Californians have ushered in a law protecting individuals’ privacy unlike any other in the United States, and businesses are well-advised to evaluate its impact and prepare to comply. Proposition 24, which passed during this month’s vote, establishes the California Privacy Rights Act (CPRA), which will take effect Jan. 1, 2023. If this seems like déjà vu, it is because just two years ago, the California legislature passed an unprecedented privacy law, the California Consumer Privacy Act (CCPA), which the CPRA amends. The continuing shift in privacy law embodied by the CPRA is set to make a significant impact on businesses’ compliance efforts and operational risk, as well as individuals’ expectations.

Businesses should take comfort that the Jan. 1, 2023 effective date, and delayed enforcement start (July 1, 2023), means there is time to come into compliance. However, the law imposes various changes that will require businesses to address new considerations—even factoring in the efforts many already have made to comply with the CCPA.

Read more

Originally published by The Recorder on November 18, 2020.

---

The following Gibson Dunn lawyers assisted in the preparation of this article: Cassandra Gaedt-Sheckter, Alexander H. Southwell and Ryan Bergsieker.

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 member of the firm’s California Consumer Privacy Act Task Force or its Privacy, Cybersecurity and Consumer Protection practice group:

California Consumer Privacy Act Task Force:
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Deborah L. Stein – Los Angeles (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])

Please also feel free to contact any member of the Privacy, Cybersecurity and Consumer Protection practice group:

United States
Alexander H. Southwell – Co-Chair, PCCP Practice, New York (+1 212-351-3981, [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])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
Kristin A. Linsley – San Francisco (+1 415-393-8395, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Deborah L. Stein – Los Angeles (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, [email protected])

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

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

© 2020 Gibson, Dunn & Crutcher LLP

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

Please join us to discuss the SEC’s enforcement priorities and key areas of risk in light of COVID-19.  In this webcast, we will discuss:

• The SEC’s latest accounting and pandemic-related enforcement trends and initiatives;
• Impact of the SEC Division of Enforcement’s EPS Initiative;
• Key areas of accounting risk amplified by COVID-19, including revenue recognition, asset impairment, and going concern risks; and
• Disclosure issues pertaining to COVID-19’s impact on business and forward-looking guidance.

View Slides (PDF)

---

---

PANELISTS:

Richard W. Grime is co-chair of Gibson Dunn’s Securities Enforcement Practice Group. Mr. Grime’s practice focuses on representing companies and individuals in corruption, accounting fraud, and securities enforcement matters before the SEC and the DOJ. Prior to joining the firm, Mr. Grime was Assistant Director in the Division of Enforcement at the SEC, where he supervised the filing of over 70 enforcement actions covering a wide range of the Commission’s activities, including the first FCPA case involving SEC penalties for violations of a prior Commission order, numerous financial fraud cases, and multiple insider trading and Ponzi-scheme enforcement actions.

Monica K. Loseman is co-chair of Gibson, Dunn’s Securities Litigation Practice Group and is a partner in the Denver office. Ms. Loseman has substantial experience in complex corporate and securities enforcement matters and civil litigation. Her practice includes a focus on financial reporting, accounting and related investigations and accountant defense. Ms. Loseman’s trial experience largely focused on accounting and financial reporting and corporate governance matters, including three trials before SEC administrative law judges, several bench and jury trials, and private arbitrations. Ms. Loseman also conducts independent investigations involving allegations of corporate fraud and issues relating to financial reporting, accounting, internal controls, and other issues, and is skilled at interacting with Board committees and other stakeholders in presenting results and remedial recommendations.

Michael J. Scanlon is a partner in the Washington, D.C. office, where he is a member of the Firm’s Securities Regulation and Corporate Governance, and Securities Enforcement Practice Groups. Mr. Scanlon has an extensive practice representing U.S. and foreign public company and audit firm clients on regulatory, corporate governance, and enforcement matters. He advises corporate clients on SEC compliance and disclosure issues, the Sarbanes-Oxley Act, and corporate governance best practices, with a particular focus on financial reporting matters.

Jason H. Smith is a senior associate in the Washington, D.C office where, he is a member of the White Collar Defense and Investigations Practice Group and focuses primarily on white collar defense, corporate compliance, and securities enforcement.  Mr. Smith has particular experience representing multinational corporate clients in government investigations, including before the Department of Justice, Securities and Exchange Commission, and other regulatory and enforcement agencies.

The UK Government (the “Government”) has announced plans to upgrade and widen significantly its intervention powers on grounds of national security.

The proposal is for a ‘hybrid regime’ whereby notification and approval would be mandatory prior to completing certain deals (described further below) in specified areas of the economy deemed particularly sensitive. Here, clearance would be required to be obtained prior to closing. Further, any failure to notify would result in a transaction that is ‘legally void’,[1] sanctions would be applicable and the Government would have a potentially indefinite period to ‘call-in’ the deal (a period which would be reduced to 6 months if the Secretary of State for Business, Energy and Industrial Strategy (the “SoS”) becomes aware of the deal). Notification will otherwise be voluntary. However, the Government will be able to ‘call-in’ such transactions for a period of up to 5 years (again, this period would be reduced to a period of 6 months if the SoS becomes aware of the deal). Once a transaction has been called in and assessed, where necessary and proportionate, the Government will have the power to impose a range of remedies to address any national security concerns.

The proposed regime represents a significant expansion and extension of the current rules, including a significant broadening of the nature of transactions that can be reviewed (e.g. removing safe harbours based on turnover and market share and including acquisitions of certain qualifying assets, including acquisitions of land, physical assets and IP).[2] It is expected to result in significantly higher levels of scrutiny going forward. Indeed, the Government estimates that around 1,000-1,830 notifications could be received a year with 70-95 cases called in for a full national security assessment under the new regime. However, practitioners are of the view that the bill and the proposed secondary legislation detailing the sensitive sectors (as currently drafted) could result in many more notifications.

The Government, however, continues to emphasise the importance of foreign direct investment projects in the UK and the need to ensure that the UK remains an attractive place to invest. Indeed, the Government’s commitment to staying open to foreign investment is reflected in the Prime Minister’s recent announcement of the creation of the Office for Investment. This is a Government unit aimed at driving foreign investment into the UK (tasked to land high value investment opportunities and to resolve potential barriers to landing ‘top tier’ investments).[3] The Business Secretary Alok Sharma also specifically stated on the bills introduction to Parliament that: “The UK remains one of the most attractive investment destinations in the world and we want to keep it that way […] This Bill will mean that we can continue to welcome job-creating investment to our shores, while shutting out those who could threaten the safety of the British people.” The emphasis of the new proposals is thus on encouraging engagement, so that the Government becomes aware of a greater number of deals and can check that they do not pose risks to the UK’s national security. It has been emphasised that a targeted and proportionate approach to enforcement will be adopted, and that most transactions will be cleared without intervention (albeit that conditions will be required to be imposed in some cases and reviews will impact transaction timetables). The regime also introduces a clearer and more defined process for national security reviews than is currently the case, which should assist with transaction planning.[4]

The proposal is set out in the ‘National Security and Investment Bill’ (the “NSIB”) which will be subject to Parliamentary scrutiny before being passed into law.[5] However, in the interim, investors will need to be aware that the proposed legislation will give the Government the retroactive power from commencement to open an investigation into a transaction that has been completed following the introduction of the NSIB to Parliament  (i.e. on or from 12 November 2020) but prior to the commencement of the Act. In such circumstances, the Government will have 6 months from the commencement day to intervene, if the SoS previously became aware of the transaction. Otherwise, the Government will be able to ‘call-in’ the deal up to 5 year’s following the commencement date, unless the SoS becomes aware of the transaction earlier in which case this period is reduced to 6 months from when the SoS becomes aware of the deal.[6]

Key aspects of the proposed new regime are detailed below. At the end of this briefing, we also include some practical tips for transacting parties.

Mandatory vs voluntary notification

• The NSIB provides for the mandatory pre-closing notification of certain acquisitions of voting rights or shares (see “Trigger events/qualifying transactions”, below) in entities active in specified sectors and involved in activities considered higher risk.
• The Government is currently consulting on the proposed sectors, and which parts of each sector, should fall within the scope of the mandatory regime, which will later be defined through secondary legislation.[7]
• As currently proposed, the following 17 sectors would be affected: advanced materials; advanced robotics; artificial intelligence; civil nuclear; communications; computing hardware; critical suppliers to government; critical suppliers to the emergency services; cryptographic authentication; data infrastructure; defence; energy; engineering biology; military or dual-use technologies; quantum technologies; satellite and space technologies and transport.
• The NSIB will provide the Government with powers to amend the types of transactions in scope of the mandatory notification regime – which will include powers to amend the sectors subject to mandatory notification as well as the nature of transactions giving rise to mandatory notification requirements (discussed further below) and exempting certain types of acquisition. It is not clear as yet the circumstances in which dispensations will be granted – it is expected that these will be developed over time (if, for example, the Government finds that certain types of transactions caught by the mandatory regime routinely do not require remedies and thus do not present sufficient security concerns – this may, for example, be based on the characteristics of the investors involved or the type of transaction).
• The fact that sectors of the economy giving rise to mandatory notification requirements will be defined in secondary legislation gives ministers significant discretion to alter the regime without full parliamentary scrutiny. Indeed, it has been specifically called out by the Government that such sectors are ‘highly likely to change over time’, in response to changing risks.
• As mentioned above, if parties fail to notify a trigger event that is subject to mandatory notification, the Government can call it in whenever it is discovered – albeit that the Government is under a 6 month deadline from which the SoS becomes aware of the transaction to call-in the deal. This does not apply to events which take place prior to the commencement of the NSIB, as no mandatory notification requirement will apply until that point.
• In addition to the mandatory regime, parties will be able to voluntary notify deals. The NSIB will permit ministers to ‘call-in’ transactions (not subject to the mandatory regime) up to 6 months after the SoS becomes aware of the transaction (including potentially, through coverage of the deal in a national news publication[8]) provided that this is done within 5 years and there is a ‘reasonable suspicion’ that it may give rise to a national security risk (a transaction cannot be ‘called-in’ for any broader economic interest issues such as employment).[9]

Trigger events / qualifying transactions

• The NSIB envisages that a number of transactions will give rise to so called ‘trigger events’, which will provide an opportunity for the Government to review a transaction. These include acquisitions of:
  1. More than 25%, 50% and 75% of the voting rights or shares of an entity (with increases in shareholding passing over these thresholds notifiable);
  2. Voting rights that ‘enable or prevent the passage of any class of resolution governing the affairs of the entity’;
  3. ‘Material influence’ over an entity’s policy; and

The concept of ‘material influence’ is an existing concept under the UK’s competition regime. It can be based on an acquirer’s shareholding, its board representation or other factors. For shareholdings, the CMA may examine shareholdings of 15% or more to determine whether an acquirer will have material influence. Even a shareholding of less than 15% might attract scrutiny in exceptional cases (where other factors indicate that the ability to exercise material influence over policy are present).

1. 4. A right or interest in, or in relation to, a qualifying asset providing the ability to:
      1. use the asset, or use it to a greater extent than prior to the acquisition; or
      2. direct or control how the asset is used, or direct or control how the asset is used to a greater extent than prior to the acquisition.

Assets in scope of the regime will be defined in the NSIB – as currently proposed, this includes land, tangible moveable property,[10] and ideas, information, or techniques with industrial, commercial or other economic value (including, for example, trade secrets, databases, algorithms, formulae, non-physical designs and models, plans, drawings and specifications, software, source code and IP).

• The mandatory notification requirement would apply to the trigger events specified in (i) and (ii), above, plus an acquisition of 15% or more of the voting rights or shares of an entity. Whilst the latter is not a ‘trigger event’ for notification per se, it is designed to bring transactions to the attention of the SoS so that they can decide whether trigger event (iii) has occurred.
• So, in summary, the NSIB envisages that it could apply to shareholding as low as 10-15% and will cover deals involving a broad range of asset types.
• Moreover there are currently no safe harbour provisions (e.g. in terms of UK market share or turnover requirements) pursuant to which the Government would not have jurisdiction to review the transaction. However, transactions will require a UK nexus (as discussed below).

UK nexus

• The new regime will apply to investors from any country, including where acquirers and sellers do not have a direct link to the UK. To intervene in such circumstances, the SoS must be satisfied that:
  1. in respect of a target entity formed or recognised under laws outside of the UK, the entity carries on activities in the UK or supplies goods or services to persons in the UK; and
  2. in respect of a target asset situated outside of the UK or intellectual property, the asset must be used in connection with activities carried on in the UK or the supply of goods or services to persons in the UK.[11]
• This means, for example, that a business in one country acquiring a business in another country may fall within the regime if the latter carries out activities or provides services or goods in the UK with national security implications. This is also the case in relation to assets which may be used in connection with goods or services provided to UK persons e.g. deep-sea cables located outside of the UK’s geographical borders delivering energy to the UK or intellectual property located outside of the UK but key to the provision of critical functions in the UK.
• The Government intends to legislate for a tighter nexus test in the case of mandatory transactions, but this would not preclude the Government from using the call-in power to intervene in transactions with less direct links to the UK.

Likelihood of intervening  – voluntary notifications

• The Government intends to publish a Statutory Statement of Policy Intent (which will be reviewed at least every 5 years), setting out when the Government expects to use its call-in power. This document will assist with the assessment of when a voluntary notification is more likely to be called in – however, a large amount of discretion will still be exercisable when deciding whether or not to intervene.
• The current draft Statutory Statement of Policy Intent, published alongside the NSIB,[12] states that the SoS will consider three factors when deciding whether or not to exercise its powers, namely:
  1. Acquirer risk (i.e. the extent to which the acquirer raises national security concerns);
  2. Target risk (i.e. the nature of the target and whether it is active in an area of the economy where the Government considers risks more likely to arise e.g. within the headline sectors where mandatory notification is required); and
  3. Trigger event risk (i.e. the type and level of control being acquired and how this could be used in practice to undermine national security).

Examples of trigger event risk include – but are not limited to – the potential for: (i) disruptive or destructive actions: the ability to corrupt processes or systems; (ii) espionage: the ability to have unauthorised access to sensitive information; (iii) inappropriate leverage: the ability to exploit an investment to influence the UK; and (iv) gaining control of a crucial supply chain or obtaining access to sensitive sites, with the potential to exploit them. The risk will be assessed according to the practical ability of a party to use an acquisition to undermine national security.

• The type of asset acquisitions where Government may encourage a notification will also be set out in the Statutory Statement of Policy Intent. The current draft suggests that the SoS will intervene ‘very rarely’ in asset transactions. However, where assets are integral or closely related to activities deemed particularly sensitive (e.g. in sectors subject to the mandatory regime) or, in the case of land, where it is or is proximate to a sensitive site or location (e.g. critical national infrastructure sites or government buildings), acquisitions are more likely to be called in. The SoS may also take into account the intended use of the land.

Procedure

• Unsurprisingly, decisions will be taken by the SoS (currently responsible for making decisions in most national security cases under the current regime) rather than an independent body (as with competition cases).
• The SoS will be supported by the Investment Security Unit, which will sit within the Department for Business, Energy and Industrial Strategy and provide a single point of contact for businesses wishing to understand the NSIB and notify the Government about transactions. The unit will also coordinate cross-government activity to identify, assess and respond to national security risks arising through market activity.
• Where a notification has been made (whether mandatory or voluntary) the SoS will have an initial 30 working day ‘screening period’ to issue a ‘call-in’ notice. Where a transaction is ‘called in’ (including for non-notified transactions), the Government will then have a 30 working day preliminary assessment period. This period would be extendable by a further 45 working days where the initial assessment period is not sufficient to fully assess the risks involved. Further extensions, beyond 75 working days, may be agreed between the acquirer and the SoS for problematic transactions. The SoS will also have the ability to ‘stop the clock’ through formally issuing an information notice or attendance notice during the process, until such a notice is complied with.
• At the end of its review, the SoS will either clear the transaction or must decide to issue a final order, if satisfied that the transaction poses, or would pose, a national security risk (on the balance of probabilities). Such orders may impose conditions or may rule that the transaction should be blocked or unwound.
• The SoS will have a range of remedies available to address national security risks associated with transactions, both while assessments take place and after their completion.
• It is not intended, as under the current regime, that parties will be able to voluntarily offer up undertakings to address concerns (however, parties will be encouraged to maintain a dialogue with the Government throughout the assessment process and it is anticipated that these conversations will assist in designing remedies; further, there will be opportunity for the parties to make representations on remedies during the assessment process). All conditions to approval will be formalised in an order and enforceable through sanctions.
• During an investigation, the Government may also issue interim orders to prevent parties from completing a transaction or, where deals have closed, integrating their operations. Such orders may have extra-territorial effects.
• Legal challenges to decisions will be subject to the standard judicial review process (subject, for certain decisions, to a shortened time limit – 28 days as opposed to the usual three-month period, although the court can give permission to bring the claim after the expiry of the 28 days). The key implication being that it will not be possible to open up decisions for a full appeal on the merits (except in respect of decisions relating to civil penalties, for which a full merits appeal will be available). Close material procedures (“CMPs”) will be utilised to ensure that sensitive materials are not improperly disclosed.[13]

Sanctions

• The proposed legislation creates a number of sanctions, civil and criminal, that will apply in the event of non-compliance. For instance, criminal and civil sanctions are applicable where an acquirer progresses to completion an acquisition subject to the mandatory notification regime, without first obtaining clearance from the SoS. The recommendation would thus be to engage early with the Government and complete the notification process in such circumstances.[14]

Anticipated impact

According to Government data, the NSIB could result in approximately 1,000-1,830 notifications a year, with call-ins/full national security assessments conducted in 70-95 cases a year and remedies anticipated in around 10 cases a year.

By comparison, the UK’s competition regime typically investigates less than 100 deals per year whilst the EU merger control regime – which is one of the toughest in the world – covered 645 cases in 2019 (283 of which were under its simplified procedure regime). Further, the current regime has involved just 12 interventions on a national security basis since 2002 (the peak year for interventions being 2019, in which 4 interventions were issued).

