failure to notify transactions. There are also a number of guidelines that have been published for comments in 2020 and could be adopted in 2021. Finally, SAMR seems intent on vigorously enforcing the AML in the internet space, which could lead to landmark decisions in 2021.
1. Legislative / Regulatory Developments
2020 saw an active year in the consolidation of often overlapping regulations – a legacy from the tri-agency era – and the introduction of new regulations and guidelines. Most notably, apart from the draft amendments to the Anti-Monopoly Law on January 2, 2020, which we have covered in our Antitrust in China – 2019 Year in Review,[1] SAMR introduced new guidelines addressing competition issues relating to, among other subjects, the automobile industry, the platform economy, intellectual property rights, leniency, and commitments. A summary of these new guidelines is set forth below. In addition, SAMR published several draft guidelines for consultation, including the Guidelines on Companies’ Anti-Monopoly Compliance Abroad and the Anti-Monopoly Guidelines in the Area of Active Pharmaceutical Ingredients.
Automobile Sector: In the past decade, SAMR (and its predecessors) has undertaken significant enforcement actions against car manufacturers and distributors. Drawing from the various agencies’ law enforcement experience, SAMR issued the (long-awaited) Anti-Monopoly Guidelines for the Automobile Sector (“Automobile Guidelines”)[2] on September 18, 2020.
While acknowledging that the automobile manufacturing market as a whole is competitive, the Automobile Guidelines nevertheless provide important provisions with regard to abuses of a dominant position in aftermarket parts and services. In particular, the Automobile Guidelines note that automobile manufacturers that do not hold a dominant market position in manufacturing could nevertheless be held to be in a dominant position in aftermarkets, which include the production and supply of aftermarket spare parts and the availability of technical repair information, equipment, and tools.
The Automobile Guidelines also provide guidance with regard to resale price maintenance (“RPM”). While noting that RPM should be prohibited, the Automobile Guidelines specify several circumstances in which RPM may be exempted from the prohibition. For example, an automobile manufacturer may directly conduct price negotiations and agree on a purchase price with a customer if the distributor is merely an intermediary who plays only a supporting role limited to invoice issuance, delivery of vehicle, and receipt of payment.
Finally, under the Automobile Guidelines, car manufacturers with a market share of less than 30 percent are permitted to impose certain vertical restrictions on distributors. For example, a qualifying manufacturer may generally impose restrictions to prevent a distributor from making any active sales to customers outside of that distributor’s allocated territory.
Platform Economy Sector: SAMR issued Anti-Monopoly Guidelines for the Platform Economy Sector on February 7, 2021 (“Platform Guidelines”).[3] This follows a string of actions taken by the Chinese government to regulate the internet platform sector, most notably its suspension of the initial public offering by Ant Group.
Recognizing that there are difficulties in applying traditional antitrust enforcement approaches to the platform economy sector, the Platform Guidelines provide tailored and specific guidance regarding, among other areas, concentrations of undertakings, monopoly agreements, and abuses of dominance. For example, the Platform Guidelines acknowledge the complexity of the platform economy and that a market would not necessarily be defined by reference to an undertaking’s basic services. As a result, SAMR will take into account the possible network effects in determining if the platform is a distinct market or one that involves multiple related markets.
Moreover, the Platform Guidelines set out types of agreements that may constitute monopoly agreements, some of which go beyond the traditional written or verbal agreements or meeting of minds. Significantly, the Platform Guidelines provide that the use of technical methods, data, and algorithms may constitute horizontal or vertical monopoly agreements. Similarly, a most favored nation clause may constitute a vertical monopoly agreement. The Platform Guidelines also prohibit hub-and-spoke agreements, recognizing that competitors may reach a hub-and-spoke agreement through either a vertical relationship with the platform operator or the organization and coordination of the platform operator.
In addition, the Platform Guidelines provide that if a platform is considered an “essential facility,” the platform operator must not, without any justification, refuse to deal with operators who want to use it. In determining whether a platform constitutes an essential facility, SAMR may consider the substitutability of other platforms, the existence of a potential alternative, the feasibility of developing a competitive platform, the degree of dependence of the operators on the platform, and the possible impact of an open platform on the platform operator.
Finally, on merger control, the Platform Guidelines provide that transactions involving Variable Interest Entities (“VIEs”) must obtain merger clearance if the transaction meets the notification thresholds. This puts an end to the uncertainty surrounding transactions involving VIEs, which by and large were never notified. This announcement was expected given that in July 2020,[4] SAMR for the first time accepted the filing of and later unconditionally approved a transaction involving a VIE structure. The Platform Guidelines also reiterate that SAMR has the discretion to investigate sub-threshold transactions, especially if (1) the transactions involve a start-up or an emerging platform; (2) the undertaking has a low turnover because it operates a business model involving the provision of free-of-charge or low pricing services; or (3) the relevant market is highly concentrated.
Intellectual Property Rights: On September 18, 2020, SAMR published the Anti-Monopoly Guidelines in the Field of Intellectual Property Rights (“IP Guidelines”),[5] which provide clearer guidance on the interplay between the AML and intellectual property rights, and set out a framework for competition analysis and factors that SAMR will take into account when carrying out competition analysis on matters relating to intellectual property rights.
At the outset, the IP Guidelines acknowledge that an undertaking’s exercise of intellectual property rights will not violate the AML unless the undertaking’s conduct or the underlying transaction is anti-competitive. The IP Guidelines address a number of intellectual property-related agreements that could be considered anti-competitive, including joint research and development pacts, cross-licensing, grant-backs, no-challenge clauses, and standard-setting activities. Under the IP Guidelines, in carrying out a competition analysis, SAMR will consider, among other factors, the content, degree, and implementation of the restrictions. The IP Guidelines also provide safe harbor rules: where an undertaking involved in a horizontal monopoly agreement has a market share not exceeding 20 percent or where an undertaking involved in a vertical monopoly agreement has a market share not exceeding 30 percent, it may be presumed that the agreement does not have the effect of eliminating or restricting competition. As a result, SAMR will not take any enforcement action unless there is evidence showing the contrary. However, the safe harbor rules do not apply to hard-core conduct such as price fixing or resale price maintenance.
On abuse of dominance, the IP Guidelines acknowledge that just because an undertaking is an intellectual property right holder does not mean that it has a dominant market position. Rather, whether an intellectual property right holder has dominance in the relevant market will depend on the considerations set out in Article 18 of the AML, such as its market shares and the competitive status of the relevant market, as well as three additional factors set out in the IP Guidelines: (1) the possibility and cost of a transaction counterparty switching to an alternative technology or product; (2) the degree of dependence of the downstream markets on the goods provided by the use of the intellectual property rights; and (3) the capacity of a transaction counterparty to constrain the intellectual property right holder. The IP Guidelines further set out five types of conduct that would amount to an abuse: (1) licensing of intellectual property rights at an unfairly high price; (2) refusal to license intellectual property rights; (3) intellectual property-related bundling; (4) unreasonable transaction conditions relating to intellectual property; and (5) discriminatory treatment relating to intellectual property.
Finally, the IP Guidelines note that a filing obligation could be triggered where an undertaking acquires control or decisive influence over another undertaking by reason of a transfer or sole licensing of intellectual property rights. When determining whether a transaction would trigger the filing obligation, SAMR will consider whether the intellectual property constitutes a stand-alone business, whether the intellectual property independently generated calculable turnover in the previous financial year, and the form and duration of the intellectual property license.
Leniency and Commitments: In September and October 2020, SAMR formalized its leniency and commitment regime through the publication of the finalized version of two relevant guidelines: (a) the Guidelines for the Application of Leniency Program in Horizontal Monopoly Agreement Cases (“Leniency Guidelines”)[6] and (b) the Guidelines on Undertakings’ Commitments in Anti-Monopoly Cases (“Commitments Guidelines”).[7] The two Guidelines aim to encourage cooperation of market players to self-report breaches in exchange for immunity from or mitigation of penalties; and to offer commitments to cease anti-competitive conduct in exchange for the suspension or termination of an investigation.
The Leniency Guidelines introduce a new marker system that allows a leniency applicant to hold their place in the leniency queue while perfecting their application. The first applicant may receive up to a 100 percent reduction of fines. However, cartel leaders and undertakings that are found to have coerced others to participate in the cartel are not eligible for full immunity. The second and third applicants may receive up to a 50 and 30 percent reduction of fines, respectively. While the Leniency Guidelines allow for up to three applicants to receive leniency benefits, they also provide that SAMR may grant a reduction of no more than 20 percent to subsequent applicants in complex cases. Moreover, leniency applicants must, among other conditions, admit liability in order to secure the leniency benefits.
The Commitments Guidelines set out a mechanism under which parties under investigation may enter into voluntary commitments to terminate the alleged anti-monopoly conduct and mitigate or eliminate its consequences, in exchange for SAMR suspending and closing the investigation without a finding of breach. Under the Commitments Guidelines, parties are encouraged to discuss commitments with SAMR at any time during the investigation up to the point of SAMR’s issuance of a penalty notice. Moreover, commitments are not available in cartel investigations.
2. Merger Control
In 2020, SAMR reviewed a total of 458 concentrations, which represents only a slight increase from 2019 despite disruptions caused by the COVID-19 pandemic. Out of the 458 concentrations, 454 were approved unconditionally and four were approved subject to conditions. SAMR did not prohibit any transactions in 2020.[8]
SAMR on average took approximately 14 days to complete its review of cases under the simplified procedure, less than in 2019. On the other hand, SAMR took eight to 12 months (and on average 9.5 months) to complete its review of conditionally approved cases. SAMR asked the parties in two out of the four conditionally approved cases to withdraw and refile their applications, whilst completing its review within the review period for the other two cases.
