Washington, D.C. partner Helgi Walker, New York partner Barry Goldsmith, New York associate Jonathan Seibald and Washington D.C. associate Brian Richman are the authors of “Aggressive SEC Enforcement Actions Could Limit Small Business Recovery Resources,” [PDF] published by The National Law Journal on August 20, 2020.

Washington, D.C. partner Jason Mendro and associate Jeffrey Rosenberg are the authors of “An Oversight Claim By Any Other Name Is Reviewed Under ‘Caremark,’ Says GoPro,” [PDF] published by Delaware Business Court Insider on August 12, 2020.

CCPA Regulations Are Now Effective

On Friday, August 14, 2020, California Attorney General Xavier Becerra announced that the state’s Office of Administrative Law (“OAL”) approved the final California Consumer Privacy Act (“CCPA”) regulations. As detailed in our alert on June 12, 2020, the Attorney General submitted final proposed regulations to the OAL on June 1, 2020, and OAL approval was required before the regulations could take effect. The approved regulations—which took effect immediately on August 14, 2020—largely track the final regulations proposed by the Attorney General. The OAL withdrew four provisions,[1] however, and the Attorney General made a number of non-substantive changes for accuracy, consistency, and clarity (the non-substantive changes are detailed by the Office of the Attorney General here). The OAL withdrew the following provisions, though certain of the revisions do not indicate any substantive reversal, as noted below:

• Explicit Consent for Use of Personal Information for Different Purpose (formerly § 999.305(a)(5)): The OAG removed the requirement that notice and explicit consent is required to use a consumer’s personal information for a materially different purpose from the purpose disclosed at or before the collection of personal information. This provision was heavily debated during the public comment period, and while it would remove a significant burden on businesses seeking to make such a change with respect to explicit consent, the statute (Cal. Civ. Code § 1798.100(b)) still dictates that a “business shall not collect additional categories of personal information or use personal information collected for additional purposes without providing the consumer with notice consistent with” the CCPA.
• Offline Notice of Opt-Out (formerly § 999.306(b)(2)): The OAL removed the requirement that businesses substantially interacting with consumers offline must provide an offline notice of a consumer’s ability to opt out of the sale of personal information, such as by providing a consumer with notice on a printed form or posting signage directing consumers to a notice.
• Ease of Requesting to Opt-Out (formerly § 999.315(c)): The OAL removed the language requiring that the methods businesses use for submitting requests to opt-out “be easy for consumers to execute,” and “require minimal steps to allow the consumer to opt-out.” The withdrawn provision had also clarified that a “business shall not utilize a method that is designed with the purpose or has the substantial effect of subverting or impairing a consumer’s decision to opt-out.” Although this particular provision was removed, another provision, § 999.315(b), still encourages businesses to consider the “ease of use by the consumer when determining which methods consumers may use to submit requests to opt-out.”
• Denying Requests by Unauthorized Agents (formerly § 999.326(c)): Although this subsection allowing businesses to deny a request from an agent that failed to submit proof of authorization to act on the consumer’s behalf was removed, a different provision, § 999.315(f), provides that “[a] business may deny a request from an authorized agent if the agent cannot provide to the business the consumer’s signed permission demonstrating that they have been authorized by the consumer to act on the consumer’s behalf.”

At least the first two provisions above were particularly scrutinized during the public comment period, and their exclusion from the final regulations makes requirements for businesses less onerous (for example, businesses required to provide an opt-out-of-sale mechanism may have struggled with a practical offline procedure for opting out of the sale of data). The OAL has offered little insight into its reasoning for withdrawing these provisions, however, and the Attorney General may resubmit these sections after further review and potential revision.

Regardless of the withdrawal of these particular provisions, in light of the official approval of the remainder of the regulations, and the Attorney General’s authorization to enforce them starting immediately, businesses would be well advised to familiarize themselves with the approved regulations. We remain available to advise accordingly.

Bill Extending Key CCPA Exemptions Moves Forward at the Legislature

Separately, on August 13, 2020, the California Senate Judiciary Committee agreed—with a unanimous 9-0 vote—to extend until January 2022 exemptions from certain CCPA requirements for personal information arising from business-to-business (“B2B”) transactions and employment, which are currently set to expire January 1, 2021.[2] The relevant bill, AB 1281, was significantly revamped from a prior bill on June 25, 2020, and now its sole proposal is to extend the foregoing exemptions until January 2022, unless the California Privacy Rights Act (“CPRA”) passes. The CPRA is an initiative that is set for a vote on the November 3, 2020 state ballot, as we discuss in more detail here, and would extend the same exemptions until January 1, 2023. AB 1281 now sits with the Senate Appropriations Committee and was scheduled for a vote on August 19, 2020, but the legislature adjourned its session without a vote on the bill. The next session is scheduled for Monday, August 24. As of now, it appears likely to pass, which means the CCPA would not start applying to employment and B2B-related personal information when the current exemption expires on January 1, 2021.

_____________________

[1] Cal. Code Regs. Tit. 11, Div. 1, Chap. 20 §§ 999.305 (a)(5); 999.306(b)(2); 999.315(c);999.326(c).

[2] See California Senate Committee Roll Calls, available at https://sjud.senate.ca.gov/sites/sjud.senate.ca.gov/files/roll_call_reports_all_bills.pdf.

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Alexander Southwell, Benjamin Wagner, Ryan Bergsieker, Cassandra Gaedt-Sheckter, Abbey Barrera, Julie Hamilton, 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, 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 (+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 (+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])
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.

The New York Attorney General (“AG” or the “Office”) has a broad range of powers to launch investigations and bring actions on behalf of the State or its consumers in a wide variety of areas.  The AG’s prerogatives can have a profound impact on corporations, nonprofits, individuals, and investors.  This 18-month round-up is a summary of major cases and initiatives that have occurred under the leadership of New York State’s 67th Attorney General, Letitia James.

In January 2019, AG James was sworn into office.  She promised a rigorous defense of New Yorkers’ interests, particularly in the face of a federal administration that, in her view, may not share New York’s regulatory and enforcement priorities.  True to her word, and foreshadowed by her inaugural speech, in 2019 AG James and her team challenged the federal government in numerous sectors, and launched or joined matters in the consumer, investor, environmental protection, and immigration areas, among others.  AG James has kept her teams of over 600 lawyers busy, and they have worked on a number of ambitious and challenging cases, including, for example, the T-Mobile/Sprint antitrust case and the Exxon/Mobile securities fraud case.  Both of these cases proceeded to trial.  And in both, the Office did not prevail.  That said, the Office continues to bring complex and high-profile cases.  Most recently on August 6, 2020, AG James filed a lawsuit seeking to dissolve the National Rifle Association (“NRA”) based on the organization’s alleged diversion of millions of dollars away from the charitable mission of the organization for the personal benefit of its top executives[1]—a similar theory to the Office’s lawsuit against the Trump Foundation that resulted in the dissolution of the organization and an award of damages.[2]  The lawsuit against the NRA is expected to be extensively litigated, as the NRA quickly filed its own countersuit claiming that the AG’s lawsuit is a “political vendetta.”[3] Nevertheless, AG James has promised that the “lawsuit will continue undeterred.”[4]  As AG James continues to resolve the majority of cases through settlement agreements, she is also willing to use the bully pulpit to bring about results more favorable to her office.

In this round-up, we provide insight into some of AG James’s key cases and initiatives in her first 18 months in office.  First, we provide background on AG James and her team.  Second, we describe the Office’s aggressive approach vis-à-vis the federal government.  Third, we discuss some of the Office’s key antitrust and competition cases, including the T-Mobile/Sprint trial loss.  Fourth, we describe the Office’s activity in the data privacy and cybersecurity space.  Fifth, we describe the Office’s efforts to protect investors.  Sixth, we discuss significant cases the Office has brought in the health care area.  Seventh, we review the Office’s actions in the environmental protection area, including the Office’s ExxonMobil trial loss.  Eighth, we look at some of the actions the Office is taking in the employment space.  Finally, we provide some thoughts regarding the Office’s approach going forward.

I. AG James and Her Team

A. About AG James

AG James is the first woman of color to hold statewide office in New York, and the first woman ever elected as the State’s AG.  AG James’s background consists of public service, including serving as head of the Brooklyn Regional Office of the New York AG’s Office in 1999.  In 2003, AG James was elected to New York City Council, representing the 35th Council District in Brooklyn for a decade.  In 2013, she became the first woman of color to hold citywide office as Public Advocate of New York City.  Some of her prominent initiatives in these past roles have included assisting in the investigation of the New York Police Department’s stop-and-frisk policy, passing legislation requiring landlords to improve tenant living conditions, and expanding public access to recycling.

B. AG James’s Team 

The Office is divided into five major divisions:  Economic Justice, State Counsel, Social Justice, Criminal Justice, and Appeals and Opinions.  Soon after her election as Attorney General, AG James quickly assembled a diverse team:

• Jennifer Levy, First Deputy Attorney General:  Prior to joining the Office, Levy was the Supervising Attorney for the Civil Law Reform Unit at the Legal Aid Society, which oversees class action and affirmative litigation in matters of housing, government benefits, immigration, and homeless rights.  Before that, she served as the General Counsel in Charge of Litigation for the Public Advocate for New York City, also alongside James.
• Ibrahim Kahn, Chief of Staff:  Khan previously served as First Deputy Public Advocate of New York, working alongside AG James.  Before his service in the Public Advocate’s office, Khan was a top advisor on AG James’s Public Advocate campaign.
• Christopher D’Angelo, Chief Deputy Attorney General for Economic Justice:  D’Angelo is a former Associate Director of the U.S. Consumer Financial Protection Bureau’s Supervision, Enforcement and Fair Lending division.  In his current position in the Office, he oversees New York’s antitrust, investor protection, and taxpayer protection bureaus, among others.
• Meghan Faux, Chief Deputy Attorney General for Social Justice: Faux was previously the Managing Director of Brooklyn Legal Services, an organization which represents Brooklyn residents, who otherwise could not afford legal services, on a broad range of issues including accessing affordable housing and essential public benefits.  In her current position at the Office, she oversees a range of the Office’s bureaus—namely, the charities, civil rights, environmental protection, health care, labor, and real estate finance bureaus.
• José Maldonado, Chief Deputy Attorney General for Criminal Justice:  Maldonado previously served as a Special Advisor to the New York City Civil Service Commission, providing legal advice on personnel decisions made by city agency commissioners.  He also served as Counsel and Senior Policy Advisor to the New York City Fire Department Commissioner, and as that Department’s first compliance officer, leading efforts to revamp its hiring and recruitment practices.  Maldonado further served as Chief Assistant District Attorney in the Office of the Special Narcotics Prosecutor for the City of New York.  In his current position in the Office, he oversees the Criminal Enforcement and Financial Crimes Bureau, the Conviction Review Bureau, and the Public Integrity Bureau, among others.
• Orelia Merchant, Chief Deputy Attorney General, State Counsel:  From 2002 to 2019, Merchant served in the U.S. Attorney’s Office for the Eastern District of New York, most recently as an Executive Assistant U.S. Attorney directly overseeing the Office’s Civil and Administrative decisions.  Merchant leads the Division of State Counsel, which manages litigation involving the State, including its agencies and officials.
• Barbara Underwood, Solicitor General:  Underwood previously served as the Solicitor General of New York beginning in 2007 through early 2018, when the New York State Legislature selected Underwood to complete the remainder of former Attorney General Eric T. Schneiderman’s term.  Before joining the Office, Underwood served in the U.S. Attorney’s Office for the Eastern District of New York.  As Solicitor General, Underwood directs the Division of Appeals and Opinions, which is responsible for handling civil and criminal appeals in both state and federal courts.

II.  Taking on the Feds

AG James’s first 18 months have been, in many ways, defined by the Office’s positioning vis-à-vis the federal government as an enforcer.  Where she has viewed the federal government as stepping back—relaxing regulations or pulling away from enforcement or even acting unlawfully—AG James has aimed to fill the void.  She has made clear that when she views newly enacted federal policy as harmful to her constituents (“discriminatory, regressive, and dangerous,” in her words), she will take action.[5]  She has vowed to “work in a legal system where even the most powerful federal official in the country cannot use a loophole to evade justice” and to protect “anyone targeted by the wrath of bigotry.”[6]  Since taking office, AG James has filed over 30 lawsuits and numerous amicus briefs against the Trump Administration over such policies, including those related to immigration controls,[7] restricted access to health care,[8] and a rollback of environmental regulations.[9]  She prevailed in the U.S. Supreme Court in a lawsuit to block the Trump Administration from adding a citizenship question to the 2020 census[10]; she fought the implementation of a federal agency rule that would expand the ability of employers to refuse health care coverage to employees based on “religious beliefs or moral convictions”[11]; and she filed a lawsuit to halt the enforcement of a federal agency rule that would jeopardize the ability of immigrants to obtain legal permanent resident status and citizenship if they use certain publicly funded health benefits — a Motion to Stay Injunction Pending Appeal is currently pending.[12]  AG James has also created a Federal Initiatives Unit within her office “to ensure that the rights of all New Yorkers are not compromised by the federal government.”[13]

“Attorney General Letitia James is focused on enforcing the rule of law. In any case we pursue, we will follow the facts wherever they may lead. We wish the President would share our respect for the law.” – New York Attorney General’s Office, April 29, 2019

Immigration has been at the forefront of the broad set of federal issues that AG James has addressed in her first year.  For example, she supported the challenge to the federal government’s “fundamentally flawed” logic in eliminating Deferred Action for Childhood Arrivals (“DACA”),[14] standing alongside Gibson Dunn and others in support of multiple plaintiffs (including Gibson Dunn’s six Dreamer clients) who challenged the decision to end DACA as arbitrary and capricious under the Administrative Procedure Act and on other grounds.  Gibson Dunn partner Ted Olson argued on behalf of Dreamers in the Supreme Court in November 2019.[15]  On June 18, 2020, in a 5-4 ruling, the U.S. Supreme Court struck down the Trump Administration’s plan to end DACA, finding that it did not comply with the procedural requirement that it provide a reasoned explanation for its action.[16]

AG James has also launched recent challenges to the Trump Administration’s handling of the COVID-19 pandemic.  In May 2020, AG James filed a legal challenge against an Environmental Protection Agency (“EPA”) non-enforcement policy that has effectively waived industry compliance with pollution monitoring and reporting—a non-enforcement policy the Trump Administration claimed was justified by the pandemic that AG James has described as “literally a matter of life and death.”[17]  AG James’s motion for a preliminary injunction and the EPA’s motion to dismiss are still being briefed.  AG James has also challenged U.S. Department of Labor regulations that restrict workers’ rights to paid sick leave and emergency family leave during the pandemic; a move AG James argues contravenes the Families First Coronavirus Response Act.[18]  AG James’s motion for summary judgment was granted in part on August 3, 2020.  AG James also led a coalition of 26 attorneys general in calling for the U.S. Department of Housing and Urban Development to ensure that senior citizens with reverse mortgages do not lose their homes because of the pandemic.[19]

Across a broad spectrum, AG James has repeatedly challenged the Trump Administration’s policies, regulations, and actions.[20]

III.  Antitrust/Competition

A. T-Mobile & Sprint

On June 11, 2019, AG James and nine other attorneys general filed a lawsuit in the Southern District of New York to block T-Mobile’s proposed acquisition of Sprint under the Clayton Antitrust Act of 1914.  The lawsuit claimed that the merger would harm competition in the mobile wireless telecommunications market by reducing the number of major mobile network operators to three, thereby raising prices for consumers.  The AGs also expressed concern that the merger would result in the loss of retail jobs and harm mobile wireless independent dealers.

Following the filing, on July 26, 2019, the Federal Trade Commission and U.S. Department of Justice joined the Federal Communications Commission in approving the deal, on the condition that T-Mobile sell its prepaid business and certain wireless spectrum to DISH Network to help enable the creation of a fourth wireless operator.[21]  Eight additional AGs later joined the AG James’s lawsuit, although four ultimately withdrew.[22]  The trial commenced in December 2019 with 14 state AG plaintiffs and concluded in January 2020.[23]  On February 11, 2020, Judge Victor Marrero denied the AGs’ request to enjoin the merger.[24]  The court found that the States failed to show that T-Mobile would pursue anticompetitive behavior following the merger, and rejected the argument that DISH would be unable to enter the wireless services market as a viable competitor.[25]  On February 16, 2020, AG James announced that she would not pursue an appeal.[26]  This high-profile loss demonstrates that even though the Office may be more aggressively pursuing interests traditionally handled by the federal government, like antitrust enforcement, such cases do not easily result in success for the AGs.

B.  Google

On September 9, 2019, AG James made an announcement confirming the Office’s ongoing investigation into Google for antitrust issues, alleging that the company’s stature as a telecommunications and search engine giant was potentially harmful to consumers and the economy.[27]  In announcing the investigation, which currently involves 50 attorneys general, the AGs pointed to alleged “evidence” that “we have seen” that Google may have reduced consumer choice, slowed innovation, and violated consumer privacy.[28]

Like the federal administration and many regulators around the country, AG James is looking for ways to address the perceived dominance of “big tech” in an era of ever-growing concern about how consumer data is used, and will likely test the applicability of century-old antitrust laws to the tech industry, which, unlike other industries, often offers consumers its products free of charge.[29]

IV.  Data Privacy, Cybersecurity, and Data Breaches

A.  Equifax & Capital One

On July 22, 2019, AG James announced that she and 49 other attorneys general reached a $600 million settlement with Equifax following their investigation into a 2017 data breach of the company.[30]  Equifax, one of the three large consumer reporting agencies, had announced on September 7, 2017, a data breach that affected more than 147 million consumers, 8 million of which were purportedly New York residents.[31]  According to press reports, the breach allegedly implicated personal information including social security numbers, names, dates of birth, addresses, credit card numbers and driver’s license numbers.[32]

The settlement comprised a $425 million Consumer Restitution Fund and $175 million payment in fines to the states, approximately $9 million of which would be allocated to New York.  In addition to the monetary payment, Equifax agreed to provide free credit monitoring for up to 10 years to consumers affected by the data breach; assist consumers with identity theft issues, such as by helping to dispute inaccurate information in credit reports; and strengthen the company’s security.[33]  On December 19, 2019, Judge Thomas W. Thrash Jr. of the Northern District of Georgia granted final approval of the settlement.[34]

On July 30, 2019, AG James announced an investigation into Capital One, which experienced a data breach in which an outside individual gained unauthorized access and obtained certain types of personal information about Capital One credit card customers.[35]  While the outcome of that probe is yet to be determined, the investigation demonstrates the Office’s ongoing commitment to aggressively investigating potential breaches of consumer data.

B. Zoom

On March 20, 2020—in the midst of the COVID-19 pandemic and associated increase in work-from-home and academic videoconferencing—AG James sent Zoom a public letter asking the company to address reports of various privacy and security issues with the videoconferencing application.

On May 7, 2020, in lieu of pursuing litigation, AG James announced an agreement with Zoom whereby the company agreed to take various additional security and privacy measures.[36]  AG James opted for this route “[i]n recognition of the fact that Zoom has acted [] quickly to address the issues identified above, has worked cooperatively with the AG’s investigation, and has provided valuable services to schools, local governments and health care institutions to help address the unique circumstances” posed by the COVID-19 pandemic.[37]  Under the agreement, Zoom will maintain a comprehensive data security program that will involve regular security risk assessments, report those assessments to the Office, and enhance encryption protocols.  Zoom also agreed to stop sharing user data with social media companies, and give hosts more control over outside access to video conferences.[38]

V.  Investor Protection

Since her inauguration, AG James has consistently reiterated a commitment to protecting investors, enhancing corporate accountability, and maintaining integrity in New York’s financial markets; she views her work in this area as part of her obligation to all New Yorkers (as she often has said, “[W]hat happens on Wall Street impacts families on Main Street”).[39]

On October 2, 2019, AG James announced a new whistleblower submission system that facilitates secure and anonymous contact with the Office.[40]  The system, which utilizes a web portal allowing users to submit their complaint and relevant documentation, is intended to permit witnesses of unlawful or otherwise improper workplace conduct to express their concerns without revealing their identities.[41]  While the Office encourages users to disclose their identities,[42] it recognizes that “many people have legitimate concerns about their anonymity” and hopes that the new system will “attract, engage, and protect whistleblowers,” especially at a time when those attempting to call out corruption are facing intimidation.[43]

The new whistleblower portal represents just one of the latest efforts undertaken by AG James in 2019 with the goal of enhancing corporate accountability.  Just weeks earlier, on August 26, 2019, AG James announced the signing of a bill that restores the six-year statute of limitations for claims under the Martin Act,[44] reversing a 2018 ruling by the New York Court of Appeals[45] that confined the limitations period to three years.[46]  The Martin Act, considered one of the nation’s most powerful “blue sky” laws, grants the AG broad powers to investigate financial fraud and to bring both civil and criminal claims against any publicly traded company suspected of wrongdoing.[47]  By extending the statute of limitations period, the new law thereby enhances “one of the state’s most powerful tools to prosecute financial fraud,” which AG James cites as particularly important during a period in which she believes that the federal government has worked to roll back consumer financial protections.[48]  Critics of the Martin Act, however, have always maintained the law is too expansive, both because it permits the AG to investigate, issue subpoenas, and demand production of corporate documents without probable cause or a grand jury ruling, and because a civil fraud violation under the Martin Act does not require the AG to demonstrate scienter.[49]

Last year, the Office investigated several institutions suspected of violating the Martin Act.[50]  For example, in October, AG James announced the resolution of a three-year investigation into two related New York-based brokerage firms—BGC Financial LP (“BGC”) and GFI Securities LLC (“GFI”)—accused of using fraudulent practices to solicit trades of foreign exchange currency options.[51]  AG James’s investigation allegedly uncovered that, over a two-year period, BGC and GFI posted false bids and trades in an effort to encourage others to buy and sell options at the level at which the brokers had reported the false trade.[52]  As part of the settlement, the two entities admitted wrongdoing—specifically, posting fake bids to create a false appearance of greater liquidity in the market, and fraudulently announcing fake trades to deceptively entice traders to buy and sell options.  They agreed to pay fines totaling $12.5 million to the Office, among other penalties.[53]  The U.S. Commodity Futures Trading Commission (“CFTC”) also imposed a $25 million dollar civil penalty against BGC and GFI for the same conduct, but did not require the brokerage firms to admit wrongdoing.[54]  Both the Office and the CFTC required the appointment of independent monitors, who will work in parallel for at least 12 months.

AG James has also sought to hold individuals in the C-suite responsible for Martin Act violations.  For example, in December 2019, the Office filed a civil action against a private equity fund manager for violations of the Martin Act, alleging that this individual and the companies he controlled defrauded investors and misappropriated more than $13 million dollars in funds.[55]  In February 2020, a New York judge granted a preliminary injunction enjoining this individual from accessing funds associated with the alleged fraud, pending the upcoming trial.[56]  Reiterating her commitment to protect investors, AG James declared that “[t]here is no safe haven for white collar fraudsters in New York….”[57]  And in June 2020, the Office obtained a judgment against the founder and CEO of a wind turbine company who marketed unregistered securities and diverted investor funds to pay personal expenses in violation of the Martin Act.[58]

Not all Martin Act lawsuits pursued by AG James have been successful.  As further discussed below, following a three-week trial in November 2019, the New York Supreme Court found that the Office failed to establish that ExxonMobil violated the Martin Act, holding that the Office did not prove that a “reasonable investor” would have been misled by ExxonMobil’s representations concerning climate change risks.[59]

In September 2019, AG James led a coalition of eight attorneys general from around the country in filing a federal lawsuit challenging “Regulation Best Interest,” a June 2019 U.S. Securities and Exchange Commission (“SEC”) regulation that, according to the lawsuit, fails to comply with the requirements articulated in the Dodd-Frank Act.[60]  The regulation, known as “Reg BI,” outlines the obligations of broker-dealers who provide advice to investors, requiring covered broker-dealers to act in the best interests of their clients—but does not impose a fiduciary duty on them.[61]  According to the lawsuit,[62] the SEC’s adoption of Reg BI was contrary to Congress’s delegation of authority as outlined in the Dodd-Frank Act.  At the end of September 2019, the Southern District of New York dismissed the action for lack of subject-matter jurisdiction, finding that the law governing review of the SEC’s decisions mandated that the U.S. Court of Appeals for the Second Circuit was the proper forum for the litigation, rather than the district court.[63]  The Office continued to pursue this action in the Second Circuit.  On June 26, 2020, just four days before Reg BI was set to take effect, the Second Circuit upheld Reg BI, finding that “the SEC lawfully promulgated Regulation Best Interest pursuant to Congress’s permissive grant of rulemaking authority” under the Dodd-Frank Act and that Reg BI was not arbitrary, capricious, or an abuse of the SEC’s discretion.[64]  As another setback to AG James and potential challenges to federal regulations in the future, the court also found that the states did not have standing to challenge this federal regulation because the states did not demonstrate that the regulation caused a “direct injury” to state revenues, as required for states that challenge federal regulations.[65]

VI.  Health Care

AG James’s actions in the health care space—from partnering with other states to preserve the Affordable Care Act, to lawsuits against the pharmaceutical industry—represented a clear prioritization of those areas in 2019.  The Office made headlines for bringing large-scale suits in areas that dominated the news in 2019, including e-cigarette use among youth, the opioid crisis, and access to health care.  AG James frequently characterized these actions as protecting not only New Yorkers but the American people,[66] and her office did not hesitate to directly oppose the Trump Administration where she deemed appropriate.

A.  Federal Actions – ACA

2019 was a year of significant pushback from AG James and other states’ attorneys general against the Trump Administration’s efforts to limit protections of the Affordable Care Act (“ACA”).  In early January 2019, AG James set the tone for the Office’s actions for the rest of the year when she joined with 16 other attorneys general to appeal a Texas district court decision holding the ACA unconstitutional.[67]  In announcing that suit, AG James said that New York would “continue . . . to safeguard access to healthcare for all Americans.”  The U.S. Supreme Court granted certiorari in March 2020.

AG James made good on that statement a few months later when, in May, she led a group of states and cities in filing a suit opposing the Trump Administration’s “refusal-of-care” rule,[68] which was intended to give health-care providers, insurers, and employers greater leeway to refuse to provide medical care and services on the basis of their own religious or moral beliefs.  The rule—also called the “conscience rule” by its supporters—had been enacted by the U.S. Department of Health and Human Services (“HHS”) over opposition from the same group and others.

In November 2019, Judge Paul Engelmayer of the Southern District of New York found in favor of the states and struck down the rule.  In a lengthy decision noting that the refusal-of-care rule was “shot through with legal defects,” Judge Engelmayer agreed with the Office that the rule as adopted was unconstitutional because its central justification—that there was a “significant increase” in conscience-related violations—was “flatly untrue,” rendering the HHS “decision to promulgate the rule arbitrary and capricious,” in violation of the Administrative Procedure Act (“APA”).[69]  On January 3, 2020, HHS appealed the decision to the Second Circuit.[70]

The refusal-of-care case was just one of several actions in which AG James joined other state AGs to oppose ACA-related rulemakings by the Trump Administration.  In July 2019, AG James led a twelve-state coalition in filing the appellees’ brief in the Court of Appeals for the D.C. Circuit, defending a district court decision that struck down the Association Health Plan (“AHP”) rule promulgated by the U.S. Department of Labor which, according to the lawsuit, violated both the ACA and Employee Retirement Income Security Act (“ERISA”) through an unlawful reversal of key ERISA terms for the purpose of undermining the ACA, without adequate justification.  The rule attempted to undo federal consumer protections relating to fraud and consumer harm, and expand the use of AHPs, which offer health insurance to groups of small businesses with a common interest.[71]  The U.S. Department of Labor had appealed the decision, which found that the rule, which President Trump stated was aimed at dismantling Obamacare, was enacted in violation of the APA and was “clearly an end-run around the ACA.”[72]  The appeal remains pending following oral argument in November.  And in August 2019, AG James again joined with 21 state AGs to oppose another new HHS rule aimed at undermining anti-discrimination provisions in the ACA.[73]

B.  Consumer Health – Drug Pricing

AG James has frequently participated in multi-state lawsuits challenging allegedly anticompetitive drug pricing.

