First of four industry-specific programs
The False Claims Act (FCA) is one of the most powerful tools in the government’s arsenal to combat fraud, waste, and abuse involving government funds. After several years of statements and guidance indicating that the Department of Justice (DOJ) might alter its approach to FCA enforcement, the Biden Administration appears to be taking a different, more aggressive approach. Meanwhile, newly filed FCA cases remain at historical peak levels, and the government has recovered nearly $3 billion or more annually under the FCA for a decade. The government also continues to pursue new, large spending projects in COVID-related stimulus and infrastructure—which may bring yet more vigorous efforts by DOJ to pursue fraud, waste, and abuse in government spending. As much as ever, any company that receives government funds—especially in the financial services sector—needs to understand how the government and private whistleblowers alike are wielding the FCA, and how they can defend themselves.
Please join us to discuss developments in the FCA, including:
- The latest trends in FCA enforcement actions and associated litigation affecting financial services;
- Updates on the Biden Administration’s approach to FCA enforcement, including developments impacting DOJ’s use of its statutory dismissal authority;
- New proposed amendments to the FCA introduced by Senator Grassley; and
- The latest trends in FCA jurisprudence, including developments in particular FCA legal theories affecting your industry and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.
View Slides (PDF)
PANELISTS:
F. Joseph Warin is a partner in the Washington, D.C. office, chair of the office’s Litigation Department, and co-chair of the firm’s White Collar Defense and Investigations practice group. His practice focuses on complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation.
James Zelenay is a partner in the Los Angeles office where he practices in the firm’s Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act.
Casey Kyung-Se Lee is a senior associate in the New York office and a member of the firm’s White Collar Defense and Investigations, and Litigation Practice Groups. Mr. Lee’s practice focuses on representing clients in litigation and investigations involving the federal government. Mr. Lee rejoined Gibson Dunn in 2020 after serving as an Assistant United States Attorney in the Civil Division of the U.S. Attorney’s Office for the Southern District of New York, where he investigated allegations of fraud against the United States under the False Claims Act, Anti-Kickback Statute, and other statutes.
MCLE CREDIT INFORMATION:
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RELATED WEBCASTS IN THIS SERIES:
- The False Claims Act – 2021 Update for Government Contractors (October 14, 2021)
- The False Claims Act – 2021 Update for Drug & Device Manufacturers (October 20, 2021)
- The False Claims Act – 2021 Update for Health Care Providers (October 26, 2021)
In Horror Inc. v. Miller, the Second Circuit affirmed that Victor Miller had successfully reclaimed his rights in the screenplay for Friday the 13th by invoking the Copyright Act’s termination provisions, notwithstanding his assignment of those rights to a film production company in 1980. The Court reached that conclusion after finding that Miller’s assignment was made as an independent contractor, rather than as an employee.[1]
In certain situations, an author of a copyrighted work that has been transferred to another can terminate the transfer and reclaim the copyright. A transfer of a copyrighted work created as a work-for-hire, however, cannot be terminated. For purposes of determining if a work is a work-for-hire under the Copyright Act, Horror Inc. held that copyright law—not labor law—determines whether the creator and a hiring party are in an employer-employee relationship. The court further held that, because Miller wrote the screenplay as an independent contractor under copyright law, the screenplay was not a work-for-hire and Miller was entitled to terminate his decades-earlier transfer of the screenplay’s copyright.