2.1 Conditional Approval Decisions
We highlight below the decisions in which SAMR imposed or removed remedies. Save for Danaher/GE BioPharma, which required structural remedies, SAMR imposed behavioral remedies in all the other conditionally approved cases.
SAMR continued its focus on the technology sector as two out of the four cases which involve conditional approval concern the semiconductor industry. In these two cases, conditions were imposed despite that regulators in other jurisdictions (such as in the EU and in the U.S.) approved the transactions without conditions. It is also noteworthy that three out of the four conditionally approved cases involve the imposition of remedies requiring the merged entitles to comply with fair, reasonable and non-discriminatory (FRAND) terms.
Danaher / GE BioPharma:[9] On February 28, 2020, SAMR approved the acquisition by Danaher of GE BioPharma’s life science business, with conditions imposed in the form of structural remedies. SAMR required Danaher to divest a number of its business segments. A notable feature of this matter is the continuous role that research and development has featured in SAMR’s merger analysis. Danaher had a product in the pipeline that could potentially compete with GE BioPharma and SAMR was concerned that Danaher would, post-transaction, have less incentive to invest in research and development. SAMR imposed a condition that Danaher must provide to the purchaser of its divested businesses research and development resources for this product and remain involved in this product for a period of two years after the deal completes. Danaher must report annually to SAMR.
Infineon / Cypress:[10] On April 8, 2020, SAMR conditionally approved the proposed acquisition of Cypress Semiconductor (a U.S. semiconductor design and manufacturing company) by Infineon Technologies (a German semiconductor supplier). Pursuant to the conditions imposed by SAMR: (i) there must be no tie-in sales or imposition of unreasonable trading terms, (ii) there has to be a guarantee of separate supply of any all-in-one/integrated products (should it become possible to integrate products into a single product) as well as the stand-alone products to Chinese customers, (iii) to ensure interoperability, the products sold to Chinese customers should comply with the commonly accepted industry standards for interface and (iv) the supply of products has to be in compliance with FRAND terms.
Nvidia / Mellanox:[11] On April 16, 2020, SAMR conditionally approved the acquisition by Nvidia (a U.S. supplier of graphics processing units) of Mellanox (an Israeli supplier of semiconductor-based network interconnect products). The conditions imposed included that: (i) there must be no tie-in sales or imposition of unreasonable conditions, and it is prohibited to restrict customers from purchasing stand-alone products or otherwise discriminate against these customers, (ii) the provision of products has to comply with FRAND terms, (iii) interoperability has to be ensured between the relevant products and other third-party products, (iv) there must be open source commitment regarding the software offered and (v) protective measures have to be adopted for confidential information made available by third-party manufacturers.
ZF Friedrichshafen / WABCO:[12] On May 15, 2020, SAMR conditionally approved the acquisition of WABCO (a U.S. supplier of systems for commercial vehicles) by ZF Friedrichshafen (a German supplier of vehicle components and systems). Three conditions were imposed, namely that: (i) there has to be a continuous supply of products under terms no less favorable than the existing terms, (ii) the provision of products has to comply with FRAND terms and (iii) Chinese customers have to be provided with the opportunity to develop products in accordance with FRAND principles.
Corun / PEVE: On April 24, 2020, SAMR waived the remedies imposed back in 2014 in respect of the joint venture concerning Corun, PEVE, Sinogy, and a car manufacturer. The remedies were waived on the basis that there had been material changes in the competitive dynamics of the markets in aspects such as the applicable regulations for the automotive industry, the advancement of technology in respect of lithium batteries and the parties’ decreasing market share.
2.2 Enforcement Against Non-Notified Transactions
In 2020, SAMR published 13 decisions relating to failures to notify transactions, less than in 2018 or 2019. These cases, on average, took 250 days to investigate.
A notable development in this area is that on December 14, 2020, SAMR announced that it has fined three companies in the internet space for completing transactions involving variable interest entity, or VIE, structures without prior notification. In very simple terms, VIE refers to a business structure in which an investor has a controlling interest (but not a majority of voting rights) via contractual arrangements.
These fines confirm that SAMR takes the failure to notify mergers (especially those involving online platforms and/or concerning VIE) seriously. If and when the fines for failures to file are increased, enforcement actions in this space are likely to be more robust and visible.
3. Non-Merger Enforcement
The trend of delegation of enforcement to local antitrust agencies continued from 2019, during which local antitrust regulators were responsible for 15 out of 16 enforcement decisions published in that year. In 2020, SAMR published 22 enforcement decisions (including two decisions to terminate an investigation) involving conduct such as horizontal monopolistic agreements, price fixing and abuse of market dominance. Out of these 22 enforcement decisions, only one was investigated and penalized by SAMR (at the central level).
Enforcement actions were focused on sectors having an impact on the livelihood of the general public, including pharmaceuticals, automobiles, and utilities:
Pharmaceutical Industry: Pharmaceutical companies were penalized in two enforcement decisions, both concerning abusive conduct in the active pharmaceutical ingredient markets. In particular, the investigation by SAMR of three pharmaceutical companies, Shandong Kanghui Medicine (“Kanghui”), Weifang Puyunhui Pharmaceutical (“Puyunhui”), and Weifang Taiyangshen Pharmaceutical (“Taiyangshen”) for abuse of collective dominance, resulted in record monetary penalty against domestic firms under the AML. SAMR found that the three companies collectively abused their market dominance by selling injectable calcium gluconate at unfairly high prices and imposing unreasonable trading terms on downstream manufacturers. SAMR imposed on Kanghui the maximum penalty rate, being 10 percent of its 2018 sales amount; and imposed on Puyanhui and Yaiyangshen 9 percent and 7 percent of their respective 2018 sales amounts. The total monetary penalty imposed on the three companies was RMB 204.5 million (~USD 31.6 million, and all of their illegal gains in the aggregate amount of RMB 121 million (~USD 18.7 million) were confiscated.[13]
Automobile Industry: The automobile industry accounted for four enforcement decisions in 2020 involving price fixing, market partitioning and abusing a dominant position. Importantly, in one of the enforcement decisions, one of the 11 second-hand vehicle dealers involved in the case, Pingluo County Zhongli Second-hand Vehicle Trading, was not subject to any penalty by reason that it provided important evidence to the Ningxia Administration for Market Regulation. The other offenders in the case received a fine equivalent to 4 percent of their 2018 sales amount, in addition to a confiscation of their illegal gains.[14]
Utilities Sector/Energy: Six enforcement decisions concerned actions taken by local antitrust agencies against utility companies for anti-competitive conduct including exclusive dealing and market partitioning. SAMR continues to take into account the level of cooperation exhibited by an undertaking when imposing penalties in administrative actions. For example, in a case involving an agreement partitioning the market of sale of bottled liquefied gas, one of the two undertakings concerned was exempted from penalty in view of its cooperation during the investigation, including the proactive provision of key evidence to the enforcement agency.[15] The other undertaking was fined with an amount equivalent to 3 percent of its sales in 2018, i.e. around RMB 1.76 million (~USD 272,290).
Similarly, the importance of cooperation is highlighted in the Jiangsu Administration for Market Regulation’s (“Jiangsu AMR”) decision to terminate an investigation against Yancheng Xin’ao Fuel Gas (“Yancheng Xin’ao”) for suspected abuse of dominance. The investigation, which began in 2015, was suspended in 2019 in light of the cooperation of Yancheng Xin’ao in the investigation process and the remedial measures proposed and implemented by it. Upon the applications made by Yancheng Xin’ao and having taken into account the implementation of the remedial measures, Jiangsu AMR decided in July 2020 to terminate the investigation.[16]
Finally, the Qinghai Administration for Market Regulation (“Qinghai AMR”) imposed a monetary penalty in the amount of RMB 700,000 (~USD 108,300) on Qinghai Minhe Chuanzhong Petroleum and Natural Gas (“Qinghai Minhe”) for obstructing the investigation by concealing and destroying evidence. In addition, Qinghai AMR took into account the serious nature and the duration of the breaches, and imposed a hefty fine equivalent to 9 percent of its 2017 sales amount on Qinghai Minhe.[17]
4. Civil Litigation
There continues to be an increasing number of private antitrust litigation covering a wide range of topics and industries. For example, according to the 2020 annual report of China’s Intellectual Property Tribunal, which hears appeals from specialized intellectual property courts, the antitrust cases handled by the tribunal involved various subject matters, including information and communication technologies, pharmaceuticals, power supply, construction, and security products.
Among antitrust cases before the Chinese courts in 2020, of particular interest to the antitrust community is the increasing number of claims against tech companies and development in private litigation following an antitrust regulator’s adverse administrative decision against an undertaking, as summarized below.
4.1 Tech Companies Targeted
Tech companies continue to be the target of private antitrust litigation in 2020, though none of the claimants succeeded in any of the claims against these tech giants. For example, the appeal brought by Huaduo against a leading Chinese internet technology company alleging abuse of market dominance by the latter in relation to a well-known online game at the Higher People’s Court of Guangdong Province was dismissed in May 2020 on the basis that the defendant did not have the market dominance in the relevant market.
It is anticipated that the trend of growing private antitrust litigation against tech companies will continue in 2021. A claim filed by an individual surnamed Wang against Meituan for alleged abuse of dominance by removing Alipay as a payment option was reportedly accepted by the Beijing Intellectual Property Court in late December 2020.[18]
In addition, ByteDance’s Douyin, a video-sharing social network platform, has filed a claim against a Chinese multinational technology conglomerate for alleged monopolistic behavior by blocking users’ sharing of Douyin content on its instant sharing messaging apps. It was also reported that Zhang Zhengxin, who withdrew his claim in January 2020 after the trial against the same conglomerate for abuse of market by disenabling direct sharing of links to Taobao or Douyin through one of its instant sharing messaging apps, indicated earlier this year that he was in the process of filing a claim against the conglomerate afresh on the basis of some evidence he has recently obtained.