In May 2019, 44 states including New York sued Teva Pharmaceuticals and 19 generic drug manufacturers for allegedly working together to artificially manipulate prices and restrain trade on more than 100 drugs, purportedly leading to inflated prices for consumers.[74]  According to the Office, the lawsuit represented the culmination of a five-year investigation by the states into efforts by the companies and individual executives to coordinate and elevate pricing.[75]  The suit is still at the pleadings stage.

In January 2020, AG James announced a lawsuit against Vyera Pharmaceuticals and two of its former CEOs, including the previously convicted Martin Shkreli, for anticompetitive behavior, including for an alleged 4,000% increase in the price of Daraprim—the only FDA-approved drug for the treatment of toxoplasmosis—in August 2015.[76]  Six other states have since joined the suit, which is in the discovery phase.[77]

In June 2020, AG James joined a coalition of 51 attorneys general nationwide in filing a related antitrust complaint against 26 generic drug manufacturers and 10 executives of these companies, alleging “broad, coordinated, and systematic antitrust violations, price-fixing, market allocating, and the rigging of bids for more than 80 different topical, generic drugs.”[78]  The suit is still in the pleadings phase.

Drug pricing was a focus of AG James’s work closer to home, too:  in June 2019, the Office concluded an investigation of New York State pharmacies for failing to adhere to a law requiring them to post drug costs for consumers.[79]  The investigation led to cease-and-desist letters to 44 pharmacies that were found to be in violation of the rule, which mandates that pharmacies maintain and notify customers of a list of prices for the 150 most commonly prescribed drugs.

C.  Consumer Health – E-Cigarettes, Opioids

AG James’s actions over the last year have mirrored the nationwide concern over opioid and e-cigarette use.  Like many other states, in 2018 New York launched an investigation into JUUL Labs, Inc., the largest e-cigarette company in the United States; on November 19, 2019, more than a year later, the Office filed a lawsuit.  The suit, filed only a few days after New York changed the law to make it illegal to sell e-cigarette products to those under 21, alleges that the company engaged in deceptive marketing of its e-cigarettes and contributed to the “ongoing youth vaping epidemic.”[80]  The case is currently in the discovery stage.  It is part of a concerted push by the Office to spur further regulation of e-cigarette companies, as evidenced by her leading a coalition of seven attorneys general in filing comments with the Food and Drug Administration that urged enforcement actions related to flavored e-cigarettes and online sales.[81]

AG James has also sued pharmaceutical companies in connection with the opioid crisis.  In March 2019, she filed a lawsuit against six opioid manufactures, four distributors, and the Sackler family (who owned Purdue Pharma), alleging that they ignored their duties to prevent unlawful diversion of opioids and thus contributed to the opioid epidemic.[82]  Trial for all defendants except for Purdue Pharma and the Sackler family (whose case is moving separately through the U.S. Bankruptcy Court) was set to begin in March 2020, but has been delayed due to the COVID-19 pandemic.

AG James also pursued physicians for alleged over-prescribing and attendant Medicaid fraud, and joined a bipartisan multistate coalition of 38 states in an effort to push Congress to remove federal barriers to opioid addiction treatment,[83] calling it an effort to take “action from every angle” against the opioid crisis, and once again highlighting her willingness to get involved at the federal level.[84]

D.  Consumer Health – COVID-19

AG James focused on protecting the public health, particularly during the COVID-19 pandemic.  She has acted to “ensure the health of New Yorkers [is] not further at risk during these trying times.”[85]  For example, in April 2020, citing the importance of protecting reproductive health and limiting trips to pharmacies, AG James demanded that several health insurance companies comply with the Comprehensive Contraception Coverage Act, requiring health insurers to provide a 12-month supply of contraception at one time.[86]  The Office has also launched repeated efforts to protect New Yorkers from Coronavirus health scams, including issuing guidance to New Yorkers[87] and scrubbing websites of scams that are “stoking fear in the hearts and minds of Americans,”[88] and pursuing price gouging.[89]

VII.  Environmental Protection

“While Washington is asleep at the wheel, New York continues to lead the way in protecting our planet. . . .  I am proud to work with NYS Attorney General Letitia James to defend our precious environment from actions taken by this administration.” – New York Senator Todd Kaminsky (D)

AG James proclaimed in her 2019 Year in Review that she is committed to “fight[ing] policies that hurt New Yorkers, our natural resources, and our planet.”  AG James is stepping in to fill what she views as a gap in environmental protection enforcement by the Trump Administration.  Many state AGs, including AG James, have taken over 300 actions on climate change, air, water, and toxic chemicals during Donald Trump’s Presidency.[90]  A report by the State Energy and Environmental Impact Center at the NYU School of Law found that, as of the beginning of 2020, the Office has brought more environmental actions against the Trump Administration than any other state,[91] bringing 129 of those actions in 2019.[92]

AG James’s environmental activism takes aim at both the federal government’s policies and large corporations when she states that she believes that the federal government has not done enough to hold them accountable.  The Office’s activism—frequently coordinated with AGs across the country—could have significant impacts on companies.

A.   Taking on the Trump Administration’s Environmental Stance

AG James has challenged several of the Trump Administration’s new environmental rules, including the following:

(1) EPA’s COVID-19 Policy.  On March 26, 2020, the EPA issued a temporary policy regarding EPA enforcement of environmental legal obligations in response to the novel coronavirus outbreak.[93]  The policy applies retroactively to March 13 and has no end date.  The policy allows the EPA not to take enforcement action against companies that violate existing requirements if they draw a nexus between COVID-19 and their noncompliance.[94]  On April 15, 2020, AG James and 13 other states submitted a letter requesting that the EPA rescind the policy, contending that the “policy turns a blind eye to the impacts on our communities of more pollution and lesser accountability.”[95]  There has been no response to the letter to date.  AG James and attorneys general from several other states filed a complaint against the EPA on May 13, 2020 to challenge this policy, alleging that the EPA had not responded to the letter “or taken any of the actions requested by the Attorney[] General.”[96]  This litigation remains pending in the Southern District of New York.[97]

(2) The Cross-State Air Pollution “Close-Out” Rule.  This 2018 Trump administration rule loosens requirements that upwind states reduce their contribution of ozone precursors to downwind states, impacting the downwind states’ ability to attain ozone pollution standards by certain statutory deadlines.  AG James has challenged the Trump Administration’s EPA rulemaking surrounding the Close-Out Rule multiple times.
On October 1, 2019, the U.S. Court of Appeals for the D.C. Circuit sustained New York’s challenge and vacated the Close-Out Rule.  The court explained that the Close-Out Rule’s failure to require upwind states to reduce their emissions would “contribute significantly to downwind nonattainment in 2021.”[98]  On October 29, 2019, AG James brought another lawsuit against the EPA for failure to “abide by its legal responsibility under the Clean Air Act [(“CAA”)] to ensure upwind sources of pollution do not continue to create unhealthy ground-level ozone pollution [] in New York.”[99]  The lawsuit followed the EPA’s denial of a March 2018 petition filed by New York.  The petition requested the EPA to make a finding that nine upwind states were guilty of emissions violations and that the EPA ensure that the states reduced their emissions.[100]  On July 14, 2020 the court vacated the EPA’s denial of New York’s petition and remanded the case for further proceedings.  On February 19, 2020, AG James joined a federal lawsuit against the EPA for its failure to control air pollution from upwind states, thus preventing New York from achieving compliance with the CAA.[101]  On July 28, 2020, the court ruled in favor of the coalition of state attorneys general, granting their motion for summary judgment, finding that the EPA had not performed its obligations under the law and granting injunctive relief.

“The Trump Administration’s attempt to weaken the Clean Air Act will cause lasting damage to the economy, environment, and health of the American people.” – AG James, September 2019

(3) Energy Standards.  In August 2019, AG James led a coalition of 22 states and seven localities in filing a lawsuit challenging the EPA’s Affordable Clean Energy (“ACE”) rule, a regulation that purported to replace the Clean Power Plan (“CPP”), which had placed strict limits on fossil-fuel power plant emissions.[102]  The lawsuit alleged that the EPA had no legal standing to weaken the CPP, that the replacement ignored an EPA mandate to set limits on greenhouse gases, and that the new rule would reverse progress made in addressing climate change and prolong the U.S.’s dependence on fossil fuels.  EPA officials have argued that, unlike the CPP, the ACE rule adheres to the  CAA and is just as effective.[103]  Oral argument in the case has been scheduled for October 8, 2020.[104]  In April 2020, AG James, together with 14 other states and New York City, filed a lawsuit in the Ninth Circuit challenging the U.S. Department of Energy’s (“DOE”) revisions to its Process Rule.[105]  The Process Rule describes the procedures, interpretations, and policies that guide DOE in establishing new or revised energy-efficiency standards for consumer products.[106]  The Office argued that the revisions impose an “unreasonably high threshold for energy efficiency savings” that “threaten” the economic and environmental progress made by DOE’s long-standing energy efficiency program.[107]  The case is pending in the Ninth Circuit.

(4) Changes to Vehicle and Greenhouse Gas Emissions Standards.  In July 2019, the U.S. Department of Transportation’s National Highway Traffic Safety Administration (“NHTSA”) repealed an Obama-era rule and announced a new rule that limited the civil penalty rate for automobile manufacturers that fail to meet certain emissions standards.  AG James led a coalition of 13 state attorneys general in challenging the agency decision in the U.S. Court of Appeals for the Second Circuit, alleging that the new rule was “unlawful and rewards automakers that fail to manufacture fuel-efficient vehicles” and that it “violated federal law, which mandates that public agencies update their civil penalties to account for inflation using a clear timetable and formula for adjustment.”[108]  The case was heard on June 1, 2020.[109]  On March 31, 2020, the Trump Administration announced its final rule rolling back the Clean Car Standards.[110]  On May 27, 2020, AG James joined a multistate lawsuit against the EPA, U.S. Department of Transportation, and the NHTSA.[111]  The pending lawsuit, joined by 23 other attorneys general and several other local governments, argues that the rollback will halt the progress made “in saving consumers at the pump and reducing harmful greenhouse gas emissions, hurting the economy and public health at a time when the country can least afford it.”[112]

(5) Changes to Methane Emissions Standards.  In November 2019, AG James joined a coalition of 21 state and local governments in filing comments opposing a proposed EPA rule that would rescind emissions standards for methane.[113]  The coalition argued that the proposal was unlawful because the EPA had failed to justify its decision to abandon methane regulation, disregarded its own previous conclusions about the “substantial adverse impacts of methane emissions from the oil and gas industry,” and “arbitrarily eliminate[d] pollution controls from the transmission and storage segment of the oil and natural gas sector.”[114]

(6) Approval of Seismic Air Gun Survey Testing.  In March 2019, AG James and eight other AGs joined a group of non-governmental organizations’ motion to preliminarily enjoin the Trump Administration’s authorization of seismic air gun survey testing in the Atlantic Ocean.  Seismic testing is considered to a precursor to offshore drilling because it involves  the use of high-powered air guns to release loud pressurized blasts through the Atlantic Ocean to the seafloor to map offshore oil and gas reserves.  The AGs argued that the authorizations violated the Marine Mammal Protection Act, Endangered Species Act, National Environmental Policy Act, and the APA.[115]  The case is currently pending in the U.S. District Court for the District of South Carolina (Charleston).[116]

B.  Actions against Corporations

When it comes to the environment, AG James has also participated in actions against fossil fuel and automobile companies.

Fossil Fuel Companies.  Former AG Eric T. Schneiderman initiated an investigation against ExxonMobil in November 2015 to determine whether the company had fraudulently misled investors and the public about the risks of climate change and how such risks might hurt the oil business.[117]  In 2018, following the nearly three-year investigation, then-AG Barbara Underwood brought a securities fraud case under the Martin Act against ExxonMobil based on an alleged accounting discrepancy, alleging that the oil company caused investors to lose up to $1.6 billion by falsely telling them it had properly evaluated the impact of future climate regulations on its business.[118] In late November 2019, the case went to trial.  In December, after three weeks of trial, New York State Supreme Court Justice Barry Ostrager dismissed the case with prejudice, finding that “[t]he office of the Attorney General failed to prove, by a preponderance of evidence, that ExxonMobil made any material misstatements or omissions about its practices and procedures that misled any reasonable investor.”[119]  The court further noted, “ExxonMobil does not dispute either that its operations produce greenhouse gases or that greenhouse gases contribute to climate change.  But ExxonMobil is in the business of producing energy, and this is a securities fraud case, not a climate change case.”[120]

Following the defeat, the Office has continued to insert itself in climate change litigation brought against oil companies around the country, notably in Baltimore and the Bay Area, joining multistate coalitions in filing amici briefs in pending environmental litigation.[121]  Supporting local government plaintiffs in these cases, the state AGs have argued that fossil fuel companies should be held accountable under state law, including state tort law, for actions purportedly contributing to climate change and resulting harms.[122]  The oil companies have argued that the issues are fundamentally about emissions, which are regulated at the federal level.  Many of the cases have been dismissed, although some remain pending.

Automobile Industry.  In January 2019, AG James, a coalition of state and federal agencies, as well as private class action plaintiffs reached a $171 million settlement with Fiat Chrysler Automobiles (“Fiat”) and others.  The deal—which did not involve any admission of guilt, and included civil penalties and compensation for eligible customers—settled purported claims that Fiat had allegedly falsely advertised that its “EcoDiesel” vehicles were environmentally friendly (in violation of state environmental and consumer protection laws and the federal Clean Air Act), among other allegations.  Following the deal, Fiat announced “rigorous new validation procedures and updated . .  . . .training programs.”[123]

VIII.  Employee Rights

AG James has also been active in areas relating to labor and employment, especially post COVID-19.  Since January 2019, she has actively opposed multiple rule change proposals related to federal labor laws, like the Fair Labor Standards Act (“FLSA”), from the Trump Administration, leading coalitions of state attorneys general, because she believes the proposals weaken vital protections for workers and make it harder for states to enforce workplace laws. AG James’s many comment letters in opposition to the Trump Administration’s proposals suggest that AG James and other attorneys general have already teed up future litigation on numerous issues.[124]  We can expect her to file suit on many of these issues.

A.  Challenging Federal Policy Changes

For example, in May 2019, AG James led a coalition of states in opposing a then-proposed, now-final, rule regarding the “white collar” exemption to the overtime pay requirements under the FLSA.[125]  The exemption generally applies to salaried employees with executive, administrative or professional duties that earn above a threshold amount.  The AG coalition favored a higher, more “meaningful” salary threshold in part because they argued it would have, in practice, created a “bright-line” rule that clearly delineated exempt from non-exempt workers in more cases, particularly where states have a higher-than-national minimum wage.  However, the salary threshold that the U.S. Department of Labor (“DOL”) ultimately adopted was far below that advocated for by AG James (and the other state attorneys general), and roughly tracks to wages that are or soon will be the minimumwage in states like New York.[126]  According to the AGs’ comment letter, this lower salary requirement will likely lead to a higher incidence of worker misclassification, as more classification decisions turn on a “multifactorial duties test” that assesses the extent to which an employee’s duties are administrative, executive, or professional.  Despite AG James’s efforts, the overtime rule went into effect on January 1, 2020.[127]

AG James, along with Attorney General Josh Shapiro of Pennsylvania, also led an opposition to the Trump Administration’s efforts to revise the definition of “joint employer” as it is used to determine liability in both the FLSA and the National Labor Relations Act. AG James and AG Shapiro, joined by other states and the District of Columbia, have filed suit to challenge the DOL’s Final Rule[128] under the APA.[129]  Cross motions for summary judgment are pending.

With the onset of COVID-19, AG James has redoubled her opposition to certain federal wage and hour policies—new and old—particularly where she believes wage workers will be disproportionately impacted.  For example, AGs James and Shapiro again led a coalition of states in urging the Trump Administration to cease implementing the joint employer rule on the basis that the changes “put[] those most at risk of suffering financially as a result of the COVID-19 pandemic in even greater economic jeopardy.”[130]  According to the coalition, the new rule limits employees’ ability to collect back wages from bankrupt employers.[131]

Similarly, AG James filed suit in federal court to block implementation of a rule issued by the DOL under the Families First Coronavirus Response Act, claiming that the portions of the rule violate the APA because they are not in accordance with law and exceed the DOL’s statutory authority.[132]  AG James seeks to sever and vacate portions of the rule[133] that “make[] it harder for New Yorkers and Americans throughout the country to claim [paid sick leave and emergency family leave] benefits, which unnecessarily puts more workers at risk of exposure to COVID-19.”[134]  On August 3, 2020, the court agreed with AG James, invalidating parts of the DOL rule that AG James argued unfairly restricted access to the program.[135]

 AG James has also gone beyond wage and hour issues.[136]  In a comment letter to the Federal Trade Commission, she joined other state AGs in advocating for increased scrutiny of anticompetitive policies in the labor market, singling out non-compete and no-poach agreements as examples.[137]  Joining with other state attorneys general, she filed an amicus brief before the U.S. Supreme Court, joining in support of preservation of anti-discrimination protections, and highlighting the state’s “critical role in enforcing anti-discrimination [laws].”[138]  She also co-led the filing of an amicus brief before the U.S. Supreme Court arguing that Title VII prohibits employment discrimination based on an individual’s sexual orientation and stereotyping of that individual’s gender identity.[139]  This brief argued that discrimination against LGBT workers undermines the states’ ability to create inclusive communities, and that a contrary interpretation of Title VII would limit the extent to which states can rely on and utilize federal law to combat that discrimination.  The U.S. Supreme Court ruled adversely to her position in the first case,[140] but, in the second, issued a landmark ruling protecting the rights of LGBT workers—finding that “[a]n employer who fires an individual for being homosexual or transgender fires that person for traits or actions it would not have questioned in members of a different sex” is in violation of Title VII.[141]

B.  Employee Protection Efforts and Enforcement in New York

AG James has been active in prosecuting employers and publicly supporting the passage of various laws and initiatives to protect the rights of workers, including that:

• AG James lauded state-wide passage of the Salary History Bill, finding that the practice of inquiring into past salaries during the hiring process “unfairly perpetuates discrimination towards women and women of color, and … deprives them of the equal pay and recognition that they rightfully deserve.”[142]
• AG James applauded an amendment to the Equal Pay Act, which bans employers from paying different wages based on gender, remarking that she is “proud to see NY lead the way on ensuring equity in the workplace” by requiring that employees be paid equally for “substantially similar work.”[143]  She also joined a letter by a coalition of state attorneys general supporting a lawsuit seeking to compel “complete and final adoption” of the Equal Rights Amendment, after Virginia became the 38th state to ratify the Amendment, and urged Congress to remove any deadline for ratification.[144]
• AG James also successfully pushed for passage of a state law that penalizes discrimination and retaliation against immigrant employees, stating that “it is incumbent on us to help vulnerable workers be able to stand up for their rights without fear of punishment.”[145]  This law went into effect in October 2019.[146]  While the law essentially codifies federal case law interpreting anti-retaliation provisions, AG James advocated for the law to combat the “culture of fear” that has resulted from “increasingly heated rhetoric” regarding immigration nationwide.[147]
• AG James also heralded a decision by the New York State Court of Appeals reinstating a determination by the state’s Unemployment Insurance Appeal Board that a delivery driver was entitled to unemployment benefits.[148]  AG James heralded the decision that “delivery drivers are employees [and not independent contractors] and are entitled to the same unemployment benefits other employees can obtain” particularly “[a]s the nation battles the spread of the coronavirus and more and more employees are laid off.”[149]

AG James has signaled she will consider “all legal options” to protect employees in the wake of COVID-19.[150]  For instance, she has demanded that fast food restaurants provide employees with personal protective equipment,[151] and at least twice called on employees to report perceived violations of both preexisting labor laws and the recently issued executive orders.[152]  We expect she will continue to advance the rights of and protections for workers in the turbulence of the COVID-19 pandemic.

AG James also secured several settlements on behalf of employees:

• AG James reached a $450,000 settlement with a home health care company following the passage of the new law barring discrimination against immigrant employees based on allegations that more than 100 home health aides were not paid their earned wages, and were instead allegedly threatened with deportation if they reported or complained of the wage theft.[153]
• In a settlement regarding the company’s prior sick leave policies and practices, a coffeehouse chain recently agreed to pay $150,000 to a restitution fund, reform its sick leave policy, educate its workers on the new sick leave policy, and submit a compliance report detailing its progress within six months.[154]
• AG James has secured a $530,000 settlement for 150 car wash workers for wage theft.[155]
• With the New York City Comptroller’s Office, AG James required a developer to pay over $400,000 in restitution and interest to workers, as well as $2.5 million to New York City and the State, to settle its inquiry into whether the developers willfully violated wage requirements under Section 421-a of the New York Real Property Tax Law, which provides tax breaks on certain multifamily buildings.[156]
• AG James reached a settlement awarding $240,000 and a 10-year profit sharing arrangement for 11 former employees of a New York City restaurant and requiring implementation of new policies after an investigation found that the restaurant failed to systematically address or take adequate action to address the sexual harassment of the female staff.[157]

IX.  The Future

While we expect the next 18 months to look directionally like the last 18 months, the upcoming Presidential election will have important implications for AG James’s priorities. Civil rights including voter protection, the impact of the ongoing pandemic on consumers, borrowers, and workers will undoubtedly continue to draw her focus.  The Office’s aggressive enforcement positions require that companies pay careful attention to AG James’s actions and next steps.  AG James will continue to look for and seize upon opportunities in a broad range of areas building on her successes to date.

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Matthew Biben, Mylan Denerstein, Avi Weitzman, Amanda Aycock, Doran Satanove, Nina Meyer, Rachel Jackson, Sam Berman, and Praatika Prasad.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the following authors in New York:

Matthew L. Biben (+1 212-351-6300, [email protected])
Mylan L. Denerstein (+1 212-351- 3850, [email protected])
Avi Weitzman (+1 212-351-2465, [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.

On August 4, 2020, the Commodity Futures Trading Commission (“CFTC”) announced that the U.S. District Court for the Southern District of New York entered a consent order resolving the CFTC’s seven-year old charges against the New York Mercantile Exchange (“NYMEX”) and its two former employees for the two employees’ repeated disclosure of material non-public information in violation of the Commodity Exchange Act (“CEA”) and CFTC regulations.[1] Neither NYMEX nor its former employees admitted or denied the CFTC’s allegations. The CFTC’s enforcement action against NYMEX and its former employees is the first time the CFTC has charged an exchange with violations of the CEA and CFTC regulations’ proscriptions against disclosures of material non-public information by exchange employees.[2] It also represents one of the few actions that the CFTC has taken against a party for violating its insider trading rules in the commodity futures, options, and swap markets. And it provides guidance as to what the CFTC considers to be material, nonpublic information relating to order flow.

CFTC’s Expanded Scope of Enforcement

The Dodd-Frank Wall Street Reform and Consumer Protection Act[3], signed into law in 2010, amended the Commodity Exchange Act and granted the CFTC authority to devise enforcement to promulgate such “rules and regulations… are reasonably necessary to prohibit … trading practice that is disruptive of fair and equitable trading[.]”[4] On July 7, 2011, the CFTC adopted new antifraud regulation – Rule 180.1 which is expressly modeled on Section 10b-5 of the Securities Exchange Act of 1934. The new Rule prohibits “trading on the basis of material nonpublic information in breach of a pre-existing duty (established by another law or rule, agreement, understanding or some other source) and trading on the basis of material nonpublic information that was obtained through fraud or deception.”[5]

On December 2, 2015, the CFTC settled on consent with Arya Motazedi, for various violations of CFTC Rules[6]. This was the CFTC’s first enforcement of its anti-manipulation rules in an insider trading case. Motazedi was a gasoline and energy trader at a large, unmade, public traded company. The CFTC alleged that Motazedi committed fraud by (a) trading in his personal account against the company without the company’s knowledge, and (b) trading ahead of company orders in his personal account, taking advantage of the material, nonpublic information of his employer. Specifically, the CFTC alleged that Motazedi stole material, nonpublic information concerning the times, volumes, and prices at which his company intended to trade energy commodities futures. Instead of solely basing Motazedi’s liabilities on general antifraud provisions of the CEA, the CFTC focused on Section 6(c)(1) of the CEA and Rule 180.1 and Motazedi entered into a settlement, neither admitting nor denying that he breached his duty to his employer in violation of both Section 6(c)(1) and Rule 180.1.[7]

Similar to the Motazedi enforcement action, in September 2016, the CFTC filed a case against and reached a settlement with Jon P. Ruggles to pay a $1.75 million penalty and to forego more than $3.5 million in gains and banned him from trading and registration. Neither admitting nor denying liability, Ruggles allegedly traded in the same NYMEX products in personal accounts in his wife’s name with material nonpublic information of his employer.[8]

On September 28, 2018, the CFTC filed a civil complaint in the Southern District of Texas against EOX Holdings and Andrew Gizienski alleging violations of the CEA and CFTC insider trading regulations.[9] In this case, which remains ongoing, the CFTC alleges that Gizienski disclosed material, nonpublic information about EOX Holdings’ customer identities, block trades, and security positions, in breach of Gizienski’s duties to those customers, to profit in a friend’s trading account. The CFTC further alleges that EOX approved Gizienski’s trading in a friend’s account, but failed to implement reasonable procedures to monitor trading in that account. On the date that the CFTC charged EOX and Gizienski, the CFTC announced the formation of an Insider Trading and Information Protection Task Force.

Enforcement Against NYMEX and Its Former Employees

Over seven years ago, on or about February 21, 2013, the CFTC charged NYMEX, which is owned and operated by the CME Group, and the two former employees (William Byrnes and Christopher Curtin) with repeatedly disclosing customer trading information transmitted through the CME ClearPort Facilitation Desk to a commodity broker on at least in total approximately seventy-six occasions. The ClearPort Facilitation Desk provided clearing and settlement services for exchange-traded contracts and over-the-counter derivatives transactions. ClearPort customers were allegedly told that the trades they submitted would not be made public and would be deemed to be confidential; the customer user agreements, for example, allegedly stated that all “Exchange Data shall be deemed to be confidential” which the CFTC alleged included all price and other trade-related data, and such information could not be disclosed to third parties for any purpose other than to facilitate the transactions. At the time of the disclosures, Byrnes was a supervisor on the ClearPort Facilitation Desk and Curtin was the Associate Director of the Globex Control Center. The CFTC alleged that the disclosures were often captured on tape, and that NYMEX had failed to investigate an anonymous complaint about improper disclosures for over a year before terminating Byrnes.[10]

In the consent order against NYMEX and its two former employees, the CFTC alleged that, on numerous occasions between 2008 and 2010, the two former employees (William Byrnes and Christopher Curtin) disclosed material, nonpublic information about derivatives trading activity that they obtained through their employment at the NYMEX.[11] The material and nonpublic information Byrnes and Curtin allegedly disclosed includes “the identifies of counterparties, whether a particular counterparty purchased or sold the option, whether it was a call or a put, the volume of contracts traded, the expiry, the strike price and the trade price.”[12] The disclosures were allegedly made to a commodities broker who was apparently not authorized to receive the information.