Statutory Background
The Copyright Act of 1976[2] provides that copyright ownership “vests initially in the author or authors of the work.”[3] Under well-established case law, the person who “actually creates the work, that is, the person who translates an idea into a fixed, tangible expression entitled to copyright protection,” is generally considered to be the work’s “author.”[4] But the Copyright Act creates an exception for “a work made for hire,” which is defined as one “prepared by an employee within the scope of his or employment,” or, in certain instances, “a work specially ordered or commissioned for use as contribution to a collective work.”[5] In the case of a work-for-hire, “the employer or other person for whom the work was prepared is considered the author.”[6]
Authors can transfer ownership of any or all of the exclusive rights comprised in a copyright,[7] but Section 203 of the Copyright Act permits an author (or his or her successors) in certain circumstances to terminate prior transfers of copyrights during a specified window of time.[8] Congress added this termination right to the Copyright Act to address “the unequal bargaining position of authors” in negotiations over conveyance of their ownership rights “resulting . . . from the impossibility of determining the work’s value until the value has been exploited.”[9] A creator of a work-for-hire cannot take advantage of this provision, however, because the termination right expressly does not apply to works-for-hire.[10]
Factual Background
Victor Miller, a professional screenplay writer, has long been a member of the Writers Guild of America (“WGA”), a labor union representing writers in the film and television industries. In 1979, Miller agreed to write the screenplay for a horror film, which would eventually be titled Friday the 13th and introduce the iconic character of Jason Voorhees.[11] Friday the 13th opened on May 9, 1980 and enjoyed “unprecedented box office success for a horror film,” leading to eleven sequels to-date and a host of other derivative products.[12] But before that took place, in exchange for only $9,000, Miller assigned his rights in the screenplay to a film production and distribution company.
In 2016, Miller sought to reclaim copyright ownership of the screenplay by serving notices of termination pursuant to Section 203(a) of the Copyright Act. The companies to whom the copyrights had been transferred then sued Miller in the United States District Court for the District of Connecticut, seeking a declaration that Miller wrote the screenplay as an employee and that the screenplay therefore was a work-for-hire, which would prevent Miller from terminating the companies’ rights. On cross-motions for summary judgment asserting largely undisputed facts, the District Court concluded that Miller did not create the screenplay as a work-for-hire. Because he was the “author” of the screenplay, his termination notices were valid and served to restore his ownership of the copyright for the Friday the 13th screenplay. After the companies appealed, the Second Circuit affirmed the District Court’s ruling in Miller’s favor.
The Second Circuit’s Decision
Because the Copyright Act’s termination provision is not applicable to works-for-hire, the courts had to resolve whether Miller was an employee or independent contractor of the film production company to which he assigned his rights at the time that he wrote the screenplay for Friday the 13th. This required the Second Circuit to decide as a matter of first impression what body of federal law governed Miller’s employment status under the Copyright Act.
The production companies first argued that “Miller’s WGA membership ‘inherently’ created an employer-employee relationship” pursuant to the National Labor Relations Act (the “NLRA”), under which screenwriters are permitted to unionize because they are classified as production companies’ employees.[13] The Second Circuit rejected that argument because “the definition of ‘employee’ under copyright law is grounded in the common law of agency” and “serves different purposes than do the labor law concepts regarding employment relationships,” such that there was “no sound basis for using labor law to override copyright law goals.”[14]
In reaching this conclusion, the Court provided a thorough overview of the Supreme Court’s decision in Community for Creative Non-Violence v. Reid, which set forth a thirteen-factor test for determining in the copyright context whether the creator of a work did so as an employee or as an independent contractor.[15] As explained in Reid, the Copyright Act provides a “restrictive definition of employment, one aimed at limiting the contours of the work-for-hire determination and protecting authors.”[16] In the labor and employment law context, on the other hand, “the concept of employment is broader, adopting a more sweeping approach suitable to serve workers and their collective bargaining interests and establishing rights” related to their compensation and safety, among other issues.[17] Stated otherwise, “[t]hat labor law was determined to offer labor protections to independent writers does not have to reduce the protections provided to authors under the Copyright Act.”[18] The Court of Appeals thus found that in analyzing whether the Friday the 13th screenplay was a work-for-hire, “[t]he District Court correctly set aside NLRA-based doctrine in favor of common law principles and the Reid factors” “regardless of Miller’s employment status under the NLRA and his membership in the WGA.”[19]