4.2 Follow-on Litigation
In 2020, Chinese courts published two decisions in private follow-on litigation after an enforcement action is taken by an antitrust regulator.
In the first case, the Higher People’s Court of Shanghai Municipality (“Shanghai Higher People’s Court”) dismissed Hanyang Guangming’s claim against and Hankook Tire. The court indicated that while materials in an administrative action carried out by an antitrust regulator may be adopted as evidence in court, courts need not admit materials that are irrelevant to the dispute in the private litigation.[19] The claimant argued that the administrative decision by the Shanghai Municipal Price Bureau in 2016 to penalize Hankook Tire found that the latter reached and implemented resale price maintenance agreements, and that this administrative decision could be used as the basis to prove facts in the private litigation. The claimant also argued that the lower court erred in coming to a conclusion that contradicted the Shanghai Municipal Price Bureau’s administrative decision. The Shanghai Higher People’s Court disagreed with the claimant, and upheld the lower court’s determination that the actions of Hankook Tire did not constitute resale price maintenance agreements as prohibited by the AML. This case demonstrates that courts do not always follow determinations made by an antitrust regulator, rendering it less predictable and more difficult for claimants to succeed in private follow-on litigation.
On the other hand, the court in the second private follow-on litigation came to the same conclusion as the antitrust enforcement agency against the defendant. In this case, the defendant, Jiacheng Concrete, received an administrative penalty from the Shaanxi Administration for Market Regulation (“Shaanxi AMR”) for its monopolistic conduct. In reliance on the administrative decision by the Shaanxi AMR against Jiacheng Concrete, the Higher People’s Court of Shaanxi Province ruled in favor of the claimant in the absence of any contrary evidence, despite the fact that the administration decision was not subject to any review or appeal.[20]
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[1] Gibson Dunn, “Antitrust in China – 2019 Year in Review” (released on February 10, 2020), available at https://www.gibsondunn.com/antitrust-in-china-2019-year-in-review/. The amendments are still under discussion.
[2] SAMR, “Anti-Monopoly Guidelines for the Automobile Sector” (关于汽车业的反垄断指南) (released on September 18, 2020), available at http://gkml.samr.gov.cn/nsjg/fldj/202009/t20200918_321860.html.
[3] SAMR, “Anti-Monopoly Guidelines for the Platform Economy Sector” (关于平台经济领域的反垄断指南) (released on February 7, 2021), available at http://gkml.samr.gov.cn/nsjg/fldj/202102/t20210207_325967.html.
[4] The Establishment of a Joint Venture between Shanghai Mingcha Zhegang Management Consulting Co., Ltd. and Huansheng Information Technology (Shanghai) Co., Ltd, see announcement concerning the filing in April 2020 at http://www.samr.gov.cn/fldj/ajgs/jzjyajgs/202004/t20200420_314431.html and announcement concerning the unconditional approval in July 2020 at http://www.samr.gov.cn/fldj/ajgs/wtjjzajgs/202007/t20200722_320099.html.
[5] SAMR, “Anti-Monopoly Guidelines in the Field of Intellectual Property Rights” (关于知识产权领域的反垄断指南) (released on September 18, 2020), available at http://gkml.samr.gov.cn/nsjg/fldj/202009/t20200918_321857.html.
[6] SAMR, “Guidelines for the Application of Leniency Program in Horizontal Monopoly Agreement Cases” (横向垄断协议案件宽大制度适用指南) (released on September 18, 2020), available at http://gkml.samr.gov.cn/nsjg/fldj/202009/t20200918_321856.html.
[7] SAMR, “Guidelines on Undertakings’ Commitments in Anti-Monopoly Cases” (反垄断案件经营者承诺指南) (released on October 30, 2020), available at http://gkml.samr.gov.cn/nsjg/xwxcs/202010/t20201030_322782.html.
[8] SAMR, “Announcements of Unconditionally Approved Cases on Undertaking Concentrations” (无条件批准经营者集中案件公示), available at http://www.samr.gov.cn/fldj/ajgs/wtjjzajgs/.
[9] SAMR, “Announcement of SAMR’s Antimonopoly Review Decision to Conditionally Approve the Acquisition of the BioPharma Business of the General Electric Company by Danaher Corporation” (市场监管总局关于附加限制性条件批准丹纳赫公司收购通用电气医疗生命科学生物制药业务案反垄断审查决定的公告) (released on February 28, 2020), available at, http://www.samr.gov.cn/fldj/tzgg/ftjpz/202002/t20200228_312297.html.
[10] SAMR, “Announcement of SAMR’s Antimonopoly Review Decision to Conditionally Approve Infineon Technologies AG’s Share Acquisition of Cypress Semiconductor Corp.” (市场监管总局关于附加限制性条件批准英飞凌科技公司收购赛普拉斯半导体公司股权案反垄断审查决定的公告) (released on April 8, 2020), available at http://www.samr.gov.cn/fldj/tzgg/ftjpz/202004/t20200408_313950.html.
[11] SAMR, “Announcement of SAMR’s Antimonopoly Review Decision to Conditionally Approve Nvidia Corporation’s Share Acquisition of Mellanox Technologies, Ltd.” (市场监管总局关于附加限制性条件批准英伟达公司收购迈络思科技有限公司股权案反垄断审查决定的公告) (released April 16, 2020), available at http://www.samr.gov.cn/fldj/tzgg/ftjpz/202004/t20200416_314327.html.
[12] SAMR, “Announcement of SAMR’s Antimonopoly Review Decision to Conditionally Approve ZF Friedrichshafen AG’s Share Acquisition of WABCO Holding Inc.” (市场监管总局关于附加限制性条件批准采埃孚股份公司收购威伯科控股公司股权案反垄断审查决定的公告) (released on May 15, 2020), available at http://www.samr.gov.cn/fldj/tzgg/ftjpz/202005/t20200515_315255.html.
[13] SAMR, “Announcement of SAMR of the Decision to Penalize concerning Monopoly involving Calcium Gluconate Pharmaceutical Ingredients” (市场监管总局发布葡萄糖酸钙原料药垄断案行政处罚决定书) (released April 14, 2020), available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202004/t20200414_314227.html.
[14] SAMR, “Announcement of SAMR of the Decision concerning the Monopoly Agreement of 11 Second-hand Vehicles Dealers in Ningxia Shizuishan Shi” (市场监管总局发布宁夏石嘴山市11家二手车交易市场经营者垄断协议案的处理决定) (released on October 22, 2020), available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202010/t20201022_322556.html.
[15] SAMR, “Announcement of SAMR of the Decision to Penalize Huan Fuel Gas LLC and Huaihua Railway Economic and Technological Development Co. Ltd for Concluding and Implementing Monopoly Agreement” (市场监管总局发布湖南中民燃气有限公司与怀化铁路经济技术开发有限公司达成并实施垄断协议案行政处罚决定) (released on July 2, 2020), available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202007/t20200702_319339.html.
[16] SAMR, “Announcement of SAMR of the Decision to Terminate Investigation against Yancheng Xin’ao Fuel Gas Ltd” (市场监管总局发布盐城新奥燃气有限公司垄断案终止调查决定书) (released on July 24, 2020), available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202007/t20200724_320227.html.
[17] SAMR, “Announcement of SAMR of the Decision to Penalize Qinghai Minhe Chuanzhong Petroleum and Natural Gas Co., Ltd. for Abusing Market Dominance” (市场监管总局发布青海省民和川中石油天然气有限责任公司滥用市场支配地位案行政处罚决定书) (released on May 19, 2020), available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202005/t20200519_315357.html.
[18] China Daily, Meituan in the antitrust dock (December 31, 2020), available at https://www.chinadaily.com.cn/a/202012/31/WS5fed065ca31024ad0ba9fab1.html.
[19] Wuhan Hanyang Guangming Trading Company Limited v Shanghai Hankook Tire Sales Company Limited (Higher People’s Court of Shanghai Municipality, July 30, 2020), available here.
[20] Yanan Jiacheng Concrete Company Limited v Fujian Sanjian Engineering Company Limited (Higher People’s Court of Shanghai Municipality, August 13, 2020), available here.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Sébastien Evrard, Bonnie Tong, Rebecca Ho and Celine Leung.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following lawyers in the firm’s Hong Kong office:
Sébastien Evrard (+852 2214 3798, [email protected])
Kelly Austin (+852 2214 3788, [email protected])
Bonnie Tong (+852 2214 3762, [email protected])
Rebecca Ho (+852 2214 3824, [email protected])
Celine Leung (+852 2214 3823, [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 February 26, 2021, the Board of Governors of the Federal Reserve System (Federal Reserve) issued a Supervision and Regulation letter[1] containing its final supervisory guidance (Effectiveness Guidance) on the effectiveness of a banking institution’s board of directors. The Guidance applies to bank holding companies and savings-and-loan holding companies with total consolidated assets of $100 billion or more, with the exception of intermediate holding companies of foreign banking organizations (IHCs). A separate Supervision and Regulation letter issued the same day revised twelve prior Supervision and Regulation letters touching on the subject and made nine additional prior Supervision and Regulation letters inactive.[2]
In keeping with recent banking agency views on supervisory “guidance” generally,[3] the Effectiveness Guidance, in its final form, is less prescriptive than in the Federal Reserve’s 2017 proposal (Effectiveness Proposal).[4] The Federal Reserve states that the Effectiveness Guidance thus reflects the Federal Reserve’s “observ[ations] over time” regarding the attributes of effective boards of directors and seeks to eschew “standardized” expectations. This said, the Federal Reserve also declares that “[a]s the board effectiveness guidance builds on the principles set forth in the large financial institution ratings framework, the Federal Reserve intends to use the board effectiveness guidance in informing its assessment of the governance and controls at all firms subject to the large financial institution rating system.”[5]
As a result, it is reasonable to conclude that these new principles of board effectiveness, although stated in guidance form, will become an important standard for determining whether, in Federal Reserve assessments, a board of directors of a large financial institution is meeting regulatory expectations with respect to the firm’s governance.