If enacted, this would clearly take the UK from having one of the lightest touch regimes in Europe to arguably one of the most expansive. However, it is also clear that, whilst the Government expects to be engaged and have the opportunity to review transactions (which may have consequences in terms of deal timelines and give rise to hold separate obligations in anticipated and/or completed deals), most transactions will be cleared without any intervention by way of remedies.

Timing and next steps

It is anticipated that the National Security and Investment Act will commence during the first half of next year. The Second Reading of the NSIB took place on Tuesday 17 November 2020. The committee stage (where the bill will undergo a line by line examination, with every clause agreed to, changed or removed) is scheduled for 24 November 2020.

The consultation period on the mandatory notification sectors closes on 6 January 2021. Industry is encouraged to respond and provide views on the scope of the sectors and activities currently covered by this process – as currently drafted, there a number of areas where the scope is potentially over-reaching and insightful, technical input from the market will be welcome.

Other points of note

The national security assessment will run in parallel to any competition assessment for a transaction (which will continue to be conducted by the UK Competition and Markets Authority, the “CMA”). However, whilst the two processes will be separate, there will be interactions and, in practice, outcomes will be intertwined. In particular, the legislation will include a power that would allow the SoS to intervene where competition remedies run contrary to national security interests, where this is considered necessary and proportionate. Further, the Government’s intention is that, as far as possible, any national security remedies will be aligned with competition remedies (and that the timetables will be aligned, to the extent possible, within the statutory framework to achieve this).

The Government is clear that any conflict between competition remedies and risks posed to national security will be resolved after consultation with the CMA and that mutually beneficial remedies will be imposed wherever possible. Interaction between the two regimes will be covered in more detail in a Memorandum of Understanding with the CMA. The CMA will also be under a duty to share information with the SoS and provide other assistance reasonable required to perform its functions.

What does this mean for transacting parties?

This new proposal will have a potentially significant impact on targets, sellers and acquirers alike.

For targets and sellers, it will be incumbent to undertake a review of the target’s business and activities to consider if they fall within one of the sensitive sectors and to be alive to this risk in conjunction with future capital raises, share transfers or sales of all or parts of the business, including sales of key assets, going forwards. There may be structuring options to consider. If targets or sellers are undertaking sale processes, there will also need to be greater scrutiny of acquirers in assessing transaction risk. Auction processes should also take into account the risk that a bidder may pose.

For acquirers (whether domestic or foreign – as the regime is not only designed to capture non-UK parties) consideration should be given to their ultimate controllers, the track record of those people in relation to other acquisitions or holdings, whether the acquirer has control or significant holdings in other entities active in the same sector and any relevant criminal offences or known affiliations of parties involved in the transaction, whereby an acquirer may be regarded as giving rise to acquirer risk from the SoS perspective. It is not clear to what extent parties may be able to pre-clear or seek constructive guidance in advance from the Government. There is reference in the proposals, for example, to parties having informal discussions with the Government earlier on in a sale process. However, these appear to envisage a situation whereby a specific transaction is under contemplation. Further, the Government has flagged that in a competitive process any mandatory or voluntary notification should only be made by the final bidder or acquirer in the process.

Transactions and investment deals will need to be structured to accommodate this additional risk including through introducing additional conditionality. The UK has always been open to foreign investment and, consistent with this, no transaction has been blocked to date on national security concerns. However, strict conditions have been required for deals to be cleared under the current regime. Such implications need to be considered up-front by an acquirer when planning a transaction (and risk, procedural and timing impacts appropriately factored into contractual documentation).

Given the increasing and widening emphasis on screening transactions for national security concerns, it will be important to analyse early on the risks of Government intervention/concerns arising for a transaction. Whilst concerns will be highest in the context of a takeover by a buyer affiliated to a ‘hostile state or actor’ or where a buyer owes allegiance to a hostile state or organisation, foreign nationality more generally has been considered a risk factor under the current regime. Interventions have been launched, for example, in the past, in response to investments from the United States, Canada and elsewhere in Europe. Any foreign entity may thus face close scrutiny. Concerns over asset stripping and rationalisation motivations may also provoke investigations when the acquiring company is a UK entity.

---

Appendix – Government Guidance, Flow Charts on Process [15]

---

---

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

Ali Nikpay – Partner – Head of Competition and Consumer Law, London (+44 (0) 20 7071 4273, [email protected])

Deirdre Taylor – Partner – Antitrust and Competition, London (+44 (0) 20 7071 4274, [email protected])

Attila Borsos – Partner – Competition and Trade, Brussels (+32 2 554 72 11, [email protected])

Selina S. Sagayam – Partner – International Corporate, London (+44 (0) 20 7071 4263, [email protected])

Sarah Parker – Associate – Competition and Consumer Law, London (+44 (0) 78 3324 5958, [email protected])

Tamas Lorinczy – Associate – Corporate, London (+44 (0) 20 7071 4218, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

In 2013, California set hydrogen infrastructure targets to promote development and growth of the fuel cell electric vehicle (FCEV) and hydrogen fueling market.[1] Yesterday, the California Air Resources Board (CARB) released a draft annual report that analyzes the industry’s current status and near-term outlook, and recommends “actions necessary to maintain progress and enable continued future expansion.”[2]

Despite the COVID-19 pandemic, California’s hydrogen fueling network and the number of FCEVs on the road have continued to grow over the past year.[3] CARB concluded that the hydrogen fueling industry is “responding favorably” to California’s “maturing support systems.”[4] As of July 3, 2020, there were 42 open-retail stations, with five stations opened and nine newly funded this year.[5] The total network has reached 71 opened and planned projects across the State.[6] And the California Energy Commission is expected to announce the recipients of co-funding for new stations in the near future.[7]

Although growth projections have shifted back one year compared to prior estimate due to the pandemic, auto manufacturers nevertheless seem poised to accelerate production of FCEVs in tandem with projected fueling station development.[8] And deployment data suggests that FCEV technology has a shot at wide-spread consumer adoption based on similar trends for consumer acceptance of the current generation of battery electric vehicles.[9]

While California’s hydrogen fueling network has continued to advance and has become a priority among public and private stakeholders, CARB notes that progress must “not only continue[] but accelerate[]” in order to meet “State and industry targets for both zero-emission infrastructure development and [zero-emission vehicle] deployment.”[10] Although the State is on track to meet its AB 8 goals, “there is little room for station development delays.”[11] Specifically, the market needs “continued and coordinated industry and State support” to achieve economies of scale so that manufacturers will continue to produce FCEVs, and customer-facing costs will drop enough to make FCEV ownership possible for a broader swath of the California population.[12] CARB cites several “complementary factors” that are crucial to successful FCEV market growth: development of new supply chains and manufacturing capacity; increased consumer awareness and acceptance of FCEVs and hydrogen technology; expansion of the hydrogen fuel production network; and use of consumer incentives to make the technology more affordable.[13]

CARB recommends six specific priorities for industry development:

1. Use AB 8 and HRI program funding, and any other means available, to develop as many light-duty hydrogen fueling stations as possible through the end of the AB 8 program.
2. Appropriately balance the goals of developing stations in communities statewide and driving larger-capacity growth in highly developed local networks.
3. Continue to assess ongoing and projected development pace and quickly address bottlenecks as the technology transitions to a broader market.
4. Understand capacities and opportunities to reduce State funding and transition to a financially self-sufficient industry.
5. Expand upstream hydrogen supply to ensure fuel availability for customers as the market expands.
6. Encourage use of renewable hydrogen.[14]

CARB has solicited public and expert review of the draft report and will release a final revised report in 2021.

___________________

[1]   Assembly Bill No. 8 (Statutes of 2013).

[2]   California Air Resources Board, 2020 Annual Evaluation of Fuel Cell Electric Vehicle Deployment & Hydrogen Fuel Station Network Development xiv.

[3]   Id. at xiii, 3.

[4]   Id. at xiii.

[5]   Id. at xv-xvi.

[6]   Id.

[7]   Id. at xiii, 4-8.

[8]   Id. at xvii-xxii.

[9]   Id. at xx-xxi.

[10]   Id. at xiii, 62.

[11]   Id. at xxi.

[12]   Id. at 62.

[13]   Id. at xiii-xiv.

[14]   Id. at 62-63.

---

The following Gibson Dunn lawyers assisted in preparing this client update: Thomas Manakides, Abbey Hudson, Joseph Edmonds and Jessica Pearigen.

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 any of the following:

Stacie B. Fletcher – Co-Chair, Washington, D.C. (+1 202-887-3627, [email protected])
Daniel W. Nelson – Co-Chair, Washington, D.C. (+1 202-887-3687, [email protected])
Thomas Manakides – Orange County (+1 949-451-4060, [email protected])
Abbey Hudson – Los Angeles (+1 213-229-7954, [email protected])
Joseph D. Edmonds – Orange County (+1 949-451-4053, [email protected])
Jessica M. Pearigen – Orange County (+1 949-451-3819, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

Trying a merger case against a government enforcement agency, state or federal, presents unique challenges. Drawing on their experiences in the recent AT&T/Time Warner and Sprint/T-Mobile merger trials, Gibson Dunn trial and appellate lawyers will discuss cases where the government did and did not have the benefit of a presumption of competitive harm, as well as the role of fact witnesses, party documents, and experts. The panel will also discuss how to involve trial counsel in the merger-clearance phase and how the merging parties’ strategy during the clearance phase can affect the eventual litigation strategy.

View Slides (PDF)

---

---

PANELISTS:

Kristen Limarzi is a partner in the Washington, D.C. office of Gibson Dunn, where her practice focuses on investigations, litigation, and counseling on antitrust merger and conduct matters, as well as appellate and civil litigation. Ms. Limarzi previously served as the Chief of the Appellate Section of the U.S. Department of Justice’s Antitrust Division, where she led a team of more than a dozen professionals litigating appeals in the Division’s civil and criminal enforcement actions and participating as amicus curiae in private antitrust actions.  While at the Antitrust Division, she litigated appeals of merger challenges in United States v. AT&T and United States v. Anthem.  She also advised Division leadership and investigative teams on merger matters involving novel antitrust issues across a variety of industries.

Richard Parker is a partner in the Washington, D.C. office of Gibson Dunn and a member of the firm’s Antitrust and Competition Practice Group.  Mr. Parker is a leading antitrust lawyer who has successfully represented clients before both enforcement agencies and the courts. As an experienced antitrust trial and regulatory lawyer, Mr. Parker has been involved in many major antitrust representations, including merger clearance cases, cartel matters, class actions, and government civil investigations.  He has extensive experience representing clients in matters before the Federal Trade Commission (FTC)  and the U.S. Department of Justice Antitrust Division.  His experience in high-profile merger trials has earned him high honors, including being recognized by Chambers USA as a first-tier ranked “Leading Lawyer” in Antitrust, and included on Benchmark Litigation’s “Top 100 Trial Lawyers in America” list.

Mike Raiff is a Gibson Dunn partner in Texas.  He has a wide range of litigation experience and has tried numerous cases (jury trials, bench trials, and arbitrations), including helping try the AT&T/Time Warner merger trial in D.C. federal court.  In addition to his trial and arbitration practice, Mr. Raiff has argued numerous cases before appellate courts, including Texas appellate courts and several United States Circuit courts. In addition to his antitrust matters, Mr. Raiff has represented clients in various cases involving class actions, shareholder derivative actions, securities fraud, merger and acquisition litigation, contract disputes, environmental disputes, tortious interference claims, infrastructure and public finance disputes, partnership disputes, commercial fraud, and civil conspiracy.

Brian Robison is a partner in Gibson Dunn’s Dallas office. He is a member of the firm’s Antitrust and Competition, Class Actions, and White Collar Defense and Investigations Practice Groups, and he was a member of the team representing Deutsche Telekom in the recent Sprint/T-Mobile merger trial in federal court in New York. Mr. Robison has experience in a wide range of business litigation and antitrust matters in both state and federal courts. He has handled antitrust cases involving claims of monopolization, predatory pricing, price-fixing, supply control, bid rigging, bid rotation, and immunity under the Capper-Volstead Act, the McCarran-Ferguson Act, and the act of state doctrine.  He also has counseled clients on the antitrust implications of proposed business transactions, and he has represented clients in civil and criminal antitrust investigations conducted by both state and federal authorities. Mr. Robison has taken both civil and criminal cases to trial, served as a prosecutor for Dallas County, and argued before state courts of appeals. He has been recognized by numerous publications for his work including Chambers USA: America’s Leading Lawyers for Business, The Best Lawyers in America®, and America’s Top 100 High-Stakes Litigators.

Rob Walters is a nationally recognized trial and antitrust lawyer. He has served as lead trial counsel in a wide array of antitrust trials and cases, including as lead trial counsel to AT&T in the DOJ’s 2018 challenge to its $106 billion acquisition of Time Warner, Inc. He also counsels clients in government investigations and the antitrust aspects of mergers and acquisitions. Mr. Walters serves as Partner-in-Charge of the firm’s Dallas office and as a member of the firm’s worldwide Executive Committee. Mr. Walters served as Executive Vice President and General Counsel of Energy Future Holdings, a $60 billion market-cap power, distribution, and energy retail company, from 2008 until 2011. Mr. Walters lectures on the antitrust laws and trial of complex litigation, including as an adjunct professor at Southern Methodist University School of Law in trial advocacy and at the University of Texas School of Law on energy policy and law.

Chris Wilson is Of Counsel in the Washington, D.C. office of Gibson Dunn.  He is a member of the firm’s Antitrust and Competition Practice Group. Mr. Wilson assists clients in navigating DOJ, FTC, and international competition authority investigations as well as private party litigation involving complex antitrust and consumer protection issues, including matters implicating the Sherman Act, the Clayton Act, the FTC Act, the Hart-Scott-Rodino (HSR) merger review process, as well as international and state competition statutes.  His experience crosses multiple industries, including health insurance, transportation, telecommunications, technology, energy, agriculture, and biotechnology, and his particular areas of focus include merger enforcement, interlocking directorates, joint ventures, compliance programs, and employee “no-poach” agreements.

On November 12, 2020, President Trump issued Executive Order (“E.O.”) 13959 restricting the ability of U.S. persons to invest in securities of certain “Communist Chinese military companies.”[1] This E.O. alleges that under China’s national strategy of “Military-Civil Fusion,” China “exploits United States investors” to finance the development of its military, intelligence, and security capabilities. While the E.O. is only the latest in a flurry of actions by the Trump administration directed against Beijing, it is the first measure to focus on securities—including investments in securities of dozens of prominent Chinese companies, as well as mutual funds and index funds that hold such companies’ shares. Under the E.O., U.S. persons—including individual and institutional investors, stock exchanges, fund managers, investment advisers, broker-dealers, and insurance companies—will be prohibited from purchasing for value publicly traded securities of certain Chinese companies starting in early January 2021 and, absent a change in policy by the incoming Biden administration, will be incentivized to engage in divestment transactions through November 11, 2021.

The E.O. currently applies to 31 ostensibly civil companies that the United States alleges have ties to the Chinese military. The names of those companies appear on two lists published by the U.S. Department of Defense in June 2020 and August 2020, and reproduced below. The U.S. Department of the Treasury has yet to publish guidance indicating whether the E.O. extends to those companies’ subsidiaries; however, a plain-language reading of the E.O. suggests that it may only apply to subsidiaries (if any) that the U.S. Secretary of the Treasury identifies by name. Among the targeted entities are substantial enterprises such as China Mobile Communications and Hikvision, many of which have shares traded on mainland Chinese, Hong Kong, or U.S. stock exchanges. Additionally, several of the targeted companies were added earlier this year to the U.S. Department of Commerce’s Entity List and are therefore already subject to stringent restrictions on access to U.S.-origin goods, software, and technologies. In that sense, the new E.O. marks an expansion of U.S. pressure on Beijing from targeting suppliers of certain large Chinese firms to constricting their sources of financing, albeit in a relatively narrow manner. According to a leading China-focused research organization, of the 31 companies identified to date, only 13 are publicly traded components of the MSCI China Index and only Hikvision has substantial foreign ownership.[2]

Effective January 11, 2021—sixty days after the E.O. was issued—U.S. persons are prohibited from engaging in “any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Communist Chinese military company.” “Transaction” is defined to mean the purchase for value of any publicly traded security and the prohibition applies to shares in such companies, as well as shares held indirectly through popular investment vehicles such as exchange traded funds. The E.O. also permits U.S. persons, until November 11, 2021—one year after the E.O. was issued—to engage in otherwise prohibited transactions in order to divest their existing holdings in any of the named Communist Chinese military companies. Although the E.O.’s narrow definition of prohibited transactions does not appear to require U.S. persons to divest holdings in these companies, the prospect of securities becoming illiquid after November 11, 2021 may lead many U.S. investors to divest their holdings during this time.

In this regard the surgical and staggered imposition of restrictions under the E.O. reflects prior approaches the United States used with Venezuela and Russia and is likely animated by similar concerns. When the United States acted to limit the Maduro regime’s access to finance starting in 2017, it, inter alia, restricted transactions associated with certain Venezuela bonds. But, in order to limit the collateral consequences on innocent parties that held significant numbers of those bonds, the United States allowed the limited divestment of those bonds. In the Russia context, following the Crimea incursion in 2014, the United States imposed sanctions on some of the largest enterprises in the Russian financial and energy sectors. However, due to the exposure of U.S. and allied interests to those enterprises, the United States similarly stopped short of imposing blocking sanctions on any of the targeted entities. As with the new China E.O., Russian “sectoral” sanctions prohibit U.S. persons from engaging in only certain types of financial transactions with identified firms. And, importantly, absent some other prohibition, the earlier Russian sectoral sanctions and the new China E.O. permit U.S. persons to continue engaging in all other lawful dealings with listed entities.

The new E.O. is the latest in a series of U.S. measures calculated to address perceived threats to U.S. national security posed by China’s policy of “Military-Civil Fusion.”[3] Like the U.S. Department of Commerce’s expansion of the Military End User Rule, the new Huawei-specific Direct Product Rule, and the recent spate of Entity List designations, as well as the U.S. Government’s procurement ban on certain technologies from several Chinese companies (including two companies that are subject to the new E.O.), this latest action is designed to curtail American support for Chinese companies that allegedly support the Chinese military. The E.O. also complements outreach by the U.S. State Department in August 2020 urging colleges and universities to divest from Chinese holdings more generally,[4] and President Trump’s Working Group on Financial Markets, which has developed guidance that would require companies to provide American regulators with access to audit work papers to remain listed on U.S. exchanges, access that China had historically refused.[5] White House officials are reportedly prioritizing further action against Beijing during President Trump’s final weeks in office.