Having failed to persuade the Second Circuit to follow principles of labor law to find that Miller was an employee when he wrote the script, the production companies next argued that Miller’s WGA membership should have been considered as an additional factor in applying the Reid multi-factor work-for-hire test. The Second Circuit deemed this argument “simply another attempt to shift Reid’s analytic focus from agency law to labor law and convince us the labor law framework governs here.”[20] Because Reid “instructs [courts] to look at the overall context of the parties’ relationship based on . . . specific factors,” Miller’s WGA membership did “not alter or control [the Second Circuit’s] analysis of the Reid factors for copyright purposes.”[21] Rather, it was “relevant only insofar as it informs [the] analysis of other factors, namely whether Miller received benefits commonly associated with an employment relationship.”[22]
Applying the Reid factors, the Second Circuit proceeded to analyze whether Miller created the screenplay as an employee or as an independent contractor. In doing so, it found that only three of Reid’s thirteen factors—that the hiring party exercised some control over Miller’s writing, that the hiring party was a business entity, and that soliciting the screenplay was part of its regular business—supported the production companies’ arguments for classifying the screenplay as a work-for-hire under the Copyright Act. On balance, however, the Second Circuit found that the factors “weigh[ed] decisively in Miller’s favor,” leading the Court of Appeals to affirm the District Court’s finding that Miller had created the screenplay as an independent contractor.[23] Accordingly, under the Copyright Act, Miller had the right to terminate his decades-earlier transfer of the copyright to the screenplay for Friday the 13th.
Conclusion
For purposes of applying the Copyright Act’s termination provisions, Horror Inc. held that whether a work was “made for hire”—which in this case turned on the creator’s status as an employee or independent contractor—is strictly governed by copyright law principles, rather than labor and employment law. Accordingly, it further held that to the extent the creator of a work is a union member, that fact has no independent weight in determining whether the creator was in an employment relationship with the entity for whom the work was created. These determinations may have significant implications for a broad array of copyrighted works, the ownership of which may be similarly subject to the Copyright Act’s termination provisions.
___________________________
[1] Horror Inc. v. Miller, No. 18-3123-cv, 2021 WL 4468980 (2d Cir. Sept. 30, 2021).
[4] Community for Creative Non-Violence v. Reid, 490 U.S. 730, 737 (1989).
[9] H.R. Rep. No. 94-1476, 24th Cong. 2d Sess. at 124 (1976)
[10] 17 U.S.C. § 203(a) (termination right applies “[i]n the case of any work other than a work made for hire”).
[11] Horror Inc., 2021 WL 4468980, at *1-2.
[16] Horror Inc., 2021 WL 4468980, at *8.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Brian Ascher, Ilissa Samplin, Michael Nadler, and Doran Satanove.
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:
Media, Entertainment and Technology Group:
Scott A. Edelman – Co-Chair, Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com)
Kevin Masuda – Co-Chair, Los Angeles (+1 213-229-7872, kmasuda@gibsondunn.com)
Benyamin S. Ross – Co-Chair, Los Angeles (+1 213-229-7048, bross@gibsondunn.com)
Orin Snyder – New York (+1 212-351-2400, osnyder@gibsondunn.com)
Brian C. Ascher – New York (+1 212-351-3989, bascher@gibsondunn.com)
Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com)
Michael H. Dore – Los Angeles (+1 213-229-7652, mdore@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Ilissa Samplin – Los Angeles (+1 213-229-7354, isamplin@gibsondunn.com)
Nathaniel L. Bach – Los Angeles (+1 213-229-7241,nbach@gibsondunn.com)
Please also feel free to contact the following practice leaders:
Intellectual Property Group:
Kate Dominguez – New York (+1 212-351-2338, kdominguez@gibsondunn.com)
Y. Ernest Hsin – San Francisco (+1 415-393-8224, ehsin@gibsondunn.com)
Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com)
Jane M. Love, Ph.D. – New York (+1 212-351-3922, jlove@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Munich partner Michael Walther and associate Richard Roeder are the co-authors of the “Germany” [PDF] chapter of International Comparative Legal Guides’ Sanctions 2022, 3rd Edition published in October 2021.