Federal Reserve’s Key Principles of an Effective Board
The Effectiveness Guidance sets forth five principles that it deems important for a board of directors to be effective. These are:
- Setting a Clear, Aligned and Consistent Direction Regarding Firm Strategy and Risk Appetite
- Directing Senior Management Regarding the Board’s Information Needs
- Overseeing and Hold Senior Management Accountable
- Supporting the Independence and Stature of Independent Risk Management and Internal Audit
- Maintaining a Capable Board Composition and Governance Structure
A. Setting a Clear, Aligned and Consistent Direction Regarding Firm Strategy and Risk Appetite
The Effectiveness Guidance emphasizes the importance of the alignment of a firm’s strategy to its risk appetite. The Federal Reserve defines “risk appetite” as “the aggregate level and types of risk the board and senior management are willing to assume to achieve the firm’s strategic business objectives, consistent with applicable capital, liquidity, and other requirements and constraints.” Overseeing such an alignment is a critical board function.
The takeaway on this attribute is that risk management should be an integral part of a firm’s business strategy – the Federal Reserve believes that a business strategy untethered to effective risk management is not a good practice. This point may be seen in the Federal Reserve’s description of appropriately “clear” business strategies: such strategies help to “establish and maintain an effective risk management structure, appropriate processes for each . . . risk management function, and an effective risk management and control function.” So too, when discussing entering into new business lines, the Effectiveness Guidance states that a “clear strategy explains how conducting the business would be consistent with the firm’s risk appetite and changes that would need to be made to the firm’s risk management program and controls.”
An effective board of directors, therefore, regularly evaluates the development of a firm’s business so that risk management keeps up with business goals. This is in addition to required board reviews of capital planning, recovery and resolution planning, audit plans, enterprise-wide risk management policies, liquidity risk management, compliance risk management, and compensation programs.
B. Directing Senior Management Regarding the Board’s Information Needs
In the aftermath of the Financial Crisis, as board oversight became subject to greater regulatory scrutiny, the information provided to regulated institutions’ boards increased substantially. The Effectiveness Guidance notes as an attribute of effective boards that such boards direct senior management to provide sufficient, high-quality information in order to make well-informed decisions, including on “potential risks.”
The Effectiveness Guidance does not, however, stop with management reports. It notes that effective directors actively seek out information in other ways – through special board sessions, outreach to the firm’s chief executive officer and his or her direct reports, and, interestingly, discussions with “Federal Reserve senior supervisors.”
The Effectiveness Guidance also notes that directors of an effective board, “particularly the lead independent director or independent board chair or committee chairs,” take an active role in setting board and committee agendas. Here again, the concern with risk is paramount: the Federal Reserve gives as an example if the topic is growth into a new business, “an effective board typically discusses the firm’s risk management and control capabilities that reflect the views of the independent risk management and internal audit function.”
C. Overseeing and Holding Senior Management Accountable
In the Federal Reserve’s view, an effective board of directors is not limited in the ways in which it holds senior management accountable. There must be sufficient time in board meetings for candid discussion and debate and the hearing of diverse views – particularly around risk. The Effectiveness Guidance indicates that incomplete information, and identified weaknesses, are to be thoroughly challenged before management recommendations can be approved. It also indicates that for effective boards, the following areas demand “robust inquiry”:
- drivers, indicators and trends related to current and emerging risks;
- adherence to the board-approved strategy and risk appetite by business lines; and
- material or persistent deficiencies in risk management or control practices.
The Federal Reserve further states that an effective board reviews reports of internal and external complaints, including “whistleblower” reports.
Another key to appropriate management oversight is sufficiently empowered independent directors. For example, the Federal Reserve notes that where a firm has an executive chair of the board of directors, an effective board may give a lead independent director the power to call board meetings with or without the chair present as a means of counteracting management influence.
For the Federal Reserve, effective boards also carefully consider senior management compensation, including the degree to which management “promot[es] compliance with laws and regulations, including those related to consumer protection.” Performance objectives include nonfinancial objectives for both business line executives (including the chief executive officer) and the chief risk officer and chief audit executive; in the case of the latter two executives, only nonfinancial objectives are considered.
Once again, risk concerns are paramount to the Federal Reserve: “[p]erformance management and compensation systems, when combined with business strategies, discourage risk-taking inconsistent with the firm’s strategy and safety and soundness, including compliance with laws, regulations and internal standards, and promote the firm’s risk management goals.” The Effectiveness Guidance also notes that depending on the size, complexity, and nature of the firm, formalized board succession planning can go beyond planning for the firm’s chief executive officer and include the chief risk officer and chief audit executive, “given the independence of those positions and the control function each serves.” This is an area where the Effectiveness Guidance reflects supervisory experience that goes beyond legal constraints such as the New York Stock Exchange Rules and their CEO-only requirement.
D. Supporting the Independence and Stature of Independent Risk Management and Internal Audit
The Effectiveness Guidance also describes the attributes of effective risk committees and effective audit committees. The Federal Reserve states that an effective audit committee engages in “robust inquiry” into, among other things:
- the causes and consequences of material or persistent breaches of the firm’s risk appetite and risk limits;
- the timeliness of remediation of material or persistent internal audit and supervisory findings; and
- the appropriateness of the annual audit plan.
In the Federal Reserve’s view, an effective audit committee also meets directly with the chief audit executive, supports internal audit’s budget, staffing and internal controls, and reviews the status of actions recommended by internal and external auditors to remediate material or persistent deficiencies.
As for an effective risk committee, the Effectiveness Guidance states that it too engages in robust inquiry about the above subjects and further:
- communicates directly with the chief risk officer on material risk management issues;
- oversees the appropriateness of independent risk management’s budget, staffing, and internal control systems;
- coordinates with the compliance function;
- provides independent risk management with direct and unrestricted access to the risk committee; and
- after reviewing the risk management framework relative to the firm’s structure, risk profile, complexity, activities and size, effects changes that align with the firm’s strategy and risk appetite.
Finally, the Federal Reserve indicates that an effective board of directors steps in when internal audit and independent risk management are unduly influenced by business lines, and if the views of internal audit and independent risk management are not taken into account when management decisions are made.
E. Maintaining a Capable Board Composition and Governance Structure
The final attribute of an effective board is maintaining a capable composition and governance structure – including “a process to identify and select potential director nominees with a mix of skills, knowledge, experience and perspectives.” In an addition from the Effectiveness Proposal, the final Guidance states explicitly that a diverse pool of nominees “includ[es] women and minorities.” Other aspects that support an effective governance structure are appropriate committees and management-to-committee reporting lines. Finally, an effective board engages in evaluating on an ongoing basis its own strengths and weaknesses, including the performance of board committees, and, specifically, the audit and risk committees.
Conclusion
For those who have followed developments in bank governance, the Effectiveness Guidance does not contain many surprises. The Federal Reserve’s view – which holds true with respect to its approach to senior management as well – is that the constraints imposed by general corporate law and stock exchange requirements do not necessarily appropriately balance business goals with prudent risk taking, and therefore other checks on the profit making function are necessary to further safety and soundness. Although a firm’s independent risk management and internal audit are helpful in this regard, those functions need continual reinforcement from a well-informed board and well-informed board committees that keep all forms of risk at the forefront of their consideration and robustly challenge management.
As a result, although firms subject to the Effectiveness Guidance may be judged somewhat particularly given their size and risk profile in supervisory assessments, those firms should not take individualized examination consideration to mean that they should ignore the principles that the Federal Reserve has articulated. Indeed, to the extent that particular policies and practices at a covered firm do not take into account and reflect these principles, a firm may wish to consider the reasons for taking a different approach and determine whether its current practices achieve the Federal Reserve’s overall goal of effectively overseeing risk.
____________________
[1] Federal Reserve, SR Letter 21-3/CA 21-1: Supervisory Guidance on Board of Directors’ Effectiveness (February 26, 2021), available at https://www.federalreserve.gov/supervisionreg/srletters/SR2103.htm.
[2] Federal Reserve, SR Letter 21-4/CA 21-2: Inactive or Revised SR Letters Related to the Federal Reserve’s Supervisory Expectations for a Firm’s Boards of Directors (February 26, 2021). The purpose of the revisions was to align statements made about boards of directors with the Effectiveness Guidance. The letters rendered inactive were generally described as providing outdated guidance on their subjects.
[3] See, e.g., Joint Press Release, “Agencies propose regulation on the role of supervisory guidance” (October 29, 2020).
[4] Federal Reserve, “Proposed Guidance on Supervisory Expectation for Board of Directors,” 82 Federal Register 37,219 (August 9, 2017).
[5] Such “large financial institutions” include the firms subject to the Effectiveness Guidance, as well as greater than $50 billion asset IHCs.
The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long and Elizabeth Ising.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s Financial Institutions or Securities Regulation and Corporate Governance practice groups:
Financial Institutions Group:
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [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])
Mylan L. Denerstein – New York (+1 212-351- 3850, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Lori Zyskowski – New York (+1 212-351-2309, [email protected])
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
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This presentation focuses on the federal Stored Communications Act, including its access and disclosure prohibitions. We also discuss recent cases interpreting the Stored Communications Act, as well as recent trends in data privacy and California’s new Prop 24.
This practical discussion emphasizes what companies need to know when responding to subpoenas that might calls for customer and client data and other content.