While the E.O.’s prohibition will take effect shortly before President-elect Biden is sworn in, the apparent wind-down period for U.S. persons to divest their holdings in the listed Communist Chinese military companies extends nearly a year into the next president’s term. As such, in our assessment, the key date for this new policy is not only January 11, 2021, when the prohibition takes effect, but also nine days later when the new administration assumes power. Because the E.O. is not mandated by statute or any other requirement, once in office President Biden could engage with the E.O. as he sees fit: he could revoke the E.O. outright, narrow its reach through published guidance and the exercise of enforcement discretion, decline to target additional Chinese companies, or allow the E.O. to lapse on November 12, 2021 when the President is required by the International Emergency Economic Powers Act to renew the national emergency determination that allowed for the E.O.

However, even for a Biden administration that will be intent on changing the tone of U.S. foreign policy—including through closer coordination with traditional allies—rescinding or eliminating these and other restrictions on Beijing without receiving any concessions in return could spark bipartisan pushback in the U.S. Congress and potentially in the electorate. Moreover, even if President Biden were to narrow or revoke the new E.O., the measure may nevertheless serve its intended purpose of making U.S. persons (including U.S. financial institutions) less willing to hold securities or other financial instruments of, or do other business with, companies that have been linked to the Chinese military, intelligence, or security services. Furthermore, in light of China’s increasingly robust regulatory responses to U.S. unilateral measures—seen in the Hong Kong national security law, Beijing’s new export control law, and its continued threat of establishing an “unreliable” suppliers list for companies that choose to comply with U.S. regulations and cease certain sales to Chinese companies—we expect that China will also respond to this E.O. How China chooses to react will either reduce tensions between Beijing and Washington or continue to exacerbate the situation by potentially imposing costs on entities that choose to comply with this new measure.

*      *      *

As of November 12, 2020, the 31 Communist Chinese military companies to which the prohibition will apply are as follows:

1. Aviation Industry Corporation of China (AVIC)
2. China Aerospace Science and Technology Corporation (CASC)
3. China Aerospace Science and Industry Corporation (CASIC)
4. China Electronics Technology Group Corporation (CETC)
5. China South Industries Group Corporation (CSGC)
6. China Shipbuilding Industry Corporation (CSIC)
7. China State Shipbuilding Corporation (CSSC)
8. China North Industries Group Corporation (Norinco Group)
9. Hangzhou Hikvision Digital Technology Co., Ltd. (Hikvision)
10. Huawei
11. Inspur Group
12. Aero Engine Corporation of China
13. China Railway Construction Corporation (CRCC)
14. CRRC Corp.
15. Panda Electronics Group
16. Dawning Information Industry Co (Sugon)
17. China Mobile Communications Group
18. China General Nuclear Power Corp.
19. China National Nuclear Corp.
20. China Telecommunications Corp.
21. China Communications Construction Company (CCCC)
22. China Academy of Launch Vehicle Technology (CALT)
23. China Spacesat
24. China United Network Communications Group Co Ltd
25. China Electronics Corporation (CEC)
26. China National Chemical Engineering Group Co., Ltd. (CNCEC)
27. China National Chemical Corporation (ChemChina)
28. Sinochem Group Co Ltd
29. China State Construction Group Co., Ltd.
30. China Three Gorges Corporation Limited
31. China Nuclear Engineering & Construction Corporation (CNECC)

_____________________

   [1]   Exec. Order No. 13959, 85 Fed. Reg. 73185 (Nov. 12, 2020), https://www.govinfo.gov/content/pkg/FR-2020-11-17/pdf/2020-25459.pdf.

   [2]   Another Trump Attack on Chinese Stocks, Gavekal Dragonomics (Nov. 13, 2020), https://research.gavekal.com/article/another-trump-attack-chinese-stocks.

   [3]   The Military-Civil Fusion policy is described in China’s national strategic plan “Made in China 2025,” which was announced by Premier Li Keqiang and his cabinet in May 2015.

   [4]   Kevin Cirilli & Shelly Banjo, U.S. Warns Colleges to Divest China Stocks on Delisting Risk, Bloomberg Quint (Aug. 19, 2020), https://www.bloombergquint.com/business/state-department-urges-colleges-to-divest-from-chinese-companies.

   [5]   Press Release, President’s Working Group on Financial Markets Releases Report and Recommendations on Protecting Investors from Significant Risks from Chinese Companies, U.S. Dep’t of Treasury (Aug. 6, 2020), https://home.treasury.gov/news/press-releases/sm1086.

---

The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Jose Fernandez, Chris Timura, Stephanie Connor, R.L. Pratt and Scott Toussaint.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, [email protected])
Jose W. Fernandez – New York (+1 212-351-2376, [email protected])
Marcellus A. McRae – Los Angeles (+1 213-229-7675, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Ben K. Belair – Washington, D.C. (+1 202-887-3743, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
Laura R. Cole – Washington, D.C. (+1 202-887-3787, [email protected])
Jesse Melman – New York (+1 212-351-2683, [email protected])
R.L. Pratt – Washington, D.C. (+1 202-887-3785, [email protected])
Samantha Sewall – Washington, D.C. (+1 202-887-3509, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, [email protected])

Asia and Europe:
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Beijing – (+86 10 6502 8534, [email protected])
Joerg Bartz – Singapore – (+65 6507 3635, [email protected])
Peter Alexiadis – Brussels (+32 2 554 72 00, [email protected])
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Nicolas Autet – Paris (+33 1 56 43 13 00, [email protected])
Susy Bullock – London (+44 (0)20 7071 4283, [email protected])
Patrick Doris – London (+44 (0)207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 20 7071 4205, [email protected])
Penny Madden – London (+44 (0)20 7071 4226, [email protected])
Steve Melrose – London (+44 (0)20 7071 4219, [email protected])
Matt Aleksic – London (+44 (0)20 7071 4042, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Richard W. Roeder – Munich (+49 89 189 33-160, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

Please join our distinguished panelists for a discussion about the U.S. Sentencing Guidelines and how they apply in corporate enforcement actions. They will discuss issues arising in white collar matters and strategies that can impact the calculation of the Sentencing Guidelines fine range, including gain from the offense, corporate recidivism, and cooperation, among other issues. Another area of focus will be how the Guidelines address corporate compliance programs and how organizations can position themselves for maximum credit.

View Slides (PDF)

---

---

PANELISTS:

Stephanie L. Brooker is co-chair of Gibson Dunn’s Financial Institutions Practice Group and member of the White Collar Group. She is the former Director of the Enforcement Division at FinCEN, and previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia and as a DOJ trial attorney for several years. Ms. Brooker represents multi-national companies and individuals in internal corporate investigations and DOJ, SEC, and other government agency enforcement actions involving, for example, matters involving BSA/AML; sanctions; anti-corruption; securities, tax, and wire fraud; whistleblower complaints; and “me-too” issues.  Her practice also includes BSA/AML compliance counseling and due diligence and significant criminal and civil asset forfeiture matters. Ms. Brooker has been named a Global Investigations Review “Top 100 Women in Investigations” and National Law Journal White Collar Trailblazer.

David Debold is a partner in the Washington D.C. office, where he practices in the Litigation Department, and is a member of the firm’s White Collar Defense and Investigations Practice Groups. Mr. Debold’s white collar and regulatory matters include: major SEC enforcement actions and investigations involving accounting irregularities, investigations and regulatory actions by FINRA and the PCAOB; and federal criminal investigations and prosecutions involving a number of federal offenses in the environmental, tax, mortgage loan fraud, securities fraud, stock options backdating, money laundering, and antitrust areas.

Michael S. Diamant is a partner in the Washington, D.C. office and a member of the firm’s White Collar Defense and Investigations Practice Group. He also serves on the firm’s Finance Committee. His practice focuses on white collar criminal defense, internal investigations, and corporate compliance. Mr. Diamant has broad white collar defense experience representing corporations and corporate executives facing criminal and regulatory charges. He has represented clients in an array of matters, including accounting and securities fraud, antitrust violations, and environmental crimes, before law enforcement and regulators, like the U.S. Department of Justice and the Securities and Exchange Commission. Mr. Diamant also regularly advises major corporations on the structure and effectiveness of their compliance programs.

Patrick F. Stokes is a partner in the Washington, D.C. office, where his practice focuses on internal corporate investigations and enforcement actions regarding corruption, securities fraud, and financial institutions fraud. Prior to joining the firm, Mr. Stokes headed the DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ’s Securities and Financial Fraud Unit.

Christopher W.H. Sullivan is of counsel in the Washington D.C. office and a member of the White Collar Defense and Investigations Practice Group. Mr. Sullivan has significant experience representing clients in government investigations and compliance monitorships.  He has represented clients in a variety of areas, including False Claims Act, Foreign Corrupt Practices Act, and OFAC matters, before the Department of Justice, Securities and Exchange Commission, and other enforcement authorities.

Many UK regulated firms will be currently (re-)assessing staff as fit and proper and training staff on the FCA’s (or the PRA’s) Conduct Rules. The FCA has recently banned three individuals from working in the financial services industry for non-financial misconduct outside the workplace. The enforcement actions are, therefore, a timely reminder for regulated firms that the FCA has indicated it will bring an increased focus on how firms deal with non-financial misconduct by employees, both within and outside of the workplace.

Although these three specific cases followed criminal prosecutions for serious sexual offences, regulated firms are faced with particular challenges in determining how to deal with staff issues where the activities are not of the same degree of seriousness, take place outside of the workplace and are unconnected to any regulated activity undertaken by an individual.

Firms should consider what types of employee behaviour within and outside the workplace might be considered non-financial misconduct rendering an individual no longer “fit and proper” or alternatively constitute a breach of the FCA’s (or PRA’s) Conduct Rules reportable to the relevant regulator. Firms would be advised to appropriately document this assessment and consider how this is communicated to staff.

What enforcement action has the FCA taken ? Russell David Jameson[1] – Jameson was a financial adviser at an authorised firm and was approved by the FCA to hold various significant influence and customer facing functions. In July 2018, he was convicted of serious criminal offences involving the making, possession and distribution of indecent images of children and sentenced to five years’ imprisonment, ordered to sign the sex offenders register indefinitely, and included in the list of individuals barred from working with children or vulnerable adults. Mark Horsey[2] – Horsey was the sole director and shareholder of an authorised financial advice firm. Horsey had surreptitiously observed and video recorded his tenant having a shower without their consent. Horsey was sentenced to nine months’ imprisonment suspended for 18 months, required to complete 100 hours of unpaid work and 25 days of rehabilitation activity, and required to sign the sex offenders register. Frank Cochran[3] – Cochran was a director and shareholder of an authorised financial advice firm. In April 2018, he was convicted of sexual assault, engaging in controlling and coercive behaviour and an offence contrary to the Protection from Harassment Act 1997. Cochran was sentenced to seven years’ imprisonment and required to sign the sex offenders register. These individuals committed the offences whilst they were FCA approved persons. The FCA found that all three were not fit and proper and lacked the necessary integrity and reputation required to work in the regulated financial services sector.

What are the FCA’s expectations as to how firms address non-financial misconduct?

In response to the recent Final Notices, Mark Steward, FCA Executive Director of Enforcement and Market Oversight, stated that: “The FCA expects high standards of character, probity and fitness and properness from those who operate in the financial services industry and will take action to ensure these standards are maintained.”[4] This indicates that the regulatory direction of travel is an increased focus on how firms address instances of non-financial misconduct. This is supported by other important FCA announcements on this topic.

In September 2018, Megan Butler, FCA Executive Director sent a letter to House of Commons’ Women and Equalities Committee.[5] The letter addressed the important issue of sexual harassment and noted that the FCA regarded it as misconduct that falls within the scope of the FCA’s regulatory framework. Tolerance of this sort of misconduct would be a clear example of a driver of poor culture. Megan Butler noted that sexual harassment and other forms of non-financial misconduct can amount to a breach of the FCA’s Conduct Rules and the Senior Managers and Certification Regime (“SMCR”) imposes requirements on firms to notify the FCA of Conduct Rule breaches. The letter was followed by a speech in December 2018 by Christopher Woolard, FCA Executive Director of Strategy and Competition.[6] Mr Woolard noted that “the way firms handle non-financial misconduct, including allegations of sexual misconduct, is potentially relevant to our assessment of that firm, in the same way that their handling of insider dealing, market manipulation or any other misconduct is.”

In January 2020 a “Dear CEO” letter[7] from Jonathan Davidson, FCA Executive Director of Supervision, Retail and Authorisations, was published regarding non-financial misconduct. Although the letter was addressed to the wholesale general insurance sector, it is indicative of the FCA’s approach to non-financial misconduct across the regulated sector. In particular, Mr Davidson noted that non-financial misconduct and an unhealthy culture is a key root cause of harm. How a firm handles non-financial misconduct throughout the organisation, including discrimination, harassment, victimisation and bullying, is regarded as being indicative of a firm’s culture. The FCA expects firms, and senior managers to embed healthy cultures by identifying and modifying the key drivers of their culture. Mr Davidson highlighted that the FCA’s Approach to Supervision document flags the 4 key drivers of culture. These drivers are: leadership; purpose; approach to rewarding and managing people; and governance, systems and controls.

What challenges do firms face relating to non-financial misconduct?

Where the actions of individuals result in convictions and custodial sentences the decision on the fit and proper test is often (but not always) straightforward and the enforcement actions above, together with the various FCA pronouncements also identified, make clear the FCA’s view in this area.

However, regulated firms can be faced with a number of challenges when assessing non-financial misconduct, particularly when it occurs outside of the workplace.

(1) Identifying non-financial misconduct

It is often difficult for firms to identify non-financial misconduct, particularly if it occurs outside of the office. This may be a result of employees incorrectly understanding a firm’s policies and procedures around what must be brought to the firm’s attention or a reluctance of staff to reveal such matters to the firm.

Firms are expected to be able to demonstrate to the FCA that they have that the right processes in place to handle and escalate such cases appropriately. At a time when many employees are working from home the challenge for firms is greater. Firms should ensure that:

• staff are trained and have an understanding of their obligations to inform the firm of relevant matters;
• guidance for staff is clear on the types of matters about which firms would expect to be notified; and
• such guidance should include examples of non-financial misconduct, and the guidance and training should be appropriately documented.

(2) Determining which matters need (immediate) escalation to the FCA

Principle 11 of the FCA’s Principles for Business requires a firm to maintain an open and cooperative relationship with regulators, as well as disclosing appropriately anything relating to the firm of which the FCA would reasonably expect to be notified. Senior Managers are also subject to a Senior Manager Conduct Rule and must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

Not all instances of misconduct would, however, require an immediate notification – firms will have a challenge in determining whether a matter is sufficiently material to warrant disclosure to a regulator. Factors to consider include:

• seniority or significance of the individual to the firm; and
• seriousness of conduct, potentially as represented by outcome.

(3) Undertaking “fit and proper” assessments

The recent enforcement actions all involved an assessment of the individual concerned under the FCA’s Fit and Proper Test for Employees and Senior Personnel. The most important considerations when assessing the fitness and propriety of a person are the person’s: (1) honesty, integrity and reputation; (2) competence and capability; and (3) financial soundness. Conviction for a serious sexual offence will clearly cause an individual to fail the test. The challenge for firms comes when the scenario is less clear cut. The concepts of “honesty” and “integrity” are inherently subjective and result in a regulated firm often having to make a difficult judgement in a given scenario.

(4) Interplay with the SMCR

The introduction of the SMCR marked a regulatory shift from collective responsibility to individual accountability. For staff subject to the FCA’s Conduct Rules, in addition to the fit and proper test, firms must also make an assessment as to whether any misconduct constitutes a breach of the Conduct Rules. The Conduct Rules are drafted to cover the activities of in-scope staff in both the regulated and unregulated parts of a business. The difficultly arises for firms in assessing when non-financial misconduct, particularly outside of the workplace, also amounts to a breach of the Conduct Rules.

This is important as firms are required to report any disciplinary action taken against an individual for a breach of the Conduct Rules. Firms are also required to include Conduct Rule breaches in regulatory references from new employers once staff have left the firm. It is, therefore, important that firms have a robust process in place for determining what types of employee behaviour within and outside the workplace might be considered a breach of the Conduct Rules and that all such decisions are clearly documented.

What practical steps can firms take to meet regulatory expectations?

It is clear that there is increasing regulatory focus on how regulated firms deal with non-financial misconduct and that failure to tackle such issues appropriately can be taken by the FCA as an indicator of poor culture. Firms would be advised to undertake an assessment as to how they in practice deal, or would deal, with instances of non-financial misconduct by staff.

The following practical steps are examples of matters that firms should consider to ensure that they meet regulatory expectations in this area.

• Fitness and propriety assessments of incoming and existing staff should consider a broad spectrum of indicators, including data around financial and non-financial conduct, inside and outside the workplace.
• Firms should proactively consider the types of non-financial misconduct that would trigger a fitness and propriety re-assessment and, as applicable, a review of whether a Conduct Rule has been breached.
• Appropriate escalation procedures, including whistleblowing, should be in place so that the firm can identify and appropriately investigate allegations of non-financial misconduct by employees both within and outside of the workplace.
• Staff must be appropriately trained on the importance of their behaviour within and outside of the workplace and when matters should be raised and to whom. Firms should also consider whether those to whom such matters may be raised also require training in handling what may be sensitive personal matters.
• Non-financial, as well as financial, metrics should be included in performance assessments.
• Sufficient management information regarding non-financial misconduct should be presented to management for management to receive a complete picture of risk, performance and conduct in the areas for which they are responsible.