On September 22, 2021, the Public Company Accounting Oversight Board (the “PCAOB”) adopted a final rule (the “Final Rule”) implementing the Holding Foreign Companies Accountable Act (the “HFCAA”), which became law in December 2020 and prohibits foreign companies from listing their securities on U.S. exchanges if the company has been unavailable for PCAOB inspection or investigation for three consecutive years. The Final Rule (available here) requires U.S. Securities and Exchange Commission (the “SEC”) approval before it goes into effect.
In May 2021, the SEC adopted interim final amendments (the “Amendments”, available here) to certain forms, including Forms 20-F and 10-K, to implement the disclosure and submission requirements of the HFCAA. In June 2021, the Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years, instead of three years.
Three aspects of the HFCAA and the PCAOB’s Final Rule should be kept in mind.
The following Gibson Dunn attorneys assisted in preparing this update: Michael Scanlon, David Lee, David Ware, and Maggie Zhang.
To continue assisting US companies with planning for SEC reporting and capital markets transactions into 2022, we offer our annual SEC Desktop Calendar. This calendar provides both the filing deadlines for key SEC reports and the dates on which financial statements in prospectuses and proxy statements must be updated before use (a/k/a financial staleness deadlines).
You can download a PDF of Gibson Dunn’s SEC Desktop Calendar for 2022 at the link below.
https://www.gibsondunn.com/wp-content/uploads/2021/09/SEC-Filing-Deadline-Calendar-2022.pdf
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On September 23, 2021, President Joseph Biden announced his intention to nominate Professor Saule Omarova of Cornell Law School to be the next Comptroller of the Currency. The Comptroller heads the Office of the Comptroller of the Currency (OCC), the Treasury bureau that supervises national banks and federal thrifts; the Comptroller is also an ex officio member of the Board of Directors of the Federal Deposit Insurance Corporation (FDIC).
If confirmed by the Senate, Professor Omarova will have significant influence over regulatory policy, not only for banking institutions, but also for fintech companies that seek to enter the banking system via either a national bank or FDIC-insured industrial bank charter or that have bank partners.
Professor Omarova worked in the Bush Treasury Department and has published numerous articles on financial regulation. This Alert touches on the key themes of her academic writings and addresses how these themes could translate into regulatory priorities at the OCC and FDIC, and in view of the fact that President Biden will likely soon nominate a new Vice Chair for Supervision at the Board of Governors of the Federal Reserve System (Federal Reserve).
A. Key Themes
Professor Omarova has written on numerous topics in her academic career. Early on, she analyzed 1990s OCC interpretations that expanded national bank derivatives activities to include derivatives on commodities and equities; the Federal Reserve’s granting of Section 23A exemptions immediately before and during the 2008 Financial Crisis; and the historical exemptions from the definition of a “bank” under the Bank Holding Company Act.[1] More recently, she has written on bank governance, innovation in the financial industry, “culture” at financial institutions, restructuring the Federal Reserve to take customer demand deposits, and the “Too Big to Fail” problem, among other topics.[2]
Several key themes emerge from these writings:
- Concerns that post-Financial Crisis reforms have only magnified the size and interconnectedness of the largest banking organizations
- Concerns that banking and related financial activities frequently serve only private interests
- Concerns that activities outside of narrow banking – derivatives, commodities, trading, and even certain capital markets activities – are inherently risky
- Concerns that a focus on “innovation” may result in a weakening of supervisory standards
Perhaps most interesting, however, is Professor Omarova’s recurring theme that traditional bank supervision is too narrowly focused on what she calls “micro” issues and solutions, and that a new regulatory paradigm centered on overall “macro” economic and public interest goals, and including substantially increased government intervention in the financial sector, may be needed.