View Slides (PDF)
PANELISTS:
Michael Holecek is a litigation partner in the Los Angeles office of Gibson, Dunn & Crutcher, where his practice focuses on complex commercial litigation, class actions, labor and employment law, and data privacy—both in the trial court and on appeal. Mr. Holecek has first-chair trial experience and has successfully tried to verdict both jury and bench trials, he has served as lead arbitration counsel, and he has presented oral argument in numerous appeals. Mr. Holecek has also authored articles on appellate procedure, civil discovery, corporate appraisal actions, data privacy, and bad-faith insurance litigation.
Eric Vandevelde is a litigation partner in Gibson Dunn’s Los Angeles office and a member of its White Collar Defense and Investigations, Privacy, Cybersecurity and Data Innovation, Intellectual Property, and Crisis Management practice groups. He is a former federal prosecutor and an experienced trial and appellate attorney. Mr. Vandevelde’s practice focuses on white collar and regulatory enforcement defense, internal investigations, and technology-heavy civil litigation matters, often involving computer/software-related trade secrets, copyrights, patents, and other intellectual property. He routinely handles consumer protection investigations by state and federal regulators, including state Attorneys General and District Attorneys, as well as the Federal Trade Commission (FTC), into allegedly unfair, unlawful, and deceptive practices.
Lisa V. Zivkovic, Ph.D is an associate in the New York Office of Gibson, Dunn & Crutcher. She is a member of the Firm’s Privacy, Cybersecurity and Data Innovation, Technology Transactions, and Litigation practices groups. Ms. Zivkovic advises a wide range of clients, including technology, financial services, data aggregation and analytics, vehicle, and telematics companies, on new and complex legal and policy issues regarding global data privacy, cybersecurity, artificial intelligence, Internet of Things, and big data.
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This edition of Gibson Dunn’s Federal Circuit Update summarizes the three pending Supreme Court cases originating in the Federal Circuit and key filings for certiorari review. We address the Federal Circuit’s announcement that it will now offer a live audio streaming program for oral argument. And we discuss other recent Federal Circuit decisions concerning induced infringement via “skinny labels,” patent term adjustment, motions to transfer from the Western District of Texas, and whether anticipation is inherent in an obviousness theory.
Federal Circuit News
Supreme Court:
In February, the Supreme Court did not add any new cases originating in the Federal Circuit. It has three such cases pending.
United States v. Arthrex, Inc. (U.S. Nos. 19-1434, 19-1452, 19-1458): On Monday, March 1, the Court heard argument on the question of whether PTAB administrative patent judges are principal Officers and therefore unconstitutionally appointed in violation the Appointments Clause. Gibson Dunn partner Mark Perry argued for Smith & Nephew.
Minerva Surgical Inc. v. Hologic Inc. (U.S. No. 20-440): As we summarized in our January 2021 update, the Supreme Court granted certiorari to determine the viability of the assignor estoppel doctrine, which bars assignors from challenging the patent’s validity in district court. Minerva Surgical filed its opening brief on the merits asking the Court to eliminate assignor estoppel. Engine Advocacy filed a brief in support. Hologic’s brief is due at the end of March.
Google LLC v. Oracle America, Inc. (U.S. No. 18-956): As we summarized in our January 2021 update, the Court is considering whether copyright protection extends to a software interface and, if so, whether Google’s use constitutes fair use. The Court heard argument on October 7, 2020.
Noteworthy Petitions for a Writ of Certiorari:
There are three potentially impactful petitions currently before the Supreme Court.
As we summarized in our January 2021 update, petitioners in American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20-891) and Ariosa Diagnostics, Inc. v. Illumina, Inc. (U.S. No. 20-892) both raise questions related to patent eligibility under 35 U.S.C. § 101. The Court has requested responses to both petitions, which are due March 21, 2021, and April 19, 2021, respectively.
The Court also requested a response in Argentum Pharmaceuticals LLC v. Novartis Pharmaceuticals Corporation (U.S. No. 20-779), which Novartis filed on February 16, 2021. The question presented is whether the Federal Circuit correctly found that Argentum’s evidence of alleged injury was insufficient to establish Article III standing. Gibson Dunn partners Mark Perry and Jane Love are counsel for Novartis.
Other Federal Circuit News:
In GlaxoSmithKline LLC v. Teva Pharmaceuticals USA, Inc. (Fed. Cir. No. 18-1976), on February 9, 2021, the panel granted panel rehearing, vacated the judgment, withdrew its October opinion, and ordered a second oral argument, which it held on February 23, 2021. On October 2, 2020, a panel (Newman, J., joined by Moore, J.) vacated the district court’s grant of JMOL and reinstated the jury verdicts of infringement and damages. Over Chief Judge Prost’s dissent, the panel majority held that Teva induced infringement of GSK’s patent by marketing its generic carvedilol, even though the “skinny label” carved out the infringing method. Teva petitioned for rehearing on the question of whether a generic manufacturer can “be held liable for induced infringement based on evidence that would be available in every carve-out case.” Three amicus briefs were filed before the panel’s initial decision, and eight amicus briefs were filed in support of rehearing.
Federal Circuit Practice Update
Live streaming audio of oral argument. Beginning this week, as part of the Federal Circuit’s ongoing response to the COVID-19 pandemic, the court will offer a new live audio streaming program for oral argument panels. For the March 2021 session, Panels B, E, H, K, and N will have daily live streaming audio on the Federal Circuit’s new YouTube channel. Connection information is posted on the court’s website on the first day of the month’s session. The court anticipates that, by the April session, all oral arguments will be live audio streamed online while the courthouse remains closed to the public.
Upcoming Oral Argument Calendar
The list of upcoming arguments at the Federal Circuit are available on the court’s website.
Key Case Summaries (February 2021)
Amgen, Inc. v. Sanofi (Fed. Cir. No. 20-1074): Amgen appealed from the district court’s grant of JMOL of lack of enablement of its claims to antibodies that bind to a protein and block it from binding to low-density lipoprotein (“LDL”) receptors (elevated LDL cholesterol is linked to heart disease). The claimed antibodies are defined by their function: binding to a combination of sites on the protein and blocking the protein/LDL receptor interaction. The district court concluded, based on the Wands factors, that the claims are not enabled because they require undue experimentation.
The panel (Lourie, J., joined by Prost, C.J., and Hughes, J.) affirmed. The panel explained that, under the court’s precedents, “the enablement inquiry for claims that include functional requirements can be particularly focused on the breadth of those requirements, especially where predictability and guidance fall short.” It further explained that “[w]hile functional claim limitations are not necessarily precluded in claims that meet the enablement requirement, such limitations pose high hurdles in fulfilling the enablement requirement for claims with broad functional language.” The panel held that the claims were not enabled because undue experimentation would be required to practice the full scope of these claims.
In re: SK hynix Inc. (Fed. Cir. No. 21-113): SK hynix petitioned for a writ of mandamus directing the district court (Judge Albright in the Western District of Texas) to transfer the underlying case to the Central District of California. On May 4, 2020, SK hynix moved to transfer the case and, although briefing was complete by May 26, 2020, the court had yet to rule. Meanwhile, Judge Albright ordered the parties to engage in extensive discovery and scheduled a Markman hearing for March 19, 2021. After SK Hynix petitioned the Federal Circuit, on January 28, 2021, the district court issued an order setting a hearing on the transfer motion for the morning of February 2, 2021.
The panel (Moore, J., joined by Newman and Stoll, JJ.) granted the petition to the extent that the district court must stay all proceedings concerning the substantive issues of the case and all discovery until such time that it has issued a ruling on the transfer motion. The panel agreed with SK hynix that the district court’s handling of the transfer motion “amounted to [an] egregious delay and blatant disregard for precedent,” and that disposing of transfer motions should “unquestionably take top priority.”
In re: SK hynix Inc. (Fed. Cir. No. 21-114): The day after the court granted SK hynix’s petition, the district court denied its transfer motion and issued an opinion with its reasoning. SK hynix petitioned for mandamus again. The panel (Taranto, J., joined by Dyk and Bryson, JJ.) denied the petition, concluding that SK hynix had not shown that the district court clearly abused its discretion.
M & K Holdings, Inc. v. Samsung Electronics Co. (Fed. Cir. No. 20-1160): M & K Holdings appealed from a Board decision in an IPR proceeding that all claims are unpatentable. M&K argued that the Board erred by finding one claim anticipated when the petition for IPR asserted only obviousness as to that claim. Although the Board stated it was holding that claim to be invalid as obvious, the Board’s analysis of the patentability of the claim was based on anticipation, not obviousness.
The panel (Bryson, J., joined by Moore and Chen, JJ.) vacated the Board’s holding that the claim is unpatentable, reasoning that the Board’s reliance on anticipation deprived M&K of the notice it was due. The panel explained that the Board’s anticipation finding was “not inherent” in Samsung’s obviousness theory. And, in fact, Samsung’s position before the Board contradicted such a conclusion. M&K was not put on notice that the Board might find that the reference disclosed all of the claim limitations and might invalidate the claim based on anticipation. That amounted to a “marked deviation” from the invalidity theory set forth in Samsung’s petition.
Chudik v. Hirshfeld (Fed. Cir. No. 20-1833): Dr. Chudik’s patent issued eleven and a half years after the application was filed. The PTO ultimately awarded Dr. Chudik a patent term adjustment of 2,066 days under 35 U.S.C. § 154(b), but it rejected Dr. Chudik’s argument that he was entitled to an additional 655 days, under 35 U.S.C. § 154(b)(1)(C)(iii) (C-delay), for the time his four notices of appeal were pending in the PTO. The PTO concluded that the provision does not apply here because the examiner reopened prosecution during each of his four appeals so the Board never had jurisdiction. The district court affirmed the PTO’s decision (35 U.S.C. § 154(b)(4)(A)).