_______________________

[1] https://www.fca.org.uk/publication/final-notices/russell-david-jameson-2020.pdf

[2] https://www.fca.org.uk/publication/final-notices/mark-horsey-2020.pdf

[3] https://www.fca.org.uk/publication/final-notices/frank-cochran-2020.pdf

[4] https://www.fca.org.uk/news/press-releases/fca-bans-three-individuals-working-financial-services-industry-non-financial-misconduct

[5] https://www.fca.org.uk/publication/correspondence/wec-letter.pdf

[6] https://www.fca.org.uk/news/speeches/opening-and-speaking-out-diversity-financial-services-and-challenge-to-be-met

[7] https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-non-financial-misconduct-wholesale-general-insurance-firms.pdf

---

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 in the firm’s Financial Institutions practice group, or the following authors in London:

Matthew Nunan (+44 (0) 20 7071 4201, [email protected])

Martin Coombes (+44 (0) 20 7071 4258, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

Our distinguished panelists discuss the challenging interplay between internal audit and white collar investigations.  We discuss strategies to ensure that internal audit complements the compliance function and how best to deal with legal problems identified by internal audit activities.  Our panelists will go over recent FCPA enforcement actions that leverage internal audit findings to support alleged violations.

View Slides (PDF)

---

---

PANELISTS:

Michael Diamant is a partner in Gibson Dunn’s Washington, D.C. office. He is a member of the White Collar Defense and Investigations Practice Group, and serves on the firm’s Finance Committee. Mr. Diamant  has managed numerous internal investigations for publicly traded corporations and conducted fieldwork in nineteen different countries on five continents. He also regularly advises major corporations on the structure and effectiveness of their compliance programs.

Patrick Stokes is a partner in Gibson Dunn’s Washington, D.C. office, where his practice focuses on internal corporate investigations and enforcement actions regarding corruption, securities fraud, and financial institutions fraud. Prior to joining the firm, Mr. Stokes headed the DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ’s Securities and Financial Fraud Unit.

Christopher Sullivan is of counsel in Gibson Dunn’s Washington, D.C. office where he represents clients in a variety of areas, including False Claims Act, Foreign Corrupt Practices Act, and OFAC matters, before the Department of Justice, Securities and Exchange Commission, and other enforcement authorities.  Mr. Sullivan has also conducted internal investigations regarding potential corruption, False Claims Act, and other white collar issues.

Courtney M. Brown is a senior associate in Gibson Dunn’s Washington, D.C. office, where she practices primarily in the areas of white collar criminal defense and corporate compliance.  Ms. Brown has experience representing and advising multinational corporate clients and boards of directors in internal and government investigations on a wide range of topics, including anti-corruption, anti-money laundering, sanctions, securities, tax, and “me too” matters.

Los Angeles partner James L. Zelenay, Jr. and associate Jeremy S. Smith are the authors of “FCA update: Will the Supreme Court address materiality (again)?” [PDF] published by the Daily Journal on November 11, 2020.

On November 10, 2020, Governor Andrew Cuomo signed legislation that will expand First Amendment protections under New York’s anti-SLAPP law by providing new tools for defendants to challenge frivolous lawsuits. The bill was initially passed by the New York State Senate and Assembly on July 22, 2020. The bill amends and extends New York’s current statute (sections 70-a and 76-a the New York Civil Rights Law) addressing so-called strategic lawsuits against public participation (“SLAPPs”):[1] suits that seek to punish and chill the exercise of the rights of petition and free speech on public issues by subjecting defendants to expensive and burdensome litigation.[2] Prominent First Amendment and free speech advocates, including the Reporters Committee for Freedom of the Press,[3] Time’s Up Now,[4] the New York Civil Liberties Union,[5] and the Authors Guild[6] came out in its support, as did the Editorial Board of The New York Times.[7]

Anti-SLAPP laws currently exist in 30 states and the District of Columbia, yet despite being home to some of the world’s most prominent media and news organizations,[8] New York’s own anti-SLAPP law, enacted in 2008, has been narrowly limited to litigation arising from a public application or permit, often in a real estate development context.[9] The new law, sponsored by Senator Brad Hoylman and Assemblywoman Helene E. Weinstein, amends the civil rights law in several ways to expand and strengthen New York’s anti-SLAPP protections.

The following is a summary of the law’s changes, which take effect immediately upon enactment, and key continuing features:

• Expands the statute beyond actions “brought by a public applicant or permittee,” to apply to any action based on a “communication in 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.”[10]
• Confirms that “public interest” should be construed broadly, including anything other than a “purely private matter.”[11]
• Requires courts to consider anti-SLAPP motions based on the pleadings and “supporting and opposing affidavits stating the facts upon which the action or defense is based.”[12]
• Provides that all proceedings—including discovery, hearings, and motions—shall be stayed while a motion to dismiss is pending, except that the court may order limited discovery where necessary to allow a plaintiff to respond to an anti-SLAPP motion.[13]
• Alters the formerly permissive standard (“may”) for awarding attorneys’ fees to provide that where the court grants such a motion, an award of fees and costs is mandatory: i.e., “costs and attorney’s fees shall be recovered.”[14]

While the amended statute provides welcome tools to defendants facing SLAPP suits, it remains to be seen how the revisions will function in practice. For example, while the revisions incorporate some of the key language and structure of California’s anti-SLAPP statute[15] —including a stay of discovery, and mandatory attorneys’ fees and costs to prevailing defendants—the proposed law preserves the standard for evaluating the merits: a motion to dismiss such an action “shall be granted” unless the plaintiff can show “that the cause of action has a substantial basis in law or is supported by a substantial argument for an extension, modification or reversal of existing law.”[16] In the context of the previous limited anti-SLAPP law, New York courts have interpreted that standard to impose a “heavy burden” on plaintiffs opposing anti-SLAPP motions,[17] requiring them to make an evidentiary showing of the facts supporting their claim and demonstrating that the defendant cannot establish a defense against it.[18] It will be up to courts to determine how that standard functions when applied to a broader range of cases, including defamation and other tort claims, that may present closer questions.

Separately, the status of the applicability of state anti-SLAPP statutes in federal court remains an open question, especially in light of the Second Circuit’s recent decision that California’s anti-SLAPP statute does not apply in federal court. La Liberte v. Reid, No. 19-3574, 2020 WL 3980223 (2d Cir. July 15, 2020). Whether New York’s revised anti-SLAPP law will be available to defendants in federal lawsuits in the Second Circuit is an open question that federal courts may soon need to confront.

Finally, courts will be asked to determine whether the revised statute is effective in currently pending actions, or if it will only have effect in actions filed after enactment. New York reserves this question as “a matter of judgment made upon review of the legislative goal,” based on “whether the Legislature has made a specific pronouncement about retroactive effect or conveyed a sense of urgency; whether the statute was designed to rewrite an unintended judicial interpretation; and whether the enactment itself reaffirms a legislative judgment about what the law in question should be.”[19] New York courts will likely conclude that the revised statute has “retroactive” effect and will apply in pending cases in light of the statute’s clear “remedial purpose.”[20] The legislature was careful to explain that the revisions intend to correct judicial “narrow[] interpret[ation]” of the existing anti-SLAPP statute and to remedy the courts’ “fail[ure] to use their discretionary power to award costs and attorney’s fees” in SLAPP suits, and that the revised statute “will better advance the purposes that the Legislature originally identified in enacting New York’s anti-SLAPP law.”[21] These factors all suggest that the revisions will take immediate effect in both pending and post-enactment lawsuits.

______________________

[1] 2020 N.Y. Senate Bill No. 52-A/Assembly Bill No. 5991A (July 22, 2020), https://www.nysenate.gov/legislation/bills/2019/s52/amendment/a.

[2] Understanding Anti-SLAPP Laws, Reporters Committee for Freedom of the Press, https://www.rcfp.org/resources/anti-slapp-laws/ (last visited August 3, 2020).

[3] Reporters Committee supports legislation that would strengthen New York’s anti-SLAPP law, Reporters Committee for Freedom of the Press, https://www.rcfp.org/briefs-comments/rcfp-supports-ny-anti-slapp-bills/(last visited August 3, 2020).

[4] TIME’S UP (@TIMESUPNOW), Twitter, https://twitter.com/TIMESUPNOW/status/1286031156446728193 (last accessed August 3, 2020).

[5] Senator Brad Hoylman (@bradhoylman), Twitter, https://twitter.com/bradhoylman/status/1286002251685863424 (last accessed August 3, 2020).

[6] Authors Guild Signs Letter in Support of Anti-SLAPP Statute, Authors Guild, https://www.authorsguild.org/industry-advocacy/authors-guild-signs-letter-in-support-of-anti-slapp-statute/ (last accessed August 3, 2020).

[7] The Legal System Should Not Be a Tool for Bullies, N.Y. Times, https://www.nytimes.com/2020/07/17/opinion/new-york-slapp-frivolous-lawsuits.html.

[8] Id.

[9] 2020 N.Y. Senate Bill No. 52-A/Assembly Bill No. 5991A (July 22, 2020), https://www.nysenate.gov/legislation/bills/2019/s52/amendment/a.

[10] Id. (emphasis added).

[11] Id.

[12] Id.

[13] Id.

[14] Id. (emphasis added).

[15] Cal. Civ. Proc. Code § 425.16.

[16] 2020 N.Y. Senate Bill No. 52-A/Assembly Bill No. 5991A (July 22, 2020), https://www.nysenate.gov/legislation/bills/2019/s52/amendment/a (emphasis added).

[17] 161 Ludlow Food, LLC v. L.E.S. Dwellers, Inc., 107 N.Y.S.3d 618, at *4 (N.Y. Sup. Ct. 2018), aff’d, 176 A.D.3d 434 (1st Dep’t 2019).

[18] Edwards v. Martin, 158 A.D.3d 1044, 1048 (3d Dep’t 2018).

[19] Nelson v. HSBC Bank USA, 87 A.D.3d 995, 997–98 (2d Dep’t 2011).

[20] In re Gleason (Michael Vee, Ltd.), 96 N.Y.2d 117, 122–23 (2001).

[21] 2020 N.Y. Senate Bill No. 52-A/Assembly Bill No. 5991A (July 22, 2020), https://www.nysenate.gov/legislation/bills/2019/s52/amendment/a.

---

The following Gibson Dunn lawyers assisted in the preparation of this client update: Anne Champion, Nathaniel Bach, Connor Sullivan, Kaylie Springer, and Dillon Westfall.

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:

Anne M. Champion – New York (+1 212-351-5361, [email protected])
Connor Sullivan – New York (+1 212-351-2459, [email protected])
Scott A. Edelman – Co-Chair, Media, Entertainment and Technology Practice, Los Angeles (+1 310-557-8061, [email protected])
Kevin Masuda – Co-Chair, Media, Entertainment and Technology Practice, Los Angeles (+1 213-229-7872, [email protected])
Nathaniel L. Bach – Los Angeles (+1 213-229-7241, [email protected])

San Francisco partner Brian M. Lutz and Orange County associate Colin B. Davis are the authors of “Chancery Court Ruling Confirms High Bar to Pleading a Nonexculpated ‘Revlon’ Claim” [PDF] published by Delaware Business Court Insider on November 11, 2020.

On October 29, 2020, the 16th amendment to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung or “AWV”) entered into force. The amendment is the final step of implementing the EU-wide cooperation mechanism introduced by Regulation (EU) 2019/452 of March 19, 2019 establishing a framework for screening of foreign direct investments into the EU (the “EU Screening Regulation”).

New EU-Wide Cooperation Mechanism

The EU Screening Regulation directly applies as of October 11, 2020 which marks the beginning of a coordinated cooperation among EU member states on foreign direct investments (the “FDIs”). This means that, going forward, the German Federal Ministry for Economic Affairs and Energy (the “German Ministry”) will exchange information on FDIs undergoing screening in Germany with the European Commission and fellow EU member states which, in turn, may issue comments or, in case of the European Commission, an opinion. While such comments and/or opinions are non-binding, they need to be given ‘due consideration’ and, thus, may influence the screening decision rendered by the German Ministry. For details on the EU Screening Regulation, see our Client Alert of March 5, 2019.

In order for the German Ministry to be able to consider the potential impact of an FDI on the public order or security of one or more fellow EU member states as well as on projects or programs of EU interest, the grounds for screening under German FDI rules had to be expanded accordingly. For the same reason, the standard under which an FDI may be prohibited or restrictive measures may be imposed has been tightened from “endangering” (Gefährdung) to “likely to affect” (voraussichtliche Beeinträchtigung) the public order or security, as to reflect the EU Screening Regulation. More or less a side effect, this gives the German Ministry more discretion and room to maneuver as it no longer has to determine an “actual and serious threat” (tatsächliche und hinreichend schwere Gefährdung) but now could prohibit a transaction in order to prevent an impairment that has not yet materialized but that is likely to occur as a result of the contemplated FDI.

Recent Changes to German FDI Rules

In light of the implementation of the EU-wide cooperation mechanism, we want to use the opportunity to recap this year’s key changes to the German FDI screening process. We refer to our client alert of May 27, 2020 (available here) for an overview on the overall screening process and a detailed outline of the most relevant amendments (and contemplated changes) to German FDI rules thus far in 2020.

Changes Effective as of October 29, 2020

• Expanding the Grounds for Screening. As described above, the grounds for screening have been expanded to include public order or security of a fellow EU member state as well as effects on projects or programs of EU interest.
• Tightening the Standard. As described above, the standard under which an FDI may be prohibited or restrictive measures may be imposed has been tightened from “endangering” (Gefährdung) to “likely to affect” (voraussichtliche Beeinträchtigung) the public order or security.

Key Changes Effective as of June 3, 2020

• Health-Care Related Additions. As a response to the COVID-19 crisis, the catalog of select industries subject to cross-sector review was expanded to include personal protective equipment, pharmaceuticals that are essential for safeguarding the provision of healthcare to the population as well as medical products and in-vitro-diagnostics used in connection with life-threatening and highly contagious diseases.
• Governmental Communication Infrastructure. Also added to the catalog of select industries subject to cross-sector review, and thus, triggering mandatory notification to the German Ministry, have been FDIs acquiring 10% or more of the voting rights in companies providing services ensuring the interference-free operation and functioning of governmental communication infrastructure.
• Investor-Related Screening Factors. In line with the EU Screening Regulation, the German Ministry may now consider screening factors that focus on the background and activities of the individual investor. In particular, the German Ministry may now take into account whether the foreign investor (i) is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or more than insignificant funding, (ii) has already been involved in activities affecting the public order or security of the Federal Republic of Germany or of a fellow EU member state, or (iii) whether there is a serious risk that the foreign investor, or persons acting on behalf of it, were or are engaged in activities that, in Germany, would be punishable as a certain criminal or administrative offence, such as terrorist financing, money laundering, fraud, corruption, or violations of the foreign trade or war weapon control rules.
• Applicability to Share and Asset Deals. Since June 3, 2020 it has been codified that German FDI control is not limited to the acquisition of shares but equally applies to asset deals.
• Notification Modalities. It was further clarified that FDIs triggering a notification obligation are to be notified immediately after signing of the acquisition agreement. The notification generally has to be submitted by the direct acquirer (even if the acquisition vehicle itself is not “foreign”) but may also be made by the indirect acquirer instead.

Key Changes Effective as of July 17, 2020

• Effects on Consummating Transactions. In addition to transactions subject to sector-specific review (i.e., the defense industry and certain parts of the IT security industry), all transactions falling under cross-sector review that are notifiable (i.e., FDIs of 10% or more of the voting rights in companies active in industries listed in the catalog of select industries) may only be consummated upon conclusion of the screening process (condition precedent). Note that this has a tangible impact on the transaction practice given the broad range of notifiable FDIs in the cross-sector category, which are affected by this change. Foreign investors need to carefully assess if the target company operates in one of the listed industry categories. From a drafting perspective, acquisition agreements regarding notifiable FDIs should include a closing condition that the FDI is (deemed) cleared by the German Ministry. Buyers should further make sure to include a mechanism allowing for the amendment or termination of the acquisition agreement in case the German Ministry imposes (comprehensive) restrictive measures.
• Penalizing the Disclosure of Security-Relevant Information and Certain Consummation Actions Pending Screening. The following actions are now penalized by way of imprisonment of up to five years or fine (in case of willful infringements and attempted infringements) or with a fine of up to EUR 500,000 (in case of negligence):
  • Enabling the investor to, directly or indirectly, exercise voting rights;
  • Granting the investor dividends or any economic equivalent;
  • Providing or otherwise disclosing to the investor information on the German target company with respect to company objects and divisions that are subject to screening on grounds of essential security interests of the Federal Republic of Germany, or of particular importance when screening for effects on public order and security of the Federal Republic of Germany, or that have been declared as ‘significant’ by the German Ministry;
  • Non-compliance with enforceable restrictive measures (vollziehbare Anordnungen) imposed by the German Ministry.

The introduction of criminal liability will lead to even greater focus on whether or not the transaction requires FDI clearing. The seller de facto will be forced to include the clearing by the German Ministry as a closing condition to avoid exposure to criminal liability.

According to the explanatory notes (Gesetzesbegründung), the prohibition to disclose security-sensitive information as described above will usually not apply to purely or other company-related commercial information that is exchanged in the course of a transaction in order to allow the investor to conduct a sound evaluation of the economic opportunities and risks of the FDI. Nonetheless, the seller will need to be cautious when preparing the due diligence process, in particular when populating the virtual data room. Typically, security-sensitive information as described above will not be shared with potential buyers prior to closing of the transaction anyway. Should the need arise, however, the use of a red data room and special disclosure and confidentiality obligations based on a clean team agreement are advisable.