The CFTC alleged that Byrnes and Curtin were directly liable for the alleged disclosures of material, nonpublic information of trading activity, and that NYMEX was vicariously liable for the conduct of its former employees.[13] Both employees are permanently banned from trading commodity interests and registering with the CFTC. The order also enjoins NYMEX to the extent the CEA and CFTC regulations apply under the vicarious liability provision of the CEA.[14] The order imposes a $4 million joint and several monetary penalty on NYMEX, Byrnes and Curtin, capping the liability of Byrnes and Curtin at $300,000 and $200,000 respectively.[15]

In 2016, NYMEX submitted a motion for summary judgement arguing that it was not vicariously liable for the violations of Byrnes and Curtin. On September 19, 2019, Judge Broderick denied NYMEX’s motion stating that “Plaintiff [CFTC] identifies several facts that could permit a jury to find that Byrnes and Curtin intended to serve some purpose of NYMEX and were acting within the scope of their employment.”[16] Judge Broderick quoted several allegations in the CFTC’s complaint that precluded the Court from granting the defense motion including: (1) Curtin’s 2007 NYMEX self-evaluation where he wrote one of his goals was to “continue to grow facilitation desk knowledge base and increase the business”; (2) Byrnes and Curtin allegedly knew that the broker whom they allegedly tipped was on NYMEX’s list of ‘Top 50’ Brokers for ClearPort; and (3) NYMEX earned fees as a result of the broker’s trades.[17]

Takeaways

There are multiple, important takeaways from this civil action that the CFTC took against NYMEX and its two former employees for violating the CFTC’s insider trading rules.

First, the CFTC set forth again its position that certain customer trading information which is supposed to be kept confidential pursuant to user agreements is material, nonpublic information. The CFTC’s position will not be tested in this case, because NYMEX and its two former employees reached a settlement resolving the matter, without admitting or denying the allegations.

Second, for purposes of alleging that the former NYMEX employees had a duty not to disclose the customer trading information, the CFTC relied on the employer’s code of conduct, the employee handbook, the employment agreements, and the customer user agreements. Often such codes of conduct, handbooks, and agreements are highly general and fail to provide clear notice as to what can and cannot be disclosed. It is important for all market participants to be aware of the non-disclosure provisions in the agreements available to them, and certainly the ones which each individual signs and agrees to follow.

Third, the CFTC partially built its case against the former NYMEX employees through recorded lines during which there was disclosure of customer information to a commodities broker and the employees were captured trying to avoid the recorded line by agreeing on the recorded line to call each other on their mobile devices. Regulators will often look for evidence that market participants are trying to avoid discussions over recorded lines such as the commodities broker’s statements “Do you want me to call you on your cell” and “Bring your cell phone tomorrow” so we can discuss customer trading.

Fourth, upon receipt of an anonymous complaint of improper activity, it is incumbent on the firm to investigate expeditiously and to be prepared to defend that investigation to regulators later. In this case, upon receipt of confidential information regarding trades cleared through CME ClearPort had been disclosed to a brokerage firm improperly, NYMEX’s manager of the ClearPort Facilitation Desk allegedly conducted a belated and cursory investigation by reviewing phone calls and emails from one day, and did not question the employees allegedly involved in the disclosures. Moreover, although the manager directed all employees on the CME ClearPort Facilitation Desk not to use mobile devices for business, the employees allegedly used their personal cell phones in the open at their desks.

Fifth, the CFTC’s theory of vicarious liability against NYMEX will unfortunately not be tested at trial. It was an aggressive theory given that Curtin and Byrnes appeared to have acted contrary to NYMEX’s policies and agreements, and against their employer’s interests. In demonstrating that the conduct of rogue employees should not be vicariously liable to their employer, it is critical to develop facts to demonstrate that the employees acted outside the scope of their employment, contrary to training and instructions, and for the purpose of benefitting themselves at the expense of the employer.

Sixth, the CFTC charged the recipient of the allegedly material, nonpublic information with aiding and abetting the primary violations of the former NYMEX employees. The CFTC alleged that the broker “repeatedly solicited Byrnes and Curtin for the specific material nonpublic information they disclosed to him and providing Byrnes and Curtin with information they needed to identify and locate information about the specific trades in which Eibschutz was interested.”[18] Whether the CFTC will be able to prove aiding and abetting liability against the broker will test the regulator’s ability to go after the recipients of material, nonpublic information.

Finally, the CFTC’s civil action took approximately seven years and six months since filing of the complaint, and over ten years since the alleged underlying misconduct took place, to resolve the matter against NYMEX and its former employees. There are many reasons for this long delay including the time taken to submit and resolve a motion to dismiss, discovery disputes, and the submission and resolution for summary judgment. That extensive stretch of time presents serious challenges to regulators and market participants in terms of the burden on regulators to prove their actions, the costs of litigating, and the distraction and other collateral consequences of a never-ending civil action to market participants. Of course the civil action against the recipient broker remains ongoing, and it’s unclear whether that will also result in a settlement or go to trial.

_________________

   [1]   NYMEX and Two Former Employees to Pay $4 Million for Disclosing Material Non-Public Information, Release Number 8216-20 (Aug 4, 2020). Please see here.

   [2]   Id.

   [3]   Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), Pub. L No. 111-2031, § 753, 124 Stat. 1376 (2010).

   [4]   7 U.S.C § 6c(a)(6) (2018).

   [5]   Commodity Futures Trading Commission Q&A – Anti-Manipulation and Anti-Fraud Final Rules (2011), please see here.

   [6]   In re Arya Motazedi, CFTC Docket No. 16-02 (Dec 2, 2015).

   [7]   Id.

   [8]   In re Jon P. Ruggles, CFTC Docket No. 16-34 (Sept. 29, 2016).

   [9]   Complaint, U.S. Commodity Futures Trading Commission v. EOX Holdings LLC et al., Case No.: 1:18-cv-08890 (S.D.N.Y. filed Sept. 28, 2018).

[10]   Complaint, U.S. Commodity Futures Trading Commission v. William Byrnes et al., Case No.: 1:13-cv-01174 (S.D.N.Y. filed Feb. 21, 2013).

[11]   U.S. Commodity Futures Trading Commission v. William Byrnes, Christopher Curtin, The New York Mercantile Exchange, Inc., and Ron Eibschutz, No. 13 Civ. 1174 (Aug 4, 2020).

[12]   Id.

[13]   Id.

[14]   Id.

[15]   Id.

[16]   U.S. Commodity Futures Trading Commission v. William Byrnes, Christopher Curtin, The New York Mercantile Exchange, Inc., and Ron Eibschutz, No. 13 Civ. 1174 (S.D.N.Y., Sep. 19, 2019).

[17]   Id.

[18]   CFTC Charges Ron Eibschutz with Aiding and Abetting Disclosures of Material Nonpublic Information about Customer Trades in its Case Against the CME Group’s New York Mercantile Exchange and Two Former Employees, Release Number 6584-13 (May 8, 2013). Please see: https://www.cftc.gov/PressRoom/PressReleases/6584-13.

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Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Securities Enforcement Group, or the following authors:

Reed Brodsky – New York (+1 212-351-5334, [email protected])
Dan Li – New York (+1 212-351-6310, [email protected])

Securities Enforcement Group:

New York
Matthew L. Biben (+1 212-351-6300, [email protected])
Reed Brodsky (+1 212-351-5334, [email protected])
Joel M. Cohen (+1 212-351-2664, [email protected])
Lee G. Dunst (+1 212-351-3824, [email protected])
Barry R. Goldsmith (+1 212-351-2440, [email protected])
Laura Kathryn O’Boyle (+1 212-351-2304, [email protected])
Mark K. Schonfeld (+1 212-351-2433, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Avi Weitzman (+1 212-351-2465, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])
Tina Samanta (+1 212-351-2469, [email protected])

Washington, D.C.
Stephanie L. Brooker (+1 202-887-3502, [email protected])
Daniel P. Chung (+1 202-887-3729, [email protected])
Stuart F. Delery (+1 202-887-3650, [email protected])
Richard W. Grime (+1 202-955-8219, [email protected])
Patrick F. Stokes (+1 202-955-8504, [email protected])
F. Joseph Warin (+1 202-887-3609, [email protected])

San Francisco
Winston Y. Chan (+1 415-393-8362, [email protected])
Thad A. Davis (+1 415-393-8251, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
Michael Li-Ming Wong (+1 415-393-8234, [email protected])

Palo Alto
Michael D. Celio (+1 650-849-5326, [email protected])
Paul J. Collins (+1 650-849-5309, [email protected])
Benjamin B. Wagner (+1 650-849-5395, [email protected])

Denver
Robert C. Blume (+1 303-298-5758, [email protected])
Monica K. Loseman (+1 303-298-5784, [email protected])

Los Angeles
Michael M. Farhang (+1 213-229-7005, [email protected])
Douglas M. Fuchs (+1 213-229-7605, [email protected])
Debra Wong Yang (+1 213-229-7472, [email protected])

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On August 13, 2020, the California Supreme Court issued its ruling in Facebook v. Superior Court (“Touchstone”), No. S245203, ___Cal.5th___. The decision provides a framework for courts evaluating a criminal defendant’s third-party subpoena of records relating to a crime victim or prosecution witness. In Touchstone, a criminal defendant facing trial for attempted murder sought his alleged victim’s records from Facebook—instead of from the victim himself—in an effort to bolster the defendant’s self-defense theory and gather witness impeachment material. Facebook moved in the Superior Court to quash Touchstone’s subpoena on the basis of the Stored Communications Act, 18 U.S.C. § 2701 et seq. (“SCA”), which prohibits an electronic communications service from disclosing the contents of people’s communications in the absence of certain exemptions, such as consent. The Superior Court denied Facebook’s motion to quash, the Court of Appeal reversed, and the California Supreme Court granted Touchstone’s petition for review.

Writing for a unanimous Court, Chief Justice Cantil-Sakauye remanded the case for a renewed analysis of whether the subpoena was supported by good cause. The Court held that on remand the Superior Court should employ a seven-factor balancing test to determine the existence of good cause, evaluating such factors as, among others, the defendant’s “plausible justification” for the third-party subpoena, the infringement on third-party privacy rights posed by the subpoena, and the availability of the materials sought from alternative sources. The Court’s decision provides much-needed clarity to social media and other web-based companies that are routinely inundated with requests for third-party communications and data for use in court proceedings.

I.  The Court Establishes a Good-Cause Framework for Third-Party Subpoenas of User Communications and Data

In Touchstone, the Superior Court had allowed Touchstone to submit the declaration and exhibits supporting his proposed subpoena under seal and on an ex parte basis, thus depriving both the prosecution and Facebook of any opportunity to challenge whether the subpoena was supported by good cause. Touchstone, supra at [p. 36].

During appellate proceedings, the California Supreme Court unsealed Touchstone’s declaration and exhibits and requested argument from Facebook and the prosecution (which had intervened in the appeal) regarding Touchstone’s subpoena’s good-cause backing. Id. at [p. 38]. Upon viewing the newly-unsealed information, Facebook and the prosecution argued that the subpoena was overbroad (it sought the alleged victim’s entire Facebook account history, without any date limitation); that the subpoena was predicated on speculation that relevant communications might exist; that the material sought was readily available from alternative sources (including the alleged victim himself, whom Touchstone had never attempted to subpoena); and that the alleged victim should be afforded the chance to interpose his own privacy objections to the subpoena.

The California Supreme Court remanded, instructing the Superior Court to hear argument from Facebook, the prosecution, and the defense as to whether the subpoena was supported by good cause, applying the following seven-factor balancing test:

(1) Has the defendant carried his burden of showing a ‘plausible justification’ for acquiring documents from a third party;

(2) Is the sought material adequately described and not overly broad;

(3) Is the material reasonably available to the . . . entity from which it is sought (and not readily available to the defendant from other sources);

(4) Would production of the requested materials violate a third party’s confidentiality or privacy rights or intrude upon any protected governmental interest;

(5) Is defendant’s request timely, or, alternatively, is the request premature;

(6) Would the time required to produce the requested information . . . necessitate an unreasonable delay of defendant’s trial; and

(7) Would production of the records containing the requested information . . . place an unreasonable burden on the [third party]?

Id. at [pp. 15-19] (quotations omitted).

The Court explained that unless this balancing test is satisfied, a criminal defendant’s third-party subpoena must be quashed, regardless of whether the SCA or any other law also independently bars disclosure in a given circumstance.  The Court walked through several of the factors in detail.

Alternative Sources. The Court explained that if alternative sources for information sought via third-party subpoena have not been exhausted, the subpoena is more likely to fail for lack of good cause.  The Court offered several helpful illustrations, citing with approval cases quashing subpoenas where “the proponents can obtain the same information by other means,” the defendant can “readily obtain the [discovery] information through his own efforts,” or “there existed an alternative source for the requested information.”  Id. at [p. 17] (citations omitted).  In Touchstone, for instance, Touchstone never subpoenaed the alleged victim for his own records, nor any of the recipients of the alleged victim’s communications.

Plausible Justification. The Court further explained that whether the defendant has shown a “plausible justification” to acquire the documents sought requires that “each legal claim that a defendant advances to justify acquiring and inspecting sought information must be scrutinized and assessed regarding its validity in strength.”  Id. at [p. 27].

Third-Party Privacy Interests. The Court also explained that “[w]hen, as in the present case, a litigant seeks to effectuate a significant intrusion into privacy by compelling production of a social media user’s restricted posts and private messages, the fourth factor . . . becomes especially significant.”  Id. at [p. 29].  In such cases, the “plausible justification” factor “must be subject to even closer examination in the absence of an apparent relationship between the alleged crime and the sought private communications.”  Id. (noting that in the “present case,” “it is questionable whether there is any [ ] substantial connection between the victim’s social media posts and the alleged attempted murder”).

Finally, the Court also questioned the trial court’s use of ex parte and under-seal proceedings, id. at [pp. 35-38], admonishing trial courts to carefully consider whether “it is necessary and appropriate to proceed ex parte and/or under seal, and hence to forego the benefit of normal adversarial testing.” Id. at [p. 37].

II.  The Court Reserves All Ruling on the SCA’s Independent Bar to Production

Because the Court resolved the appeal by determining that the Superior Court had failed to conduct an adequate threshold good-cause analysis regarding Touchstone’s subpoena, it declined to reach Facebook’s argument that regardless of good cause, Touchstone’s subpoena was barred by the SCA, which broadly prohibits electronic communications providers from divulging the contents of communications in response to a criminal defendant’s subpoena absent an applicable exception. See Facebook, Inc. v. Superior Court, 4 Cal. 5th 1245, 1250 (2018) (holding that third-party subpoenas of electronic service providers are “unenforceable under the [SCA] with respect to communications addressed to specific persons, and other communications that were and have remained configured by the registered user to be restricted”); Facebook, Inc. v. Wint 199 A.3d 625, 629 (D.C. 2019) (“[E]very court to consider the issue has concluded that the SCA’s general prohibition on disclosure of the contents of covered communications applies to criminal defendants’ subpoenas.”). In other words, the Court ruled that because the subpoena may not be supported by good cause, the SCA’s independent bar on disclosure was not yet implicated and need not be addressed.

Chief Justice Cantil-Sakauye and Justice Cuéllar wrote separate concurring opinions to suggest that lower courts should apply a context-dependent and critical lens in future cases regarding the threshold determination of whether an entity is covered by the SCA in the first instance.

III.  Implications of the Court’s Decision

The Court’s decision clarifies the standard that criminal defendants must meet before enforcing third-party subpoenas on social media and other companies seeking the records of potential crime victims or witnesses, holding that their subpoenas fail unless they meet a seven-factor balancing test that evaluates whether the materials can be obtained from a different source, the defendant’s need for the materials, and third-party privacy interests.

Gibson Dunn represented Facebook in the California Supreme Court.

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For more information, please feel free to contact the Gibson Dunn lawyer with whom you usually work or any of the following attorneys listed below.

Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, [email protected])
Daniel M. Kolkey – San Francisco (+1 415-393-8420, [email protected])
Julian W. Poon – Los Angeles (+1 213-229-7758, [email protected])
Joshua S. Lipshutz – Washington, D.C. (+1 202-955-8217, [email protected])
Michael Holecek – Los Angeles (+1 213-229-7018, [email protected])
Thomas F. Cochrane – Los Angeles (+1 213-229-7095, [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 first half of 2020 brought the spread of COVID-19 and unprecedented changes in daily life and the economy. We discuss how, nevertheless, there has still been a variety of securities-related lawsuits, including securities class actions, insider trading lawsuits, and government enforcement actions. We also discuss developments in the securities laws that have occurred against this backdrop.

The mid-year update highlights what you most need to know in securities litigation developments and trends for the first half of 2020:

• In Liu v. SEC, the U.S. Supreme Court affirmed the SEC’s ability to obtain disgorgement as an equitable remedy in civil actions, but left open several questions about the permissible scope of the remedy. In addition, a petition for a writ of certiorari was filed in National Retirement Fund v. Metz Culinary Management, Inc., a case posing the question of how to calculate withdrawal liability based on interest rate assumptions for union pension plans.
• We discuss the Delaware Supreme Court’s decision in Salzberg v. Sciabacucchi, which confirmed the facial validity of federal-forum provisions, as well as the Court of Chancery’s treatment of Caremark claims and director independence with respect to a putatively controlling stockholder.
• We continue to analyze how lower courts are applying the U.S. Supreme Court’s decision in Lorenzo, with a focus on recent district court opinions interpreting Lorenzo’s scope.
• We survey securities-related lawsuits arising in connection with or related to the coronavirus pandemic, including securities class actions, insider trading lawsuits, and government enforcement actions filed by both the SEC and the Department of Justice.
• We discuss recent decisions illustrating the difficulty plaintiffs face in attempting to overcome Omnicare’s formidable barrier to adequately pleading securities fraud.
• We examine the Second Circuit’s noteworthy decision in Goldman Sachs II regarding how defendants may rebut the presumption of reliance under Halliburton II.
• Finally, we examine the intersection of the federal securities laws and ERISA, discussing the U.S. Supreme Court’s recent Sulyma decision, which clarified the statute of limitations for fiduciary breach claims, and the lower court decisions addressing significant issues in the wake of the Court’s January decision in Jander.

I.  Filing And Settlement Trends

Despite COVID, data from a newly released NERA Economic Consulting (“NERA”) study shows that the first half of 2020 was not markedly different from 2019, and in some cases, continued trends that have been developing over the last few years. Perhaps unsurprisingly, this year, the number of new federal class action cases filed is on pace to be about 15–20% lower than 2017–2019, but is still on par with the amount of new federal class actions filed during those years as compared to the first half of the decade.

There has also been a continuation of the trends that have formed over the last few years for the types of cases filed. For example the number of merger cases in 2020 is on pace to generally continue the trend of post-2017 declines, and the number of Rule 10b-5-related cases is projected to continue the upward slope begun in 2016.

With regards to securities cases filed per industry sector, the Health Technology and Services sector is projected to have a decline for a fifth year in a row, while the Electronic Technology and Technology Services sector is projected to have additional growth.

The median settlement values of federal securities cases for 2020—excluding merger-objection cases and cases settling for either more than $1 billion or equal to $0—is on pace to be the highest of the decade (and up about 10% compared to 2019). This continues the trend of the last few years, which has resulted in median settlements that average nearly twice the median settlement in 2017 ($6.5 million). In contrast to the median settlement, the average settlement, however, does not appear to be following a trend, as it is more than double the average settlement value in 2019, but about 10% less than the average settlement in 2018.

A.  Filing Trends

Figure 1 below reflects the number of federal filings for the first half of 2020.[1] The one hundred seventy-five cases filed as of June 30 put 2020 on pace to have 15-20% fewer filings than the years spanning 2017-2019, but still significantly more than during 1996–2016 (with the exception of 2001, which was dominated by IPO Laddering Filings).

Figure 1:

B.  Mix Of Cases Filed In 1H 2020

1.  Filings By Industry Sector

Figure 2 below sets forth the split of non-merger objection class actions filed in the first half of 2020. Notably, the percentage of class actions related to Health Technology and Services continue to decline as they have each year from 2016–2020, whereas class actions related to Electronic Technology and Technology Services continue to increase as they have each year during 2016–2020. Finance-based class actions bounced back to 2016–2018 levels, suggesting that 2019 was an anomaly.

Figure 2:

2.  Merger Cases

Figure 3 below breaks down the types of federal filings in the first half of 2020. Merger objection filings are projected to constitute 40% of federal filings in 2020, which is generally consistent with the trend of slight decreases that began following the massive jump in 2017 (48%), declining in 2018 (46%) and 2019 (38%). Rule 10b-5 filings are projected to represent 51% of federal filings in 2020, which represents a slight increase as compared to 2019 (48%), 2018 (44%), and 2017 (44%).

Figure 3:

C.  Settlement Trends

As Figure 4 shows below, the average settlement value in 2020 is more than double the average settlement value in 2019, and is in the upper half of average settlement values over the past decade. However, as the chart demonstrates, it is difficult to infer any particular trend in average settlement values over the past decade.

Figure 4:

In Figure 5 below, median settlement values show for 2020 are similar to 2018 and 2019, all three of which are among the highest of the decade. The differences between Figure 4, which shows a sharp contrast between 2020 and 2019, and Figure 5, which does not, is likely attributable to Figure 5’s exclusion of settlements over $1 billion.

Figure 5:

II.  What To Watch For In The Supreme Court

In a blockbuster term affected by the pandemic, the U.S. Supreme Court issued 53 signed opinions—its lowest number in over 150 years. Only one of those cases arose under the federal securities laws.

A.  The Supreme Court Allows Equitable Disgorgement In SEC Enforcement Actions

On June 22, 2020, the Supreme Court issued an opinion in Liu v. SEC, which affirmed the Securities and Exchange Commission’s (“SEC”) ability to obtain disgorgement as an equitable remedy in civil actions, but left open several questions about the permissible scope of the remedy. 140 S. Ct. 1936 (2020). As discussed in our 2019 Year-End Securities Litigation Update, in Liu, the SEC brought an action for securities fraud against Charles Liu and his wife Xin Wang, alleging they misappropriated over $20 million of EB-5 investor funds.

The district court granted summary judgment in favor of the SEC on its claim under Section 17(a)(2) of the Securities Act and ordered disgorgement of the total amount raised from investors. SEC v. Liu, 262 F. Supp. 3d 957, 976 (C.D. Cal. 2017). The Ninth Circuit affirmed, rejecting defendants’ argument that the district court lacked the authority to order disgorgement based on Kokesh v. SEC, 137 S. Ct. 1635, 1645 (2017). SEC v. Liu, 754 F. App’x 505, 509 (9th Cir. 2018). In their petition, defendants argued that the Court’s decision in Kokesh, which held that “SEC disgorgement constitutes a penalty within the meaning of § 2462,” 137 S. Ct. at 1643, foreclosed the court from considering disgorgement as an equitable remedy under 15 U.S.C. § 78u(d)(5). See Liu, 140 S. Ct. at 1946.

On June 22, 2020, in an 8-1 decision, the Supreme Court disagreed with defendants’ argument that disgorgement is categorically unavailable to the SEC, finding that “a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under § 78u(d)(5),” and remanded the case to the lower court to consider whether the order was appropriately tailored. Id. at 1940.

Even though the Court’s decision does not foreclose the SEC from obtaining disgorgement, it does cabin the remedy in several important ways. The Court noted that in recent years, grants of disgorgement have “test[ed] the bounds of equity practice: by ordering the proceeds of fraud to be deposited in Treasury funds instead of disbursing them to victims, imposing joint-and-several disgorgement liability, and declining to deduct even legitimate expenses from the receipts of fraud.” Id. at 1946. Although the Court declined to specify the precise boundaries of permissible disgorgement, it “nevertheless discuss[ed] principles that may guide the lower courts’ assessment of these arguments on remand.” Id. at 1947.

First, the Court noted that “[t]he equitable nature of the profits remedy generally requires the SEC to return a defendant’s gains to wronged investors for their benefit.” Id. at 1948. The broad public benefit of “depriving a wrongdoer of ill-gotten gains” alone is not generally sufficient to meet that requirement and “would render meaningless the latter part of §78u(d)(5),” which restricts equitable relief to that “appropriate or necessary for the benefit of investors.” Id. While the Court considered that practical concerns may justifiably limit the ability to remit funds to defrauded investors, it did not offer specific guidance on when it may be permissible to deposit disgorged funds into the Treasury, instead noting that “[i]t is an open question whether, and to what extent, that practice . . . is consistent with the limitations of §78u(d)(5).” Id.

Second, the Court discussed the application of joint-and-several liability, noting that the practice has occurred “in a manner sometimes seemingly at odds with the common-law rule requiring individual liability for wrongful profits.” Id. at 1949. Applying this liability to disgorgement remedies could improperly “transform any equitable profits-focused remedy into a penalty.” Id. Because Liu and Wang were married and commingled finances, the Court left it to the Ninth Circuit to determine whether joint-and-several liability would be appropriate in this case, as “partners engaged in concerted wrongdoing.” See id.

Third, the Court found that “courts must deduct legitimate expenses before ordering disgorgement,” but provided limited guidance on what would constitute such expenses. Id. at 1950. The Court postulated that defendants who operate an “entirely fraudulent scheme” might have illegitimate expenses, such as those for “personal services.” Id. On the other hand, expenses that “have value independent of fueling a fraudulent scheme” may be legitimate. Id. Again, the Court left it to the lower court to examine precisely which expenses may be included “consistent with the equitable principles underlying § 78u(d)(5).” Id.

Accordingly, the Liu decision leaves open significant questions concerning the practical application of any disgorgement remedy, including the contours of when (1) disgorged funds may be disbursed to the Treasury rather than recouped by investors; (2) joint and several liability may be imposed; and (3) business expenses should be deemed legitimate and deducted from a disgorgement award.

In the coming years, lower courts will have to grapple with these complicated considerations in deciding how to apply the Court’s guidance in particular cases.

B.  Pension Plan Seeks Review Of Withdrawal Liability Calculation Decision

On May 29, 2020, a petition for a writ of certiorari was filed in National Retirement Fund v. Metz Culinary Management, Inc., No. 19-1336, a case involving the question of how to calculate withdrawal liability based on interest rate assumptions for union pension plans. Petitioners, a multiemployer trust fund and its trustees, which manage the pension plans of approximately 10 million participants, asked the Court to reverse the Second Circuit’s decision that favored employers. Petition for Writ of Certiorari at i–ii, 1–2, Metz (No. 19-1336).

Under ERISA, an employer seeking to withdraw from a multiemployer pension plan must pay its share of unfunded vested benefits, known as the “withdrawal liability.” See 29 U.S.C. § 1381(b)(1). Plans must calculate the withdrawal charge as of the last day of the plan year before the year the employer withdrew, known as the “Measurement Date.” See 29 U.S.C. § 1391. In calculating this charge, plan actuaries must make assumptions, including, as relevant in Metz, about what interest rate to use to discount an employer’s liability for future benefit payments. Applying a higher interest rate would decrease an employer’s withdrawal liability.

In Metz, the plan’s actuaries applied a revised, lower interest rate developed the year following the Measurement than it had applied for the year in which the Measurement date fell, which nearly quadrupled the employer’s liability. Nat’l Ret. Fund v. Metz Culinary Mgmt., Inc., 2017 WL 1157156, at *4 (S.D.N.Y. Mar. 27, 2017). An arbitrator found in favor of the employer and ordered that the assumptions and methods in place on the Measurement Date must be used to calculate the employer’s withdrawal liability. Id. The district court vacated the arbitrator’s decision, holding the “withdrawal liability interest rate assumption in effect on the Measurement Date is not applicable to the upcoming plan year unless the actuary affirmatively determines that the assumption . . . is reasonable and her best estimate of anticipated experience under the plan as of the Measurement Date.” Id. at *7.

The Second Circuit disagreed, finding retroactive application of interest rates improper, and holding that “the assumptions and methods used to calculate the interest rate assumption for purposes of withdrawal liability must be those in effect as of the Measurement Date.” Nat’l Ret. Fund v. Metz Culinary Mgmt., Inc., 946 F.3d 146, 151 (2d Cir. 2020). In its petition, the fund argues that the Second Circuit misread the Court’s seminal withdrawal liability opinion, Concrete Pipe & Products of California, Inc. v. Construction Laborers Pension Trust, 508 U.S. 602 (1993), in holding that allowing actuaries to select interest rates “would create significant opportunity for manipulation and bias.” Petition for Writ of Certiorari at 26, Metz (No. 19-1336) (quoting Metz, 946 F.3d at 151).