The panel (Taranto, J., joined by Bryson and Hughes, JJ.) also affirmed. The panel held that, under any framework (Chevron or not) and even without Skidmore deference, the best interpretation of the statutory language is the one the PTO adopted.
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:
Wayne Barsky – Los Angeles (+1 310-552-8500, [email protected])
Josh Krevitt – New York (+1 212-351-4000, [email protected])
Mark Reiter – Dallas (+1 214-698-3100, [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 February 24, 2021, Allison Herren Lee, Acting Chair of the Securities and Exchange Commission (“SEC”), issued a statement titled “Statement on the Review of Climate-Related Disclosure” that “direct[s] the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings” (the “Climate Change Statement”).[1] The Climate Change Statement expressly builds on the interpretive guidance that the SEC previously issued in 2010 regarding how the SEC’s existing principles-based disclosure requirements apply to climate change matters (the “2010 Climate Change Guidance”).[2] This alert reviews the Climate Change Statement, the SEC’s 2010 Climate Change Guidance, and other recent developments regarding climate change disclosures, and it addresses what public companies should consider going forward.
Overview of the Climate Change Statement
The Climate Change Statement explains that “[n]ow more than ever, investors are considering climate-related issues when making their investment decisions” and that it is the SEC’s “responsibility to ensure that they have access to material information when planning for their financial future.” To that end, the Climate Change Statement announces that the SEC and its staff will take “immediate steps” to “[e]nsur[e] compliance with the rules on the books, and updat[e] existing guidance” as part of “the path to developing a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures.” Specifically, as part of their “enhanced focus in this area,” the SEC staff “will review the extent to which public companies address the topics identified in the [2010 Climate Change Guidance], assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks.” The Climate Change Statement also notes that the SEC staff “will use insights from this work to begin updating the [2010 Climate Change Guidance] to take into account developments in the last decade.”
Overview of the 2010 Climate Change Guidance
The 2010 Climate Change Guidance referenced in the Climate Change Statement is an interpretative release issued by the SEC clarifying how existing SEC disclosure rules[3] may require public companies to describe climate change matters.[4] The 2010 Climate Change Guidance notes four topics in particular that may trigger climate change disclosure under the SEC’s rules:
1. The impact of climate change legislation and regulation. The 2010 Climate Change Guidance notes that companies should consider the impact of existing (and in some circumstances, pending) legislation and regulation related to climate change both in the United States and globally.
2. The impact of international climate change accords. The 2010 Climate Change Guidance advises companies to consider, and disclose under existing SEC rules where material, the impact of international accords relating to climate change.
3. Indirect consequences of climate change regulation or business trends. The 2010 Climate Change Guidance indicates that companies should consider actual and potential indirect consequences of climate change-related regulation and business trends.
4. The physical impacts of climate change. The 2010 Climate Change Guidance also states that companies should consider actual or potential impacts of the physical effects of climate change on their business.
The 2010 Climate Change Guidance appeared to have dramatically impacted public company disclosures regarding climate change: the number of S&P 500 companies mentioning climate change and/or greenhouse gas(es) in their Annual Reports on Form 10-K approximately doubled from the one year prior to the one year after the release of the 2010 Climate Change Guidance.[5] However, the 2010 Climate Change Guidance was not a focus of SEC staff comments in the years that followed. According to a 2018 Government Accountability Office report (the “GAO Report”), the SEC staff issued a limited number of climate change comments to public companies and often without citing the 2010 Climate Change Guidance.[6] For example, the GAO Report noted that based on a review of SEC filings by companies in five industries particularly “affected by climate change-related matters” (oil and gas, mining, insurance, electric and gas utilities, and food and beverage), the SEC staff issued only 14 comment letters relating to climate-related disclosures to 14 companies, out of the over 41,000 comment letters issued from January 1, 2014, through August 11, 2017.[7]
What Companies Should Do Now
In light of Acting Chair Lee’s Climate Change Statement and its emphasis on compliance with existing SEC regulation, including the 2010 Climate Change Guidance, public companies should:
1. As part of the company’s disclosure controls and procedures, review the existing process for assessing the materiality of climate change matters to the company and determine whether any additional climate change disclosures should be included in their SEC filings. The process should include discussions among the company’s securities law counsel, environment/safety/health, sustainability and government relations personnel and members of the company’s disclosure committee. Companies that will file their Annual Reports on Form 10-K in the coming weeks should in particular review their disclosures in light of the Statement and the 2010 Climate Change Guidance. However, it is important to note that the Statement was released after many large accelerated filers had already filed their 2020 Annual Reports on Form 10-Ks. That said, the number of S&P 500 companies now mentioning climate change and/or greenhouse gas(es) in their Annual Reports on Form 10-K has approximately doubled when compared to the one year after the release of the 2010 Climate Change Guidance.[8] In addition, as disclosures become more granular and science-based, it is important to avoid unintentionally including statements that would need to be “expertized” under the Securities Act without following appropriate related procedures.
2. Assess the company’s other public climate change disclosures (e.g., state- and EPA-mandated disclosures, voluntary disclosures in sustainability reports and to third-party organizations like the CDP, and disclosures on websites and in investor presentations). Companies have increased the scope and quantity of voluntary ESG disclosures over the last decade, often in response to stakeholders and in an attempt to address the many surveys and other data requests from entities that rate companies’ ESG practices. While many of these disclosures may not be material under the federal securities laws, the increasing focus on ESG matters may lead to SEC staff comments regarding their absence from issuers’ SEC filings.[9] For example, in 2016, the SEC staff issued a comment letter that quoted text from a company’s CDP Report[10] and a different comment letter that referenced disclosures in a company’s sustainability report.[11]
3. Evaluate whether additional disclosure controls are needed around the company’s other public climate change disclosures, particularly with respect to voluntary disclosures. Companies should carefully evaluate their disclosure controls and procedures that are in place for reviewing and approving public disclosures regarding climate change. This is important both because the SEC staff may now review such disclosures and comment on whether they should be included in SEC filings, but also because—whether presented on an investor relations website or not—it may now be more likely that investors will review and potentially even rely on such statement (or at least that plaintiffs’ lawyers may claim so in hindsight). Among other things, companies should evaluate whether each of their statements are verifiable, make sure that goals and aspirations are clearly stated as such as opposed to being stated as accomplished facts, and remove any materially misleading statements or omissions. Companies should consider including forward-looking statement disclaimers with any statement of goals or intentions.[12]
4. Monitor regulatory and legislative developments on greenhouse gas and climate change matters at the international, Federal, state and regional levels, and assess the potential impact of such developments on the company’s business. Public policy responses to climate change are rapidly developing internationally and in the United States. This is especially the case given recent actions by President Joseph Biden related to the United States rejoining the Paris Agreement (an agreement within the United Nations Framework Convention on Climate Change) and promised additional actions in his January executive orders[13] addressing climate change.[14] Companies will need to stay informed of these developments and continue to assess their impact on the risks and opportunities presented by climate change.
5. Prepare for additional SEC disclosure requirements related to climate change and ESG matters. In their dissenting statement issued in connection with the adoption of Regulation S-K amendments in November 2020, Acting Chair Lee and the other Democratic Commissioner Caroline Crenshaw noted that “[w]e have an opportunity going forward to address climate, human capital, and other ESG risks, in a comprehensive fashion with new rulemaking specific to these topics,” possibly providing a glimpse of what to expect from a new Democratic-controlled SEC.[15] Commissioners Lee and Crenshaw also suggested an internal task force and ESG Advisory Committee dedicated to building upon the recommendations of leading organizations, such as the Task Force on Climate-Related Financial Disclosures, and to defining a clear plan to address sustainable investing.
Recent senior SEC appointments already signal that climate and other ESG matters will be priorities at the SEC during the Biden Administration—including Acting Chairman Lee’s appointment of the SEC’s first-ever senior policy adviser on “climate and ESG” matters earlier this month.[16] Another recent appointee, Acting Director of the Division of Corporation Finance John Coates, was a member of the SEC’s Investor Advisory Committee when it urged the SEC to update its disclosure requirements to include “material, decision-useful, ESG factors” in May 2020.[17] More recently, Acting Director Coates told financial industry members at a conference on climate how the SEC can help create “a cost-effective and flexible disclosure system,” adding that “[s]omething like that is clearly increasingly necessary to the capital markets at the center of our global economy to adequately price climate and other ESG risks and opportunities.”[18] In a recent interview about ESG disclosure and related rulemaking, Acting Director Coates said that, “[i]f I were to pick a single new thing that I’m hoping the SEC can help on, it would be this area.”[19]
Public companies should also note that legislation in the U.S. Congress would mandate additional climate change-related disclosures. For example, the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets last week held a hearing[20] on several bills that would require additional climate change disclosures in SEC filings, including:
- the “Climate Risk Disclosure Act of 2021,”[21] which would amend the Exchange Act to require issuers to disclose in SEC filings various climate change-related risks and require the SEC to adopt rules mandating certain other climate change-related disclosures such as “input parameters, assumptions and analytical choices to be used in climate scenario analyses”; and
- the “Paris Climate Agreement Disclosure Act,”[22] which would amend the Exchange Act to require disclosures related to the Paris Climate Agreement, including “[w]hether the issuer has set, or has committed to achieve, targets that are a balance between greenhouse gas emissions and removals, at a pace consistent with limiting global warming to well below 2 degrees Celsius and pursuing efforts to limit it to 1.5 degrees Celsius” (or if it is committed to setting such targets in the future or, if it is not, a statement to that effect and a detailed explanation as to why and whether it supports the Paris Agreement’s temperature goals).