• Time Periods. In view of necessary adjustments to the timeframe of the screening process to integrate the EU-wide cooperation mechanism, the German legislator took the opportunity to overhaul the framework of screening periods altogether. Time periods are now set forth directly in the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz or “AWG”) instead of the AWV. This way, time periods can only be adjusted by way of legislative procedure, i.e. with involvement of the German parliament, and may no longer be changed unilaterally by executive order of the German government.Note the following changes to the timeline of the screening process (which will only apply to FDIs of which the German Ministry became aware of after July 17, 2020):
  • Standardized Time Periods. The same review periods apply to sector-specific (i.e., the defense industry and certain parts of the IT security industry) and to cross-sector (i.e., all industry sectors except for defense/certain IT security) FDIs alike. The German Ministry now has two months from becoming aware of the reviewable FDI – instead of previously three months (sector-specific review) or even four months (cross-sector review) – to decide whether to initiate formal proceedings. Making a mandatory notification or filing for a certificate of non-objection will equally trigger the two-month pre-assessment period. In addition, the formal screening period was standardized and may now take up to four months regardless of the sector.
  • Extension of Time Periods. The German Ministry may extend the four-month screening period by three months if the individual case is particularly difficult in either a factual or a legal manner. A further extension by one month is possible if the Federal Ministry of Defense puts forward that defense interests of Germany are notably affected. Moreover, periods may now be extended with the investor’s approval.
  • Suspension of Time Periods. The screening period is suspended in case the German Ministry later requests further information on the FDI. Previously, the screening period was not set in motion before the German Ministry received all (initially or later) requested information on the FDI. This change most likely is meant to allow for requests of fellow EU member states for additional information on the FDI within the cooperation process under the EU Screening Regulation while, at the same time, keeping the delay in the screening process to a minimum.
  • Resetting of Time Periods. Time periods will reset and start anew in the event that an FDI clearance or certificate of non-objection was revoked or altered (e.g., in case of willful deceit or the subsequent occurrence of facts). Equally, the time period will also reset if a restrictive measure or a contractual provision with the German Ministry is set aside, partly or in full, by a court decision.
• Submission of Information. Being a triggering point for the screening period, the submission of information also was moved from the AWV to the AWG and, therefore, may only be amended by the German parliament.
  • Triggering of Screening Period. Previously, the screening period was only triggered once all information had been submitted to the German Ministry. It is now provided that the four-month screening period starts when all initially requested information has been submitted which includes, as before, all information set forth in the corresponding general ordinance issued by the German Ministry, and, as of now, all information that the German Ministry additionally may request in its decision to initiate formal screening proceedings.
  • Subsequent Request for Additional Information. The German Ministry may, also later in the screening process, request further information from anyone directly or indirectly involved in the acquisition. Although the screening period will be suspended until submission of the requested information, the overall duration of the screening process remains calculable for the investor who can limit the suspension by actively working towards a speedy submission.
• More Effective Monitoring of Compliance with Measures. Investors and target companies are to expect more monitoring activity by the German Ministry which now has a right of information as well as a right to carry out examinations (including access to stored data, respective data processing systems, and business premises, in each case also by use of third-party representatives (Beauftragte)) in order to better monitor the investor’s and/or target company’s compliance with contractually agreed or imposed measures.
• Imposing Restrictive Measures without Consent of the German Government. Previously, restrictive measures regarding FDIs subject to cross-sector review could only be imposed with the consent of the German government. Now, restrictive measures may be imposed in agreement with and/or consultation of certain federal ministries instead. For the sake of clarity, the German Ministry still requires the consent of the German government if it wants to prohibit an FDI that is subject to cross-sector review. This has not changed.

What Is Next?

Further changes to the AWV are announced to follow in the 17^th amendment to the AWV. In particular, the German Ministry plans to expand the catalog of critical industries which are notifiable and subject to cross-sector review from the acquisition of 10% or more of the voting rights. Based on earlier announcements by the German Ministry on this subject, we expect artificial intelligence, robotics, semiconductors, biotechnology and quantum technology to be potentially declared critical industries. The German Ministry stresses that it will take special consideration of feedback provided by the affected industry circles when proposing the expansion of critical industries to the German government.

---

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

Markus Nauheim – Munich (+49 89 189 33 122, [email protected])
Wilhelm Reinhardt – Frankfurt (+49 69 247 411 502, [email protected])
Stefanie Zirkel – Frankfurt (+49 69 247 411 513, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

The current environment is leading many public companies to reconsider the costs and benefits of remaining listed on a US securities exchange and continuing to file reports with the SEC. During 2020, many public companies have experienced declines in revenues and market capitalization, and their compliance costs have increased as a percentage of revenues. These companies may consider “going dark,” which refers to the process of delisting a public company’s shares from a national securities exchange and suspending or terminating the company’s public reporting obligations. Going dark does not result in a change in the capital structure but does require a highly technical compliance process under applicable SEC and stock exchange rules. For similar reasons, large shareholders of some public companies may consider a “going private” transaction, which generally involves the cash-out of all or a substantial portion of a company’s public shares so that the company becomes eligible to delist and terminate its reporting obligations. Going private transactions can take many forms and may involve a merger, tender offer or reverse split of the company’s shares. These transactions require extensive board consideration, fairness opinions, SEC filings and possibly a shareholder vote.

In this presentation, we will discuss the procedures involved in the going dark process and going private transactions, including SEC requirements, stock exchange requirements, board governance considerations and timelines. We will also explore the common issues that must be managed in these transactions, including conflicts of interest, fiduciary duties, solvency, M&A strategy, financing arrangements and access to capital markets.

View Slides (PDF)

---

---

PANELISTS:

Boris Dolgonos is a partner in the New York office of Gibson, Dunn and Crutcher and a member of the Capital Markets and Securities Regulation and Corporate Governance Practice Groups. Mr. Dolgonos has more than 20 years of experience advising issuers and underwriters in a wide range of equity and debt financing transactions, including initial public offerings, high yield and investment-grade debt offerings, leveraged buyouts, cross-border securities offerings, and private placements. He also regularly advises U.S. and non-U.S. companies on corporate governance, securities laws, stock exchange rules and regulations, and periodic reporting responsibilities.

Tull Florey is a partner in the Houston office of Gibson, Dunn & Crutcher and a member of the firm’s Mergers & Acquisitions, Capital Markets, Oil & Gas and Securities Regulation and Corporate Governance practice groups. He has an extensive corporate and securities law practice, emphasizing transactional and governance matters. His practice focuses on mergers and acquisitions and securities offerings for companies in the energy industry. He has particular experience with clients engaged in oilfield service, oil and gas exploration and production, oilfield equipment manufacturing, midstream and seismic activities. He also assists clients on an ongoing basis with general corporate concerns, including Exchange Act reporting, corporate governance and Section 16 matters. Mr. Florey has been widely recognized, including Chambers USA ,The Legal 500 U.S., The Best Lawyers in America®, and Texas Super Lawyer.

Courtney C. Haseley is of counsel in Gibson, Dunn & Crutcher’s Washington, D.C. office, where she is a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Ms. Haseley focuses her practice on governance matters and securities regulatory issues. Prior to joining Gibson Dunn, Ms. Haseley served as Special Counsel in the Division of Corporation Finance’s Office of Chief Counsel at the U.S. Securities and Exchange Commission, where she provided interpretive advice on a variety of matters under the Securities Act, Exchange Act, Trust Indenture Act, and associated rules and forms. Ms. Haseley also co-managed the 2019 and 2017 Shareholder Proposal Task Force. Before joining the SEC, Ms. Haseley was a corporate associate at two leading international law firms, advising clients on securities transactions, public offerings, private placements, mergers and acquisitions and governance matters.

Hillary H. Holmes is a partner in the Houston office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets practice group, and a member of the firm’s Securities Regulation and Corporate Governance, Energy, M&A and Private Equity practice groups. Ms. Holmes advises companies in all sectors of the energy industry on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws and corporate governance issues. She has deep experience representing all parties in a wide array of equity and debt capital markets transactions, as well as going dark processes and going private transactions. Among other recognitions, Ms. Holmes is Chambers Band 1 ranked for Capital Markets Central U.S. and ranked for Energy Transactional Nationwide and Corporate/M&A Texas. Ms. Holmes also regularly advises boards of directors, special committees and financial advisors in M&A transactions and situations involving complex issues and conflicts of interest.

This update provides an overview and summary of key class action developments during the third quarter of 2020 (July through September).

Part I discusses an important Second Circuit decision regarding claims for injunctive relief in false advertising class actions.

Part II describes an Eleventh Circuit opinion in which a divided panel held that 19th-century Supreme Court decisions prohibit the very common practice of providing incentive awards to class representatives.

Part III covers two decisions from the Ninth Circuit relating to the Class Action Fairness Act’s amount-in-controversy requirement.

I.   The Second Circuit Holds That It Is Improper to Certify an Injunctive-Relief Class of Past Purchasers of an Allegedly Falsely Advertised Product

In a very significant decision impacting false advertising class actions, the Second Circuit in Berni v. Barilla S.p.A., 964 F.3d 141 (2d Cir. 2020), held that district courts cannot certify a Rule 23(b)(2) injunctive-relief class of past purchasers of products that were allegedly falsely advertised.

Berni involved the allegation that boxes of pasta they had purchased were underfilled in violation of New York’s General Business Law § 349(a), which prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce.” Id. at 144. The parties reached a settlement in which the defendant agreed, among other things, to include disclosures on its boxes regarding the amount of pasta contained in them. Id. The district court certified an injunctive-relief class for settlement purposes under Rule 23(b)(2) and entered final approval of the settlement. An objector appealed.

The Second Circuit held that the objector had standing to appeal even though he was not personally deceived by the packaging, id. at 145–46, and it then reversed the grant of class certification, holding that a Rule 23(b)(2) class may be certified only where the injunctive relief sought would be “proper for each and every member of the group of past purchasers.” Id. at 146. In this case, such relief would not be proper, according to the court, because past purchasers were under no obligation to buy the product again, and, even if they did, would already have the information they claimed to lack at the time of their initial purchase. As such, they were “not likely to encounter future harm of the kind that makes injunctive relief appropriate.” Id. at 147–48.

The Berni decision is a critical ruling in favor of class-action defendants, as it will prevent the certification of Rule 23(b)(2) classes in many, if not most, false advertising class actions within the Second Circuit. Coupled with the Ninth Circuit’s decision in Sonner v. Premier Nutrition Corp., 971 F.3d 834 (9th Cir. 2020), which upheld the dismissal of equitable claims when an adequate legal remedy exists, plaintiffs should face more challenges asserting Rule 23(b)(2) class actions in two of the busiest jurisdictions for these lawsuits.

II.   Relying on Longstanding Supreme Court Decisions, the Eleventh Circuit Rejects Incentive Awards for Class Representatives

The Eleventh Circuit caught the attention of practitioners this quarter on the permissibility of incentive payments for class representatives, which are almost customary in class settlements.

In Johnson v. NPAS Solutions, LLC, 975 F.3d 1244 (11th Cir. 2020), a putative class of consumers alleged that the defendant had violated the Telephone Consumer Protection Act, 47 U.S.C. § 227. The parties settled, and the district court eventually approved the settlement, overruling one class member’s objection that the class representative’s incentive award “contravened” the United States Supreme Court’s decisions in Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885), which are known for “establishing the rule . . . that attorneys’ fees can be paid from a common fund.” Johnson, 975 F.3d at 1250, 1255–56.

The frequency of class action “service awards” in modern practice did not persuade the majority of the Eleventh Circuit panel:

The class-action settlement that underlies this appeal is just like so many others that have come before it. And in a way, that’s exactly the problem. We find that, in approving the settlement here, the district court repeated several errors that, while clear to us, have become commonplace in everyday class-action practice . . . . We don’t necessarily fault the district court—it handled the class-action settlement here in pretty much exactly the same way that hundreds of courts before it have handled similar settlements. But familiarity breeds inattention, and it falls to us to correct the errors in the case before us.

Id. at 1248–49. The majority ruled that while Greenough and Pettus had permitted an award of class counsel’s fees, they had denied class representatives’ claims for a “salary” or “personal services” and for “private expenses” as “unsupported by reason or authority.” Id. at 1256–57. The majority held that incentive awards are “roughly analogous to a salary” and, “[i]f anything, . . . present even more pronounced risks than . . . salary and expense reimbursements” because they “promote litigation by providing a prize to be won.” Id. at 1257–58.

Judge Martin dissented and warned that the majority’s holding was unprecedented and would cause plaintiffs to “be less willing to take on the role of class representative in the future.” Id. at 1264.

III.   The Ninth Circuit Reverses Remand Orders in Two Class Action Fairness Act Cases

The Ninth Circuit issued two significant decisions in appeals involving remand orders under the Class Actions Fairness Act (“CAFA”) that will make it easier for defendants to establish the $5 million amount in controversy needed for removal under CAFA.

In Salter v. Quality Carriers, Inc., 974 F.3d 959 (9th Cir. 2020), the court held that plausible allegations of CAFA’s amount-in-controversy requirement are sufficient unless the plaintiff challenges the truth of those allegations. In Salter, the defendant removed an action brought by a putative class of truck drivers alleging that they were misclassified as independent contractors. To establish that the amount in controversy exceeded $5 million, the defendant relied on a declaration from its Chief Information Officer that stated he was familiar with the company’s record-keeping practices and that the company had deducted expenses totaling over $14 million from putative class members’ paychecks. Id. at 961–62. The district court determined that the declaration was conclusory and faulted the defendant for failing to attach the underlying business records, and remanded the action to state court. Id. at 962. Citing Dart Cherokee Basin Operating Co. v. Owens, 574 U.S. 81, 88–89 (2014), the Ninth Circuit vacated the remand order because the district court erred in refusing to accept the truth of the declaration. Salter, 974 F.3d at 964–65. Because the plaintiff did not make a factual attack on the truth of the declaration, and instead argued only that the declaration was insufficiently detailed and did not attach supporting data, the declaration’s conclusions should have been accepted as true. Id. at 965.

In Greene v. Harley-Davidson, Inc., 965 F.3d 767 (9th Cir. 2020), the Ninth Circuit held that punitive damages can be factored into the amount in controversy calculation under CAFA if there is a “reasonable possibility” of such damages. The defendant argued that a jury might award punitive damages on a 1:1 ratio with compensatory damages, as juries had done in other cases brought under California’s Consumers Legal Remedies Act. Id. at 770–71. The district court refused to include punitive damages in the amount-in-controversy calculation because the defendant did not “analogize or explain” how the cited cases “[we]re similar to the instant action.” Id. at 771. The Ninth Circuit reversed. It reasoned that the amount in controversy for purposes of CAFA is the “amount at stake in the underlying litigation,” which “refers to possible liability.” Id. at 772 (first emphasis in original, second emphasis added). A defendant could meet its burden to show possible liability by “cit[ing] a case based on the same or a similar statute in which the jury or court awarded punitive damages based on the punitive-compensatory damages ratio relied upon by the defendant in its removal notice.” Id. Because the defendant had cited four such cases, it met its burden. Id.

---

The following Gibson Dunn lawyers contributed to this client update: Christopher Chorba, Theane Evangelis, Kahn Scolnick, Bradley Hamburger, Lauren Blas, Nathan Strauss, Vincent Eisinger, and Andrew Kasabian.

Gibson Dunn attorneys are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers:

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

© 2020 Gibson, Dunn & Crutcher LLP

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

This program provides a comprehensive overview of spoofing as well as recent trends, developments, and cutting-edge issues. The panelists, all highly experienced lawyers in this area, discuss the recent record-breaking spoofing settlements announced by the CFTC, and the overlapping and often coordinated investigations conducted simultaneously by multiple domestic and foreign regulators. We also explore the strategies used by the government to investigate and prosecute spoofing cases, and the implications for private litigation arising out of regulatory settlements.

Topics include:

• Spoofing activities and affected markets
• Criminal and civil liability triggers
• Recent multi-agency trends and developments
• Government investigation and prosecution strategies

View Slides (PDF)

---

---

MODERATOR:

F. Joseph Warin is co-chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and chair of the Washington, D.C. office’s 200-person Litigation Department.  Mr. Warin’s group is repeatedly recognized by Global Investigations Review as the leading global investigations law firm in the world. Mr. Warin is a former Assistant United States Attorney in Washington, D.C.  He is ranked annually in the top-tier by Chambers USA, Chambers Global, and Chambers Latin America for his FCPA, fraud and corporate investigations experience.  Among numerous accolades, he has been recognized by Benchmark Litigation as a U.S. White Collar Crime Litigator “Star” for ten consecutive years (2011–2020).

PANELISTS:

Joel M. Cohen is co-chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and a member of its Securities Litigation, Class Actions and Antitrust & Competition Practice Groups. He has been lead or co-lead counsel in 24 civil and criminal trials in federal and state courts, and he is equally comfortable in leading confidential investigations, managing crises or advocating in court proceedings. Mr. Cohen’s experience includes all aspects of FCPA/anticorruption issues, in addition to financial institution litigation and other international disputes and discovery.

Jeffrey L. Steiner is a partner in the Washington, D.C. office, where he co-leads the firm’s Derivatives practice and is co-leader of the firm’s Digital Currencies and Blockchain Technology team practice. Mr. Steiner advises financial institutions, dealers, hedge funds, private equity funds, and others on compliance and implementation issues relating to CFTC, SEC, the Dodd-Frank Act, and other banking rules and regulations. He also helps clients to navigate through cross-border issues resulting from global derivatives requirements. Before joining the firm, Mr. Steiner was special counsel in the Division of Market Oversight at the CFTC where he handled issues relating to trading and execution of futures and swaps. He has been recognized by Chambers Global and Chambers USA as an international leading lawyer for his work in derivatives, and was named a Cryptocurrency, Blockchain and Fintech Trailblazer.

Darcy C. Harris is a litigation associate in the New York office. She is a member of Gibson Dunn’s Securities Enforcement, Securities Litigation, and White Collar Defense and Investigations Practice Groups. Ms. Harris’s practice focuses on complex commercial litigation, internal and regulatory investigations, securities litigation, and white collar defense.  She has represented clients across a variety of industries, including financial services, insurance, accounting and auditing, healthcare, real estate, consumer goods, media and entertainment, and non-profit.

The UK Financial Conduct Authority (the “FCA”) has published a final notice (the “Final Notice”) detailing enforcement action taken against a Hong Kong asset manager for short selling disclosure rule breaches under the Short Selling Regulation (the “SSR”). The Final Notice provides a reminder to non-UK based asset managers of the extra-territorial reach of the SSR when trading in the UK and EU markets and of the need to ensure that they have the systems and controls in place to comply with the SSR. This client alert provides our clients with a refresher on the SSR and the key takeaways from this enforcement action.

Key takeaways All firms trading in the UK and EU markets should maintain systems and controls to ensure ongoing compliance with the SSR. This will involve monitoring developments in the parallel UK and EU versions of the SSR after the end of the current Brexit transition period. Non-UK / non-EU investors can be caught by the provisions of the SSR as the rules have extra-territorial effect. The FCA has shown a willingness to take enforcement action against non-UK investors for breaches of the SSR, even if that investor only trades infrequently in the UK.  The FCA specifically identified as an aggravating feature the failure of the firm to notify it as soon as it realised there was an issue.