1. Concern with Size and Interconnectedness
Professor Omarova, like other observers, has noted one of the ironies of post-Financial Crisis regulation – that although the size and interconnectedness of the global banking sector contributed significantly to the Crisis, the financial system was saved only by increasing the size of the nation’s largest banks:
The post-crisis increase in the level of concentration of the U.S. financial industry is difficult to deny. For example, as of the year-end 2017, top five U.S. bank holding companies (BHCs) held forty-eight percent of the country’s BHC assets. By early 2018, there were four U.S. BHCs with more than $1.9 trillion in assets on their individual balance sheets. Despite the post-crisis passage of the Dodd-Frank Act, the most wide-ranging regulatory reform in the U.S. financial sector since the 1930s, [too big to fail] remains a “live” issue on the public policy agenda.[3]
This in turn, she believes, imposes considerable challenges for supervisors: “today’s financial system is growing increasingly complex and difficult to manage. This overarching trend manifests itself not only in the dazzling organizational complexity of large financial conglomerates, but also in the exponential growth of complex financial instruments – derivatives, asset-backed securities, and other structured products – and correspondingly complex markets in which they trade.”[4] The result is that it is “extremely difficult to measure and analyze not only the overall pattern of risk distribution in the financial system but also the true level of individual financial firms’ risk exposure.”[5]
2. Private Versus Public Interest
It is fair to say that Professor Omarova is not a strong believer in the “Invisible Hand.” Her articles frequently posit a dichotomy between the driving forces of finance and the “public interest.” Her article on bank culture, for example, makes this assertion:
[New York Federal Reserve Bank President] Gerald Corrigan argued that, in exchange for the publicly-conferred benefits uniquely available to them, banks have an obligation to align their implicit codes – and their actual conduct – with the public good. In practice, however, there has been little evidence of such an alignment . . . . One of the most troubling revelations [about bank conduct before the Financial Crisis] was that, in the vast majority of these cases, banks’ and their employees’ socially harmful and ethically questionable business conduct was perfectly permissible under the existing legal rules. In each of those instances, bankers voluntarily, and often knowingly, chose to pursue a particular privately lucrative but socially suboptimal business strategy. And, as long as mortgage markets kept going up and speculative trading in mortgage assets remained profitable, bankers showed no interest in fulfilling their public duties or prioritizing moral values over pecuniary self-interest.[6]
In an article on bank governance, she returns to this theme, stating that “[a]ll too often, however, the incentives of bank managers and shareholders to pursue short-term private gains are perfectly aligned but work directly against the public interest in preserving long-term financial stability. The recent financial crisis . . . made abundantly clear that the modern system of corporate governance . . . is not a sufficiently reliable or consistent mechanism for managing this insidious and apparently pervasive conflict in a publicly beneficial way.”[7]
Although it is clear how Professor Omarova views what then-Chief Judge Cardozo called “the forms of conduct permissible in a workaday world for those acting at arm’s length,”[8] it is less clear how she defines the “public interest.” Her writings do, however, suggest that it includes a focus on maintaining financial stability and appropriately allocating capital and credit to productive use, which she argues is not likely to occur absent government intervention:
[T]o date, there has been no meaningful debate on improving the system-wide allocation of financial resources to productive enterprise. In most, if not all, post-crisis discussions on financial regulation, the underlying presumption remains that private market actors are inherently better at assessing financial risks and spotting potentially beneficial investment opportunities ‘on the ground.’ Accordingly, the existing dysfunctions in the process of system-wide credit allocation are framed predominantly in terms of specific private incentive misalignments or more general political-economy frictions.[9]
3. Preference for Narrow Banking
From her earliest writings, Professor Omarova has expressed a distrust of activities that are not at the core of traditional commercial banking. In an early article, she took issue with the OCC’s increasingly flexible approach to interpreting the phrase “business of banking” in the National Bank Act to include derivative activities related to commodities and equities, including hedging such activities through physically settled transactions, and related activities such as national bank participation in power marketing and clearing organizations.[10] She similarly criticized Federal Reserve interpretations of the Gramm-Leach-Bliley Act under which commodity activities were deemed “complementary” to financial activities, and investments in commodity-related assets could be permissible merchant banking investments.[11] (It is worthwhile remembering that under Governor Daniel Tarullo, the Federal Reserve commenced an advanced notice of proposed rulemaking to consider established commodity activities by financial holding companies.[12]) And Professor Omarova strongly supported the statutory Volcker Rule but feared that the law’s mandated administrative rulemakings had great potential to weaken it.[13]