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[1] Allison Herren Lee, Statement on the Review of Climate-Related Disclosure (February 24, 2021), available at https://www.sec.gov/news/public-statement/lee-statement-review-climate-related-disclosure.
[2] Securities and Exchange Commission, Commission Guidance Regarding Disclosure Related to Climate Change (17 CFR PARTS 211, 231 and 241; Release Nos. 33-9106; 34-61469; FR-82), available at http://www.sec.gov./rules/interp/2010/33-9106.pdf.
[3] The key rules addressed are in Regulation S-K: Item 101 (Description of Business); Item 103 (Legal Proceedings); Item 303 (Management’s Discussion of Financial Condition and Results of Operations (MD&A)); and Item 503(c) (Risk Factors).
[4] For additional information, see Gibson Dunn, SEC Issues Interpretive Guidance on Climate Change Disclosures (February 4, 2010), available at https://www.gibsondunn.com/sec-issues-interpretive-guidance-on-climate-change-disclosures/.
[5] Based on an Intelligize search of S&P 500 companies’ Forms 10-K filed between February 1, 2009 and February 1, 2010 (82 filings) compared to February 2, 2010 to February 1, 2011 (167 filings).
[6] United States Government Accountability Office, Climate-Related Risks: SEC Has Taken Steps to Clarify Disclosure Requirements (February 2018) (the “GAO Report”), available at https://www.gao.gov/assets/700/690197.pdf.
[8] Based on an Intelligize search of S&P 500 companies’ Forms 10-K filed between February 2, 2010 to February 1, 2011 (167 filings) compared to February 1, 2020 to February 1, 2021 (329 filings).
[9] As noted in the GAO Report, one of the challenges the SEC staff faces in reviewing climate change-related and other disclosure in companies’ SEC filings is that the “SEC relies primarily on information that companies determine is material [and] may not have details of the information companies used to support their determination of material climate-related risks.” GAO Report, supra note 6, at 16.
[10] See comment letter to Anadarko Petroleum dated September 16, 2016 stating “Please reconcile this assertion in your proxy statement with your description of the climate change risks from your CDP Report as having a ‘high’ impact on your business and provide your analysis as to why you believe such ‘uncertaint[ies]’ do not constitute ‘known trends or . . . uncertainties’ requiring disclosure pursuant to Item 303(a) of Regulation S-K,’” available at https://www.sec.gov/Archives/edgar/data/773910/000000000016093302/filename1.pdf.
[11] See comment letter to Mettler Toledo International dated March 23, 2016 inquiring about operations in Sudan and Syria and noting “[t]he 2014 Sustainability Report posted on your website states that you have largely ceased business in Sudan,” available at https://www.sec.gov/Archives/edgar/data/1037646/000000000016069396/filename1.pdf.
[12] For additional information, see Gibson Dunn and the Society for Corporate Governance, ESG Legal Update: What Corporate Governance and ESG Professionals Need to Know (June 2020), available at https://www.gibsondunn.com/wp-content/uploads/2020/10/Ising-Meltzer-McPhee-Percopo-Assaf-Holmes-ESG-Legal-Update-What-Corporate-Governance-and-ESG-Professionals-Need-to-Know-Society-for-Corporate-Governance-06-2020.pdf
[13] The White House, FACT SHEET: President Biden Takes Executive Actions to Tackle the Climate Crisis at Home and Abroad, Create Jobs, and Restore Scientific Integrity Across Federal Government (January 27, 2021), available at https://www.whitehouse.gov/briefing-room/statements-releases/2021/01/27/fact-sheet-president-biden-takes-executive-actions-to-tackle-the-climate-crisis-at-home-and-abroad-create-jobs-and-restore-scientific-integrity-across-federal-government/.
[14] For additional information, see Gibson Dunn, President Biden Issues Executive Orders on Climate Change Policy (February 9, 2021) (the “Climate Change Alert), available at https://www.gibsondunn.com/president-biden-issues-executive-orders-on-climate-change-policy/.
[15] Allison Herren Lee and Caroline A. Crenshaw, Joint Statement on Amendments to Regulation S-K: Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information (November 19, 2020), available at https://www.sec.gov/news/public-statement/lee-crenshaw-statement-amendments-regulation-s-k.
[16] Securities and Exchange Commission, Satyam Khanna Named Senior Policy Advisor for Climate and ESG (February 1, 2021), available at https://www.sec.gov/news/press-release/2021-20.
[17] Al Barbarino, SEC To Drill Down On Co[mpanies’] Climate-Related Risk Disclosures (Law360, February 25, 2021), available at https://www.law360.com/articles/1358615/sec-to-drill-down-on-cos-climate-related-risk-disclosures.
[18] Bloomberg Law Staff, ESG Reporting Top Priority for SEC Director on Leave From Harvard (February 24, 2021), available at https://news.bloomberglaw.com/environment-and-energy/esg-reporting-top-priority-for-sec-director-on-leave-from-harvard.
[19] Id. (quoting Acting Director Coates).
[20] U.S. House Committee on Financial Services, Virtual Hearing: Climate Change and Social Responsibility: Helping Corporate Boards and Investors Make Decisions for a Sustainable World, (accessed February 24, 2021), available at https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407109.
[21] See Climate Risk Disclosure Act of 2021 (Discussion Draft) (January 26, 2021), available at https://financialservices.house.gov/uploadedfiles/02.25_bills-1173ih.pdf.
[22] See Paris Climate Agreement Disclosure Act (Discussion Draft) (February 17, 2021), available at https://financialservices.house.gov/uploadedfiles/02.25_bills-1176ih.pdf.
The following Gibson Dunn attorneys assisted in preparing this client update: Hillary Holmes, Elizabeth A. Ising, Thomas J. Kim, Ronald O. Mueller, Lori Zyskowski, Julia Lapitskaya, and Stefan Koller. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Securities Regulation and Corporate Governance or ESG practice groups.
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The California Supreme Court’s February 25, 2021 opinion in Donohue v. AMN Services, LLC is the most significant decision construing an employer’s duty to provide and record meal periods in nearly a decade. California employers may wish to assess their meal period policies and practices, including relating to the recordation of meal periods, in light of the Court’s guidance in Donohue.
Donohue reaffirmed the key holding of Brinker Restaurant Corp. v. Superior Court, 53 Cal. 4th 1004 (2012), as the Court once again made clear that employers need not force employees to take full meal periods, so long as such meal periods are provided. But at the same time, the Court held that whenever timekeeping records show that an employee failed to take a compliant meal period, a rebuttable presumption arises under which it is presumed that the employer failed to provide a proper meal period. This means that employers will have the burden to prove they provided compliant meal periods for any shifts in which timekeeping records show that a meal period was short, late, or not recorded at all.
After Donohue, employers seeking to minimize potential litigation may wish to consider, among other options, ensuring that they have robust timekeeping systems that track the amount of time employees spend taking meal periods and automatically prompt employees to confirm they voluntarily chose to take a short or late meal period, or to skip the meal period entirely.
Donohue’s Key Holdings
- Reaffirming the core teachings of Brinker, the Court in Donohue explained that “[a]n employer is liable [for failing to provide meal periods] only if it does not provide an employee with the opportunity to take a compliant meal period,” that an “employer is not liable if the employee chooses to take a short or delayed meal period or no meal period at all,” that an “employer is not required to police meal periods to make sure no work is performed,” and that “the employer’s duty is to ensure that it provides the employee with bona fide relief from duty and that this is accurately reflected in the employer’s time records.” Donohue slip op. at 27–28.
- With respect to recordation of meal periods, the Court held that “employers cannot engage in the practice of rounding time punches—that is, adjusting the hours that an employee has actually worked to the nearest preset time increment.” Id. at 1.
- The Court expressly did not address the use of time rounding policies outside the context of meal periods, but suggested that “the practical advantages of rounding polices may diminish further” as “technology continues to evolve” and “technological advances may help employers to track time more precisely.” Id. at 19, 21.
- The Court adopted the rebuttable presumption discussed by Justice Werdegar in her concurring opinion in Brinker. Under this presumption, “[i]f an employer’s records show no meal period for a given shift over five hours, a rebuttable presumption arises that the employee was not relieved of duty and no meal period was provided.” Id. at 21–22.
- The Court further explained that this presumption applies not only to records showing “missed meal periods” but also when records show “short and delayed meal periods.” Id. at 24. And “the presumption goes to the question of liability and applies at the summary judgment stage, not just at the class certification stage.” Id.
- Significantly, “[a]pplying the presumption does not mean that time records showing missed, short, or delayed meal periods result in ‘automatic liability’ for employers.” Id. at 26. To the contrary, employers “can rebut the presumption by presenting evidence that employees were compensated for noncompliant meal periods or that they had in fact been provided compliant meal periods during which they chose to work.” Id. at 26–27.
- And the Court specifically held that “[e]mployers may use a timekeeping system like” the electronic timekeeping system used by the employer in Donohue—which “included a dropdown menu for employees to indicate whether they were provided a compliant meal period but chose to work” and “triggered premium pay for any missed, short, or delayed meal periods”—without rounding time punches for meal periods. Id. at 28.
Key Takeaways
Donohue makes clear that even where an employer’s records are imperfect, there is no automatic liability. Rather, employers may rebut the presumption that they did not provide compliant meal periods with evidence showing employees were provided proper meal periods. But to avoid unnecessary litigation, among other options, employers might consider adopting timekeeping systems that adequately track meal periods and do not engage in any rounding of time employees spend taking meal periods.