How courts rule on the proper amount of latitude to give actuaries in calculating withdrawal liability can have an impact measuring in the millions of dollars. Consequently, employers are monitoring the appellate courts as they start to take up these complex issues, which are most often resolved in arbitration. Although the Court may ultimately deny the petition in Metz given the lack of a circuit split on this issue, questions were raised when the Court requested a brief from the respondent employer after it initially waived its response.

III.  Delaware Developments

A.  Delaware Supreme Court Holds Federal-Forum Provisions Facially Valid

In March, a unanimous Delaware Supreme Court confirmed the facial validity of federal-forum provisions (or “FFPs”), which several Delaware corporations had adopted to require stockholder actions arising under the Securities Act of 1933 to be filed exclusively in federal court. Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. Mar. 18, 2020) (revised Apr. 14, 2020). In Salzberg, the Court was presented with three nearly identical FFPs that had been challenged through a declaratory judgment. Id. On review, the Court determined that the plaintiffs had failed to show that “the charter provisions ‘do not address proper subject matters’ as defined by statute, ‘and can never operate consistently with the law.’” Id. In doing so, the Court emphasized the “broadly enabling” scope of both the Delaware General Corporation Law (“DGCL”) as a whole, and of Section 102(b)(1), which governs the contents of a corporation’s certificate of incorporation. The Court specifically held that Section 102(b)(1) authorizes corporations to adopt provisions regulating matters within an “outer band” of “intra-corporate affairs” extending beyond the “universe of internal affairs” of a Delaware corporation.

As a practical matter, the Court’s ruling likely means that Delaware corporations generally may amend their charters to require claims under the 1933 Act to be filed in federal court. After the United States Supreme Court decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018)—which, as we discussed in our 2018 Mid-Year Securities Litigation Update, prevents defendants from removing 1933 Act claims to federal courts—plaintiffs began filing 1933 Act claims in state courts at a high rate. As a result, corporations have increasingly been forced to contest duplicative state and federal court litigation throughout the country, rendering corporate amendments minimizing this an attractive option.

The full impact of the Delaware Supreme Court’s decision in Salzberg is yet to be determined, as the extent to which FFPs will be enforced by courts around the country will depend on facts and circumstances unique to each case. Apart from its direct effect, the decision will be of continued interest to practitioners and academics alike for the opportunities it creates. In particular, although the Court explicitly rebuffed the notion that Section 115 of the DGCL might permit modified FFPs to require arbitration of internal corporate claims, practitioners may well continue to push to include arbitration as an exclusive means to resolve certain intra-corporate disputes lying within the “outer bound” of Section 102(b)(1).

B.  Another Caremark Claim Survives A Motion To Dismiss

In Hughes v. Hu, the Delaware Court of Chancery once again addressed the degree of particularity with which a plaintiff must plead a Caremark claim. 2020 WL 1987029 (Del. Ch. Apr. 27, 2020). Although duty of oversight claims are notoriously difficult to plead, Delaware courts have recently offered greater clarity on pleading violations of Caremark’s first prong—that directors “utterly failed to implement any reporting or information system or controls.” Id. at *14 (quoting Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006)); see also Marchand v. Barnhill, 212 A.3d 805, 821–22 (Del. 2019) (holding “inference that a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation” supports an inference that the board “made no good faith effort to ensure that the company had in place any ‘system of controls’”). In Hughes, the court denied the defendants’ motion to dismiss and held that the plaintiff had pled sufficient facts to support an inference that Kandi Technologies’ directors had willfully breached their duty of oversight. The alleged problem was that Kandi’s directors had consciously failed to “act in good faith to maintain a board-level system for monitoring the Company’s financial reporting.” Id. at *17. The director defendants at issue also comprised a majority of Kandi’s six-member board at the time the complaint was filed (the “Demand Board”), thus excusing demand.

In reaching this conclusion, the court reaffirmed the high pleading bar for Caremark claims, noting that Caremark claims must plead particular facts that could lead to a reasonable inference that a company’s directors either “(a) . . . utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations” (i.e., ignored “red flags”). Id. at *14 (quoting Stone, 911 A.2d at 370). Despite this high standard, the court in Hughes found that it was met because Kandi’s directors allegedly “did not make a good faith effort to do their jobs.” Id. at *16. The company’s audit committee only convened “sporadically” for “abbreviated meetings,” often less than once a year, and even then only with minimal efforts to comply with federal securities laws. Id. at *14–16. According to the court, this “pattern of behavior” showed that the directors “followed management blindly,” and “did not make a good faith effort to do their jobs.” Id. at *16.

The court’s other notable conclusion was that demand was excused because Kandi’s board was comprised of a majority of directors who would likely face oversight liability. Under the test set forth in Rales v. Blasband, 634 A.2d 927 (Del. 1993), a director cannot utilize his or her independent and disinterested business judgment when evaluating a litigation demand if “the director is either interested in the alleged wrongdoing or not independent of someone who is.” Hughes, 2020 WL 1987029, at *12. Such a disqualifying interest would exist if there were a “substantial risk” of liability to the director considering the demand, not just a mere threat. Id. Here, four members of Kandi’s board were also named defendants in the complaint as willfully neglecting their duty of oversight. Three members of Kandi’s board also served on the audit committee that only “met sporadically, devoted inadequate time to its work, had clear notice of irregularities, and consciously turned a blind eye to their continuation.” Id. at *14. These facts supported a substantial likelihood of personal liability for these directors, thus making them interested in—and excusing as futile—a litigation demand.

C.  Director Independence Remains A Focus Of Delaware Courts

As we noted in our 2019 Year-End Securities Litigation Update, in recent years Delaware courts have reviewed director independence with seemingly reinvigorated scrutiny. See, e.g., Marchand v. Barnhill, 212 A.3d 805 (Del. 2019) (director’s 28-year relationship with CEO’s family rebutted presumption of independence); Sandys v. Pincus, 152 A.3d 124 (Del. 2016) (director’s 50-year friendship with controller rebutted presumption of independence); Del. Cnty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017 (Del. 2015) (director and controller’s co-ownership of airplane rebutted presumption of independence).

In Voigt v. Metcalf, 2020 WL 614999 (Del. Ch. Feb. 10, 2020), the Court of Chancery continued that trend by closely scrutinizing directors’ independence from a putatively controlling stockholder. There, a stockholder of NCI Building Systems, Inc. (“NCI”) alleged that NCI’s directors, as well as NCI’s largest and allegedly controlling stockholder, Clayton, Dubilier & Rice (“CD&R”), breached their fiduciary duties by causing NCI to acquire one of CD&R’s portfolio companies at a 94% premium. Id. at *1. The persistent and ongoing nature of CD&R’s relationships with a majority of NCI’s directors was the first among myriad “possible sources of influence” cited by the court as contributing to its conclusion that CD&R—which owned 34.8% of NCI’s voting stock—conceivably controlled NCI for purposes of the transaction. Id. at *12, 17.

Of the twelve directors comprising NCI’s board, four directors’ independence were compromised by virtue of being CD&R insiders. Id. at *1. Thus, the court’s analysis focused on four nominally outside directors. Id. at *14–16. Plaintiff alleged that two of these directors derived a substantial portion (if not all) of their income from serving as directors of NCI and other CD&R portfolio companies. Id. at *15–16. Both directors also had a decades-long connections to CD&R portfolio companies, which suggested a persistent and ongoing relationship with CD&R. Id. Accordingly, the directors had an alleged sense of “beholden-ness” towards CD&R, which conceivably subjected them to CD&R’s influence and control. Id.

The court’s independence analysis also focused on allegations concerning two additional directors’ roles as senior members of NCI’s leadership. NCI’s CEO allegedly received millions of dollars in compensation in the years leading up to the disputed merger, from which the court inferred a sense of “owing-ness” towards CD&R. The chairman of NCI’s board learned at an early stage of negotiations that he would be both chairman and CEO of the combined company, the prospect of which allegedly induced him to favor the challenged transaction. Id. at *16. “Under the great weight of Delaware precedent,” the court reasoned, “senior corporate officers generally lack independence for purposes of evaluating matters that implicate the interests of a controller.” Id. (citing, e.g., Rales v. Blasband, 634 A.2d 927, 937 (Del. 1993)). Thus, the court concluded that these directors also conceivably lacked independence with respect to CD&R. Id.

The court’s conclusion that CD&R conceivably controlled NCI required application of the plaintiff-friendly entire fairness standard of review, and ultimately denial of the defendants’ motion to dismiss, id. at *23–24, because the defendants had not attempted to follow the MFW blueprint by conditioning the acquisition upfront on both the approval of a committee and a favorable vote by a majority of unaffiliated shares, id. at *10.

IV.  Courts Continue To Grapple With The Supreme Court’s Decision In Lorenzo

As we discussed in our 2019 Year-End Securities Litigation Update, over the course of the past year, courts have begun grappling with how to apply the Supreme Court’s decision in Lorenzo v. SEC, 139 S. Ct. 1094 (2019). In Lorenzo, the Supreme Court held that those who disseminate false or misleading information to the investing public with the intent to defraud can be found liable under Section 17(a)(1) of the Securities Act and Exchange Act Rules 10b-5(a) and 10b-5(c), even if the disseminator did not “make” the statements and thus was not subject to enforcement under Rule 10b-5(b). This holding raised the possibility that secondary actors—such as financial advisors and lawyers—could face liability under Rules 10b-5(a) and 10b-5(c) simply for disseminating the alleged misstatement of another if a plaintiff showed that they knew the statement contained false or misleading information.

One very recent case addressing Lorenzo is In re Cognizant Technology Solutions Corp. Securities Litigation in the District of New Jersey, where a court found that the plaintiffs had adequately alleged scheme liability against the former Chief Legal and Corporate Affairs Officer of the defendant corporation, under both Lorenzo and the “pre-Lorenzo scheme liability framework.” 2020 WL 3026564, at *18–19 (D.N.J. June 5, 2020). The court preceded its discussion of Lorenzo by noting that the two cases were “markedly different”—namely because the Supreme Court’s holding in Lorenzo was limited to situations where the “only conduct involved concerns a misstatement,” id. at *16 (quoting Lorenzo, 139 S. Ct. at 1100 (emphasis original)), whereas in the Cognizant case, the defendant’s alleged “participation in and concealment of the bribery scheme [at issue] extended far beyond the mere dissemination of alleged misstatements,” id. Thus, the finding that the defendant could be liable for disseminating statements he knew to be false was not critical to the conclusion that plaintiffs adequately had pleaded a claim under Rule 10b-5. Nonetheless, the Court expressly rejected the defendant’s attempt to view the alleged misstatement in isolation by arguing that “Lorenzo did not do away with a requirement that the act of dissemination be inherently deceptive,” and instead ruled that Lorenzo did not preclude from liability “instances where the dissemination of a misstatement is preceded by additional allegedly deceptive conduct.” Id. at *17 (emphasis original) (internal quotation marks omitted). In so finding, the Court noted the Supreme Court’s language in Lorenzo that “provisions [under subsections (a) and (c)] capture a wide range of conduct.” Id. (quoting Lorenzo, 139 S. Ct. at 1101 (alteration and emphasis original)).

On the other hand, a court in the Southern District of New York recently rejected an attempt to invoke Lorenzo to support claims for scheme liability under Rule 10b-5. In Geoffrey A. Orley Revocable Trust U/A/D 1/26/2000 v. Genovese, two trusts that had invested in defendant Genovese’s investment fund brought securities law claims against Genovese and two lawyers with regard to alleged misrepresentations about the fund. 2020 WL 611506, at *1–2 (S.D.N.Y. Feb. 7, 2020). The court granted the lawyer defendants’ motions to dismiss, rejecting the plaintiff trusts’ claim that under Lorenzo, one of the lawyer’s “participation in the preparation of” documents used to pitch the trusts on the investment fund gave “rise to primary liability under Rule 10b-5 . . . because such participation was one part of a larger scheme to defraud them.” Id. at *7–8. The Court distinguished the facts in Lorenzo by explaining that the defendant lawyer was “not alleged to have disseminated the statements in the January 2015 brochure or the Privacy Information document,” at issue; therefore, the plaintiff trusts could “not take advantage of any additional liability Lorenzo may have carved out.” Id. at *8 (emphasis added). The Court concluded its discussion by stating that construing the lawyer’s actions “to fall under the prohibitions of paragraphs (a) and (c) [of Rule 10b-5] would serve to erase the distinction between” primary and secondary liability. Id.

Also of note, a court in the Northern District of Illinois denied the defendants’ motion to dismiss and rejected the contention that “claims under Rule 10b-5(a) and (c) cannot be predicated on the same conduct as that supporting claims under Rule 10b-5(b).”  SEC v. Kameli, 2020 WL 2542154, at *1, 15 (N.D. Ill. May 19, 2020).  The Kameli case arose out of an immigration attorney’s alleged improper handling of funds invested by foreign nationals seeking to obtain visas in order to become U.S. legal permanent residents. See id. at *1–3. In their motion to dismiss, the defendants argued that “conduct used to support a claim under Rule 10b-5(b)—defendants’ false/misleading statements/omissions—cannot also be used as the basis for claims under Rule 10b-5(a) and (c).”  Id. at *14. More specifically, they argued that “asserting claims under Rule 10b-5(a) and (c) based only on misrepresentations generally remains verboten under Lorenzo” and that “Lorenzo merely carve[d] out an exception allowing such claims where the defendant is alleged to have disseminated the misrepresentation, rather than having made it.”  Id. (emphasis original).  Relying on Lorenzo, the Court rejected defendants’ argument, stating that “[t]he Court [in Lorenzo] rejected the notion ‘that [Exchange Act Rules 10b-5(a)–(c)] should be read as governing different, mutually exclusive, spheres of conduct,’ observing that the ‘Court and the Commission have long recognized considerable overlap among the subsections of the Rule and related provisions of the securities laws.’”  Id. (quoting Lorenzo, 139 S. Ct. at 1102).  Instead the Court explained that “[r]ather than positing a fine distinction between ‘making’ statements and ‘disseminating’ them, Lorenzo effectively abrogated the line of cases on which defendants rely and permits liability under Rule 10b-5(a) and (c) for both making and disseminating misleading statements—despite some resulting redundancy with Rule 10b-5(b).”  Id.  Notably, the Court went on to point out that, even if the defendants’ position were correct, the complaint did adequately allege that defendants disseminated misleading statements and that defendants engaged in a fraudulent scheme in connection with the purchase or sale of securities.  Id. at *15.

Interestingly, notwithstanding Kameli, a court in the Eastern District of Michigan granted the defendants’ motion for summary judgment as to scheme liability claims under Rules 10b-5(a) and 10b-5(c) because the plaintiff did not allege a fraudulent scheme “separate and apart from” the alleged misstatements and omissions. See Gordon v. Royal Palm Real Estate Inv. Fund I, LLLP, 2020 WL 2836312, at *4–5 (E.D. Mich. May 31, 2020).  In Gordon, the plaintiff-receiver, who was appointed on behalf of “a convicted Ponzi-schemer,” sued an investment fund and other companies, alleging securities fraud claims and seeking the recovery of money invested in an “allegedly fraudulent investment scheme.” Id. at *1. The plaintiff argued that, in Lorenzo, the Supreme Court “recognize[d] overlap between the 10b-5 provisions and allow[ed] 10b-5 (a) and (b) liability when a defendant disseminates false or misleading statements.”  Id. at *5.  In rejecting that argument, the Court recognized two “key differences” that distinguished Lorenzo. Id.  First, the Court noted that the false statements at issue in Lorenzo occurred before the relevant purchase of securities, whereas in the case at hand the alleged misstatements were made after the relevant securities purchase.  Id.  Second, the Court pointed out that, while the defendant in Lorenzo disseminated the misstatements of others and was therefore liable for participating in a fraudulent scheme, the defendants before it simply were not involved in the alleged misstatements at issue at all.  Id.

Finally, as noted in our 2019 Year-End Securities Litigation Update, the Tenth Circuit seemingly expanded Lorenzo last year by holding that scheme liability could be found based on a failure to correct a misstatement. See Malouf v. SEC, 933 F.3d 1248 (10th Cir. 2019), cert. denied, 140 S. Ct. 1551 (2020). Readers will recall that the Malouf Court accepted that the defendant was liable because, although he did not disseminate the alleged misstatements, he failed to correct the relevant disclosures that he knew were false. To date, this holding has not been adopted by other courts.

If the above cases are any indication, it seems as though parties are invoking the Lorenzo decision in order to stretch the bounds of scheme liability to secondary actors, while some courts remain reticent to expand its holding in the absence of other improper conduct. We will provide a further update on the direction that courts take Lorenzo and scheme liability in our 2020 Year-End Securities Litigation Update.

V.  Survey Of Coronavirus-Related Securities Litigation

Unsurprisingly, the unique challenges posed by COVID-19 have given rise to a variety of securities-related lawsuits. As it is too soon to say how courts will broadly view the merits of these actions, we are providing only a survey of these cases. For example, securities class actions concerning COVID-19 have been filed based on alleged (1) false statements concerning a company’s commitment to safety; (2) failure to make sufficiently detailed risk disclosures; and (3) false statements concerning vaccinations, cures, and testing products. Plaintiffs have also asserted at least two insider trading lawsuits, including allegations that Senator Richard Burr improperly traded on information obtained as Chairman of the Senate Intelligence Committee. In addition, government enforcement actions have been filed by both the SEC and the Department of Justice, in each case relating to alleged false statements with respect to COVID-19-related products and tests.

Again, it is too soon to tell how courts will treat COVID-19 in these cases more broadly, but by year’s end some broader themes may emerge. We will continue to monitor developments in these and other coronavirus-related securities litigation cases. Additional resources regarding company disclosure considerations related to the impact of COVID-19 can be found in the Gibson Dunn Coronavirus (COVID-19) Resource Center.

A.  Securities Class Actions

1.  False Claims Concerning Commitment To Safety

In the Second Circuit, statements concerning a company’s commitment to safety are often considered inactionable because they are “too general to cause a reasonable investor to rely upon them.” In re Vale S.A. Sec. Litig., 2017 WL 1102666, at *21 (S.D.N.Y. Mar. 23, 2017) (citations omitted); see also Foley v. Transocean Ltd., 861 F. Supp. 2d 197, 204 n.7 (S.D.N.Y. 2012) (“[W]e note that the statements [regarding commitment to safety and training] would likely be considered expressions of ‘puffery’ that cannot form the basis of a securities fraud claim.”). However, such statements may be found actionable when the company operates in a dangerous industry, where “it is to be expected that investors will be greatly concerned about [its] safety and training efforts,” Bricklayers & Masons Local Union No. 5 Ohio Pension Fund v. Transocean Ltd., 866 F. Supp. 2d 223, 244 (S.D.N.Y. 2012).

Douglas v. Norwegian Cruise Lines, No. 1:20-cv-21107 (S.D. Fla. Mar. 12, 2020): The proposed class action complaint alleges that Norwegian Cruise Lines violated the securities laws by minimizing the likely impact of the coronavirus outbreak on its operations and failing to disclose allegedly deceptive sales practices that downplayed the risks of COVID-19. Purportedly, this failure to disclose caused the company’s statements regarding its commitment to safety to be misleading, including the claim that it places “the utmost importance on the safety of [its] guests and crew.” Norwegian’s stock fell more than 50% in the days after news reports revealed these alleged practices. A putative class action complaint asserting similar claims has been consolidated with Douglas in the Southern District of Florida. See Atachbarian v. Norwegian Cruise Lines, No. 20-cv-21386.

Service Lamp Corp. Profit Sharing Plan v. Carnival Corp., No. 1:20-cv-22202 (S.D. Fla. May 27, 2020): The complaint alleges that Carnival Corp. made false and misleading statements regarding its commitment to safety, including its “commit[ment] to operat[e] a safe and reliable fleet and protect[] the health, safety and security of [its] guests, employees and all others working on [its] behalf.” The stock price slipped after news articles accused the company of failing to adequately protect customers from COVID-19, contrary to its claimed commitments.

2.  Failure To Disclose Specific Risks

“Forward-looking statements are protected under the ‘bespeaks caution’ doctrine where they are accompanied by meaningful cautionary language.” In re Am. Int’l Grp., Inc. 2008 Sec. Litig., 741 F. Supp. 2d 511, 531 (S.D.N.Y. 2010). “However, generic risk disclosures are inadequate to shield defendants from liability for failing to disclose known specific risks.” Id.; see also Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 193 (S.D.N.Y. 2010) (observing generally, in adjudicating a motion to dismiss, that defendants “cannot be immunized for knowingly false statements even if they include some warnings”).

In re Zoom Sec. Litig., No. 5:20-cv-02353 (N.D. Cal. Apr. 7, 2020): Two related putative class actions with substantially similar allegations of securities fraud against Zoom Video Communications, Inc.—Drieu v. Zoom Video Communications, Inc., No. 5:20-cv-02353, and Brams v. Zoom Video Communications, Inc., No. 3:20-cv-02396—were consolidated in the Northern District of California. The operative complaint alleges that Zoom misled shareholders about its data privacy and security measures and failed to disclose that its service was not end-to-end encrypted. According to the complaint, the company’s offering documents contained “generic, boilerplate representations concerning Zoom’s risks related to cybersecurity, data privacy, and hacking,” and “‘catchall’ provisions that were not tailored to Zoom’s actual known risks.”

Wandel v. Gao, No. 1:20-cv-03259 (S.D.N.Y. Apr. 24, 2020): A shareholder in Chinese co-living company Phoenix Tree Holdings Ltd. filed a complaint alleging that the company pushed its January 22, 2020 initial public offering without fully disclosing its pandemic-related risks or the full extent and nature of renter complaints. The company’s risk disclosures were inadequate, the complaint alleges, only “obliquely warn[ing]” that its “business could also be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics,” without specifically referencing COVID-19.

3.  False Claims About Vaccinations, Cures, And Testing for COVID-19

Securities class actions regarding medical devices or developments often concern statements about pending approval from the Food and Drug Administration (“FDA”). See, e.g., Tongue v. Sanofi, 816 F.3d 199, 211 (2d Cir. 2016) (holding that there was no conflict between the defendant’s statement of optimism and the FDA’s instructions as to the treatment results necessary for approval); In re Atossa Genetics Inc. Sec. Litig., 868 F.3d 784, 794 (9th Cir. 2017) (finding allegations that defendant’s test did not receive FDA clearance directly contradicted its alleged statements that the test was FDA-cleared); In re Delcath Sys., Inc. Sec. Litig., 36 F. Supp. 3d 320, 333 (S.D.N.Y. 2014) (finding FDA approval statements not actionable “because they were forward-looking statements that fall within the safe harbor provision”). But certain cases, including the recent COVID-19-related suits, have less to do with whether the drug will be approved than whether it will be developed or effective. See, e.g., Abely v. Aeterna Zentaris Inc., 2013 WL 2399869, at *9 (S.D.N.Y. May 29, 2013) (“Plaintiff also failed to allege that a press release contained actionable omissions concerning the drug’s lack of short-term efficacy and its failure to enumerate particular side effects, when defendants made no representation that the drug was effective in the short term and reported ‘serious adverse events’ for those treated with the drug as compared to those given placebo.”).

Yannes v. SCWorx Corp., No. 1:20-cv-03349 (S.D.N.Y. Apr. 29, 2020): The complaint against SCWorx Corp., a service provider to healthcare companies, alleged that the company artificially inflated its stock by falsely claiming to have received a purchase order to sell millions of COVID-19 rapid testing kits. The company’s stock dropped precipitously after an investment research firm referred to the purported deal as “completely bogus” and backed by fraudsters and convicted felons. After Yannes, additional stockholders filed derivative and putative class action claims based on similar allegations. See Lozano v. Schessel, No. 1:20-cv-04554 (S.D.N.Y. June 15, 2020) (derivative complaint); Leeburn v. SCWorx Corp., No. 1:20-cv-04072 (S.D.N.Y. May 27, 2020) (proposed class action).

Wasa Med. Holdings v. Sorrento Therapeutics, Inc., No. 20-cv-00966 (S.D. Cal. May 26, 2020): A shareholder in Sorrento Therapeutics Inc. filed a proposed class action complaint alleging that the company falsely claimed it discovered a COVID-19 “cure.” The stock dropped by nearly half when it was revealed that no cure had in fact been discovered.

McDermid v. Inovio Pharm., Inc., No. 20-cv-1402 (E.D. Pa. Mar. 12, 2020): An investor in Inovio Pharmaceuticals Inc., filed a proposed class action lawsuit alleging that the company’s stock price “more than quadrupled” after its CEO claimed Inovio developed a COVID-19 vaccine “in a matter of about three hours” and could begin testing in early April. The stock price then plummeted by more than 70 percent after a well-known short-seller challenged the veracity of the vaccine claim in a tweet that also called for an SEC investigation into the company’s “ludicrous and dangerous claim.” A derivative suit has also been filed based on similar allegations. See Beheshti v. Kim, No. 2:20-cv-1962 (E.D. Pa. Apr. 20, 2020).

B.  Insider Trading

“Under the ‘traditional’ or ‘classical theory’ of insider trading liability, § 10(b) and Rule 10b–5 are violated when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information.” United States v. O’Hagan, 521 U.S. 642, 651–52, (1997). Thus, “a corporate insider must abstain from trading in the shares of his corporation unless he has first disclosed all material inside information known to him.” Chiarella v. United States, 445 U.S. 222, 227 (1980). “[I]f disclosure is impracticable or prohibited by business considerations or by law, the duty is to abstain from trading.” SEC v. Obus, 693 F.3d 276, 285 (2d Cir. 2012). Under the Stop Trading on Congressional Knowledge Act of 2012 (“STOCK Act”), Pub. L. No. 112–105, 126 Stat. 291 (2012), “Members of Congress . . . are not exempt from the insider trading prohibitions arising under the securities laws, including section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder,” STOCK Act, § 4(a), and “owe[] a duty arising from a relationship of trust and confidence to the Congress, the United States Government, and the citizens of the United States” not to trade on material, nonpublic information derived from their positions in Congress, id. § 4(b)(2), 15 U.S.C. § 78u–1(g)(1). A similar state-law claim in Delaware is known as a Brophy claim, which permits a corporation to recover from its fiduciaries for harm caused by insider trading. Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949).

Jacobson v. Burr, No. 1:20-cv-00799 (D.D.C. Mar. 23, 2020): On March 23, 2020, a shareholder in Wyndham Hotels and Resorts filed suit against Senator Richard Burr. The complaint alleges that Senator Burr sold securities in a variety of publicly traded companies on material, nonpublic information concerning COVID-19, which he obtained in his capacity as Chairman of the Senate Intelligence Committee. See Dkt. No. 1 at 1. The plaintiff alleged that Senator Burr “injured shareholders . . . who purchased and/or continued to hold securities in the same companies.” Id. On May 1, 2020, the plaintiff announced that he was dismissing the suit without prejudice, “[i]n consideration of the effect that this lawsuit may have on any pending criminal or civil investigation” by the Justice Department and SEC “as well as the effect those investigations will have on the discovery process in this action.” Dkt. No. 6 at 1.

St. Paul Elec. Constr. Pension Plan v. Garcia, No. 2020-0415 (Del. Ch. May 28, 2020): On May 28, 2020, plaintiffs filed suit against the controlling stockholder of a company and other individuals alleging that defendants purchased shares of the company at a price that was too low in light of a decline in the company’s stock price at the outset of the COVID-19 pandemic.  Dkt. No. 1 at 1–4, 24.  Plaintiffs bring a Brophy claim, as well as derivative claims for breach of fiduciary duty, waste, and unjust enrichment.  See id. at 39–44.