These concerns about risks from non-traditional activities extend to capital markets activities generally, including those that were broadly permissible for bank holding companies even before the Gramm-Leach-Bliley Act was enacted. (By 1997, the Federal Reserve had interpreted the Glass-Steagall Act in a manner that posed few limits on corporate debt and equity underwriting and dealing, in addition to underwriting and dealing in bank-permissible assets.[14]) Professor Omarova states that “[i]n today’s world, secondary markets in financial assets are far bigger, more complex, and more systemically important than primary markets. . . . It is not surprising, therefore, that today’s secondary markets in financial instruments are the principal sites of both relentless transactional ‘innovation’ and chronic over-generation of systemic risk.”[15] In criticizing the Federal Reserve’s Section 23A exemptions granted during the Financial Crisis, she argued that “it is hard to deny that these extraordinary liquidity backup programs also functioned to prop up the banks’ broker-dealer affiliates, which . . . were in the business of creating, trading, and dealing in securities that needed . . . financing and, as a result, had direct exposure to . . . highly unstable markets.”[16]
4. Innovation as a Source of Risk
In contrast to former Acting Comptroller Brian Brooks, who encouraged financial innovation, most notably with respect to national charters for virtual currency companies, Professor Omarova has had a skeptical eye on the question. One of her early articles, as noted above, criticized the OCC for its interpretive approach with respect to equity and commodity derivatives:
[T]he OCC’s highly expansive interpretation of the “business of banking” . . . served to undermine the integrity and efficacy of the U.S. system of bank regulation. Through the seemingly routine and often nontransparent administrative actions, the OCC effectively enabled large U.S. commercial banks to transform themselves from the traditionally conservative deposit-taking and lending institutions, whose safety and soundness were guarded through statutory and regulatory restrictions on potentially risky activities, into a new breed of financial “super-intermediaries,” or wholesale dealers in pure financial risk.[17]
This view carries over in later discussions of pre-Financial Crisis loan securitizations and credit default swaps, as well as fintech generally. Of the latter, Professor Omarova has written:
By making transacting in financial markets infinitely faster, cheaper, and easier to accomplish, fintech critically augments the ability of private actors to synthesize tradable financial claims – or private liabilities – and thus generate new financial risks on an unprecedented scale. Moreover, as the discussion of Bitcoin and ICOs shows, new crypto-technology enables private firms to synthesize tradable financial assets effectively out of thin air. . . . The sheer scale and complexity of the financial market effectively “liberated” from exogenously imposed constraints on its growth will make it inherently more volatile and unstable . . . . The same factors, however, will also make it increasingly difficult, if not impossible, for the public to control, or even track, new technology-driven proliferation of risk in the financial system.[18]
5. The Futility of Bank Supervision
Perhaps most interestingly for someone who would be the lead supervisor of most of the nation’s largest banks, Professor Omarova’s writings show a decidedly pessimistic view of the effectiveness of financial regulation. She frequently points out the failures of what she terms “micro” entity-specific solutions to such risks, in order to argue in favor of a revised “macro,” i.e., far more fundamental and structural, approach. One example comes from her article on Too Big To Fail: “At the heart of the TBTF problem, there is a fundamental paradox: TBTF is an entity-centric, micro-level metaphor for a cluster of interrelated systemic, macro-level problems. This inherent conceptual tension between the micro and the macro, the entity and the system, frames much of the public policy debate on TBTF.”[19]
Professor Omarova’s “macro” approach includes suggestions of potential governmental interventions in the financial system on a scale unprecedented even in times of crisis – government “golden shares” in large financial companies that would allow the government to override management decisions to forestall a crisis,[20] Federal Reserve counter-cyclical intervention in a broader range of financial markets,[21] “public interest” guardians who would supplement regulatory bodies to correct the self-interest of the financial sector,[22] and a significant National Investment Authority to counteract the biases of the private investment community.[23] As Professor Omarova acknowledges, such measures would require new legislation, for which there does not currently appear to substantial appetite.