Employers may also want to consider, as one option, implementing timekeeping systems that can flag when meal periods are recorded as short, late, or missed, and create a follow-up process to determine and document whether employees voluntarily chose not to take a full meal period. In fact, the California Supreme Court indicated that the electronic timekeeping system used by the employer in Donohue, which “included a dropdown menu for employees to indicate whether they were provided a compliant meal period but chose to work, and the system triggered premium pay for any missed, short, or delayed meal periods due to the employer’s noncompliance,” would suffice under the law so long “as the system does not round time punches.” Donohue slip op. at 28.
Finally, while Donohue did not address rounding policies outside the context of meal periods, the Court suggested that technological advances may render such policies obsolete. Given that observation, employers may wish to explore recording work time to the minute without any rounding.
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:
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Plaintiffs alleging claims of employment discrimination often prefer to file suit in New York City if they can plead a violation of the New York City Human Rights Law (“City HRL”), which was enacted with the “desire that [it] meld the broadest vision of social justice with the strongest law enforcement deterrent.”[1] Its application was nevertheless recently narrowed by the New York Court of Appeals in Doe v. Bloomberg L.P. That decision clarified as a matter of first impression that, despite the City HRL’s liberal construction and the availability of vicarious liability against a company for the actions of its employees, no such vicarious liability can be imposed on a company’s shareholders, agents, limited partners, or employees, because these individuals are not themselves deemed “employers” under the statute. As a result, “those individuals may incur liability” under the City HRL “only for their own discriminatory conduct, for aiding and abetting such conduct by others, or for retaliation against protected conduct.”[2]
Background on the City HRL
The City HRL prohibits employment discrimination within New York City based on a wide variety of protected characteristics,[3] providing additional protections—and an additional cause of action—on top of those already available under state and federal anti-discrimination laws. In oft-quoted language addressing its enactment in 1991, Mayor David Dinkins described the City HRL as “the most progressive” such statute “in the nation,” which “reaffirm[ed] New York’s traditional leadership in civil rights.”[4] That sentiment was underscored by a 2005 statutory amendment codifying that “similarly worded provisions of federal and state civil rights laws” provide “a floor below which the [City HRL] cannot fall, rather than a ceiling above which [it] cannot rise.”[5] As a result, the City HRL is often invoked by plaintiffs bringing similar state and federal causes of action.
One crucial distinction between the City HRL and its federal and state counterparts is that although employers “are not normally subject to vicarious liability for the wrongs of corporate employees,”[6] the City HRL imposes such liability. With some exceptions, under other anti-discrimination statutes employers typically only face liability where their own conduct is at issue or where they have failed to take reasonable steps to address and prevent discrimination in their workplaces. Under Title VII, for example, employers may be vicariously liable for their employee’s discriminatory conduct, but such claims are subject to an affirmative defense that the employer has enacted sufficient policies and procedures to respond to complaints of discrimination.[7] No such affirmative defense exists under the City HRL.[8] Rather, an “employer” can be vicariously liable “based upon the [discriminatory] conduct of [its] employees or agents” under the City HRL “where:
(1) the employee or agent exercised managerial or supervisory responsibility; or
(2) the employer knew of the employee’s or agent’s discriminatory conduct, and acquiesced in such conduct or failed to take immediate and appropriate corrective action . . . ; or
(3) the employer should have known of the employee’s or agent’s discriminatory conduct and failed to exercise reasonable diligence to prevent such discriminatory conduct.”[9]
But the City HRL does not provide a functional definition for the word “employer,” giving little guidance as to whom that term encompasses. Myriad tests and arguments have been offered over the years, “generating confusion as courts have endeavored to determine who is an employer in the context of the extensive—and at times strict—liability imposed” by the City HRL.[10] The Court of Appeals’ recent Doe decision provides significant guidance.
Facts and Procedural History of Doe v. Bloomberg L.P.
The plaintiff in Doe, a former employee of Bloomberg L.P., filed a complaint asserting claims against Bloomberg L.P., her supervisor, and Michael Bloomberg. Doe alleged that her supervisor sexually harassed her for years, but she did not allege any “personal participation” in these acts by Mr. Bloomberg.[11] Rather, her claim as set forth in her complaint against Mr. Bloomberg arose solely from his role as the “co-founder, chief executive officer, and president” of Bloomberg L.P., as a result of which Doe argued that Mr. Bloomberg was her “employer”[12] and could be held vicariously liable for the acts of her supervisor.
As the case made its way through the courts, the definition of “employer” for purposes of the City HRL was resolved in many different ways by different jurists. The trial court initially dismissed the claims against Mr. Bloomberg, finding that he could not be held liable as an employer, before subsequently reversing its own decision upon reargument and reinstating the claims against him.[13] Next, the reinstatement of the claims against Mr. Bloomberg was reversed by the Appellate Division, First Department, which split 3-2 in holding that Mr. Bloomberg could not be held liable as an employer because there was no allegation that he “encouraged, condoned or approved the specific conduct which gave rise to the claim.”[14] The Appellate Division dissenters, meanwhile, would have held that an individual is an employer under the City HRL if he or she has either an ownership interest in the corporate defendant or the power to do more than carry out others’ personnel decisions.[15] Finally, the Court of Appeals affirmed that Mr. Bloomberg was not Doe’s employer while rejecting the reasoning and tests set forth by both the Appellate Division’s majority and dissenting opinions.
The Doe Court’s Legal Analysis
In a 6-1 decision, the Court of Appeals held that “where a plaintiff’s employer is a business entity, the shareholders, agents, limited partners, and employees of that entity are not employers” for purposes of being held vicariously liable under the City HRL.[16] Instead, “those individuals may incur liability” under the City HRL “only for their own discriminatory conduct, for aiding and abetting such conduct by others, or for retaliation against protected conduct.”[17]
The majority opinion reasoned that the statute expressly distinguishes between agents, employees, owners, and employers in various ways, “demonstrat[ing] that employees, agents, and others with an ownership stake are not employers within the meaning of the City HRL.”[18] It also observed that the law generally does not view a company’s shareholders, agents, and employees as “employers” or “subject [them] to vicarious liability for the wrongs of corporate employees.”[19] Moreover, designating shareholders as employers for the purpose of imposing vicarious liability “would go against the principles underlying the legal distinction” between a company and its owners because “[t]he law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability.”[20] While acknowledging the “broad vicarious liability” imposed on employers by the City HRL, which remains “substantially broader than that provided by its state counterpart,” the Court of Appeals nonetheless narrowly construed the law’s use of the term “employer.”[21] Although the majority did not provide an affirmative test for determining who is an “employer” under the City HRL, it concluded that the term, pursuant to its “ordinary meaning,” “does not extend to individual owners, officers, employees, or agents of a business entity.”[22] Accordingly, the Court of Appeals determined that Mr. Bloomberg was not Doe’s employer under the City HRL and thus could not be held vicariously liable for the discriminatory conduct that she alleged.[23]
Conclusion
Doe provides an important clarification concerning the extent of employer liability under the City HRL and brings the City HRL closer in line with similar state and federal causes of action. Under the rule announced by the Court, a business entity’s “individual owners, officers, employees, or agents” are not themselves “employers,” and therefore cannot be held vicariously liable for the actions of the company’s employees. Nevertheless, they can continue to be held personally liable for their own discriminatory conduct, for aiding and abetting such conduct by others, or for retaliation against protected conduct. In addition, “the unique provisions of the City HRL” continue to “provide for broad vicarious liability” for “employers”—that is, for the business entities themselves—when their employees violate the City HRL.[24]
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[1] Williams v N.Y.C. Hous. Auth., 61 A.D.3d 62, 68–69 (1st Dep’t 2009) (internal quotation marks omitted).
[2] Doe v. Bloomberg, L.P., 2021 WL 496608, at *4 (N.Y. Feb. 11, 2021).
[3] N.Y.C. Admin. Code § 8-101 (listing protected characteristics including “race, color, creed, age, national origin, immigration or citizenship status, gender, sexual orientation, disability, marital status, partnership status, caregiver status, sexual and reproductive health decisions, uniformed service, any lawful source of income, status as a victim of domestic violence or status as a victim of sex offenses or stalking”).
[4] Comm. on Gen. Welfare, Committee Report at 2 (Aug. 17, 2005) (quoting Remarks by Mayor David N. Dinkins at Public Hearing on Local Laws, June 18, 1991, at 1).
[5] Local Civil Rights Restoration Act of 2005, N.Y.C. Local Law No. 85 (2005).
[6] Doe, 2021 WL 496608, at *5.
[7] See, e.g., Faragher v. City of Boca Raton, 524 U.S. 775 (1998); Burlington Indus., Inc. v. Ellerth, 524 U.S. 742 (1998); see also, e.g., Vance v. Ball State Univ., 570 U.S. 421, 428 (2013); Totem Taxi v. N.Y. State Human Rights Appeal Bd., 65 N.Y.2d 300, 305 (1985).
[8] See Zakrzewska v. New Sch., 14 N.Y.3d 469, 481 (2010).
[9] N.Y.C. Admin. Code. § 8-107.
[10] Doe, 2021 WL 496608, at *2.
[11] Id. at *1; id. at *10 (Rivera, J., dissenting).
[13] See Doe v. Bloomberg, L.P., 178 A.D.3d 44, 47 (2019).
[15] Id. at 53 (Manzanet-Daniels, J. dissenting).
[16] Doe, 2021 WL 496608, at *4.
[20] Id. (quoting Walkovszky v. Carlton, 18 N.Y.2d 414 (1966)).
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 Labor and Employment practice group, or the following authors:
Mylan L. Denerstein – New York (+1 212-351-3850, [email protected])
Akiva Shapiro – New York (+1 212-351-3830, [email protected])
Michael Nadler – New York (+1 212-351-2306, [email protected])
Please also feel free to contact the following Labor and Employment practice group leaders:
Catherine A. Conway – Los Angeles (+1 213-229-7822, [email protected])
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, [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.