C.  SEC Cases

SEC v. Praxsyn Corp., No. 9:20-cv-80706 (S.D. Fla. Apr. 28, 2020): On April 28, 2020, the SEC filed a lawsuit against Praxsyn Corp. claiming it had “blatantly” lied about (1) having and being able to acquire and supply large quantities of N95 masks, and (2) “that it was negotiating the sale of millions of masks” and “vetting suppliers to guarantee a dependable supply chain.” Dkt. No. 1 at 1–2. The SEC alleges that internal Praxsyn emails and other documents reveal both claims were false—Praxsyn “never had either a single order from any buyer to purchase masks, or a single contract with any manufacturer or supplier to obtain masks, let alone any masks actually in its possession.” Id. at 2.

SEC v. Turbo Glob. Partners Inc., No. 8:20-cv-01120, (M.D. Fla. May 14, 2020): On May 14, the SEC filed a lawsuit against Turbo Global Partners, Inc. and its CEO, Robert W. Singerman, alleging the company falsely claimed that it was “selling equipment that scans large crowds to detect individuals with elevated fevers,” one of the early warning signs of COVID-19 infection. Dkt. No. 1 at 1–2. The SEC alleges that Turbo’s false statements significantly impacted its securities. For example, “the trading volume doubled” and the stock price increased as much as 15 percent “the day after” Turbo issued one of its allegedly fraudulent press releases. Id. at 1–2.

SEC v. Applied BioSciences Corp., No. 1:20-cv-03729 (S.D.N.Y May 14, 2020): On May 14, the SEC filed suit against Applied BioSciences Corp. alleging that the company “issued a materially misleading press release in which it falsely claimed to be offering and shipping a COVID-19 home test kit to the general public for private use.” Dkt. No. 1 at 1–2. In reality, the suit alleges, the company had not yet shipped any finger-prick tests, did not offer or intend to sell the tests for home or private use by the general public, and had not yet had the test approved by the FDA. Id. at 2.

SEC v. E*Hedge Securities Inc., No. 1:20-cv-22311 (S.D. Fla. June 3, 2020): On June 3, the SEC filed suit against an internet investment advisor firm and its President for failing to turn over its books while touting investment opportunities related to treatments and vaccines for COVID-19. See Dkt. No. 1 at 1–2, 6.

SEC v. Nielsen, No. 5:20-cv-03788 (N.D. Cal. June 9, 2020): On June 9, the SEC brought suit against a penny stock trader allegedly engaged in a fraudulent “pump and dump” scheme involving the stock of a biotechnology company, Arrayit. Dkt. No. 1 at 1. The defendant allegedly posted on an internet forum numerous false and misleading statements regarding the company’s development of a COVID-19 test and FDA approval, which statements were designed to drive up the price of the stock. Id. at 1–2. The trader then sold the stock at the artificially-inflated price. Id. at 2.

D.  Criminal Securities Fraud

United States v. Schena, No. 5:20-mj-70721 (N.D. Cal. June 8, 2020): In its first criminal securities fraud case related to COVID-19, the Justice Department brought securities and health care fraud claims against a California biotechnology executive. According to the Complaint, Schena and the company of which he is president, Arrayit Corporation, promoted a quick COVID-19 test that would be done with the same finger-stick test kit the company used to test for allergies. See Dkt. No. 1 at 6, 17. Among other things, however, Arrayit’s promotional materials failed to mention that the FDA had advised it in April that the test “failed to satisfy FDA performance standards” and thus could not qualify for emergency use authorization. Id. at 18. The SEC also alleges that Schena “repeatedly issued” false or misleading “tweets and press releases on Arrayit’s behalf, stating that [its] financial were forthcoming shortly.” Id. at 8.

E.  Conclusion

Although a fair number of COVID-19 suits have been filed, the book is far from closed on this topic. Upcoming earnings announcements and other disclosures will undoubtedly be scrutinized carefully by potential plaintiffs and plaintiffs’ attorneys, while whistleblower complaints are likely to increase as the economic impact continues. Regardless of the course COVID-19 takes in the second half of 2020, we expect plaintiffs to continue filing coronavirus-related securities litigation lawsuits. As such, we will continue to monitor developments in these and other cases.

VI.  Falsity Of Opinions – Omnicare Update

As we discussed in our prior securities litigation updates, lower courts continue to examine the standard for imposing liability based on a false opinion as set forth by the Supreme Court in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S. 175 (2015). The Supreme Court in Omnicare held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong,” but that an opinion statement can form the basis for liability when the speaker does not “actually hold[] the stated belief,” or when the opinion statement contains “embedded statements of fact” that are untrue. Id. at 184–86. Additionally, an opinion may give rise to liability if facts are omitted that “conflict with what a reasonable investor would take from the statement itself.” Id. at 189. And while decided in the context of a Section 11 claim, Omnicare’s holding has been widely applied to Section 10(b) and Rule 10b-5 claims as well. See, e.g., Chapman v. Mueller Water Products, Inc., 2020 WL 3100243 (S.D.N.Y. June 11, 2020).

In the first half of 2020, Omnicare had continued to act as a pleading barrier when proper cautionary language accompanies opinions and when shareholders seek to impose liability when an opinion statement turns out to be incorrect. The Third Circuit recently affirmed the district court’s dismissal of a portion of a shareholder suit arising out of a merger between two banks in Jaroslawicz v. M&T Bank Corp., 962 F.3d 701 (3d Cir. 2020). The court rejected the shareholders’ argument that the bank’s projection of when the merger would close provided grounds for liability because the opinion turned out to be wrong, reaffirming that “a plaintiff cannot state a claim by alleging only that an opinion was wrong.” Id. at 717 (quoting Omnicare, 575 U.S. at 194). The shareholders also alleged that the proxy statement at issue omitted facts about the due diligence the bank performed to form the basis of its opinions—specifically that the “reverse due diligence” lasted at most five business days. The court explained that because the proxy statement disclosed the duration of the due diligence efforts, the bank had sufficiently “divulge[d the] opinion’s basis.” Id. at 718 (quoting Omnicare, 575 U.S. at 195). Even if a reasonable investor may have expected the banks to conduct diligence over a longer period of time, the proxy provided enough information about what the banks did, and that information was enough for shareholders to decide how to vote on the merger. The Court thus rejected the shareholders’ claims because “[c]autionary language surround[ed] the opinions, warning of the uncertainty of projections,” and “these opinions inform, rather than mislead, a reasonable investor.” Id.

Recent district court cases also provide guidance on the types of statements that will not give rise to liability under Omnicare. In Chapman, plaintiff investors alleged that defendants had made a number of false and misleading statements concerning the financial health of the company. The statements at issue included reports on the defendant company’s financial results, its risk disclosures, and a $9.8 million warranty charge; statements made during an investor call discussing quarterly results; and SOX certifications. Chapman, 2020 WL 3100243, at *9-10. The court held that none of the alleged opinion statements qualified as actionable opinions because plaintiffs’ allegations were largely based on conjecture. Plaintiffs offered no evidence suggesting that defendants lacked an “honest belief” in these statements, that defendants knew the information was false, or that the omitted information made the opinions misleading to a reasonable investor. Id. at *10-12, 15, 18-19. In In re Adient plc Securities Litigation, 2020 WL 1644018 (S.D.N.Y. Apr. 2, 2020), plaintiffs alleged that defendant had made false and misleading statements in connection with projections of defendant’s “Metals” business segment. The court rejected plaintiffs’ claims, holding that not only did plaintiffs fail to adequately show that “any Defendant falsely or unreasonably held the opinions they public discussed,” but also that the statements at issue were mere statements of goals and belief that do not run afoul of Omnicare. Id. at *16-17. As such, these statements were found inactionable.

Other recent district court decisions illustrate how plaintiffs may be able to adequately plead allegations and overcome Omnicare’s high bar. For example, in In re Advance Auto Parts, Inc., Securities Litigation, 2020 WL 599543 (D. Del. Feb. 7, 2020), plaintiffs alleged with particularity that defendants had made a series of statements projecting an increase in sales and operating margins at a time when it knew that such projections were not attainable based on information that defendants did not disclose to investors. Id. at *4. The court permitted this claim to go forward because plaintiff specifically pleaded that defendant had omitted several known adverse facts, including that it had disregarded several negative forecasts in late 2016, missed its operating margin “by the largest gap as compared to any point earlier in the year,” and was experiencing an extended downward trend in sales. Id.

As shareholder litigation arising from the economic impact of COVID-19 continues, Omnicare will likely play a significant role. Volatile markets and drops in stock price, together with circumstances that make forward-looking statements and other statements of opinion—including management analysis and expectations, accounting estimates and management valuations, and predictions pertaining to a company’s ability to operate as a going concern—easy to second guess in hindsight may put Omnicare further to the test in the coming quarters.

VII.  Halliburton II Market Efficiency And “Price Impact” Cases

As we discussed in our 2018 Year-End Securities Litigation Update, the Second Circuit has shaped the law regarding how defendants can rebut the presumption of reliance under Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (“Halliburton II”), more than any other federal circuit court of appeals since Halliburton II was issued. Recall that, in Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption, permitting plaintiffs to maintain the common proof of reliance that is required for class certification in a Rule 10b-5 case, but also permitting defendants to rebut the presumption at the class certification stage with evidence that the alleged misrepresentation did not impact the issuer’s stock price.

As we anticipated in our 2019 Year-End Securities Litigation Update, this year the Second Circuit continued its development of the Supreme Court’s decision in Halliburton II regarding the use of price impact evidence to rebut the presumption of reliance at the class certification stage in its decision in Arkansas Teacher Retirement System v. Goldman Sachs Group, Inc., 955 F.3d 254 (2d Cir. 2020) (“Goldman Sachs II”).

By way of background, the Goldman Sachs plaintiffs allege that the company’s generic statements about its business principles and conflicts omitted material information about alleged conflicts of interest. See Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., 879 F.3d 474, 478–80 (2d Cir. 2018) (“Goldman Sachs I”). The first time the case reached the Second Circuit, in Goldman Sachs I, the appellate court vacated the trial court’s order certifying a class and remanded the action, directing that price impact evidence must be analyzed prior to certification, even if price impact “touches” on the merits issue of materiality. Id. at 486. On remand, the district court again certified a class after supplemental briefing, an evidentiary hearing, and oral argument. In re Goldman Sachs Grp. Sec. Litig., 2018 WL 3854757, at *1–2 (S.D.N.Y. Aug. 14, 2018). The district court judge held that while defendants had produced evidence to show that the company’s stock price had not moved in response 36 disclosures regarding the company’s conflicts, the alleged corrective disclosure—a subsequent announcement of regulatory action related to conflicts of interest—was sufficiently different to credit plaintiffs’ expert’s “link between the news of Goldman’s conflicts and the subsequent stock price declines,” and that defendants’ expert testimony was insufficient to “sever” that link. See id. at *3–6.

Defendants appealed again, arguing (1) that “the district court misapplied the inflation-maintenance theory,” which should apply only in limited circumstances, and (2) “that the [district] court abused its discretion by holding that Goldman failed to rebut the Basic presumption by a preponderance of the evidence.” Goldman Sachs II, 955 F.3d at 264.

Defendants were unable to persuade the Second Circuit a second time. On April 7, 2020, a divided Second Circuit panel affirmed the trial court’s second order certifying a class, permitting the plaintiffs to obtain class certification based on Goldman Sachs’ generic public statements without any showing that the statements inflated the stock price, or maintained existing price inflation, when made, because the stock price dropped with the announcement of a related regulatory action. See id. at 258–59, 262–63, 271, 273–74; see also id. at 275 (Sullivan J., dissenting).

The Second Circuit rejected Goldman Sachs’s argument that the “inflation-maintenance” theory—which is frequently the only theory of price impact in Rule 10b-5 cases—may only be applied to “fraud-induced” inflation and should be narrowed to disallow its application to “general statements.” Id. at 265–70. In rejecting that argument, the court held that “the actual issue is simply whether Goldman’s share price was inflated” and not whether the inflation entered the stock price through fraud. Id. at 265. The court characterized defendants’ proposal to disallow inflation maintenance for “general statements” as “a means for smuggling [the merits issue of] materiality into Rule 23.” See id. at 267. The court also found that defendants’ proposed narrowing was “at odds” with the Second Circuit’s prior holding that “theories of ‘inflation maintenance’ and ‘inflation introduction’ are not separate legal categories.” Id. at 268 (quoting In re Vivendi, S.A., Sec. Litig., 838 F.3d 223, 259 (2d Cir. 2016)). The court further explained that the Second Circuit had already “implicitly rejected” Goldman Sachs’s argument in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017), in which inflation maintenance was applied outside of defendants’ proposed limited circumstances. Goldman Sachs II, 955 F.3d at 268–69.

The court also dismissed defendants’ policy arguments that upholding inflation maintenance in these circumstances would “open the floodgates to unmeritorious litigation by allowing courts to certify classes that it believes should lose on the merits,” id. at 269, and that any time allegations of misconduct caused a stock to drop, “plaintiffs could just point to any general statement about the company’s business principles or risk controls and proclaim ‘price maintenance,’” id. (quoting Brief and Special Appendix for Defendants-Appellants at 52–53, Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., 955 F.3d 254 (2d Cir. 2020) (No. 18-3667), ECF No. 62). In the court’s view, Second Circuit case law provides defendants with opportunities to challenge materiality in a motion to dismiss, motion for summary judgment, and at trial, and with the opportunity to challenge price impact at the class certification stage. See id. at 269–70.

The Second Circuit went on to find no abuse of discretion in the district court’s “holding that Goldman failed to rebut the Basic presumption.” See id. at 270–74. The opinion describes defendants’ task in meeting the burden of persuasion to disprove price impact, see Waggoner, 875 F.3d at 99–103 (assigning the burden of persuasion to defendants in the Second Circuit), as a requirement to “show by a preponderance of the evidence that the entire price decline on the corrective-disclosure dates was due to something other than the corrective disclosures.” Goldman Sachs II, 955 F.3d at 271. Assigning a stock price decline to a corrective disclosure does not amount to a showing of price impact by an alleged misstatement unless the corrective disclosure reveals something that corrects a challenged statement. See Halliburton II, 573 U.S. at 277–78.

Defendants’ “primary contention” was that the district court’s decision was clearly erroneous because it ignored defendants’ uncontested evidence that the market did not react to 36 earlier press reports “touch[ing] on” Goldman Sachs’ alleged conflicts. Goldman Sachs II, 955 F.3d at 271. The Second Circuit rejected this argument, because it believed that the district court had not abused its discretion in finding that plaintiffs had shown that the 37th disclosure revealed new, “hard evidence” of conflicts sufficient to create a “link” between the alleged misstatements and the stock price drop. Id. (quoting In re Goldman Sachs, 2018 WL 3854757, at *4–5). It emphasized the role in the standard of review in this case by acknowledging “one of us given the same task as that of the district judge” may have “conclude[d] otherwise.” Id. at 274.

Judge Sullivan dissented. He explained that he would reverse because Goldman Sachs had “sever[ed] the link that undergirds the Basic presumption” with its “persuasive and uncontradicted evidence that Goldman’s share price was unaffected by earlier disclosures of Defendants’ alleged conflicts of interest.” Id. at 275. He went on to explain why, despite agreeing that “the district court did not misapply the inflation-maintenance theory of price impact,” he nonetheless “believe[d] that the majority [erred in] uncritically accept[ing] the district court’s conclusions regarding what rebuttal evidence is necessary to overcome the Basic presumption.” Id. To this end, Judge Sullivan distinguished precedent such as Waggoner, noting that Goldman Sachs “demonstrated that the prior disclosures . . . had no impact on [its] stock price,” id. at 278, and, thus “sever[ed] the link between the alleged misrepresentation and . . . the price . . . paid by the plaintiff,” id. (quoting Waggoner, 875 F.3d at 95). Notably, Judge Sullivan concluded, contra the majority, that “it’s fair for this court to consider the [general] nature of the alleged misstatements in assessing whether and why ‘the misrepresentations did not in fact affect the market price of Goldman stock.’” Id. (quoting Goldman I, 879 F.3d at 486).

The disagreement between the majority and the dissent in Goldman Sachs II is emblematic of questions that continue to arise in trial courts, as well. For example, in In re Chicago Bridge & Iron Co. N.V. Securities Litigation, the District Court for the Southern District of New York rejected a special master’s recommended “correctiveness” test that would have inquired whether the corrective disclosure “relates to the same subject matter” as the misrepresentation or is “wholly unrelated.” 2020 WL 1329354, at *5–7 (S.D.N.Y. Mar. 23, 2020). Instead, the court reemphasized the need for the alleged misstatement to be “linked” to the corrective disclosure. Id. at *6.

On June 15, 2020, the Second Circuit denied the defendants’ petition for rehearing en banc in Goldman Sachs II, Order, Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., No. 18-3667 (2d Cir. June 15, 2020), ECF No. 277, and stayed the case pending the filing of a petition for a writ of certiorari, id. at ECF No. 288.

Given the importance of the issue, the extant circuit split on the viability of the inflation maintenance theory, and related issues, more is anticipated in this space soon. Accordingly, we will continue to monitor developments in Goldman Sachs II and related cases.

VIII.  ERISA Litigation

Where employer stock is offered as an investment option in employee retirement plans, securities litigation is often accompanied by claims under the Employee Retirement Income Security Act of 1974 (“ERISA”). The first half of 2020 saw significant ERISA litigation activity, including the Supreme Court’s recent Sulyma decision clarifying the statute of limitations for fiduciary breach claims. Lower courts have also been active in the wake of the Court’s January decision in Retirement Plans Committee of IBM v. Jander, 140 S. Ct. 592 (2020), in addition to analyzing the requirements for fiduciary breach claims, pleading standards for claims partly grounded in fraud, and the applicability of arbitration agreements.

A.  Supreme Court Clarifies “Actual Knowledge” Trigger For Three-Year Limitations Period In Fiduciary Breach Cases

In February, the Supreme Court unanimously held in Intel Corporation Investment Policy Committee v. Sulyma, 140 S. Ct. 768 (2020), that for purposes of ERISA’s limitations period in fiduciary breach cases, a fiduciary’s disclosure of plan information alone does not create “actual knowledge” subjecting such claims to the statute’s shorter three-year period absent proof that a beneficiary actually read the disclosures. Gibson Dunn submitted an amicus brief on behalf of the National Association of Manufacturers, the Chamber of Commerce of the United States, the Securities Industry and Financial Markets Association, the American Benefits Counsel, the ERISA Industry Committee, and the American Retirement Association in support of petitioner Intel Corp. Investment Policy Committee.

ERISA Section 413(2) requires claims for breach of fiduciary duty to be brought no later than “three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.” 29 U.S.C. § 1113(2). Absent “actual knowledge,” breach of fiduciary duty claims under ERISA must be brought within six years of the breach or violation. Id. § 1113(1). In 2015, Christopher Sulyma, a former Intel employee, sued multiple retirement plans, claiming the plans improperly over-invested in alternative investments. Sulyma, 140 S. Ct. at 774-75. More than three years, but fewer than six years, before that suit was filed, Sulyma had received plan disclosures that described the investments Sulyma claimed were imprudent. Id. The Ninth Circuit held that the disclosures alone did not trigger the three-year bar because Sulyma testified he had not read the disclosures and Intel had not established Sulyma had subjective awareness of what was disclosed. Id.

The Supreme Court affirmed, clarifying that the statutory phrase “actual knowledge” means what it says: a plaintiff must in fact have become “aware of” the information pertaining to the alleged breach or violation. Id. at 771. Disclosure of plan information alone does not trigger the three-year limitations period in Section 413(2). Id.

As a result, retirement plans and their sponsors may be susceptible to claims reaching back more than three years to the extent participants need only allege that they did not read plan disclosures advising of certain investments, fees or returns, in order to expand the ERISA statute of limitations from three to six years. However, the Court left open questions about how to prove “actual knowledge” based on circumstantial evidence or “willful blindness.” See Sulyma, 140 S. Ct. at 779. Only a few lower courts have applied this decision so far. See, e.g., Toomey v. DeMoulas Super Markets, Inc., No. 19-cv-11633, 2020 WL 3412747, at *4 (D. Mass. April 16, 2020) (declining to dismiss based on plaintiff’s allegation of lack of actual knowledge); Moitoso v. FMR LLC, No. 18-cv-12122, 2020 WL 1495938, at *4 n.3 (D. Mass. Mar. 27, 2020) (same).

B.  Lower Court Developments

1.  ESOP Fiduciary Claims After Jander

Readers will recall that, as we discussed in our 2019 Year-End Securities Litigation Update, the Supreme Court heard argument in November 2019 in Retirement Plans Committee of IBM v. Jander on the question whether the “more harm than good” pleading standard from Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 430 (2014), can be satisfied by generalized allegations that the harm resulting from the inevitable disclosure of an alleged fraud generally increases over time. Rather than deciding that question, the Court remanded the case in January to allow the Second Circuit to address two unresolved issues raised by the parties: (1) whether ERISA ever imposes a duty on a fiduciary for an employee stock option plan (ESOP) to act on inside information, and (2) whether ERISA requires disclosures that are not otherwise required by the securities laws. 140 S. Ct. 592 (2020) (per curiam). Justice Kagan (joined by Justice Ginsburg) and Justice Gorsuch filed dueling concurrences addressing those questions and disputing whether they were properly presented in this case.

On remand, the Second Circuit reinstated the judgment entered pursuant to its original opinion—an uncommon win for plaintiffs in this area. Jander v. Ret. Plans Comm. of IBM, 962 F.3d 85 (2d Cir. 2020) (per curiam). The court agreed with Justice Kagan’s suggestion that the additional arguments raised by defendants and the government in supplemental briefing “either were previously considered by this Court or were not properly raised,” and therefore were forfeited. Id. at 86.

Other lower courts have continued to apply the Dudenhoeffer pleading standard, offering varying answers to the questions raised by the Supreme Court in Jander. In Varga v. General Electric Company, No. 18-cv-1449, 2020 WL 1064809 (N.D.N.Y. Mar. 5, 2020), the court dismissed a class action complaint alleging that General Electric violated its fiduciary duties owed to participants of the GE Retirement Savings Plan, which offered an ESOP that invested all of its assets in GE common stock. Id. at *5. The complaint alleged that the defendants breached their fiduciary duties of prudence and loyalty by continuing to invest in GE stock despite knowing, and failing to disclose, the company’s $15 billion insurance funding shortfall. Id. at *1. The court interpreted Dudenhoeffer as requiring a plaintiff to plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the company stock fund than to help it. Id. at *3. It rejected the two alternatives suggested by plaintiffs: (1) disclose the problem earlier, or (2) close the GE Stock Fund to additional investments once they knew, or should have known, of the insurance reserve problem. Id. The first alternative failed to satisfy the requirement that a prudent fiduciary could not have concluded that the alternative would do more harm than good, and the second alternative failed Dudenhoeffer’s pleading standard because it rested purely on speculation. Id. at *4.

In Perrone v. Johnson & Johnson, No. 19-cv-923, 2020 WL 2060324 (D.N.J. Apr. 29, 2020), the court dismissed a fiduciary breach class action complaint concerning Johnson & Johnson’s failure to disclose information related to allegations of cancer-causing asbestos in the company’s talc powder on grounds similar to Varga. The court reasoned in part that plaintiffs failed to meet their burden under Dudenhoeffer because they alleged an alternative action (corrective disclosure) that would have been impermissibly taken in defendants’ corporate, as opposed to its fiduciary, capacity. In so ruling, the district court drew “support from Justice Gorsuch’s concurrence to the per curiam opinion remanding Jander.” Id. at *16.

2.  Defined-Contribution Plan Fiduciary Claims

Other recent decisions have addressed claims by defined-contribution plan participants for breach of the duties of prudence and diversification. ERISA requires the fiduciary of a pension plan to act prudently in managing the plan’s assets, but what that requirement entails may vary depending on the type of plan at issue, giving rise to complex questions in securities-related litigation.

The Seventh Circuit affirmed the dismissal of one such claim in Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020). The court held plaintiffs did not allege a fiduciary breach by alleging, inter alia, that defendants provided investment options that were too numerous, too expensive, or underperforming—notwithstanding decisions of the Third and Eighth Circuits potentially suggesting otherwise. Id. at 991 (citing Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 596 (8th Cir. 2009) (finding imprudence where investment plan offered “relatively limited menu of funds . . . chosen to benefit the trustee at the expense of the participants”); Sweda v. Univ. of Pennsylvania, 923 F.3d 320, 330 (3d Cir. 2019) (stating that offering a “meaningful mix and range of investment options” does not automatically “insulate[] plan fiduciaries from liability for breach of fiduciary duty”)).

The Fifth Circuit affirmed the dismissal of a putative fiduciary breach class action in Schweitzer v. Investment Committee of Philips 66 Savings Plan, 960 F.3d 190 (5th Cir. 2020). Schweitzer first addressed the scope of the statutory definition of qualifying employer securities exempt from the otherwise applicable fiduciary duties of diversification. The ERISA statute defines such a security as a “security issued by an employer of employees covered by the plan, or by an affiliate of such employer.” 29 U.S.C. § 1107(d)(1). Here, the court rejected the defendants’ argument that the funds at issue (investing in ConocoPhillips stock) were qualifying employer securities, because an intervening spinoff had made a new entity (Phillips 66) the employer for statutory purposes. 960 F.3d at 195. But the court nevertheless held that the defendants satisfied their fiduciary obligations by allowing plan participants to choose to retain their previous investments in those funds, while closing the funds to new investments post-spinoff. Id. at 196, 199.

3.  Pleading Standards For Claims Partly Grounded In Fraud

In Vigeant v. Meek, 953 F.3d 1022, 1026 (8th Cir. 2020), the Eighth Circuit highlighted a recurring issue regarding which pleading standard should be applied when a complaint for breach of ERISA fiduciary duties contains specific allegations that are grounded in fraud. The Eighth Circuit agreed with the district court that an allegation grounded in fraud must be pleaded, and considered by a court, according to the specificity required by Rule 9(b) of the Federal Rules of Civil Procedure. Id. The remaining allegations, however, are to be considered under the less rigorous plausibility standard under Rule 8.

4.  Arbitrability Of ERISA Claims

The extent to which ERISA plan participants can be required to arbitrate fiduciary duty-related disputes has also continued to be litigated in the securities context. In Ramos v. Natures Image, Inc., No. 19-cv-7094, 2020 WL 2404902, (C.D. Cal. Feb. 19, 2020), the court partially denied a motion to compel arbitration on an ERISA claim for breach of fiduciary duty, even though the individual employee plaintiffs had signed arbitration agreements. Unlike other employment-related claims, under Ninth Circuit precedent, the ERISA claims “ultimately belong to the plan,” not the individual employee, and hence are not arbitrable “without consent from the plan to arbitrate.” Id. at *7–8 (citing Munro v. Univ. of S. Cal., 896 F.3d 1088, 1092 (9th Cir. 2018)).

Although Ramos was not itself a stock-drop case, the principle it applied holds significance for ERISA securities litigation where plaintiffs are current or former employees who may have signed individual arbitration agreements in connection with their employment. In addition to individual participant arbitration agreements, plan sponsors may want to assess whether to include arbitration provisions within plan documents to counter the reasoning of Ramos. For example, in Dorman v. Charles Schwab Corp., 780 F. App’x 510 (9th Cir. 2019), “the Plan did consent in the Plan document to arbitrate all ERISA claims.” Id. at 514. The Ninth Circuit accordingly distinguished the line of cases applied in Ramos and held that the ERISA claims in Dorman were indeed arbitrable. Id.

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   [1]   All charts courtesy of NERA.