What is the SSR?

The SSR came into force on 1 November 2012 and is intended to provide a harmonised framework for requirements and regulatory powers relating to short selling and entering into sovereign credit default swaps (“CDS”). In summary, the SSR:

• requires investors to notify the relevant national competent authority (“NCA”) of any net short positions in EU sovereign debt instruments and shares admitted to a trading venue in the EU;
• restricts uncovered short sales of shares and EU sovereign debt instruments;
• prohibits the entry into uncovered sovereign CDS; and
• provides NCAs and the European Securities and Markets Authority (“ESMA”) with powers to, amongst others, suspend or prohibit short selling.

The SSR has extra-territorial effect and ESMA has confirmed that the location of a transaction and the domicile or location of the parties to the transaction are irrelevant when assessing whether or not the SSR applies.

This client alert will focus on the requirement of investors to notify the relevant NCA of the net short positions they hold with respect to in-scope shares. For these purposes, “in-scope shares” are the shares of companies admitted to trading on a regulated market or a multilateral trading facility and derivatives relating to such financial instruments.

Why is short-selling reporting regarded by regulators as being important?

In September 2020, the FCA published Market Watch 63, the latest version of its periodic newsletter on market conduct and transaction reporting issues. Market Watch 63 reiterated the FCA’s view that it considers that short selling can contribute usefully to liquidity and price discovery, and therefore support open, effective markets that operate with integrity. However, the FCA stated that it is important that market participants ensure that they continue to meet their obligations under the SSR as this give appropriates transparency to short selling activity and support the orderly functioning of the market.

What are the SSR notification thresholds for in-scope shares?

The SSR sets out transparency requirements for net short positions in relevant shares. There are two types of disclosure, private and public.

Private disclosure	Public disclosure
An investor must notify the relevant NCA of a net short position it has in relation to in-scope shares: when the position reaches 0.2% (note COVID-related developments below) of the issued share capital of the company; at each additional 0.1% above the 0.2% threshold; and when the position decreases below either of the above disclosure thresholds.	An investor must notify the relevant NCA of a net short position it has in relation to in-scope shares: when the position reaches 0.5% of the issued share capital of the company; at each additional 0.1% above the 0.5% threshold; and when the position decreases below either of the above disclosure thresholds.

What is the method and timing of private and public disclosures?

In the UK, the FCA has confirmed that disclosures of net short positions should be made by sending a completed notification form to it by email. A disclosure must be made by 3.30 pm on the trading day following the day on which the person reaches, falls below or passes through the relevant threshold. The key difference is that the SSR requires public disclosures to be published on a website maintained by the relevant NCA.

Will Brexit have an impact on the SSR as implemented in the UK?

The SSR, an EU regulation, is directly applicable and will form part of UK law at the end of the Brexit transition period under the European Union (Withdrawal) Act 2018. The SSR will be amended in the UK to ensure that it will operate effectively after 31 December 2020. There will, therefore, be two versions post-transition period, the EU SSR and the UK SSR. Investors will need to ensure that they have systems and controls in place to comply with both the EU SSR and the UK SSR.

Has COVID had an impact on the reporting thresholds?

On 16 March 2020, ESMA issued a decision to temporarily amend the threshold for notifying net short positions to NCA under the SSR from 0.2% of issued share capital to 0.1%. The FCA confirmed that this decision would apply in the UK. However, the FCA stated that systems changes would be required and firms should continue to report at the previous thresholds until further notice. On 31 March 2020, the FCA confirmed that the required changes to its systems had been made and that it would be ready to receive notifications at the lower threshold from 6 April 2020. Firms were not required to amend and resubmit notifications submitted to the FCA between 16 March 2020 and 3 April 2020.

On 11 June 2020, ESMA issued a decision renewing its original decision on 16 March 2020 amending the threshold from 17 June 2020 for a period of 3 months. On 16 September 2020, ESMA further renewed the March decision from 18 September 2020 for another period of 3 months. Firms should continue reporting at the lower threshold to the relevant NCA.

What enforcement action has the FCA taken?

On 14 October 2020, the FCA published the Final Notice it issued to Asia Research and Capital Management Ltd (“ARCM”), fining it £873,118 for breaches of short selling disclosure rules under the SSR. ARCM is a Hong Kong-based asset manager that trades infrequently in EU markets.

From February 2017 to July 2019, ARCM failed to make 155 notifications to the FCA and 153 disclosures to the public of its net short position in a UK listed company. By July 2019, ARCM had built a net short position equivalent to 16.85% of the issued share capital of the UK listed company. This position was held for a further 106 trading days before being notified to the FCA and disclosed to the public. ARCM agreed to resolve the matter and qualified for a 30% discount under the FCA’s executive settlement procedures.

The FCA considered the failings to be particularly serious given:

• the failures to comply with its obligations under the SSR were multiple and occurred over a long period of time;
• ARCM did not inform it promptly on discovering its failure and instead notified it only after it had reviewed and collated the relevant data for disclosure; and
• the size of the position was the largest net short position held in an issuer admitted to the FCA’s Official List with shares admitted to trading on the Main Market of the London Stock Exchange.

What steps should firms be taken to ensure ongoing compliance?

The enforcement action against ARCM demonstrates that the FCA is willing to take action against investors for breaches of the SSR, even if that investor only trades infrequently in the UK. All firms trading in the UK and EU markets should maintain systems and controls to ensure ongoing compliance with the SSR. Firms would be well advised to undertake a review of their current systems and controls. This will involve monitoring developments in the parallel UK and EU versions of the SSR after the end of the current Brexit transition period.

---

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 in the firm’s Financial Institutions practice group, or the following authors in London:

Michelle M. Kirschner (+44 (0) 20 7071 4212, [email protected])

Matthew Nunan (+44 (0) 20 7071 4201, [email protected])

Martin Coombes (+44 (0) 20 7071 4258, [email protected])

Chris Hickey (+44 (0) 20 7071 4265, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

Singapore partner Robson Lee is the author of “Rising corporate failures and new Act on insolvency, restructuring and dissolution,” [PDF] published by NextInsight on November 7, 2020.  He was assisted by Singapore associates Marcus Tan and Eliza Teo.

COVID-19 has shone a bright light on the critical role that ESG considerations can play for companies and firms. Questions of corporate purpose and the meaning of “success” have been reprised and are being carefully considered in the context of an active debate around stakeholder capitalism.  Critically, the role and expectations of directors and management in pursuing a sustainability agenda have risen to the top of the agenda for corporates, legislatures and regulators alike.

But what constitutes “good governance” in the context of ESG and how do boards and senior managers address the complex web of rules, regulations, standards and frameworks which apply at a national, regional and global level? During this webinar, members of the ESG Practice Group of Gibson Dunn (London) will provide some insights to help navigate the global ESG landscape from a UK perspective, touching on key rules and regulations, forthcoming developments and trends, and practical tips including:

• An overview of the ESG landscape
• How boards are fulfilling their directors’ duties in the wake of the new vision of the “purposeful company” including engagement with stakeholder groups
• Key reporting and disclosure requirements
• Governance structures and features that underpin effective, integrated ESG business models
• Market trends and emerging rules, regulations and policy changes
• Risk mitigation, litigation risk and shareholder pressures
• Practical guidance and examples for boards and managers

View Slides (PDF)

---

---

PANELISTS:

Selina Sagayam is a partner in Gibson Dunn’s international corporate team. Her practice focuses on international corporate finance transactional work, including public and private M&A, joint ventures, international equity capital markets offerings and advisory work focused on corporate governance, shareholder activism and securities law advice. Regarded as one of the leading public M&A advisers in the UK, Ms. Sagayam has advised on hostile, competitive and recommended takeovers. Ms. Sagayam is also noted for her expertise in financial services and regulatory advice. She advises boards and senior management of international corporations, exchanges, regulators, investment banks, and financial sponsors (private equity and hedge funds) on such issues. Her experience as a senior secondee at the UK takeover Panel and also as a non-executive director of a FTSE250 company has positioned her uniquely in her practice area. Ms. Sagayam established and co-chairs the firm’s UK ESG Practice Group.

Susy Bullock is a partner in Gibson Dunn’s international litigation team.  Ms. Bullock specializes in commercial litigation and investigations, and business and human rights. Previously Ms. Bullock was Head of Litigation for Europe, the Middle East and Africa at UBS and had responsibility for all litigation and contentious regulatory matters in the EMEA region for the bank including commercial and white-collar criminal litigation, as well as certain internal investigations. In a business and human rights context, Ms. Bullock has supported the Thun Group of banks since 2016 and has also participated in various consultations of the UN Office of High Commissioner for Human Rights. Ms. Bullock can advise clients on sustainability and corporate social responsibility matters such as supply chain issues and investigations, non-financial disclosures and Modern Slavery Act 2015 compliance, and disputes.  Ms. Bullock co-chairs the firm’s UK ESG Practice Group.

Anna Howell is a partner in Gibson Dunn’s international corporate team, a co-chair of the Oil & Gas practice, and a member of the firm’s Energy & Infrastructure, M&A, Private Equity, and UK ESG practice groups.  Ms. Howell advises on complex cross-border transactions and advisory work in the energy sector with a particular focus on alternative energy, renewables, gas and liquefied natural gas (LNG).  Over her 25+ year career she has advised high-profile clients on some of their most prestigious and challenging mandates, including first entries into both mature and emerging markets throughout Europe, Africa, Latin America, Asia Pacific, and the Middle East.  Ms. Howell has advised clients on re-use and repurposing in the context of decommissioning as well as switching to cleaner fuels, energy efficiency, sustainability and emissions trading.   Ms. Howell spent over 11 years practising in Asia and has worked in London, Singapore, Hong Kong and Beijing.

The third quarter of 2020 saw a noticeable surge in Artificial Intelligence (“AI”)-related regulatory and policy proposals. The European Union (“EU”) has emerged as a pacesetter in AI regulation, taking significant steps towards a long-awaited comprehensive and coordinated regulation of AI at EU level—evidence of the European Commission’s (the “Commission”) ambition to exploit the potential of the EU’s internal market and position itself as a major player in sustainable technological innovation. In this update, we review some of the recent policy initiatives in the EU ahead of the Commission’s long-awaited legislative proposals expected in early 2021.

In the U.S., the third quarter of 2020 saw a number of bipartisan bills passed in the U.S. House of Representatives seeking to develop and refine U.S. national AI policy and adopt measures promoting the ethical and equitable use of AI technologies and consumer protection measures.

As global AI policy develops, we are observing some interesting themes emerging, one of which is stakeholders’ varying levels of comfort with the lack of a universal definition of AI. Some commentators have suggested that undue effort should not be expended on defining AI since it is a dynamic technology that will continue to change.[1] At the same time, global lawmakers are already reviewing and passing regulations that focus on certain categories of AI, often in the absence of clear definitions and delineations between certain AI applications that will impact the scope of regulation (see, e.g., the European Parliament’s discussion about a possible regulation of “all” AI applications, discussed further at I. below), creating legal uncertainty for regulators and businesses alike. We will continue to monitor these policy trends and provide a comprehensive analysis in our forthcoming 2020 Artificial Intelligence and Automated Systems Annual Legal Review.

____________________

Table of Contents

EU Legislation & Policy

U.S. Federal Legislation & Policy

Intellectual Property

Autonomous Vehicles

____________________

I.  EU LEGISLATION & POLICY

In past years, EU discussions about regulating AI technologies had been characterized by a restrictive “regulate first” approach.[2] However, the regulatory road map presented by the Commission in February under the auspices of its new digital strategy eschewed, for example, blanket technology bans and proposed a more nuanced “risk-based” approach to regulation, emphasizing the importance of “trustworthy” AI but also acknowledging the need for Europe to both remain innovative and competitive in a rapidly growing space and avoid fragmentation of the single market resulting from differences in national legislation. As discussed further below, there is some evidence of a growing dissonance between EU members with respect to the balance between technological innovation and risk, and a European consensus on a harmonized legal framework is far from realized.

The Commission’s “White Paper on Artificial Intelligence – A European approach to excellence and trust” (the “White Paper”) sets out a road map designed to balance innovation, ethical standards and transparency.[3] As noted in our client alert “EU Proposal on Artificial Intelligence Regulation Released,” the White Paper favors a risk-based approach with sector- and application-specific risk assessments and requirements, rather than blanket sectoral requirements or bans—earmarking a series of “high-risk” technologies for future oversight, including those in “critical sectors” and those deemed to be of “critical use.”[4] The Commission also released a series of accompanying documents: the “European Strategy for Data” (“Data Strategy”)[5] and a “Report on the Safety and Liability Implications of Artificial Intelligence, the Internet of Things and Robotics” (“Report on Safety and Liability”).[6]

While the Commission’s comprehensive legislative proposal is not anticipated before early 2021, the EU policy landscape remains dynamic. Companies active in AI should closely follow recent developments in the EU, given the proposed geographic reach of the future AI legislation, which is likely to affect all companies doing business in the EU.

A.  European Commission’s AI White Paper Consultation and “Inception Impact Assessment”

As we reported in our Artificial Intelligence and Automated Systems Legal Update (1Q20), in January 2020, the EC launched a public consultation period and requested comments on the proposals set out in the White Paper and the Data Strategy, providing an opportunity for companies and other stakeholders to provide feedback and shape the future EU regulatory landscape. The consultation closed on June 14. In July, the Commission published a summary report on the consultation’s preliminary findings.[7] Over 1,250 stakeholders from all over the world responded, providing feedback on the proposed policy and regulatory framework on AI. Respondents raised concerns about the potential for AI to breach fundamental rights or lead to discriminatory outcomes, but they were divided on whether new compulsory requirements should be limited to high-risk applications.

On the heels of the White Paper Consultation, the Commission launched an “Inception Impact Assessment” initiative for AI legislation in July, aiming to define the Commission’s scope and goals for AI legislation with a focus on ensuring that “AI is safe, lawful and in line with EU fundamental rights.”[8] The Commission’s road map builds on the proposals in the White Paper and provides more detail on relevant policy options and policy instruments, from a “baseline” policy (involving no policy change at the EU level) through various alternative options following a “gradual intervention logic,” ranging from a nonlegislative, industry-led, “soft law” approach (Option 1) through a voluntary labelling scheme (Option 2), to comprehensive and mandatory EU-level legislation for all or certain types of AI applications (Option 3), or a combination of any of the options above taking into account the different levels of risk that could be generated by a particular AI application (Option 4).[9] Another core question relates to the scope of the initiative, notably how AI should be defined (narrowly or broadly) (e.g., machine learning, deep neural networks, symbolic reasoning, expert systems, automated decision-making).

Substantively, the road map reiterates that the Commission is particularly concerned with a number of specific, significant AI risks that are not adequately covered by existing EU legislation, such as cybersecurity, the protection of employees, unlawful discrimination or bias, the protection of EU fundamental rights, including risks to privacy, and protecting consumers from harm caused by AI (both through existing and new product safety legislation). Continued focus remains on the need for legal certainty, both for businesses marketing products involving AI in the EU, and for market surveillance and supervisory authorities. The feedback period for the road map closed in September, and the completion of the Inception Impact Assessment is scheduled for December 2020. As noted, these policy proposals are intended to culminate in proposed regulation, which is expected to be unveiled by the Commission in the first quarter of 2021.

B.  European Parliament Votes on Proposals regarding the Regulation of Artificial Intelligence

Earlier this year, the European Parliament (the “Parliament”) set up a special committee to analyze the impact of artificial intelligence on the EU economy.[10] The new committee chair, Dragoș Tudorache, noted that “Europe needs to develop AI that is trustworthy, eliminates biases and discrimination, and serves the common good, while ensuring business and industry thrive and generate economic prosperity.”[11]

In April, the Parliament’s Legal Affairs Committee (“JURI”) published three draft reports to the Commission providing recommendations on a framework for AI liability, copyright protection for AI-assisted human creations, safeguards within the EU’s patent system to protect the innovation of AI developers, and AI ethics and “human-centric AI.”[12] The three legal initiatives, summarized in final reports and recommendations outlined in more detail below, were adopted by the plenary on October 20, 2020.[13]

1.  Report with Recommendations to the Commission on a Framework of Ethical Aspects of Artificial Intelligence, Robotics and Related Technologies

The legislative initiative urges the Commission to present a legal framework outlining the ethical principles and legal obligations to be followed when developing, deploying and using artificial intelligence, robotics and related technologies in the EU including software, algorithms and data, protection for fundamental rights. The initiative also calls for the establishment of a “European Agency for Artificial Intelligence” and a “European certification of ethical compliance.”[14]

The proposed legal framework is premised on several guiding principles, including “human-centric and human-made AI; safety, transparency and accountability; safeguards against bias and discrimination; right to redress; social and environmental responsibility; and respect for privacy and data protection.”[15] High-risk AI technologies, which include machine learning and other systems with the capacity for self-learning, should be designed to “allow for human oversight and intervention at any time, particularly where a functionality could result in a serious breach of ethical principles and could be dangerous.”[16] Some of the high-risk sectors identified are healthcare, public sector and finance, banking and insurance.

2.  Report with Recommendations to the Commission on a Civil Liability Regime for Artificial Intelligence

The Report calls for a future-oriented civil liability framework that makes front- and back-end operators of high-risk AI strictly liable for any resulting damage and provides a “clear legal framework [that] would stimulate innovation by providing businesses with legal certainty, whilst protecting citizens and promoting their trust in AI technologies by deterring activities that might be dangerous.”[17] While it does not take the position that a new EU liability regime is necessary, the Report identifies a gap in the existing EU product liability regime with respect to the liability of operators of AI-systems in the absence of a contractual relationship with potential victims, proposing a dual approach: (1) strict liability for operators of “high-risk AI-systems” akin to the owner of a car or pet; or (2) a presumption of fault towards the operator for harm suffered by a victim by a non-“high-risk” AI system, with national law regulating the amount and extent of compensation as well as the limitation period in case of harm caused by the AI-system.[18] Multiple operators would be held jointly and severally liable, subject to a maximum liability of €2 million. The Report defines criteria on which AI-systems can qualify as high-risk in the Annex, proposing that a newly formed standing committee, involving national experts and stakeholders, should support the Commission in its review of potentially high-risk AI-systems.