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The following Gibson Dunn lawyers assisted in the preparation of this client update:  Jefferson Bell, Shireen Barday, Krista Hanvey, Monica Loseman, Brian Lutz, Karl Nelson, Mark Perry, Avi Weitzman, Lissa Percopo, Mark H. Mixon, Jr., Sam Berman, Andrew Bernstein, Jason Bressler, Tim Deal, Luke Dougherty, Rachel Jackson, Hannah Kirshner, Andrew V. Kuntz, Zachary Piaker, Emily Riff, Max Schulman, Alisha Siqueira, Marc Aaron Takagaki, Collin James Vierra, and Chase Weidner.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Securities Litigation practice group steering committee:

Monica K. Loseman – Co-Chair, Denver (+1 303-298-5784, [email protected])
Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, [email protected])
Robert F. Serio – Co-Chair, New York (+1 212-351-3917, [email protected])
Jefferson Bell – New York (+1 212-351-2395, [email protected])
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Jennifer L. Conn – New York (+1 212-351-4086, [email protected])
Thad A. Davis – San Francisco (+1 415-393-8251, [email protected])
Ethan Dettmer – San Francisco (+1 415-393-8292, [email protected])
Barry R. Goldsmith – New York (+1 212-351-2440, [email protected])
Mark A. Kirsch – New York (+1 212-351-2662, [email protected])
Gabrielle Levin – New York (+1 212-351-3901, [email protected])
Jason J. Mendro – Washington, D.C. (+1 202-887-3726, [email protected])
Alex Mircheff – Los Angeles (+1 213-229-7307, [email protected])
Robert C. Walters – Dallas (+1 214-698-3114, [email protected])
Aric H. Wu – New York (+1 212-351-3820, [email protected])
Meryl L. Young – Orange County (+1 949-451-4229, [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.

Washington, D.C. partner Andrew Tulumello and associates Jason Spencer and Joshua Wesneski are the authors of “Neb. Ruling May Squash Consent By Registration Theory,” [PDF] published by Law360 on August 7, 2020.

On July 16, 2020, the Court of Justice of the European Union struck down as legally invalid the U.S.-EU Privacy Shield but ruled that the “Standard Contractual Clauses”(“SCCs”) approved by the European Commission, another mechanism many companies use to justify such transfers, remain valid with some caveats. The Court’s decision will force companies on both sides of the Atlantic and globally to reassess their data transfer mechanisms, as well as the locations in which they store personal data.

Our international privacy group from the EU, the US and Asia shares its analysis of the Court ruling and its recommendations in light of the initial guidance issued by the European Data Protection Board and National Supervisory Authorities in the EU.

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PANELISTS:

Our in-depth discussion of cutting-edge issues will be moderated by global co-Chairs of Gibson Dunn’s Privacy, Cybersecurity and Consumer Protection group, Alexander H. Southwell and Ahmed Baladi

Ahmed Baladi – Partner, Paris
Patrick Doris – Partner, London
Cassandra L. Gaedt-Sheckter – Associate Attorney, Palo Alto
Kai Gesing – Of Counsel, Munich
Alejandro Guerrero – Of Counsel, Brussels
Connell O’Neill – Partner, Hong Kong
Clémence Pugnet – Associate Attorney, Paris
Alexander H. Southwell – Partner, New York

New York partners Lee Dunst and Joel Cohen are the authors of “INSIGHT: Lessons From a Rare in-Person Courtroom Experience in a Pandemic,” [PDF] published by Bloomberg Law on August 6, 2020.

On July 22, 2020, the New York State Senate and Assembly passed legislation that, if signed into law by Governor Andrew M. Cuomo, will expand First Amendment protections under New York’s anti-SLAPP law by providing new tools for defendants to challenge frivolous lawsuits. 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] have all come out in its support, as has 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 proposed statute, sponsored by Senator Brad Hoylman and Assemblywoman Helene E. Weinstein, would amend the civil rights law in several ways to expand and strengthen New York’s anti-SLAPP protections. Governor Cuomo has not yet commented on whether he will sign the bill.

The following is a summary of the law’s changes, which would 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 proposed 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 current 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 would 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.

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[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.

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Orin Snyder, 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:

Orin Snyder – Co-Chair, Media, Entertainment and Technology Practice, New York (+1 212-351-2400, [email protected])
Anne M. Champion – New York (+1 212-351-5361, [email protected])
Connor Sullivan – New York (+1 212-351-2459, [email protected])
Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice, Los Angeles (+1 213-229-7000, [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])

© 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.

On August 3, 2020, in response to a request from the Ninth Circuit, the California Supreme Court provided guidance on important questions about the bounds of legitimate business competition under California tort and antitrust law in Ixchel Pharma, LLC v. Biogen, Inc., No. S256927. The Court issued a unanimous opinion addressing two issues: (1) whether a claim for tortious interference with an at-will contract requires a showing of an independently wrongful act, and (2) whether business-to-business contracts imposing limits on a contracting party’s business activities are per se illegal under California Business and Professions Code section 16600. Specifically, the Court held that tortious interference with at-will contracts does require independent wrongfulness, and that a rule of reason standard, rather than a per se prohibition, applies to determine whether a restraint in a business-to-business agreement violates section 16600. This decision provides important clarification regarding the elements of these claims, ensuring that vigorous competition aimed at winning customers away from competitors should not give rise to valid claims for tortious interference and that ancillary restraints within business-to-business agreements will continue to be assessed under a reasonableness standard, rather than as per se illegal under California law. Had the Court adopted the rule of per se illegality for such restrictions advanced by Plaintiff Ixchel Pharma, LLC, that approach would have called into question the legality of many common types of business arrangements, such as joint ventures with ancillary non-compete agreements, exclusive dealing agreements, vertical territorial or other restrictions on distributors, and franchise agreements.

Plaintiff Ixchel Pharma Sues Defendant Biogen Regarding A Settlement Agreement Provision That Allegedly Restrained Trade

Plaintiff Ixchel Pharma, LLC (“Ixchel”), a biotechnology company, entered into a terminable-at-will agreement with Forward Pharma (“Forward”) to jointly develop a drug containing the active ingredient dimethyl fumarate (“DMF”) for the treatment of Friedreich’s ataxia, a neurodegenerative disorder. The companies engaged in joint development efforts until Forward decided to withdraw from the parties’ at-will collaboration agreement. Forward terminated the agreement pursuant to a settlement agreement it reached with Defendant Biogen, Inc. (“Biogen”) regarding a patent dispute between the companies related to the use of DMF for the treatment of multiple sclerosis. Ixchel sued Biogen in federal district court asserting violations of federal and state antitrust laws, tortious interference with contractual relations, and violation of California’s unfair competition law (UCL), alleging that Biogen restrained Forward from engaging in lawful business with Ixchel and therefore violated section 16600’s prohibition against restraints of trade. The district court dismissed Ixchel’s amended complaint on the grounds that the Forward-Biogen settlement agreement should be analyzed under the antitrust rule of reason and that section 16600 does not apply outside the employment context.[1]

Ixchel appealed the district court’s decision to the Ninth Circuit. After oral argument, the Ninth Circuit certified two questions of California state law to the California Supreme Court.[2] The California Supreme Court accepted the certification but rephrased and reordered the questions as:

1. “Is a plaintiff required to plead an independently wrongful act in order to state a claim for tortious interference with a contract that is terminable at will?” and
2. “What is the proper standard to determine whether section 16600 voids a contract by which a business is restrained from engaging in a lawful trade or business with another business?” Slip Op. at 6.

The Court’s Opinion Provides Important Clarity On The Elements Of A Claim For Tortious Interference With An At-Will Contract And The Standard For Assessing Business-To-Business Agreements Under Section 16600

Justice Liu authored the opinion of the Court, in which Chief Justice Cantil-Sakauye and Justices Chin, Corrigan, Cuéllar, Kruger, and Groban concurred.

First, the Court addressed whether Ixchel must allege that Biogen committed an independently wrongful act in order to state a claim for tortious interference with contract, in light of the fact that the parties’ collaboration agreement was terminable at-will. The Court reviewed the history of economic relations torts under California law, emphasizing the distinction between tortious interference with contractual relations—which generally does not require independent wrongfulness—and tortious interference with prospective economic advantage—which does require an independently wrongful act. According to the Court, it had yet to determine which of those two categories “more closely resembles” the tort of interference with at-will contracts. Slip Op. at 10. After analyzing this issue in the context of its precedent, the Court concluded that “[l]ike parties to a prospective economic relationship, parties to at-will contracts have no legal assurance of future economic relations” (id. at 16) and, therefore, that to state a claim for interference with an at-will contract by a third party, the plaintiff must allege that the defendant engaged in an independently wrongful act (id. at 18). The Court reasoned that allowing claims of interference with at-will contracts without requiring independent wrongfulness would risk chilling legitimate competition and could “expose routine and legitimate business competition to litigation.” Id. at 19.

The Court next turned to the question of the proper interpretation of section 16600. As an initial matter, the Court declined Ixchel’s invitation to resolve only the narrow question of whether section 16600 applies to business contracts. Both parties agreed that it did—and the Court concurred. But the Court explained that because the “primary dispute” between the parties was “whether contractual restraints on business operations or commercial dealings are subject to a reasonableness standard under section 16600,” an “important question of California law, potentially affecting all contracts in California that in some way restrain a contracting party from engaging in a profession, trade, or business,” it was appropriate for the Court to address the broader question of the appropriate standard for such claims. Id. at 19-20.

After reviewing the statutory history and state court precedent, the Court concluded, “a survey of our precedent construing section 16600 and its predecessor statute reveals that we have long applied a reasonableness standard to contractual restraints on business operations and commercial dealings.” Id. at 36. In so stating, the Court noted that it was not disturbing its holding in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (Cal. 2008), and other decisions in which section 16600 was strictly interpreted to invalidate noncompetition agreements that entirely prohibit an employee or business owner from engaging in a profession upon termination of their employment or sale of their interest in a business. Slip Op. at 36. But it distinguished those cases from ones, like the case at hand, involving “contractual restraints on business operations and commercial dealings.” Id. The Court also emphasized the possible detrimental consequences from applying a per se standard to business agreements under section 16600, acknowledging that certain contractual restraints on competition in business-to-business agreements in fact “promote competition.” Id. at 38.

Thus, the Court held that “a rule of reason applies to determine the validity of a contractual provision by which a business is restrained from engaging in a lawful trade or business with another business.” Id. at 40-41. This means that in evaluating whether a restraint in business-to-business agreement runs afoul of section 16600, courts will generally look to whether the anticompetitive effects of the agreement outweigh its procompetitive effects. It remains to be seen precisely how courts will apply the reasonableness standard under section 16600. In its decision, the Court stressed the importance of harmonizing the Cartwright Act and section 16600, stating that they should be “interpreted together” (id. at 38), which suggests that the rule of reason analysis employed for claims brought under the Cartwright Act would also be used for section 16600 claims.

The Court’s decision clarifies the elements of a claim for tortious interference with at-will contracts under California law. It also provides going-forward guidance to courts regarding the standard that applies to contractual restraints on business operations and commercial dealings under section 16600, and ensures that—in accord with federal antitrust law—such restraints will not be deemed per se unlawful.

Gibson, Dunn & Crutcher LLP represented the California Chamber of Commerce in filing an amicus brief in support of Biogen, Inc.

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   [1]   Ixchel Pharma, LLC v. Biogen, Inc., No. 2:17-cv-00715-WBS-EFB, 2018 WL 558781 at *4 (E.D. Cal. Jan. 25, 2018).

   [2]   Ixchel Pharma, LLC v. Biogen, Inc., 930 F.3d 1031, 1033 (9th Cir. 2019).

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The following Gibson Dunn lawyers prepared this client alert: Rachel Brass, Thomas Hungar, Daniel Swanson and Caeli Higney.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn attorney with whom you usually work, the authors, or any member of the firm’s Antitrust and Competition or Appellate and Constitutional Law practice groups, or the following lawyers.

Antitrust and Competition Group:
Daniel G. Swanson – Los Angeles (+1 213-229-7430, [email protected])
Rachel S. Brass – San Francisco (+1 415-393-8293, [email protected])
Samuel G. Liversidge – Los Angeles (+1 213-229-7420, [email protected])
Jay P. Srinivasan – Los Angeles (+1 213-229-7296, [email protected])
Rod J. Stone – Los Angeles (+1 213-229-7256, [email protected])

Appellate and Constitutional Law Group:
Theane Evangelis – Los Angeles (+1 213-229-7726, [email protected])
Blaine H. Evanson – Orange County (+1 949-451-3805, [email protected])
Thomas G. Hungar – Washington, D.C. (+1 202-887-3784, [email protected])
Julian W. Poon – Los Angeles (+1 213-229-7758, [email protected])
Michael Holecek – Los Angeles (+1 213-229-7018, [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 client alert provides an overview of shareholder proposals submitted to public companies during the 2020 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.

Top Shareholder Proposal Takeaways from the 2020 Proxy Season

As discussed in further detail below, based on the results of the 2020 proxy season, there are several key takeaways to consider for the coming year:

• Shareholder proposal submissions continue to decline. The number of proposals submitted decreased by 9% from the prior year to 720, which was 11% lower than the five-year average of 809.
• The number of social and environmental proposals significantly decreased, leading to governance proposals being the most common. Social and environmental proposals declined notably, down 21% and 10%, respectively, from 2019. The number of governance proposals remained steady in 2020 compared to 2019 and represented 40% of proposals submitted, the single largest category during 2020. The five most popular proposal topics, representing 37% of all shareholder proposal submissions, were (i) written consent, (ii) climate change, (iii) anti-discrimination and diversity (although board diversity proposals were down more than 51% from 2019 levels), (iv) independent chair, and (v) lobbying spending.
• Overall no-action request success rates held steady, but Staff response letters declined significantly. The overall success rate for no-action requests held steady at 70%, driven primarily by substantial implementation, procedural, and ordinary business arguments. However, recent changes in the Staff’s practices for responding to no-action requests resulted in significantly fewer written explanations, with the Staff providing response letters only 18% of the time. Almost three-fourths of those Staff response letters were issued when the Staff concurred that a proposal was excludable or denied reconsideration.
• Company success rates using board analysis during this proxy season show promise. Although fewer companies included a board analysis during this proxy season (down 24% from 25 in 2019 to 19 this year), companies that included a board analysis had greater success, with the Staff concurring with the exclusion of four proposals during this year based on the company’s use of a board analysis, compared to just one proposal during the 2019 proxy season.
• Negotiated withdrawals decreased significantly. The overall percentage of proposals withdrawn decreased significantly to its lowest number since 2017. Only 14% of shareholder proposals were withdrawn this season, compared to 20% in 2019, due in part to declining withdrawal rates for social and environmental proposals (dropping to 25% from 38% in 2019).
• Overall voting support dipped slightly, including average support for social proposals, although support for environmental proposals continued to gain momentum. Average support for all shareholder proposals voted on was 31.3% of votes cast, down slightly from the 32.8% average in 2019 and 32.5% in 2018. In 2020, support for social (non-environmental) proposals was about 21.5%, down from 23.6% in 2019, whereas support for environmental proposals increased to 30.2% from 23.9% in 2019. Governance proposals continued to receive the highest average support at 35.3%. This year also saw a decrease in the number of shareholder proposals that received majority support (50 in total, down from 62 in 2019), with an increasing number of such proposals focused on issues other than traditional governance topics.
• Continued proliferation of new proponents and co-filers. The number of shareholders using the Rule 14a-8 shareholder proposal process continues to grow, with more than 300 proponents in each of 2020 and 2019 (compared to approximately 200 proponents in 2018). Approximately two-thirds of proposals were submitted by individuals and religious-affiliated organizations. As in prior years, John Chevedden and his associates were the most frequent proponents (filing 31% of all proposals in 2020). This year also saw the continued trend of multiple co-filers submitting proposals—for example, the number of proposals submitted by at least five co-filers has tripled since 2018.
• Proponents continue to use exempt solicitations and litigation. Exempt solicitation filings continued to proliferate, with the number of filings reaching a record high again this year and increasing more than 40% over the last three years. This continues to be an area ripe for abuse—for example, nearly 20% of exempt solicitation filings in 2020 failed to comply with Staff guidance. In addition, for the second consecutive year, a proponent turned to the courts to fight the exclusion of an environmental proposal even before the Staff had issued its response to the related no-action request.
• Shareholder proposal reform remains pending. On November 5, 2019, the SEC proposed amending Rule 14a-8 to address certain eligibility requirements for submitting shareholder proposals and to raise resubmission thresholds. We anticipate that final rules will be adopted in the near term.

Read More

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Elizabeth Ising, Ron Mueller, Lori Zyskowski, Lauren Assaf-Holmes, Chris Connelly, Sherri Deckelboim, Rama Douglas, Courtney Haseley, Scott Kaplan, Darren Kerstien, David Korvin, Zachary Lankford, Candice Lundquist, Michael Mencher, Jean Park, Victor Twu, and Geoffrey Walter.

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

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

Private equity webcasts

London partner Sandy Bhogal and associate Barbara Onuonga are the authors of “United Kingdom,” [PDF] published in Global Legal Insights – Corporate Tax 2020, Eighth Edition in August 2020.

Washington, D.C. partner Thomas Hungar is the author of “INSIGHT: The SEC’s Failing Report Card on Regulatory Losses,” [PDF] published by Bloomberg Law on July 31, 2020.

Denver partners Beau Stark and Frederick Yarger and associate Graham Valenta are the authors of “Navigating the Battleground State,” [PDF] published by Oil and Gas Investor in its August 2020 issue.

The ongoing coronavirus has caused governments and populations to rethink how to conduct social interactions and in turn how to conduct business on a global scale. Despite the ongoing global public health crisis, the United States Government’s efforts to use its economic leverage to conduct foreign policy continues unabated. Indeed, throughout the first half of 2020, the United States continued to tighten the screws on Iran and Venezuela and has not shied away from using its economic arsenal in its escalating trade war with China.

As the global pandemic has deepened, there have been calls from some quarters, including from UN Secretary General António Guterres and UN High Commissioner for Human Rights Michelle Bachelet, for a temporary easing of sanctions—on humanitarian and public health grounds—against countries especially vulnerable to the spread of COVID-19, including Iran and Venezuela. U.S. officials have so far declined that invitation, citing the broad humanitarian exceptions already incorporated into U.S. sanctions measures. Underscoring the point, the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) in April 2020 issued a fact sheet compiling all of the existing authorizations and exemptions for humanitarian trade and other assistance with respect to each comprehensively sanctioned jurisdiction, including Iran. This suggests that, for now at least, OFAC views its existing exemptions and authorizations as sufficient to meet the current public health emergency and has no intention or appetite for otherwise easing sanctions.

The pandemic has only further highlighted U.S.-China tensions and, unsurprisingly, the United States has continued to use sanctions and export controls not only to apply pressure in the escalating trade war but in response to China’s human rights abuses in Hong Kong and against the country’s Uyghur minority.

More broadly, the U.S. administration and OFAC have taken several measures to remind the world that compliance with economic sanctions remains of paramount importance despite the global upheaval. Even in the midst of the pandemic-induced chaos, OFAC still found time to issue an entirely new sanctions program addressing the humanitarian situation in Mali and has continued to take additional measures targeting Syria and North Korea. OFAC and BIS designations have continued apace, and the State Department has even gotten into the game by designating an increasing number of individuals as “Corrupt Actors” and “Human Rights Violators.” Taking a warning shot across the bow of the shipping industry, in May 2020, OFAC issued the latest in a series of industry advisories addressing deceptive practices in global maritime transportation, building upon previously published guidance relating to North Korea’s, Syria’s, and Iran’s illicit shipping practices. The advisory stresses that 90 percent of global trade involves maritime transportation, and that, even during a massive international public health crisis, participants must remain vigilant.

I. Major U.S. Program Developments

A. Iran

During the first half of 2020, the United States continued to increase sanctions pressure on the regime in Tehran while also seeking to enable the flow of humanitarian goods and services to the Iranian people to alleviate the suffering due to COVID-19. Notably, amid a spike in tensions between Washington and Tehran following the January 2020 killing of Iranian General Qassem Soleimani in a U.S. airstrike, the Trump Administration imposed secondary sanctions on some of the few remaining sectors of the Iranian economy not already subject to U.S. restrictive measures. Meanwhile, as Iran grappled with one of the first severe outbreaks of COVID-19, OFAC leveraged its existing authorities to facilitate the provision of aid to the Iranian people, including by opening a new Swiss channel for humanitarian trade and authorizing certain transactions to flow through Iran’s central bank.

On January 10, 2020, President Trump issued Executive Order 13902, which authorizes OFAC to designate entities operating in the construction, mining, manufacturing, or textiles sectors of the Iranian economy, as well as any other sector of the Iranian economy targeted by the U.S. Secretary of the Treasury. The order also authorizes the imposition of secondary sanctions against any non-U.S. person or company that knowingly engages in a significant transaction involving one of those targeted sectors. Following the expiration of a 90-day wind-down period on June 5, 2020, OFAC published guidance indicating how the agency expects to define those four sectors, as well as what types of dealings in goods and services are potentially sanctionable. For example, in light of the COVID-19 pandemic, OFAC clarified that the new manufacturing sanctions do not target persons or companies in Iran manufacturing medicines, medical devices, or products used for sanitation, hygiene, medical care, medical safety, and manufacturing safety (e.g., soap, hand sanitizer, ventilators, respirators, personal hygiene products, diapers, infant and childcare items, personal protective equipment, and manufacturing safety systems), solely for use within Iran and not for export abroad.

Additionally, consistent with longstanding U.S. policy in favor of legitimate humanitarian trade with sanctioned jurisdictions, the United States during the past six months also implemented several measures designed to facilitate Iran’s response to the coronavirus pandemic.

OFAC, building on a framework announced in October 2019 under which foreign governments and foreign financial institutions may establish approved payment mechanisms for humanitarian exports to Iran, in February 2020 announced that the first such payment channel has become operational. Developed in cooperation with the Swiss government, the Swiss Humanitarian Trade Arrangement is a voluntary mechanism under which OFAC will provide written confirmation, or “comfort letters,” to persons domiciled in Switzerland (including entities owned or controlled by U.S. persons), affirming that sales to Iran of food, agricultural commodities, medicine, and medical devices are not exposed to U.S. sanctions. To obtain these comfort letters, exporters must submit to stringent due diligence and reporting requirements to ensure that humanitarian exports are not improperly diverted to sanctioned parties. Given those exacting requirements, however, the number of transactions processed through the new Swiss payment channel so far remains relatively small.

In February 2020, OFAC issued Iran General License 8, which authorizes certain humanitarian transactions involving the Central Bank of Iran (“CBI”). Entities designated under OFAC’s counterterrorism authorities, including as of last year the CBI, are not only subject to the broad sanctions restrictions typically imposed on SDNs, but also may not participate in humanitarian trade with Iran—a category of activity generally exempt from sanctions restrictions. General License 8 therefore creates an exception under which both U.S. persons and non-U.S. persons are authorized to engage in certain transactions with the CBI involving sales to Iran of food, agricultural commodities, medicine, and medical devices. Notably, that exception is specific to the CBI and does not extend to transactions involving any other Iranian financial institution sanctioned under a U.S. counterterrorism authority, such as Executive Order 13224.

Moreover, as part of its “maximum pressure” campaign, the Trump administration has continued to tighten sanctions on Iranian transactions and activities that do not raise humanitarian concerns. In May 2020, the U.S. Department of State announced that, subject to a 60-day wind-down period that expires on July 27, 2020, the United States is ending sanctions waivers that have allowed non-U.S. persons to engage in certain activities involving Iran’s civil nuclear program. The United States in May and June also designated a steady stream of Iranian targets, including military front companies, senior law enforcement officials, ship captains, and metals producers. With a U.S. presidential election looming in November 2020, such Iran-related designations will likely continue apace throughout the months ahead.

B. Venezuela

Despite presiding over a collapsing economy, a deepening public health crisis, and the exodus of several million of its citizens, the regime of President Nicolás Maduro presently controls nearly all levers of power within Venezuela, including the country’s courts and armed forces. Expanding on earlier sanctions measures, the Trump administration during the first half of 2020 deployed an array of tools to deny the Maduro regime the resources and support necessary to sustain its hold on power—from indicting several of Venezuela’s top leaders to aggressively targeting virtually all dealings with Venezuela’s crucial oil sector.

In March 2020, the U.S. Department of Justice announced criminal indictments against President Maduro and 14 other high-level officials, including Venezuela’s chief justice and defense minister. The indictments allege a wide range of criminal conduct by Venezuela’s senior leadership, including overseeing a cartel that imported significant quantities of cocaine into the United States, corruption, money laundering, and sanctions evasion. While not formally a sanctions action, the announcement was notable because the United States, as a matter of policy, does not charge sitting heads of state—a restriction that was determined not to apply because the United States and nearly 60 other countries do not recognize Maduro as Venezuela’s rightful leader. In addition to constricting the officials’ ability to travel overseas for fear of being arrested and extradited, the indictments also potentially dim the prospects for a negotiated settlement to Venezuela’s political crisis if, upon ceding power, President Maduro and his top lieutenants face the prospect of being jailed in New York.

In addition to leveraging the criminal justice system, the Trump administration over the past six months repeatedly sanctioned (or threatened to sanction) non-U.S. persons for playing even an indirect role in bringing Venezuelan oil to market.

In February and March 2020, OFAC designated two subsidiaries of the Russian state-controlled oil giant Rosneft for brokering the sale and transport of Venezuelan crude—prompting Rosneft to announce shortly afterward that it will cease all operations in Venezuela and sell its Venezuelan assets to an unnamed company wholly owned by the Kremlin. However, this shift does not necessarily mean that Russia is abandoning its alliance with the Maduro regime or even its involvement in Venezuela’s oil industry. Rather, the transaction appears designed to protect Rosneft—the centerpiece of Russia’s oil sector—from the imposition of deeper U.S. sanctions by walling off all Venezuela-related dealings inside a special purpose entity that is perhaps less vulnerable to U.S. sanctions pressure than a large, publicly traded company.

In April 2020, OFAC further restricted dealings with Venezuela’s oil sector by narrowing one of the few remaining authorizations for U.S. companies to engage in dealings with the state-owned oil company Petróleos de Venezuela, S.A. (“PdVSA”). Since the United States imposed sanctions on PdVSA in January 2019, OFAC has issued, and repeatedly extended, a general license authorizing five named U.S. oil and oil field services companies to engage in all transactions and activities ordinarily incident and necessary to operations in Venezuela involving PdVSA and its various subsidiaries. This authorization was designed to enable specific empresas mixtas, which are joint ventures between large multinational energy companies and PdVSA, to continue operating.

The latest version of that license, issued on April 21, 2020, is more limited in scope—authorizing, until December 1, 2020, just certain “essential” activities involving those five companies’ joint ventures, including activities ordinarily incident and necessary to protecting the safety of personnel, preserving assets, and participating in shareholder and board meetings. OFAC now expressly excludes from the authorization a number of key activities, including (1) drilling, lifting, processing, purchasing, selling, or transporting Venezuelan-origin petroleum and petroleum products; (2) repairs or improvements to Venezuelan energy infrastructure; and (3) the payment of dividends to PdVSA entities. Moreover, the license for the first time provides for—but does not require—the wind down of the five companies’ dealings with PdVSA. By effectively prohibiting U.S. firms from extracting and selling Venezuelan-origin petroleum, this policy shift calls into question the continuing viability of the empresas mixtas more generally—at least after December 1, 2020. Though the general license could be renewed once more, if the five U.S. companies named in the license—and their non-U.S. peers, including a number of leading European energy firms with similar ventures—were ultimately to depart Venezuela, the United States stands to lose a foothold in an OPEC member state with enormous proven oil reserves.

Finally, reflecting the breadth of the Trump administration’s efforts to disrupt the Venezuela oil trade, OFAC in June 2020 repeatedly designated shipping companies and tankers for lifting Venezuelan crude. While these companies and their vessels were eventually de-listed following enhancements to their sanctions compliance programs and pledges to cease involvement with Venezuela’s oil sector for so long as the Maduro regime remains in power, these actions—coupled with reports of imminent plans by OFAC to designate dozens more vessels—have caused maritime companies to re-evaluate their exposure to Venezuela. Indeed, ship owners, managers and operators, flag registries, port operators, insurance companies, and financial institutions are now effectively on notice that, absent authorization from OFAC, any involvement in transporting Venezuelan oil is now highly risky.