3.  Report on Intellectual Property Rights for the Development of Artificial Intelligence Technologies

The Report emphasizes that EU global leadership in AI requires an effective intellectual property rights (“IP”) system and safeguards for the EU’s patent system in order to protect and incentivize innovative developers, balanced with the EU’s ethical principles for AI and consumer safety.[19] Notably, the Report distinguishes between AI-assisted human creations and AI-generated creations, taking the position that AI should not have a legal personality and that ownership of IP rights should only be granted to humans. Where AI is used only as a tool to assist an author in the process of creation, the current IP legal framework should remain applicable. Nonetheless, the Report recommends that AI-generated creations should fall under the scope of the EU IP regime in order to encourage investment and innovation, subject to protection under a specific form of copyright.

C.  A Lack of Consensus between EU Members on the Balance to Be Struck between Innovation and Safety

Although the Commission is seeking to impose a comprehensive and harmonious framework for AI regulation across all member states, it is far from clear that consensus exists as to the scope of regulatory intervention. In October, 14 EU members (Denmark, Belgium, the Czech Republic, Finland, France, Estonia, Ireland, Latvia, Luxembourg, the Netherlands, Poland, Portugal, Spain and Sweden) published a joint position paper urging the Commission to espouse a “soft law approach” that takes into account the fast-evolving nature of AI technologies.[20] The paper calls for the adoption of “self-regulation, voluntary labelling and other voluntary practices as well as a robust standardisation process as a supplement to existing legislation that ensures that essential safety and security standards are met” to allow regulators to learn from technology and identify potential regulatory challenges without stymieing innovation.

This approach may be met with challenge from Germany, the current chair of the EU presidency, which has expressed concern over certain Commission proposals to apply restrictions on AI applications deemed to be of high-risk only, and would prefer a broader regulatory reach for technologies that would be subject to the new framework, as well as mandatory, detailed rules for data retention, biometric remote identification and human supervision of AI systems.[21]

On November 5, a German AI inquiry committee (Enquete-Kommission Künstliche Intelligenz des Deutschen Bundestages, hereafter the “Committee”) presented its final report, which provides broad recommendations on how society can benefit from the opportunities inherent in AI technologies (defined in the report as “lernende Systeme” or “self-learning systems”) while acknowledging the risks they pose. The Committee’s work placed a focus on legal and ethical aspects of AI and its impact on the economy, public administration, cybersecurity, health, work, mobility, and the media.[22] The Committee advocates for a “human-centric” approach to AI, a harmonious Europe-wide strategy, a focus on interdisciplinary dialog in policy-making, setting technical standards, legal clarity on testing of products and research, and the adequacy of digital infrastructure. At a high level, the Committee’s specific recommendations relate to (1) data-sharing and data standards; (2) support and funding for research and development; (3) a focus on “sustainable” and efficient use of AI; (4) incentives for the technology sector and industry to improve scalability of projects and innovation; (5) education and diversity; (6) the impact of AI on society, including the media, mobility, politics, discrimination and bias; and (7) regulation, liability and trustworthy AI. The committee was set up in late 2018 and comprises 19 members of the German parliament and 19 external experts. We will provide a more detailed analysis of the Committee’s final report in our forthcoming 2020 Artificial Intelligence and Automated Systems Annual Legal Review.

D.  UK ICO Guidance on AI and Data Protection

On July 30, 2020, the UK Information Commissioner’s Office (“ICO”) published its final guidance on Artificial Intelligence (the “Guidance”).[23] Intended to help organizations “mitigate the risks of AI arising from a data protection perspective without losing sight of the benefits such projects can deliver,” the Guidance sets out a framework and methodology for auditing AI systems and best practices for compliance with the UK Data Protection Act 2018 and data protection obligations under the EU’s General Data Protection Regulation (“GDPR”). The Guidance proposes a “proportionate and risk-based approach” and recommends an auditing methodology consisting of three key parts: auditing tools and procedures for use in audits and investigations; detailed guidance on AI and data protection; and a tool kit designed to provide further practical support to organizations auditing the compliance of their own AI systems (which is forthcoming). The guidance addresses four overarching principles:

1. Accountability and governance in AI—including data protection impact assessments (“DPIAs”), understanding the relationship and distinction between controllers and processors in the AI context, as well as managing, and documenting decisions taken with respect to competing interests between different AI-related risks (e.g., trade-offs);
2. Fair, lawful and transparent processing—including how to identify lawful bases (and using separate legal bases for processing personal data at each stage of the AI development and deployment process), assessing and improving AI system performance, mitigating potential discrimination, and documenting the source of input data as well as any inaccurate input data or statistical flaw that might impact the output of the AI system.
3. Data minimization and security—including guidance to technical specialists on data security issues common to AI, types of privacy attacks to which AI systems are susceptible, compliance with the principle of data minimization (the principle of identifying the minimum amount of personal data needed, and to process no more than that amount of information), and privacy-enhancing techniques that balance the privacy of individuals and the utility of a machine learning system during the training and inference stages.[24]
4. Compliance with individual data subject rights—including data subject rights in the context of data input and output of AI systems, rights related to automated decision, and requirements to design AI systems to facilitate effective human review and critical assessment and understanding of the outputs and limitations of AI systems.

The Guidance also emphasizes that data protection risks should be considered at an early stage in the design process (e.g., “safety by design”) and that the roles of the different parties in the AI supply chain should be clearly mapped at the outset. Of note is also the recommendation that training data be stored at least until a model is established and unlikely to be retrained or modified. The Guidance refers to, but does not provide guidance on, the anonymization or pseudonymization of data as a privacy-preserving technique, but notes that the ICO is currently developing new guidance in this field.[25]

The ICO encourages organizations to provide feedback on the Guidance to make sure that it remains “relevant and consistent with emerging developments.”

II.  U.S. FEDERAL LEGISLATION & POLICY

A.  AI in Government Act of 2020 (H.R. 2575)

First introduced by Rep. Jerry McNerney (D-CA) on May 8, 2019, the AI in Government Act of 2020 (H.R. 2575) was passed by the House on September 14, 2020 by voice vote.[26] The bill aims to promote the efforts of the federal government in developing innovative uses of AI by establishing the “AI Center of Excellence” within the General Services Administration (“GSA”), and requiring that the Office of Management and Budget (“OMB”) issue a memorandum to federal agencies regarding AI governance approaches. It also requires the Office of Science and Technology Policy to issue guidance to federal agencies on AI acquisition and best practices.

Senators Rob Portman (R-OH) and Cory Gardner (R-CO) are cosponsoring an identical bill, S. 1363, which was approved by the U.S. Senate Homeland Security and Governmental Affairs Committee in November 2019.[27] Sen. Portman described the bipartisan legislation, which remains pending in the Senate, as “the most significant AI policy change ever passed by Congress.”

B.  Consumer Safety Technology Act (H.R. 8128)

On September 29, the House passed the Consumer Safety Technology Act (H.R. 8128), previously named the “AI for Consumer Product Safety Act.” If enacted, the bill would direct the U.S. Consumer Product Safety Commission (“CPSC”) to establish a pilot program to explore the use of artificial intelligence for at least one of the following purposes: (1) tracking injury trends; (2) identifying consumer product hazards; (3) monitoring the retail marketplace for the sale of recalled consumer products; or (4) identifying unsafe imported consumer products. The bill has been referred to the Senate Committee on Commerce, Science, and Transportation.

C.  Bipartisan U.S. Lawmakers Introduce Legislation to Create a National AI Strategy

On September 16, 2020, Reps. Robin Kelly (D-Ill.) and Will Hurd (R-Texas), after coordination with experts and the Bipartisan Policy Center, introduced a concurrent resolution calling for the creation of a national AI strategy.[28] This Resolution proposes four pillars to guide the strategy:[29]

• Workforce: Fill the AI talent gap and prepare American workers for the jobs of the future, while also prioritizing inclusivity and equal opportunity;[30]
• National Security: Prioritize the development and adoption of AI technologies across the defense and intelligence apparatus;
• Research and Development: Encourage the federal government to collaborate with the private sector and academia to ensure America’s innovation ecosystem leads the world in AI; and
• Ethics: Develop and use AI technology in a way that is ethical, reduces bias, promotes fairness, and protects privacy.

D.  Artificial Intelligence Education Act

On September 24, 2020, Reps. Paul D. Tonko (D-NY) and Guy Reschenthaler (R-PA) introduced the Artificial Intelligence Education Act (H.R. 8390).[31] The bipartisan legislation would establish grant support within the National Science Foundation to fund the creation of easily accessible K-12 lesson plans for schools and educators.[32] The bill has been referred to the Committee on Science, Space, and Technology and the Committee on Education and Labor.

III.  INTELLECTUAL PROPERTY

A.  USPTO Releases Report on Artificial Intelligence and Intellectual Property Policy

On October 6, 2020, the U.S. Patent and Trademark Office (“USPTO”) published a report “Public Views on Artificial Intelligence and Intellectual Property Policy” (the “Report”).[33] The Report catalogs the roughly 200 comments received in response to the USPTO’s request for comments issued in October 2019 (as reviewed in our client alert USPTO Requests Public Comments On Patenting Artificial Intelligence Inventions).[34] The USPTO requested feedback on issues such as whether current laws and regulations regarding patent inventorship and authorship of copyrighted work should be revised to take into account contributions other than by natural persons.

A general theme that emerges from the report is concern over the lack of a universally acknowledged definition of AI, and a majority view that current AI (i.e., AI that is not considered to be artificial general intelligence, or “AGI”) can neither invent nor author without human intervention. The comments also suggested that existing U.S. intellectual property laws are “calibrated correctly to address the evolution of AI” (although commenters were split as to whether any new classes of IP rights would be beneficial to ensure a more robust IP system), and that “human beings remain integral to the operation of AI, and this is an important consideration in evaluating whether IP law needs modification in view of the current state of AI technology.”[35]

The key comments sound in eight categories:

1.  Elements of an AI Invention

AI has no universally recognized definition, but can be understood as computer functionality that mimics human cognitive functions, e.g., the ability to learn. AI inventions include inventions embodying an advance in AI itself (e.g., improved models or algorithms), inventions that apply AI to a field other than AI, and inventions produced by AI itself. The current state of the art is limited to ‘narrow’ AI, as opposed to artificial general intelligence akin to human intelligence.

2.  Conception and Inventorship

The vast majority of public commenters asserted that current inventorship law is equipped to handle inventorship of AI technologies and that the assessment of conception should remain fact-specific. The use of an AI system as a tool by a natural person does not generally preclude a natural person from qualifying as an inventor if he or she contributed to the conception of the claimed invention. Many commenters took issue with the premise that, under the current state of the art, AI systems were advanced enough to “conceive” of an invention. As one commenter put it, “the current state of AI technology is not sufficiently advanced at this time and in the foreseeable future so as to completely exclude the role of a human inventor in the development of AI inventions.”[36] Some commenters suggested that the USPTO should revisit the question when machines begin achieving AGI (i.e., when science agrees that machines can “think” on their own). A minority of commenters suggested that AGI was a present reality that needed to be addressed today.

3.  Ownership of AI Inventions

The vast majority of commenters stated that no changes should be necessary to the current U.S. law—that only a natural person or a company (via assignment) should be considered the owner of a patent or an invention. However, a minority of responses stated that while inventorship and ownership rights should not be extended to machines, consideration should be given to expanding ownership to a natural person who trains an AI process, or who owns/controls an AI system.

4.  Subject Matter Eligibility under 35 U.S.C. § 101

Many commenters asserted that there are no patent eligibility considerations unique to AI Inventions, and that AI inventions should not be treated any differently than other computer-implemented inventions. This is consistent with how the USPTO currently examines AI inventions today: claims to an AI invention that fall within one of the four statutory categories and are patent-eligible under the Alice/Mayo test[37] will be patent subject matter-eligible under 35 U.S.C. § 101. While some AI inventions may not pass muster under the subject matter eligibility analysis because they can be characterized as certain methods of organizing human activity, mental processes, or mathematical concepts, as one commenter noted, the complex algorithms that underpin AI inventions have the ability to yield technological improvements. In addition, claims directed to an abstract idea will still be patent-eligible if the additional claim elements, considered individually or as an ordered combination, amount to significantly more than the abstract idea so as to transform them into patent-eligible subject matter.

5.  Written Description and Enablement under 35 U.S.C. § 112(a)

The majority of commenters agreed that there are no unique disclosure considerations for AI inventions. One commenter stated that the principles set forth in the USPTO’s examiner training materials regarding computer-implemented inventions “are similarly applicable to AI-related inventions as to conventional algorithmic solutions.” However, some commenters indicated that there are significant and unique challenges to satisfying the disclosure requirements for an AI invention since even though the input and output may be known by the inventor, the logic in between is in some respects unknown. Commenters noted that proper enforcement of the description requirement is imperative for patent quality. USPTO takes the position that whether a specification provides enabling support for the claimed invention is “intensely fact-specific.”

Commenters suggest that there are differing views on the predictability of AI systems. One commenter stated that “most current AI systems behave in a predictable manner and that predictability is often the basis for the commercial value of practical applications of these technologies.” Others noted that some AI inventions may operate in a black box because there is an “inherent randomness in AI algorithms,” making it appropriate to “apply the written description requirement and the enablement factors from In re Wands.”[38]

Commenters presented differing views as to the predictability of AI inventions. Some explained that AI inventions generally behave predictably in their practical applications (that fact being a basis for their commercial value), whereas some AI inventions might be less predictable due to inherent randomness in their algorithms. This unpredictability may make it appropriate to consider established factors such as the level of predictability in the art, amount of direction provided by the inventor, existence of working examples, and quantity of experimentation necessary to make or use the invention based on the content of the disclosure.

6.  Level of Ordinary Skill in the Art

The USPTO noted that AI is capable of being applied to various disciplines, a tendency that requires an assessment of how it is affecting seemingly disparate fields of innovation since it may have “the potential to alter the skill level of the hypothetical ‘ordinary skilled artisan,’ thereby affecting the bar for nonobviousness.” Many commenters asserted that AI has the potential to affect the level of ordinary skill in an art and that the present legal framework for assessing the person of ordinary skill in the art is “adequate to determine the impact of AI-based tools in a given field.” However, commenters cautioned that widespread use of AI systems have not yet permeated all fields and discouraged the USPTO from declaring that the application of conventional AI is an exercise of ordinary skill in the art.

7.  Prior Art Considerations

The majority of commenters stated that there were no prior art considerations unique to AI inventions and that current standards were sufficient. However, some commenters indicated that there were prior art considerations unique to AI inventions, many of which focused on the proliferation of prior art, such as the generation of prior art by AI, and the difficulty in finding prior art, such as source code related to AI. Others indicated that while no prior art considerations unique to AI inventions currently existed, depending on how sophisticated AI becomes in the future, unique AI prior art could become relevant. Among all the responses, a common theme was the importance of examiner training and providing examiners with additional resources for identifying and finding AI-related prior art.

8.  New IP Protections for Data Protection and Other Issues

The USPTO noted that data protection under current U.S. law is limited in scope, and the U.S. does not currently have intellectual property rights protections solely focused on data for AI algorithms. In their responses to the question of whether any new forms of IP protections are needed for AI inventions, commenters noted the importance of “big data” in developing and training AI systems, but were equally divided between the view that new intellectual property rights were necessary to address AI inventions and the belief that the current U.S. IP framework was adequate to address AI inventions. Generally, however, commenters who did not see the need for new forms of IP rights suggested that developments in AI technology should be monitored to ensure needs were keeping pace with AI technology developments.

Those requesting new IP rights focused on the need to protect the data associated with AI, particularly in the context of machine learning systems. One opinion stated that companies that collect large amounts of data have a competitive advantage relative to new entrants to the market and that “[t]here could be a mechanism to provide access to the repositories of data collected by large technology companies such that proprietary rights to the data are protected but new market entrants and others can use such data to train and develop their AI.”[39] Commentators took the view that training data is currently protectable as a trade secret or, in the event that the training data provides some new and useful outcome, as a patent, but thought that there may be gaps in IP protection for trained models. Commenters did not provide concrete proposals on how any newly created IP rights should function, and many called on the USPTO to further consult the public on the issue. Commenters also stressed the need for examiner technical training and a call for memorializing guidance specific to AI for patent examiners.

Finally, in response to a question about whether policies and practices of other global patent agencies should inform the USPTO’s approach, there was a divide between commentators advocating for an evolution of global laws in a common direction, and those who cautioned against further attempts to harmonize international patent laws and procedures “because U.S. patent law is the gold standard.”[40]

We will continue to monitor developments in this space and report on any action USPTO may take in response to these comments.

IV.  AUTONOMOUS VEHICLES

A.  SELF-DRIVE Act Reintroduced in U.S. Congress

Federal regulation of autonomous vehicles had so far faltered in the new Congress, leaving the U.S. without a federal regulatory framework while the development of autonomous vehicle technology continues apace. However, on September 23, 2020, Rep. Bob Latta (R-OH) reintroduced the Safely Ensuring Lives Future Deployment and Research In Vehicle Evolution (“SELF DRIVE”) Act.[41] As we have addressed in previous legal updates,[42] the House previously passed the SELF DRIVE Act (H.R. 3388) by voice vote in September 2017, but its companion bill (the American Vision for Safer Transportation through Advancement of Revolutionary Technologies (“AV START”) Act (S. 1885)) stalled in the Senate.

The bill empowers the National Highway Traffic Safety Administration (“NHTSA”) with the oversight of manufacturers of Highly Automated Vehicles (“HAVs”) through enactment of future rules and regulations that will set the standards for safety and govern areas of privacy and cybersecurity relating to such vehicles. The bill also requires vehicle manufacturers to inform consumers of the capabilities and limitations of a vehicle’s driving automation system and directs the Secretary of Transportation to issue updated or new motor vehicle safety standards relating to HAVs.