C. Syria

As the almost decade-old conflict in Syria persists, the U.S. Government has continued to use economic sanctions as a means to pressure the Assad regime as well as other actors in the region who continue to commit human rights abuses against the Syrian civilian population. On June 17, 2020 the Caesar Syria Civilian Protection Act of 2019 (“Caesar Act” or the “Act”) went into effect (180 days since its signing by President Trump as part of the 2020 National Defense Authorization Act). The Caesar Act, named after the Syrian defector known as “Caesar” who smuggled out photographs of torture occurring under the Assad regime, was implemented by Congress to, in the words of Secretary Pompeo, “promote accountability for brutal acts against the Syrian people by the Assad regime and its foreign enablers.” The Act requires the President, at the 180-day mark, to take certain actions, including with respect to the Act’s sanctions provisions. The provisions strengthen secondary sanctions with respect to Syria by requiring the President to enact certain sanctions against foreign persons found to be acting in support of the Government of Syria or other sanctioned individuals or groups operating in Syria. Specifically, Congress has required the President to sanction foreign individuals and entities who knowingly:

• provide financial, material, or technological support to: (i) the Government of Syria or a senior official; (ii) foreign military or paramilitary forces operating in Syria on behalf of the Syrian, Russian, or Iranian governments; or (iii) foreign persons already sanctioned under the United States’ Syria sanctions program;
• sell or provide “significant” goods, services, or any other support that “significantly facilitates” the Syrian Government’s natural gas or petroleum production;
• sell or provide aircraft or aircraft parts to foreign persons or forces operating in areas controlled by the Syrian government or otherwise associated with the Syrian government, or provides goods to services to any such foreign person;
• provide “significant” construction or engineering services to the Syrian government.

Additionally, the Act requires the Treasury Secretary to determine, by June 17, 2020, whether the Central Bank of Syria (“CBS”) constitutes an institution of primary money laundering concern under the USA PATRIOT ACT, a law enacted passed in 2001 to strengthen U.S. measures to prevent, detect, and prosecute international money laundering and terrorist financing. A primary money laundering concern designation would require U.S. banks that deal with the CBS to take certain information gathering and record-keeping measures and, more significantly, could result in U.S. banks’ being prohibited from opening or maintaining correspondent or payable-through accounts that involve the CBS. However, as of date of this writing no such determination appears to have been made.

Also on June 17, 2020, the U.S. Treasury and State Departments designated 39 individuals and entities under the Caesar Act and Executive Order 13894 and one month later, on July 31, 2020, another 14 individuals and entities were designated under the same authorities. On June 5, 2020, OFAC promulgated new regulations implementing EO 13894 under 31 C.F.R. part 569.  Interestingly, Syrian first lady Asma al-Assad and Assad’s adult son, Hafez al-Assad, were designated for the first time under this new authority. Syrian President Bashar al-Assad and other Syrian military officials were also named, but had previously been designated under authorities such as EO 13573 and EO 13582, which together provided for the designation of senior Syrian government officials and, more broadly, the Government of Syria. As we previously discussed in a client alert and last year’s update, EO 13894 was initially enacted in October 2019 in order address Turkey’s aggression in northern Syria, rather than members of the Assad regime itself.

D. North Korea

During the first half of 2020, the United States continued to mount pressure on the government of North Korea through the issuance of two separate sanctions advisories targeting the country’s illicit activities in the cyber and maritime sectors, amending and intensifying the North Korea Sanctions Regulations (“NKSR”), and bringing indictments against individuals for evading U.S. sanctions for the purpose of supporting the despotic regime’s nuclear program.

On April 15, the U.S. Departments of State, the Treasury, and Homeland Security, and the Federal Bureau of Investigation (“FBI”) issued an advisory on the North Korean Cyber Threat and on measures that the U.S. Government encourages industry and individuals to take to protect themselves from cyber-enabled malicious activity. The advisory notes that North Korea has increasingly relied upon cybercrime as a means to generate revenue in the face of mounting international sanctions. According to a UN sanctions committee expert report, North Korea has attempted to steal as much as U.S. $2 billion through illicit cyber activities.

According to the advisory, cyberattacks sponsored by North Korean state-run organizations—including ransomware, spear phishing, and extortion campaigns—have targeted U.S. and international financial institutions, critical infrastructure, government and military networks, private industry, and individuals. Notable cyber incidents attributed to state-sponsored actors in North Korea include: the hacking of Sony Pictures in 2014, the theft of over $80 million from Bangladesh Bank in 2016, and the WannaCry 2.0 ransomware attacks in 2017.

The purpose of the advisory is to put industry and individuals on notice of the threat, to encourage commercial actors to adopt technical and behavioral measures to enhance their cybersecurity, and to encourage communication between industry and relevant U.S. Government agencies—including the Cybersecurity and Infrastructure Security Agency (“CISA”) and the FBI Cyber Division.

Among the measures companies are encouraged to take is to implement appropriate anti-money laundering/countering the financing of terrorism/counter-proliferation financing compliance standards and programs, such as those published by the Financial Action Task Force or required, in the United States, under the Bank Secrecy Act. U.S. enforcement agencies, including FinCEN, are particularly concerned about U.S. financial institutions’ involvement in digital currency platforms that provide anonymous payment and account services without transaction monitoring, suspicious activity reporting or customer due diligence.

Separately, on April 10, 2020, OFAC issued amendments to the NKSR, found at 31 C.F.R. part 510. These amendments followed Congressional legislation focused on applying further pressure to the isolated regime’s stagnant economy, implementing provisions of the North Korea Sanctions and Policy Enhancement Act of 2016 (“NKSPEA”) (as amended by the Countering America’s Adversaries Through Sanctions Act (“CAATSA”) and the National Defense Authorization Act for Fiscal Year 2020 (“2020 NDAA”). The amendments made several changes to the NKSR, including: implementing secondary sanctions for certain transactions; adding potential sanctions restricting the use of correspondent accounts for non-U.S. financial institutions that have provided significant services to SDNs; prohibiting non-U.S. subsidiaries of U.S. financial institutions from transacting with the government of North Korea or any SDN designated under the NKSR; and revising the definitions of “significant transactions” and “luxury goods.” Due to the rather limited size of the North Korean economy, these changes may not have a very large practical effect; however, these changes serve to remind the international community of the risks involved when dealing with North Korea.

These risks were made even more apparent when, on May 28, 2020, DOJ unsealed an indictment charging 28 North Korean and 5 Chinese individuals, acting on behalf of North Korea’s Foreign Trade Bank, for facilitating over $2.5 billion in illegal payments to support North Korea’s nuclear program. Though the prosecution is still in its early stages, the indictment is yet another reminder that U.S. enforcement agencies will continue to hold individuals and entities accountable—at times criminally accountable—for sanctions violations.

Rounding out the first half of the year, on July 16, 2020, OFAC announced that it had entered into a settlement agreement with UAE-based Essentra FZE Company Limited for violating the NKSR by exporting cigarette filters to North Korea using deceptive practices, including the use of front companies in China and elsewhere, and receiving payment into its accounts at a foreign branch of a U.S. bank. Significantly, OFAC found that Essentra FZE violated 31 C.F.R. § 510.212 by “causing” the U.S. bank to export financial services or engage in transactions involving North Korea. This enforcement action is reminiscent of OFAC”s 2017 settlement with CSE TransTel Pte. Ltd. (“TransTel”), a wholly owned subsidiary of CSE Global Limited (“CSE Global”). As we described in our 2017 Sanctions Year-End Update, OFAC in the CSE Global case appeared to expand its jurisdiction to cases in which non-U.S. parties “cause” U.S. entities (like financial institutions) to violate their sanctions obligations.

II. New Developments

A. China

Against the backdrop of the U.S.-China trade war, the United States has taken several sanctions measures in recent months targeting China’s aggression in its Xinjian region and in Hong Kong. In a volatile political season, there is significant pressure in the U.S. Congress to take steps to deter China’s alleged human rights abuses in its provinces, though it remains to be seen whether these sanctions measures will have any measurable economic impact. Moreover, recent weeks and months have seen a marked deterioration in the rhetoric used by the Trump administration to describe China’s actions, and the Chinese government has taken retaliatory measures that so far have been deemed largely symbolic. China experts report these events as a “turning point” in the U.S.-China relationship and as a downward “ideological spiral” and new “cold war.”

1. Human Rights & Forced Labor Concerns Regarding the Xinjiang Uyghur Autonomous Region

In June and July, the government took several measures aimed at confronting and punishing China’s alleged human rights abuses in the Xinjiang region. On June 17, 2020, the President signed the Uyghur Human Rights Policy Act, which condemns actions taken by the government of China with respect to Turkic Muslims and other Muslim minority groups in the Xinjiang Uyghur Autonomous Region (“XUAR”). The Act requires the President to submit a report to Congress within 180 days that identifies foreign persons, including Chinese government officials, who are responsible for gross violations of human rights in Xinjiang, including, as identified in the legislation, torture, arbitrary detention, abduction, and the operation of internment and forced labor camps. The Act requires the imposition of blocking sanctions and a visa ban on persons identified in the report.

Shortly after passage of the Act, the U.S. Departments of State, Treasury, Commerce, and Homeland Security issued the Xinjiang Supply Chain Business Advisory, a detailed guidance document for industry highlighting risks related to doing business with or connected to forced labor practices in Xinjiang and elsewhere in China. The Advisory states that businesses and individuals engaged in specified industries may face reputational or legal risks if their activities involve support for or acquisition of goods from commercial and governmental actors involved in illicit labor practices. The following activities were noted:

• Selling or providing biometric devices, cameras, computers, items with surveillance capabilities, microchips and microprocessors, tracking technology, or related equipment, software, and technology; and
• Involvement in joint ventures with PRC government officials and departments, or Chinese companies whose intellectual property has been known to aid the development or deployment of mass surveillance systems.

The Advisory recommends that businesses with supply chain links to Xinjiang assess their legal, economic, and reputational risks and take appropriate steps to implement reasonable human rights due diligence. The document provides many resources and links to internationally-recognized standards for conducting supply chain due diligence and establishing related corporate responsibility policies and procedures.

Ratcheting Up Designations

On July 9, OFAC designated the Xinjian Public Security Bureau and four current and former senior officials of the Chinese Communist Party (“CCP”) under authority delegated pursuant to the Global Magnitsky Act. The State Department announced complementary visa restrictions on three of the designated CCP officials. On July 31, the U.S. designated the Xinjiang Production and Construction Corps (“XPCC”), a paramilitary group associated with the CCP, as well as the XPCC’s former Political Commissar and Deputy Party Secretary and Commander, also pursuant to the Global Magnitsky Act. We discuss the designation of other entities using U.S. export control authorities in Section IV.G, supra.

In response to the July 9 designations, on July 13, China announced “corresponding sanctions” against four U.S. officials and the U.S. Congressional-Executive Commission on China, an independent U.S. Government agency created by statute in 2001. Though these sanctions have widely been described as “symbolic,” it could portend further retaliatory action by China in the future.

2. Hong Kong

The U.S. Government has taken several measures in early 2020 in response to China’s crackdown on ongoing protests in Hong Kong, opposing China’s proposed legislation that would impose serious criminal penalties on activities deemed to constitute separatism, subversion or collusion with a foreign government.

On May 28, 2020, U.S. Secretary of State Michael Pompeo reported to Congress that Hong Kong no longer warrants preferential treatment under U.S. law as it no longer maintains a “high degree of autonomy” from mainland China. The “de-certification” was announced in conjunction with the State Department’s annual report on the status of Hong Kong required under the United States-Hong Kong Policy Act of 1992, as amended by the Hong Kong Human Rights and Democracy Act of 2019. On July 14, 2020, President Trump issued an Executive Order formally revoking Hong Kong’s special trading status. The effects of this de-certification and revocation are discussed further below in Section IV.F, supra.

The State Department also announced visa restrictions on current and former members of the CCP believed to be responsible for “undermining Hong Kong’s high degree of autonomy,” as guaranteed by the 1984 Joint Declaration signed by Great Britain and Hong Kong and governing the terms of the transfer of Hong Kong back to Chinese sovereignty. Under the Joint Declaration, Hong Kong was to retain unchanged its internal economic, political, and legal institutions through the transfer, effective July 1, 1997, for a period of fifty years until 2047.

Hong Kong Autonomy Act authorizes additional sanctions

After Beijing officials enacted the national security law on an accelerated basis, the U.S. Congress responded with legislation that would authorize the U.S. Government to impose sanctions on foreign persons determined to have materially contributed to the failure of China to meet its obligations under the Joint Declaration, or its implementation in Hong Kong’s Basic Law, establishing the rights and freedoms particular to Hong Kong. President Trump signed the Hong Kong Autonomy Act on July 14, 2020.

The legislation requires the Secretaries of State and the Treasury to submit a report to Congress within 90 days of enactment identifying persons who have materially contributed to China’s actions in apparent violation of the Joint Declaration or the Basic Law. Blocking sanctions and visa restrictions are required within one year of the report. The Secretaries of State and the Treasury are also required to report to Congress if they have determined that any foreign financial institutions have knowingly conducted a significant transaction with a person identified under the Act. Sanctions for financial institutions include asset freezes, bans on banking or correspondent account transactions with U.S. financial institutions, and sanctions on individual officers, among other restrictions.

B. Select Designations

1. SDN List: Shanghai Saint Logistics Limited

On May 19, 2020, OFAC designated the China-based Shanghai Saint Logistics Limited (“Shanghai Saint Logistics”) for acting as a general sales agent for Iranian commercial airline Mahan Air, an entity sanctioned by OFAC under counterterrorism authorities in October 2011 and by the State Department under antiproliferation authorities in December 2019.

According to the U.S. Government, Mahan Air has, for years, transported terrorists and lethal cargo throughout the Middle East in support of Iran’s Islamic Revolutionary Guard Corps (“IRGC”) and the Assad regime in Syria. Mahan Air has also supported the Maduro regime by recently chartering flights to Venezuela for Iranian technicians and technical equipment (containing China-sourced materials).

As we pointed out in our 2019 Year-End Sanctions Update, OFAC’s July 2019 advisory warned non-U.S. persons that they could face designation or secondary sanctions penalties for dealing with Mahan Air. And the year before, U.S. Secretary of the Treasury Steve Mnuchin warned the aviation industry to “sever all ties and distance themselves immediately from this airline.” OFAC has backed up these warnings with action. In the past two years, OFAC has systematically targeted the non-U.S. actors supporting Mahan Air.

Shanghai Saint Logistics joins six other general sales agents (“GSAs”) that have already been blacklisted by OFAC for dealing with Mahan Air. A GSA is an agent providing services on behalf of an airline, typically under the airline’s brand. These services can include sales, marketing, freight handling, administrative services, and financial services. The now seven GSAs sanctioned for supporting Mahan Air span the globe, and include entities based in the United Arab Emirates, Malaysia, and Thailand.

Unsurprisingly, the designation of Shanghai Saint Logistics has not been received well by the government the People’s Republic of China (“PRC”). The PRC has called the designation “illegal” and has asked that the U.S. Government “change course and correct its mistake.” As a PRC Foreign Ministry spokesperson put it, “China stands consistently against U.S. unilateral sanctions and so-called long-arm jurisdiction.”

2. Cuba Restricted List: FINCIMEX and Travel Companies

Consistent with President Trump’s mandate to “identify the entities or subentities . . . that are under the control of, or act for or on behalf of, the Cuban military, intelligence, or security services or personnel,” the State Department has maintained a List of Restricted Entities and Subentities Associated with Cuba (the “Cuba Restricted List”) since November 2017. As we covered in our November 16, 2017 client alert, OFAC generally prohibits U.S. persons and entities from engaging in direct financial transactions with those entities and subentities on the Cuba Restricted List. BIS also has a general policy of denying applications to export or reexport items for use by such listed entities and subentities.

On June 12, 2020, the State Department added seven Cuban military-owned subentities—most operating in Cuba’s tourism industry—to the Cuba Restricted List: (1) a financial services company (FINCIMEX); (2) three hotels (Hotel Marqués de Cardenas de Montehermoso, Hotel Regis, Playa Paraíso Hotel); (3) two diving centers (Varadero, Gaviota Las Molas); and (4) a marine park for tourists (Cayo Naranjo dolphinarium). In announcing the additions, Secretary of State Pompeo stated that the profits generated by these seven subentities were being used to oppress the Cuban people and fund interference in Venezuela. A State Department senior official apparently characterized the additions as a “birthday present to Raul Castro” who turned 89 the day prior.

The listing of FINCIMEX, which handles remittances to Cuba and processes foreign-issued credit cards, is notable. FINCIMEX is the exclusive Cuban representative of Western Union, the vendor of choice for thousands of Americans who send money to their Cuban relatives. A Western Union spokesperson stated that, despite the FINCIMEX listing, “business and services from the U.S. to Cuba are operating as usual and [are] in compliance with U.S. law and regulations.” At this stage, it remains to be seen to what degree remittances to Cuba will be affected in practice. At the very least, this development is consistent with the Trump administration’s recent attempts to tighten remittance-related allowances, such as imposing $1,000 per quarter cap on remittances to Cuba as of September 2019. For more on these remittance-related restrictions, see our 2019 Year-End Sanctions Update.

3. Section 7031(c) Designations: Corrupt Actors and Human Rights Violators

Pursuant to Section 7031(c) of the Further Consolidated Appropriations Act of 2020, “[o]fficials of foreign governments and their immediate family members about whom the Secretary of State has credible information have been involved in significant corruption . . . or a gross violation of human rights [are] ineligible for entry into the United States.” Section 7031(c) designations can be made public or kept private by the State Department. A variation of this authority has existed in annual State-Department appropriations legislation since 2008. However, the Trump administration was the first to implement it when it publicly designated an allegedly corrupt former Albanian prosecutor under Section 7031(c) in February 2018.

Since then, the Trump administration has not been shy about adding to the Section 7031(c) list. Currently, more than 150 individuals (including immediate family members) from over thirty countries have been publicly designated. Thirty of these individuals were designated in the first three months of 2020. They include, for example: (1) thirteen former military personnel from El Salvador allegedly involved in the killing of six Jesuit priests and two others on November 16, 1989 on the campus of Central American University; (2) IRGC Commander Hassan Shahvapour, whose military units killed as many as 148 Iranian protestors in November 2019; and (3) Roberto Sandoval Castañeda, a former governor of the Mexican state of Nayarit, who misappropriated state assets and received bribes from narcotics trafficking organizations. Gibson Dunn will continue to monitor the use of Section 7031(c) designations, as well as other human-rights-based tools of foreign policy available to the President such as the Global Magnitsky sanctions.

III. Other U.S. Developments

A. International Criminal Court

As we have previously noted, the Trump administration has deployed sanctions in unprecedented ways and directed their force at surprising targets. On June 11, the President, unilaterally and without coordination with the United States’ European partners, issued an Executive Order authorizing sanctions against foreign persons determined to have engaged in any effort by the International Criminal Court (“ICC”) to investigate, arrest, detain, or prosecute United States or any U.S. ally personnel without the consent of the United States or that ally. Previously, on March 5, the ICC announced that it would authorize its chief prosecutor to open an investigation into alleged war crimes committed in Afghanistan, including any that may have been committed by U.S. personnel. The Executive Order refers to this decision and reiterates that the United States is not a party to the Rome Statute and has not consented to ICC jurisdiction. To date, no designations have been made under the order.

This action is somewhat reminiscent of the quickly-implemented, and just as quickly removed, sanctions against Turkey in October 2019—the first time that sanctions had been used to target government ministries of a NATO-member country. Unlike the October 2019 sanctions against Turkey, however, it is unlikely that this order will be revoked in the near future. The June 11 Executive Order demonstrates the continued willingness of the Trump administration to use sanctions to advance political and policy interests that traditionally have been outside the conventional use of sanctions.

B. New York Department of Financial Services

New York’s Department of Financial Services (“DFS”), the state’s key regulator in the financial industry, continues to bring enforcement actions against banks that have a New York presence for money laundering and sanctions violations. In its first action involving allegations of sanctions violations since its $405 million fine against Unicredit Group in April 2019, on April 20, 2020, DFS announced a $35 million dollar settlement with the Industrial Bank of Korea (“IBK”) for its failure to maintain adequate Bank Secrecy Act and anti-money laundering (“AML”) compliance programs. Among the compliance failures, DFS noted that IBK failed to detect a money laundering scheme that involved circumventing unspecified sanctions laws, with almost $1 billion clearing through New York banks.

Later that month DFS announced a $220 million settlement with Bank HaPoalim for knowingly facilitating clients’ tax evasion, and in July the regulator brought a $150 million action against Deutsche Bank for its failure to flag suspicious activities involving Jeffrey Espstein’s accounts as well as its failure to adequately monitor the activities of its clients Danske Estonia and FBME Bank, despite known risks associated with both banks. These actions, together with the appointment of a new DFS General Counsel with extensive background in AML and sanctions compliance, indicate that the state regulator will continue to devote significant resources to sanctions and AML enforcement; financial institutions with a New York presence should take heed that OFAC is far from being the only agency monitoring this space.

IV. Export Controls

Despite operating under work-from-home orders due to COVID-19 and a number of significant items still remaining on their to-do list, the staff at the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) has already had an extraordinarily busy year administering U.S. export controls on dual-use goods, software, and technology. BIS is continuing to evaluate how to identify and control exports of “emerging and foundational technologies,” as required by the Export Control Reform Act of 2018, with anticipated controls on emerging technologies expected any day and new proposals for foundational technologies reportedly in the pipeline as well. In the meantime, BIS has imposed a number of significant new controls on trade with China and Hong Kong and has suggested that more may be on the way. Alongside these developments, BIS has continued the use of its powerful Entity List designation tool to effectively ban U.S. exports to entities implicated by the Executive Branch’s interagency End-User Review Committee (“ERC”) in certain human rights violations in the XUAR and elsewhere in China.

These developments demonstrate that BIS is continuing to move away from its past as a purely technical agency and towards a much more dynamic future in which its authorities are used for foreign policy and national security objectives, not unlike OFAC. In some respects this is because the collateral impact of an SDN designation on a large company, such as Huawei, is too significant and disruptive to the global economy, and the more limited impact on being added to the Entity or Unverified Lists is more palatable. As such, as the trade war with China heats up and the potential for more designations of even more economically consequential actors becomes a reality, the administration (and the next one) will likely continue to rely on these “lesser” restrictions in place of adding these too-big-to-sanction entities to the SDN blacklist.

A. 0Y521 Series Classification for Geospatial SW

On January 3, BIS announced that it would be imposing new export controls on certain types of artificial intelligence software specially designed to automate the analysis of geospatial imagery in response to emergent national security concerns related to the newly covered software. Covered software includes products that employ artificial intelligence to analyze satellite imagery and identify user-selected objects. As a result of the new controls, a license from BIS is now required to export the geospatial imagery software to all countries, except Canada, or to transfer the software to foreign nationals. The only exception to this license requirement is for software transferred by or to a department or agency of the U.S. Government.

Implementing new export controls can often be a lengthy process, sometimes requiring international coordination. However, to implement this new license requirement, BIS deployed a rarely used tool for temporarily controlling the export of emerging technologies—the 0Y521 Export Controls Classification Number (“ECCN”). This special ECCN category allows BIS to impose export restrictions on previously uncontrolled items that have “significant military or intelligence advantage” or when there are “foreign policy reasons” supporting restrictions on its export. Although these controls would only last one year, items subjected to these controls can be moved to a more permanent ECCN before the expiration of the classification.

These controls on covered geospatial imagery software will last least until January 2021, and the United States will work with its allies over the course of 2020 to impose permanent, multilateral controls on this software. As noted above, we are also expecting BIS to publish a suite of new controls on “emerging technologies” in the near future. BIS has also indicated that it hopes to soon publish an Advanced Notice of Proposed Rulemaking on “foundational” technologies.

B. Expansion of Military End Use/User Rule

In response to U.S. Government concerns about significant overlap between the development of China’s military and commercial sectors, BIS announced a range of regulatory changes on April 28. The most significant of these changes was the expansion of U.S. controls on exports of items to military end users or for military end uses. Specifically, the new rule, which was implemented on June 29, strengthens the controls on exports to China, Russia, and Venezuela by:

• Expanding the definition of “military end uses” for which exports must be authorized;
• Adding a new license requirement for exports to Chinese “military end users”;
• Expanding the list of products to which these license requirements apply; and
• Broadening the reporting requirement for exports to China, Russia, and Venezuela.

1. Expanding Military End Uses Subject to Control

Exporters of certain goods, software, or technology that are subject to the Export Administration Regulations (“EAR”) previously required a license from BIS to provide those items to China, Russia, or Venezuela if the exporters knew or had reason to know that the items were intended, entirely or in part, for a “military end use” in those countries. This licensing requirement is separate from the EAR’s item-based licensing requirements that otherwise identify which items require export licenses when exported to specific countries and which are based on a range of national security and foreign relations policies. Under the separate, military end use and end user license requirement, “military end use” was defined to include the “use,” “development,” or “production” of certain military items. An export was considered to be for the “use” of a military item if the export is for the operation, installation, maintenance, repair, overhaul and refurbishing of the military item. The exported item had to perform all six functions in order to be considered a “use” item subject to the military end use restriction.

The new rule expands the definition of “military end use” in two important ways. Where the prior formulation only captures items exported for the purpose of using, developing, or producing military items, the revised rule also captures items that merely “support or contribute to” those functions. The revised rule also effectively broadens the definition of “use.” Rather than requiring that an item perform all six previously listed functions, an item that supports or contributes to any one of those functions will now be subject to the military end use license requirement. For example, a repair part for a military item that might not have required a license under the previous formulation (perhaps because it was not also required for the military item’s installation) would be subject to the updated license requirement.

2. Restricting Exports to Chinese Military End Users

Under the prior regulations, exports to military end users in Russia and Venezuela were subject to a specific license requirement. The new rule now also require licenses for exports of covered items to Chinese military end users.

Military end users covered by this license requirement not only include national armed services, police, and intelligence services, but also include “any person or entity whose actions or functions are intended to support ‘military end uses.’” Taken together with the newly broadened definition of “military end uses,” this restriction may apply to a significant number of private entities in China, even those that are engaged largely in civilian activities. For example, a manufacturing company that has an unrelated contract with a military entity could be considered a “military end user” subject to these strict licensing requirements. Given that applications for BIS licenses to export covered items for military end uses or end users face a presumption of denial, this restriction could have a significant impact on commerce with large swaths of the Chinese economy, where the U.S. Government has indicated its concerns about military-civilian collaboration in Chinese industry.

3. Expanding the List of Covered Items

The updated rule also expands the category of goods, software, or technology that require a license for military end use or end user exports. The previous military end use/end user license requirement applied to a relatively limited set of items specifically described in a supplement to the rule. The revised rule expands the scope of the item categories already listed and adds many new categories of covered items—including goods, technology, and software relating to materials processing, electronics, telecommunications, information security, sensors and lasers, and propulsion.

Many of the new items were previously subject to some of the EAR’s most permissive controls and did not generally require a license for export to China, Russia, or Venezuela. For example, mass market encryption software (ECCN 5D992)—a category which includes many types of software that incorporate or call on common encryption functionality—were not previously subject to the military end use restrictions but now are subject to the new controls.

4. Broadening the Reporting Requirement

BIS is also now requiring exporters to report more often and to provide more data on items provided to China, Russia, or Venezuela.

Under the previous rules, exporters were not required to provide Electronic Export Information (“EEI”) for shipments valued under $2,500. Exporters also were not required to provide the ECCN for shipments of items that were only controlled for export because of antiterrorism concerns—the most permissive and most frequently applied category of control on the EAR’s list of items controlled for export.

Under the new rules, there is no value threshold. EEI is generally required for all shipments to China, Russia, or Venezuela of items described on the Commerce Control List (CCL) regardless of value (i.e., all items except those classified EAR 99). Moreover, exporters are required to provide the ECCNs for all items exported to China, Russia, or Venezuela, regardless of the reason for control.

In announcing this change, U.S. Commerce Secretary Wilbur Ross noted that “[c]ertain entities in China, Russia, and Venezuela have sought to circumvent America’s export controls, and undermine American interests in general.” Secretary Ross vowed that the United States would “remain vigilant to ensure U.S. technology does not get into the wrong hands.” This amendment to the EEI reporting requirements—along with the other new licensing requirements—is designed to ensure that BIS and other U.S. Government trade enforcement agencies have increased visibility into shipments to jurisdictions of significant concern.

C. Removal of License Exception for Civilian End Use

On June 29, BIS also removed License Exception Civil End Users (“CIV”) from Part 740 of the EAR. This exception previously allowed eligible items controlled only for National Security (NS) reasons to be exported or reexported without a license for civil end users and civil end uses in countries included in Country Group D:1, excluding North Korea. NS controls are BIS’s second most frequently applied type of control, applying to a wide range of items listed in all categories of the CCL. Country Group D:1 identifies countries of national security concern for which the Commerce Department will review proposed exports for potential contribution to the destination country’s military capability. D:1 countries include China, Russia, Ukraine, and Venezuela, among others.

By removing License Exception CIV, the Commerce Department now requires a license for the export of items subject to the EAR and controlled for NS reasons to D:1 countries. As with the expansion of the military end use/end user license requirements described above, the Commerce Department has stated that the reason for the removal of License Exception CIV is the increasing integration of civilian and military technological development pursued by countries identified in Country Group D:1, making it difficult for exporters or the U.S. Government to be sufficiently assured that U.S.-origin items exported for apparent civil end uses will not actually also be used to enhance the military capacity contrary to U.S. national security interests.

D. Proposed Amendment of License Exception APR

BIS also proposed to amend the EAR’s License Exception Additional Permissive Reexports (“APR”), which currently allows the unlicensed reexport (the export of a U.S.-origin item from one non-U.S. country to another non-U.S. country) of an item subject to the EAR from trusted allies with similar export control regimes (i.e., listed in Country Group A:1, and Hong Kong) to countries presenting national security concerns (i.e., Country Group D:1, except North Korea). To be eligible for the exception, the reexport must also be consistent with the export licensing policy of the reexporting country and the item must be subject to only a subset of other controls (i.e., controlled only for antiterrorism, national security, or regional security reasons), among other limitations. The reexporting countries identified in Country Group A:1 include those countries that are participants with the United States in the Wassenaar Arrangement, a multilateral consortium that develops export controls on conventional weapons and dual-use items and underlies much of the U.S. export control regime. BIS’s proposed amendment would remove this portion of the license exception.

The Commerce Department explained that it has proposed this amendment because of concerns regarding variations in how the United States and its international partners, including those in Country Group A:1, perceive the threat caused by the policy of civil-military technological integration pursued by D:1 countries. Due to these alleged disparities, reexports under License Exception APR have occurred that reportedly would not have been licensed by BIS if the export had taken place directly from the United States.

This proposed rule change echoes recent changes affecting the scope of investment reviews by the U.S. Committee on Foreign Investment in the United States (“CFIUS”), by which the United States has similarly sought to incentivize foreign allies to harmonize their national security-related measures with those of the United States. In the new CFIUS rules implemented in February and previously described here, the Committee will require “excepted foreign states” to ensure their national security-based foreign investment review process meets requirements established by CFIUS in order to retain their excepted status.

E. Huawei Direct Product Rule

In addition to the broad new restrictions on Chinese trade described above, the United States has also focused specifically on restricting trade with Huawei Technologies Co. Ltd. (“Huawei”)—one of the world’s largest technology companies—on the basis of concerns about espionage and national security risks that U.S. officials allege its products may present. Among other U.S. Government initiatives to dissuade U.S. allies from partnering with Huawei and other Chinese telecommunications providers in the development and deployment of 5G networks, BIS has designated Huawei and over one hundred of its affiliates to the Entity List, which has significantly limited Huawei’s ability to source many products directly from the United States and the non-U.S. affiliates of many U.S. companies.

On May 15, BIS announced a new rule to further restrict Huawei’s access to U.S. technology. The rule amends the “Direct Product Rule” and the BIS Entity List to restrict Huawei’s ability to share its semiconductor designs or rely on foreign foundries to manufacture semiconductors using U.S. software and technology.

Although Huawei’s Entity List designation had already effectively cut off Huawei’s access to exports of most U.S.-origin products and technology, BIS has claimed that Huawei has responded to the designations by moving more of its supply chain outside the United States. Huawei and many of the foreign chip manufacturers that Huawei uses, however, still depend on U.S. equipment, software, and technology to design and produce Huawei chipsets.

BIS’s action expands one of the bases on which the U.S. can claim jurisdiction over items produced outside of the United States. Generally, under the EAR, the U.S. claims jurisdiction over items that (1) are U.S. origin; (2) foreign-made items that are being exported from the U.S., (3) foreign-made items that incorporate more than a minimal amount of controlled U.S.-origin content, and (4) foreign-made “direct products” of certain controlled U.S.-origin software and technology. Under the fourth basis of jurisdiction, also known as the Direct Product Rule, foreign-made items are subject to EAR controls if they are the direct product of certain U.S.-origin technology or software or are the direct product of a plant or major component of a plant located outside the U.S., where the plant or major component of a plant itself is a direct product of certain U.S.-origin software and technology. Items that are subject to EAR controls may require BIS licensing depending on the export classification of the item and its destination, the end use to which the item is being put, and the end user receiving it. Depending on the licensing policy BIS applies to particular exports, BIS can effect an embargo on the export of items subject to the EAR to particular countries, end uses, and end users.

BIS’s new rule allows for the application of a tailored version of the Direct Product Rule to parties identified on its Entity List, with a bespoke list of controlled software and technology commonly used by foreign manufacturers to design and manufacture telecommunications and other kinds of integrated circuits for Huawei. The rule imposes a control on foreign-produced items that are a direct product of an expanded subset of specific technology or software described by certain specified ECCNs and foreign-produced items that are the direct product of a plant or major component of a plant located outside the U.S. where the plant or major component is a direct product of the same expanded subset of U.S.-origin technology or software.

Specifically, the rule will make the following non-U.S.-origin items subject to the restrictions of U.S. export controls:

• Items, such as chip designs, that Huawei and its affiliates on the Entity List produce by using certain software or technology that is subject to the EAR; and
• Items, such as chipsets made by manufacturers from Huawei-provided design specifications, if those manufacturers are using semiconductor manufacturing equipment that itself is a direct product of certain software or technology subject to the EAR.

Combined with Huawei’s Entity List designation, this new rule will significantly restrict Huawei’s ability to export its semiconductor designs as well as to receive semiconductors from its foreign manufacturers. It will also curtail the ability of Huawei to receive semiconductors from the non-U.S. subsidiaries of U.S. companies that may have previously been eligible for export to Huawei without a license because they were produced from software and technology that would not have triggered export licensing through the normal operation of the Direct Product Rule. Taken together, these changes mean that BIS can now block the sale of many semiconductors manufactured by a number of non-U.S.-based manufacturers that Huawei uses across its telecom equipment and smartphone business lines.

F. Revoking Hong Kong’s Status under U.S. Export Controls

In response to China’s Hong Kong National Security Law—which the Trump administration considers an encroachment on Hong Kong’s special status—President Trump announced on May 29 that the U.S. would reevaluate its export controls imposed on Hong Kong to revoke any preferential treatment given the territory over mainland China. A month later, following statements by Secretaries Pompeo and Ross, BIS announced that it would be suspending license exceptions that treated Hong Kong differently than mainland China.  The agency has not yet made any other adjustments to the treatment of Hong Kong-bound exports or to license exceptions that apply equally to Hong Kong and mainland China—although an Executive Order announced on July 14 will likely require further leveling of treatment for exports to Hong Kong and mainland China

As a result of the license exception suspension enacted on June 30, license exceptions that previously permitted unlicensed exports, reexports, or transfers to or within Hong Kong, but not to mainland China, no longer authorizes exports to Hong Kong.  Such exports will now require specific authorization from BIS.  For example, exports to Hong Kong of software and technology related to telecommunications equipment that would have previously been authorized under License Exception – Technology and Software under Restriction (“TSR”) may now require a specific license. Deemed exports (i.e., the transfer of technology or source code to a foreign person in the U.S.) may continue under affected licenses until August 28.

Other license exceptions affected (but not necessarily unavailable) may include those pertaining to replacement of parts and equipment (“RPL”), aircraft, vessels, and spacecraft (“AVS”), gifts (“GFT”), and baggage (“BAG”).  Importantly the suspension of these license exceptions would not impact products that are not subject to the EAR (e.g., by virtue of their place of development or delivery only through the cloud), are specifically authorized by a BIS-issued license, or are authorized by a license exception that applies equally to both Hong Kong and mainland China.

G. Human Rights-Based Entity List Designations

As we highlighted in our 2019 Year End Review, the ERC, which is chaired by BIS, has been exceptionally active over the past several years. While the ERC, which is composed of representatives of Departments of Commerce, State, Defense, Energy and, where appropriate, the Treasury, has always had the power to designate companies and other organizations for acting counter to U.S. national security and foreign policy interests, these interests historically have been focused on regional stability, counterproliferation, and anti-terrorism concerns and violators of U.S. sanctions and export controls. Beginning in October last year, however, the ERC added human rights to this list of concerns, particularly as they relate to human rights violations occurring in the XUAR and other regions of China directed Uyghurs, Kazakhs, and other members of Muslim minority groups in China.

On October 9, 2019, the ERC placed the XUAR People’s Government Public Security Bureau, eighteen of its subordinates, and an additional eight businesses on its Entity List, thereby restricting their access to American exports. On June 5, 2020, BIS placed eight additional businesses and one governmental institute on the Entity List on the explicit basis of their human rights violations. Those added to the Entity List are largely surveillance or security companies, including certain artificial intelligence start-ups. Most recently, on July 22, BIS designated eleven additional entities. Nine appear to be in the apparel, accessories, and manufacturing sectors and were designated due to the ERC’s finding that were using forced labor. Two other entities were added for their involvement in conducting genetic analyses used to further the repression of Muslim minority groups in the XUAR.

As a result of these designations, almost all exports of items subject to the EAR require BIS’s prior review and authorization and most are subject to a policy presumption of denial.

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The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Stephanie Connor, Chris Timura, Jesse Melman, R.L. Pratt, Scott Toussaint, Samantha Sewall and Audi Syarief.

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])

Europe:
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, 333 South Grand Avenue, Los Angeles, CA 90071

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

The COVID-19 pandemic has posed challenges for international students, and the universities and colleges they attend, as they prepare for the Fall 2020 school semester. Post-secondary education institutions responded to these challenges by considering the best interests, as well as the health and safety, of their students in shaping revised programming and remote learning opportunities. This Client Alert provides an overview of an Immigration and Customs Enforcement (“ICE”) policy that instructed international students they could not remain in the country if their schools provided only online classes; litigation brought against that policy, which led to a rescission of the challenged policy; and subsequent developments, including a new policy that would permit international students who were enrolled as of March 9, 2020 to reenter the country and attend an online-only school while prohibiting international students who would be new to the school from doing the same.

I. Overview of the Administration’s Challenged Policy

Citizens of foreign countries who wish to enter the United States to attend school must obtain a nonimmigrant F student visa. “F-1” students are international students who are enrolled in a “full course of study” in elementary, secondary, or post-secondary academic institutions. Ordinarily, a student may count no more than the equivalent of one class or three credits per term toward the “full course of study” requirement if the class is taken online. 8 C.F.R. § 214.2(f)(6)(i)(G).

On March 9, 2020, as the COVID-19 pandemic spread throughout the United States, ICE issued a guidance document stating that ICE “recognize[d] that schools are updating their emergency operations plans to minimize the potential impact of COVID-19 on the school,” including by “provid[ing] online instruction,” and that ICE intended to “be flexible with temporary adaptations.” Immigration & Customs Enforcement, Broadcast Message: Coronavirus Disease 2019 (COVID-19) and Potential Procedural Adaptations for F and M Nonimmigrant Students (Mar. 9, 2020). Four days later, ICE issued another guidance document to address the status of students whose schools “stop[ped] in-person classes” but would “offer[ ] online instructions.” Immigration & Customs Enforcement, COVID-19: Guidance for SEVP Stakeholders (Mar. 13, 2020). “Given the extraordinary nature of the COVID-19 emergency,” ICE exempted F-1 students from the rule that they must attend most classes in person, instead permitting F-1 students to attend only online courses and still remain in the United States. Id. At that time, many universities and colleges had suspended in-person instruction for the Spring 2020 semester. Following ICE’s guidance, many schools made plans to offer online instruction, in whole or in part, for the Fall 2020 semester.

On July 6, 2020, ICE abruptly rescinded its March guidance. ICE directed that “[s]tudents attending schools operating entirely online may not take a full online course load and remain in the United States.” Students enrolled in such program were instructed to “depart the country” or else “potentially face immigration consequences.” ICE also instructed schools to submit operational change plans within weeks and to reissue visa-related forms for each of their F-1 international students within a month.

This abrupt rescission wreaked havoc on the universities and colleges who had been scrambling to provide a meaningful and appropriate Fall semester while facing the challenge of COVID-19. These schools were already having to adapt to new safety and security concerns, as well as juggle putting together a meaningful curriculum, evaluating housing options for students, and addressing a myriad of other challenges. The July 6th rescission failed to acknowledge or account for any of those obstacles.

II. Challenging the Policy in Court

Shortly after ICE announced its new policy, Gibson Dunn filed a lawsuit in the U.S. District Court for the District of Oregon challenging the policy as violating the Administrative Procedure Act on behalf of 20 universities and colleges from the western United States. Univ. of Or. v. Dep’t of Homeland Security, No. 6:20-cv-01127-MK (D. Or.). The schools argued that in promulgating the policy, ICE failed to consider the serious harms arising from its action, including forcing students to quickly relocate across the globe in the middle of a pandemic where they could face challenging conditions and lose educational opportunities. The schools sought a temporary restraining order and a preliminary injunction.

Several other plaintiff groups also brought cases across the United States challenging ICE’s new policy. See State of California v. Dep’t of Homeland Security, No. 4:20-cv-04592 (N.D. Cal.); Regents of Univ. of Cal. v. Dep’t of Homeland Security, No. 4:20-cv-04621 (N.D. Cal.); President & Fellows of Harvard Coll. v. Dep’t of Homeland Security, No. 1:20-cv-11283 (D. Mass.); State of Washington v. Dep’t of Homeland Security, No. 2:20-cv-01070 (W.D. Wash.); John Hopkins Univ. v. Dep’t of Homeland Security, No. 1:20-cv-01873 (D.D.C.); Z.W. v. Dep’t of Homeland Security, No. 8:20-cv-01220 (C.D. Cal.).

In a July 14, 2020 hearing held in Harvard and MIT’s case brought in Massachusetts, a DHS attorney announced that the agency would be rescinding the policy.

III. Subsequent Developments

On July 24, 2020, pursuant to its representation to the court in the aforementioned case, ICE issued new guidance. According to the revised guidance, active F and M students who were “in valid F-1 or M-1 nonimmigrant status on March 9, 2020, including those previously enrolled in entirely online classes who are outside of the United States and seeking to re-enter the country this fall,” will be permitted to count online classes toward a full course of study and may re-enter the United States, as they were under the March guidance. Immigration & Customs Enforcement, Broadcast Message: Follow-up: ICE Continues March Guidance for Fall School Term (July 24, 2020). In so doing, ICE restored the status quo and gave schools flexibility in determining how to structure the upcoming semester.

The July 24 announcement, however, also included an important new limitation—“F and M students in new or initial status after March 9, 2020, will not be able to enter the United States to enroll in a U.S. school as a nonimmigrant student for the fall term to pursue a full course of study that is 100 percent online.” Id. ICE had not previously announced a policy regarding international students coming to the United States for the first time, but under the new guidance, those students are unable to enter or reside in the United States if their courses will be conducted fully online.

At this time, it is uncertain whether any schools will challenge the new July 24 guidance. Gibson Dunn will continue to monitor and assess any developments.

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

Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])
Matthew D. McGill – Washington, D.C. (+1 202-887-3680, [email protected])
Katherine Marquart – New York (+1 212-351-5261, [email protected])
Joshua M. Wesneski – Washington, D.C. (+1 202-887-3598, [email protected])
Amalia Reiss – Washington, D.C. (+1 202-955-8281, [email protected])
Aaron M. Smith – Washington, D.C. (+1 202-955-8263, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071

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

After 40 years without an update, the White House Council on Environmental Quality (CEQ) has recently revamped its National Environmental Policy Act (NEPA) implementing regulations.

The revised NEPA regulations were published in the Federal Register on July 16, 2020. They include both substantive and procedural changes with the stated goal of streamlining and accelerating the environmental review process federal agencies are required to conduct under NEPA. The final rulemaking is the culmination of a Trump Administration directive to the CEQ to modernize the NEPA review process,[1] and follows a proposed rulemaking published in January of this year.

The most significant aspects of the CEQ’s final rule for project developers are that the CEQ: (1) clarified which undertakings should and should not be subject to NEPA environmental analysis; (2) created new time limits for environmental assessments (EAs) and environmental impact statements (EISs); (3) eliminated the requirement to consider whether a project is “highly controversial”; (4) revamped and streamlined the environmental “effects” analysis; and (5) revised the definition of a “reasonable alternative” to limit alternatives to those that are technically and economically feasible and consistent with the goals of the applicant.

The final rule has already been challenged and more challenges, both facial and as-applied, are expected. As such, project sponsors and private parties who are working with federal and state agencies who are relying on the new regulations must weigh the time saved under the new rule against the litigation risk that all or a portion of the regulations may not survive.

Below we discuss the most significant aspects of the new rulemaking and the threat of litigation on the horizon.

Clarifying the Scope of Projects Subject to NEPA

Several elements of the CEQ’s rulemaking function to reduce the number of projects subject to NEPA review. Most notably, the CEQ attacks the long-standing “small handle” problem head-on by carving “non-Federal projects with minimal Federal funding or minimal Federal involvement” out of the definition of “major actions” subject to NEPA.[2] This revision likely excludes a broad swath of state-led infrastructure projects from NEPA review, as well as privately funded transportation projects, but the CEQ left the task of defining “minimal Federal funding” or “minimal Federal involvement” to each of the reviewing agencies.[3]

The CEQ also encourages the identification, adoption, and use of categorical NEPA exclusions for agency activities deemed to consistently have an insignificant environmental impact, in part by providing reviewing agencies the flexibility to adopt another agency’s categorical exclusions.[4]

Time Limits for Environmental Reviews

Once it is determined that a project is subject to a NEPA review, the new regulations set presumptive time limits for the completion of a NEPA environmental review: one year (following the decision to prepare the review) for an environmental assessment (EA) and two years for an environmental impact statement (EIS).[5] This represents a significant time savings: According to the CEQ, the median time required for the preparation of an EIS is currently 3.5 years,[6] and so the new limits may provide relief to many developers.

However, these time limits are merely presumptive. Reviewing agencies may extend the deadlines should they deem it necessary, considering factors such as the number of the persons and agencies affected by the action under review;[7] more complex environmental reviews may therefore continue to run beyond the time limits. Still, some have expressed concern that, should agencies strictly adhere to the time goals and consequently rush through the drafting of an EA or EIS, such reviews may be more subject to legal challenge than they otherwise would be.

Eliminates Requirement to Consider Whether Project Effects Are “Highly Controversial”

The final rule removes the requirement that agencies consider “[t]he degree to which the effects on the quality of the human environment are likely to be highly controversial” when determining whether an environmental impact is “significant.”[8] The “highly controversial” prong has itself been highly controversial; as the CEQ explains, whether a project is “highly controversial” is “subjective and is not dispositive of effects’ significance.”[9]

Revamps the Environmental Effects Analysis

NEPA requires federal agencies to consider the “adverse environmental effects” of any “major federal action” which will significantly impact the human environment.[10] For decades, NEPA implementing regulations elaborated on this statutory mandate by directing reviewing agencies to categorize and analyze a proposed federal action’s adverse environmental effects as either “direct,” “indirect,” or “cumulative.”[11]

No longer. The new rulemaking simplifies the environmental effects analysis by instructing agencies to only assess environmental impacts which are “reasonably foreseeable” and have a “reasonably close causal relationship” to the action under review.[12] This revision will enable a reviewing agency to focus its time and resources on analyzing those environmental impacts which are most likely to be significant and eliminate highly unlikely or highly attenuated potential effects.[13]

Commenters critical of this change have attacked it as a means of excluding climate change concerns from the scope of NEPA review. To address such concerns, the CEQ explains that the new effects analysis framework does not explicitly bar reviewing agencies from considering a federal action’s climate change impacts,[14] and requires agencies conducting an EIS to consider “reasonably foreseeable” environmental trends when analyzing baseline conditions at the site of a proposed project.[15] The CEQ also pulled back from its proposal that effects should not be analyzed if remote in time, geographically remote, or the result of a lengthy causal chain, adding the word “generally” before those provisions.[16]

Despite this revision, this portion of the rule is expected to be challenged, as some courts have previously invalidated agency actions for failing to take a hard look at an action’s indirect impacts or cumulative impacts on climate change.[17]

Streamlines the Definition of “Reasonable Alternatives”

Under the prior rule, agencies were often required to consider alternatives to proposed actions that were not economically feasible, that the agencies had no ability to implement due to their jurisdiction, or that were unrelated to the goal of the applicant proposing the project.[18] The new definition of a “reasonable alternative” now bounds the analysis of alternatives by limiting the definition to alternatives that are technically and economically feasible and consistent with the goals of the applicant, where applicable.[19]

The NEPA Forecast: Cloudy, with a Certainty of Litigation

Litigation storm clouds are already brewing over the nascent NEPA overhaul.

The CEQ’s final rule is set to take effect on September 14, 2020.[20] Federal agencies may continue adhering to the preexisting NEPA review procedures with respect to any reviews commenced prior to September 14,[21] but will be required to implement the revised regulations for reviews commenced after the new rule’s effective date unless there is a clear and fundamental conflict with another applicable statute.[22] Agencies have a one-year grace period to actually revise their own implementing NEPA regulations to align with the CEQ’s update.[23]

The new regulations have already been challenged in court. On July 29, 2020, two lawsuits were filed in district courts challenging the rule under the Administrative Procedures Act—one in the Western District of Virginia, brought by the Southern Environmental Law Center on behalf of seventeen wildlife groups, and another in the Northern District of California, brought by the Western Environmental Law Center and Earthjustice on a behalf of a coalition of twenty environmental justice and outdoor recreation groups.[24] The two existing lawsuits emphasize the alleged environmental harms that will be caused by the changes to the CEQ’s NEPA regulations and protest the CEQ’s alleged dismissal of many of the rule commenters’ concerns. It is expected that these or other plaintiffs will seek preliminary injunctions to delay the effective date of the new CEQ rule, arguing that alleged defects in the rule stand to cause imminent and irreparable harm.

The existing facial suits face difficult standing and ripeness headwinds, in part because NEPA’s implementing regulations are directed at federal agencies and do not take effect until at least September 14. And the flexibility agencies have to apply the preexisting environmental review procedures to pending reviews will hamper any injunction requests lodged prior to the effective date. Moreover, NEPA’s broad, open-ended statutory language, as well as the deference afforded to agencies when issuing rules interpreting an ambiguous statute, will narrow challengers’ potential avenues of success on the merits.[25] Unchallenged provisions will likely be allowed to be implemented even while legal challenges to other provisions proceed, as the CEQ has specifically provided for its various revisions to be severable from one another.[26]

However, a storm-front of as-applied challenges is also on the horizon. Once the new rule becomes effective, and as agencies begin conducting their NEPA reviews in compliance with them, as-applied challenges to various revisions will proliferate.[27] Individual agencies’ various decisions regarding what actions entail “minimal federal involvement” or what indirect effects require analysis, for example, are likely to spawn litigation across the nation. Challenges to CEQ rules are not automatically brought to the Circuit of the U.S. Court of Appeals for the District of Columbia, meaning both facial and as-applied lawsuits will likely be filed in district courts across the country, potentially creating a patchwork of conflicting judicial guidance.

Of course, any legal wrangling will be for naught if Democrats sweep November’s election and invoke the Congressional Review Act (CRA) to rescind the CEQ’s rule. The CRA allows Congress, with Presidential approval, to rescind a rulemaking by simple majority within 60 legislative days of the rule’s finalization, and the Biden campaign has already indicated a desire to wield this weapon against vulnerable Trump Administration environmental rules.[28]

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   [1]   See Executive Order No. 13,807 (Aug. 15, 2017).

   [2]   40 C.F.R. § 1508.1(q)(vi).

   [3]   85 Fed. Reg. at 43347.

   [4]   40 C.F.R. § 1507.3(d)(2).

   [5]   85 Fed. Reg. 43304, 43326 (July 16, 2020); 40 C.F.R. § 1501.10.

   [6]   85 Fed. Reg. at 43305.

   [7]   40 C.F.R. § 1501.10.

   [8]   85 Fed. Reg. at 43322.

   [9]   Id.

[10]   42 U.S.C. § 4332.

[11]   85 Fed. Reg. at 43343.

[12]   Id.; 40 C.F.R. § 1508.1(g). Furthermore, the CEQ states that a “but for” causal relationship is insufficient to make an agency responsible for reviewing a particular effect under NEPA. 40 C.F.R. § 1508.1(g)(2).

[13]   85 Fed. Reg. at 43343, 43344.

[14]   85 Fed. Reg. at 43344.

[15]   40 C.F.R. § 1502.15.

[16]   85 Fed. Reg. at 43343, 43344.

[17]   See, e.g., WildEarth Guardians v. Zinke, 368 F. Supp. 3d 41 (D.D.C. 2019) (holding that the U.S. Bureau of Land Management was required to quantify downstream greenhouse gas emissions and reasonably foreseeable cumulative climate impacts of oil and gas development when authorizing leases on federal land); see also Juan Carlos Rodriquez, WH Tweak To Enviro Review Rule May Bring New Headaches, Law360 (July 26, 2020), https://www.law360.com/transportation/articles/1292130/wh-tweak-to-enviro-review-rule-may-bring-new-headaches.

[18]   See, e.g., Citizens Against Burlington, Inc. v. Busey, 938 F.2d 190, 194 (D.C. Cir. 1991) (“[T]he rule of reason does not give agencies license to fulfill their own prophecies, whatever the parochial impulses that drive them. . . . [A]n agency may not define the objectives of its actions in terms so unreasonably narrow that only one alternative from among the environmentally benign ones in the agency’s power would accomplish the goals of the agency’s action.”).

[19]   85 Fed. Reg. at 43343, 43376.

[20]   40 C.F.R. § 1506.13.

[21]   Id.

[22]   40 C.F.R. § 1507.3.

[23]   Id.

[24]   Niina H. Farah, Enviros to court: Trump “cut every corner” on NEPA overhaul, E&E News (July 29, 2020), here.

[25]   See National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967 (2005) (giving deference an agency when issuing a rule that overturns a previous judicial precedent interpreting an ambiguous statute that the agency is tasked with executing).

[26]   40 C.F.R. § 1500.3.

[27]   Dawn Reeves, Critics Blast CEQ Rule Overhaul As Cutting ‘Heart’ Out Of NEPA’s Purpose, Inside EPA (July 16, 2020), https://insideepa.com/daily-news/critics-blast-ceq-rule-overhaul-cutting-‘heart’-out-nepa’s-purpose.

[28]   Coral Davenport, Democrats Eye Trump’s Game Plan to Reverse Late Rule Changes, N. Y. Times (July 17, 2020), https://www.nytimes.com/2020/07/17/climate/trump-regulations-election.html.

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