One key aspect of the bill is broad preemption of the states from enacting legislation that would conflict with the Act’s provisions or the rules and regulations promulgated under the authority of the bill by the NHTSA. While state authorities would likely retain their ability to oversee areas involving human driver and autonomous vehicle operation, the bill contemplates that the NHTSA would oversee manufacturers of autonomous vehicles, just as it has with non-autonomous vehicles, to ensure overall safety. In addition, the NHTSA is required to create a Highly Automated Vehicle Advisory Council to study and report on the performance and progress of HAVs. This new council is to include members from a wide range of constituencies, including members of the industry, consumer advocates, researchers, and state and local authorities. The intention is to have a single body (the NHTSA) develop a consistent set of rules and regulations for manufacturers, rather than continuing to allow the states to adopt a web of potentially widely differing rules and regulations that may ultimately inhibit development and deployment of HAVs.

In a joint statement on the bill, Energy and Commerce Committee Republican Leader Rep. Greg Walden (R-OR) and Communications and Technology Subcommittee Republican Leader Rep. Bob Latta (R-OH) noted that “[t]here is a clear global race to AVs, and for the U.S. to win that race, Congress must act to create a national framework that provides developers certainty and a clear path to deployment.”[43] The bill has been referred to the House Energy and Commerce Committee and awaits further action.[44]

B.  European Commission Report on the Ethics of Connected and Automated Vehicles

In September 2020, the Commission published a report by an independent group of experts on the ethics of connected and automated vehicles (“CAVs”).[45] The report—which promotes the “systematic inclusion of ethical considerations in the development and use of CAVs”[46]—sets out twenty ethical recommendations on road safety, privacy, fairness, AI explainability, responding to dilemma situations, clear testing guidelines and standards, the creation of a culture of responsibility for the development and deployment of CAVs, auditing CAV algorithmic decision-making reducing opacity, as well as the promotion of data, algorithm and AI literacy through public participation. The report applies a “Responsible Research and Innovation” approach that “recognises the potential of CAV technology to deliver the […] benefits [reducing the number of road fatalities and harmful emissions from transport, improving the accessibility of mobility services]” but also incorporates a broader set of ethical, legal and societal considerations into the development, deployment and use of CAVs and to achieve an “inherently safe design” based on a user-centric perspective.[47] The report builds on the Commission’s strategy on Connected and Automated Mobility.[48]

C.  Proposed German Legislation on Autonomous Driving

The German government intends to pass a law on autonomous vehicles (“Gesetz zum autonomen Fahren”) by mid-2021.[49] The new law is intended to regulate the deployment of CAVs in specific operational areas by the year 2022 (including Level 5 “fully automated vehicles”), and will define the obligations of CAV operators, technical standards and testing, data handling, and liability for operators. The proposed law is described as a temporary legal instrument pending agreement on harmonized international regulations and standards.

Moreover, the German government also intends to create, by the end of 2021, a “mobility data room” (“Datenraum Mobilität”), described as a cloud storage space for pooling mobility data coming from the car industry, rail and local transport companies, and private mobility providers such as car sharers or bike rental companies.[50] The idea is for these industries to share their data for the common purpose of creating more efficient passenger and freight traffic routes, and support the development of autonomous driving initiatives in Germany.

_____________________

   [1]   United States Patent and Trademark Office, Public Views on Artificial Intelligence and Intellectual Property Policy (Oct. 2020), at 2 (summarizing responses by stakeholders to the USPTO’s request for public comment), available at https://www.uspto.gov/sites/default/files/documents/USPTO_AI-Report_2020-10-07.pdf.

   [2]   H. Mark Lyon, Gearing Up For The EU’s Next Regulatory Push: AI, LA & SF Daily Journal (Oct. 11, 2019), available at https://www.gibsondunn.com/wp-content/uploads/2019/10/Lyon-Gearing-up-for-the-EUs-next-regulatory-push-AI-Daily-Journal-10-11-2019.pdf.

   [3]   EC, White Paper on Artificial Intelligence – A European approach to excellence and trust, COM(2020) 65 (Feb. 19, 2020), available at https://ec.europa.eu/info/sites/info/files/commission-white-paper-artificial-intelligence-feb2020_en.pdf.

   [4]   Id. Industries in critical sectors include healthcare, transport, police, recruitment, and the legal system, while technologies of critical use include such technologies with a risk of death, damage or injury, or with legal ramifications.

   [5]   EC, A European strategy for data, COM (2020) 66 (Feb. 19, 2020), available at https://ec.europa.eu/info/files/communication-european-strategy-data_en.

   [6]   EC, Report on the safety and liability implications of Artificial Intelligence, the Internet of Things and robotics, COM (2020) 64 (Feb. 19, 2020), available at https://ec.europa.eu/info/files/commission-report-safety-and-liability-implications-ai-internet-things-and-robotics_en.

   [7]   EC, White Paper on Artificial Intelligence: Public consultation towards a European approach for excellence and trust, COM (2020) (July 17, 2020), available at https://ec.europa.eu/digital-single-market/en/news/white-paper-artificial-intelligence-public-consultation-towards-european-approach-excellence.

   [8]   EC, Artificial intelligence – ethical and legal requirements, COM (2020) (June 2020), available at https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12527-Requirements-for-Artificial-Intelligence.

   [9]   Id.

[10]   European Parliament, Setting up a special committee on artificial intelligence in a digital age, and defining its responsibilities, numerical strength and term of office (June 18, 2020), available at https://www.europarl.europa.eu/doceo/document/TA-9-2020-0162_EN.html; the European Parliament is also working on a number of other issues related to AI, including: the civil and military use of AI (legal affairs committee); AI in education, culture and the audio-visual sector (culture and education committee); and the use of AI in criminal law (civil liberties committee).

[11]   European Parliament, News Report, AI rules: what the European Parliament wants (Oct. 21, 2020), available at https://www.europarl.europa.eu/news/en/headlines/society/20201015STO89417/ai-rules-what-the-european-parliament-wants.

[12]   European Parliament, Parliament leads the way on first set of EU rules for Artificial Intelligence (Oct. 20, 2020), available at https://www.europarl.europa.eu/news/en/press-room/20201016IPR89544/.

[13]   In addition, the Parliament announced that it had approved two separate legislative initiative reports calling on the Commission to address and tackle current shortcomings in the online environment in its Digital Services Act (“DSA”) package, due to be presented in December 2020. In particular, the Parliament noted that the EU aims to shape the digital economy at the EU level, as well as set the standards for the rest of the world. In addition, the Parliament outlined in its reports that all digital service providers established in non-EU must adhere to the DSA’s rules when their services are also aimed at consumers or users in the EU.

[14]   European Parliament, Report with recommendations to the Commission on a framework of ethical aspects of artificial intelligence, robotics and related technologies (2020/2012 (INL)) (Oct. 8, 2020), available at https://www.europarl.europa.eu/doceo/document/A-9-2020-0186_EN.pdf; European Parliament, Resolution of 20 October 2020 with recommendations to the Commission on a framework of ethical aspects of artificial intelligence, robotics and related technologies (2020/2012 (INL)) (Oct. 20, 2020), available at https://www.europarl.europa.eu/doceo/document/TA-9-2020-0275_EN.pdf.

[15]   Press Release, European Parliament, Parliament leads the way on first set of EU rules for Artificial Intelligence (Oct. 20, 2020), available at https://www.europarl.europa.eu/news/en/press-room/20201016IPR89544/.

[16]   Id.

[17]   Press Release, European Parliament, Parliament leads the way on first set of EU rules for Artificial Intelligence (Oct. 20, 2020), available at https://www.europarl.europa.eu/news/en/press-room/20201016IPR89544/.

[18]   European Parliament, Report with recommendations to the Commission on a civil liability regime for artificial intelligence (2020/2014 (INL)) (Oct. 5, 2020), available at https://www.europarl.europa.eu/doceo/document/A-9-2020-0178_EN.pdf; European Parliament, Resolution of 20 October 2020 with recommendations to the Commission on a civil liability regime for artificial intelligence (2020/2014 (INL)), available at https://www.europarl.europa.eu/doceo/document/TA-9-2020-0276_EN.pdf.

[19]   European Parliament, Report on intellectual property rights for the development of artificial intelligence technologies (2020/2015(INI)) (Oct. 2, 2020), available at https://www.europarl.europa.eu/doceo/document/A-9-2020-0176_EN.pdf; European Parliament, Resolution of 20 October 2020 on intellectual property rights for the development of artificial intelligence technologies (2020/2015(INI)) (Oct. 20, 2020), available at https://www.europarl.europa.eu/doceo/document/TA-9-2020-0277_EN.pdf.

[20]   Innovative And Trustworthy AI: Two Sides Of The Same Coin, Position paper on behalf of Denmark, Belgium, the Czech Republic, Finland, France, Estonia, Ireland, Latvia, Luxembourg, the Netherlands, Poland, Portugal, Spain and Sweden, available at https://em.dk/media/13914/non-paper-innovative-and-trustworthy-ai-two-side-of-the-same-coin.pdf; see also https://www.euractiv.com/section/digital/news/eu-nations-call-for-soft-law-solutions-in-future-artificial-intelligence-regulation/.

[21]   Stellungnahme der Bundesregierung der Bundesrepublik Deutschland zum Weißbuch zur Künstlichen Intelligenz – ein europäisches Konzept für Exzellenz und Vertrauen, COM (2020) 65 (June 29, 2020), available at https://www.ki-strategie-deutschland.de/files/downloads/Stellungnahme_BReg_Weissbuch_KI.pdf; see also Philip Grüll, Germany calls for tightened AI regulation at EU level, Euractiv (July 1, 2020), available at https://www.euractiv.com/section/digital/news/germany-calls-for-tightened-ai-regulation-at-eu-level/.

[22]   Deutscher Bundestag, Enquete-Kommission, Künstliche Intelligenz – Gesellschaftliche Verantwortung und wirtschaftliche, soziale und ökologische Potenziale, Kurzzusammenfassung des Gesamtberichts (Oct. 28, 2020), available at https://www.bundestag.de/resource/blob/801584/102b397cc9dec49b5c32069697f3b1e3/Kurzfassung-des-Gesamtberichts-data.pdf.

[23]   UK ICO, Guidance on AI and data protection (July 30, 2020), available at https://ico.org.uk/for-organisations/guide-to-data-protection/key-data-protection-themes/guidance-on-ai-and-data-protection/.

[24]   Examples of such privacy-enhancing techniques include perturbation or adding ‘noise’, synthetic data, and federated learning.

[25]   On the topic of data minimization, see further the European Data Protection Board’s (“EDPB”) Draft Guidelines on the Principles of Data Protection by Design and Default under Article 25 of the GDPR, adopted on October 20, 2020 after a public consultation and available here.

[26]   H.R. 2575, 116th Congress (2019-2020).

[27]   The Ripon Advance, GOP senators praise House passage of AI in Government Act (Sept. 16, 2020), available at https://riponadvance.com/stories/gop-senators-praise-house-passage-of-ai-in-government-act/?_sm_au_=iVV6kKLFkrjvZrvNFcVTvKQkcK8MG; Rob Portman, House Passes Portman, Gardner Bipartisan Legislation to Improve Federal Government’s Use of Artificial Intelligence (Sept. 14, 2020), available at https://www.portman.senate.gov/newsroom/press-releases/house-passes-portman-gardner-bipartisan-legislation-improve-federal?_sm_au_=iVV6kKLFkrjvZrvNFcVTvKQkcK8MG.

[28]   Robin Kelly, Kelly, Hurd Introduce Bipartisan Resolution to Create National Artificial Intelligence Strategy (Sept. 16, 2020), available at https://robinkelly.house.gov/media-center/press-releases/kelly-hurd-introduce-bipartisan-resolution-to-create-national-artificial?_sm_au_=iVV6kKLFkrjvZrvNFcVTvKQkcK8MG; H.Con.Res. 116, 116th Congress (2019-2020).

[29]   Bipartisan Policy Center, A National AI Strategy (Sept. 1, 2020), available at https://bpcaction.org/wp-content/uploads/2020/09/1-Pager-on-National-AI-Strategy-Resolution-.pdf?_sm_au_=iVV6kKLFkrjvZrvNFcVTvKQkcK8MG.

[30]   On September 10, the House Budget Committee held a hearing to discuss the impact of Artificial Intelligence on the U.S. economy, and specifically on what role technology should play in the country’s recovery post-COVID-19. Witness Darrell West, Ph.D., of Brookings Institution warned that the rapid integration of AI technologies developed in the private sector could affect the American workforce by causing job losses and job dislocation.

[31]   H.R. 8390, 116th Congress (2019-2020).

[32]   Paul D. Tonko, Tonko, Reschenthaler Introduce Artificial Intelligence Education Act (Sept. 24, 2020), available at https://tonko.house.gov/news/documentsingle.aspx?DocumentID=3142.

[33]   United States Patent and Trademark Office, USPTO releases report on artificial intelligence and intellectual property policy (Oct. 6, 2020), available at https://www.uspto.gov/about-us/news-updates/uspto-releases-report-artificial-intelligence-and-intellectual-property?_sm_au_=iVV6kKLFkrjvZrvNFcVTvKQkcK8MG.

[34]   United States Patent and Trademark Office, Public Views on Artificial Intelligence and Intellectual Property Policy (Oct. 2020), available at https://www.uspto.gov/sites/default/files/documents/USPTO_AI-Report_2020-10-07.pdf. On October 30, 2019, the USPTO also issued a request for comments on Intellectual Property Protection for Artificial Intelligence Innovation, on IP policy areas other than patent law. The October 2020 USPTO publication summarizes the responses by commentators at Part II from p. 19 of the Report onwards.

[35]   Id. at ii.

[36]   Id. at 5.

[37]   Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 573 U.S. 208, 221 (2014); Mayo Collaborative Servs. v. Prometheus Labs., Inc., 566 U.S. 66 (2012).

[38]   In re Wands 858 F.2d 731 (Fed. Cir. 1988).

[39]   Supra, n.34, at 15.

[40]   Id. at 18.

[41]   H.R. __ 116th Congress (2019-2020).

[42]   For more information, please see our legal updates Accelerating Progress Toward a Long-Awaited Federal Regulatory Framework for Autonomous Vehicles in the United States and 2019 Artificial Intelligence and Automated Systems Annual Legal Review.

[43]   Energy & Commerce Committee Republicans, Press Release, E&C Republicans Continue Leadership on Autonomous Vehicles (Sept. 23, 2020), available at https://republicans-energycommerce.house.gov/news/press-release/ec-republicans-continue-leadership-on-autonomous-vehicles/.

[44] State regulatory activity has continued to accelerate, adding to the already complex mix of regulations that apply to companies manufacturing and testing HAVs. Over half of all U.S. states have enacted legislation related to autonomous vehicles; see further Nathan Benaich & Ian Hogarth, State of AI Report (Oct. 1, 2020), at 93, available at https://docs.google.com/presentation/d/1ZUimafgXCBSLsgbacd6-a-dqO7yLyzIl1ZJbiCBUUT4/edit#slide=id.g893233b74e_0_0; National Conference of State Legislatures, Autonomous Vehicles: Self-Driving Vehicles Enacted Legislation (Feb. 18, 2020), available at https://www.ncsl.org/research/transportation/autonomous-vehicles-self-driving-vehicles-enacted-legislation.aspx. As outlined in our 2019 Artificial Intelligence and Automated Systems Annual Legal Review, state regulations vary significantly. Also, in November 2020, Massachusetts voters are deciding on whether or not to add “mechanical” vehicle telematics data—real-time updates from a car’s sensors transmitted to an automaker’s private servers—to the list of information that Original Equipment Manufacturers (“OEMs”) have to share with independent mechanics under the state’s landmark “Right to Repair” law. Telematics data was purposefully excluded from the original 2013 law. If passed, the amendment would require automakers who want to do business in the state to make that data accessible through a smartphone app for owners starting in 2022. See Rob Stumpf, There’s Another Huge Right to Repair Fight Brewing in Massachusetts, The Drive (Oct. 13, 2020), available at https://www.thedrive.com/news/36980/theres-another-huge-right-to-repair-fight-brewing-in-massachusetts.

[45]   European Commission, Press Release, New recommendations for a safe and ethical transition towards driverless mobility, COM (2020) (Sept. 18, 2020), available at https://ec.europa.eu/info/news/new-recommendations-for-a-safe-and-ethical-transition-towards-driverless-mobility-2020-sep-18_en.

[46]   Id.

[47]   European Commission, Directorate-General for Research and Innovation, Independent Expert Report, Ethics of Connected and Automated Vehicles: Recommendations on road safety, privacy, fairness, explainability, and responsibility (Sept. 18, 2020), at 4, available here.

[48]   EC, Connected and automated mobility in Europe, COM(2020) (June 22, 2020), available at https://ec.europa.eu/digital-single-market/en/connected-and-automated-mobility-europe.

[49]   Bundesministerium für Verkehr und digitabe Infrastruktur, Gesetz zum autonomen Fahren (Oct. 2020), available at https://www.bmvi.de/SharedDocs/DE/Artikel/DG/gesetz-zum-autonomen-fahren.html; see also Josef Erl, Autonomes Fahren: Deutschland soll Weltspitze werden, Mixed.de (Oct. 31, 2020), available at https://mixed.de/autonomes-fahren-deutschland-soll-weltspitze-werden/.

[50]   Daniel Delhaes, Deutsche Autoindustrie erwägt, ihre Datenschätze zu bündeln, Handelsblatt (July 9, 2020), available at https://www.handelsblatt.com/technik/sicherheit-im-netz/autonomes-fahren-deutsche-autoindustrie-erwaegt-ihre-datenschaetze-zu-buendeln/26164062.html?ticket=ST-2824809-tuIGjXYQywf7MHzRurpa-ap4.

---

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

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

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

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

Artificial Intelligence and Automated Systems Group:
H. Mark Lyon – Chair, Palo Alto (+1 650-849-5307, [email protected])
J. Alan Bannister – New York (+1 212-351-2310, [email protected])
Patrick Doris – London (+44 (0)20 7071 4276, [email protected])
Kai Gesing – Munich (+49 89 189 33 180, [email protected])
Ari Lanin – Los Angeles (+1 310-552-8581, [email protected])
Robson Lee – Singapore (+65 6507 3684, [email protected])
Carrie M. LeRoy – Palo Alto (+1 650-849-5337, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Michael Walther – Munich (+49 89 189 33 180, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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