B. Consequences For Regulatory Priorities
What then do these themes likely foretell should Professor Omarova receive Senate confirmation? It is of course always a challenge to predict the future, and academic writing is frequently at its best when it seeks to challenge traditional paradigms and manners of thought. This said, it does seem that the following outcomes are certainly within the realm of possibility.
1. Size and Interconnectedness
The OCC currently supervises eight of the country’s ten largest banks: JPMorgan Chase, Bank of America, Wells Fargo, Citibank, US Bank, PNC Bank, TD Bank, and Capital One, ranging from just under $400 billion in assets to over $3 trillion in assets. Some, but not all, of them also engage broadly in investment banking activities. The OCC also regulates many banks in the next asset tier below.
The OCC does not have any general authority to break up well-managed banks or to order them to cease activities, but it is not unusual for the OCC to adjust its supervisory approach based on the risk profile of an institution. What Professor Omarova might add to this traditional approach given her views of increasing systemic risk and the importance of the “macro” is a more holistic approach, in which not only will a particular institution’s own risk profile determine its supervision, but also the perceived risks created by those institutions to which it is most connected. In addition, large banks that fail to meet supervisory expectations can face activities limitations; an early article by Professor Omarova analyzed the idea of requiring regulatory approval of complex financial products.[24]
Moreover, although mergers of bank holding companies must be approved only by the Federal Reserve, in many cases once the holding company merger has been approved, the parties seek to merge the subsidiary banks for efficiency reasons. If the resulting bank will be a national bank, the OCC must approve the transaction under the Bank Merger Act. The statutory factors that the OCC must consider are similar to those the Federal Reserve considers, but the OCC makes an independent decision. Many of the required factors relate to size – competitive effect, ability of management (including on integrating institutions), and financial stability.[25]
2. Private Interest Versus Public Interest
In terms of constraining what Professor Omarova views as the self-interest of the financial sector, it is noteworthy that the responsible agencies, including the OCC, have never completely finalized the executive compensation rulemaking required by Dodd-Frank, something to which SEC Chair Gary Gensler has recently called attention.[26] One of the more controversial aspects of the original rulemaking was the extent of permissible clawbacks of compensation, if actions by individual bankers ended up imposing losses on the financial institution involved. On this question, Professor Omarova’s characterization of the “morals of the marketplace” could be significant.
Another means by which the bank regulators have sought to address privatizing gains and socializing losses since the Crisis is bank governance. The OCC’s principal contribution in this regard is its Guidelines Establishing Heightened Standards for large national banks and federal thrifts, which impose a prescriptive approach to certain aspects of bank corporate governance.[27] These Guidelines were adopted as safety and soundness standards pursuant to Section 39 of the Federal Deposit Insurance Act, which gives the OCC the authority to issue orders for noncompliance, orders that may be enforced by the issuance of civil money penalties or in federal district court actions. The OCC could further strengthen these standards or take a more aggressive approach to enforcing them.
3. Narrow Banking
Historically, as Professor Omarova herself has noted, the OCC has been one of the most flexible agencies in its interpretations of its governing statute, the National Bank Act. Although certain of the activities that she has criticized for increasing systemic risk are conducted by bank affiliates, not all of them are: national banks conduct significant derivative activities, certain capital markets activities are bank permissible, and numerous bank activities implicate the broad definition of proprietary trading contained in the Volcker Rule. Even in the absence of revisiting, for example, the National Bank Act interpretations relating to permissible derivatives activities, the OCC has the authority to examine all national bank activities. Those banking institutions with substantial businesses in areas that Professor Omarova has characterized as non-core and risk-creating should therefore expect a much stricter supervisory approach. The Volcker Rule regulations, which as revised still invite significant supervisory discretion in practice due to the difficulty of distinguishing between prohibited trading and permissible activities like risk-mitigating hedging, could well see ramped up examination interest, and expectations of compliance programs could increase.
4. Innovation and Fintechs
There are currently several pressing fintech-related issues at the OCC. First is the question of whether the OCC will grant a national bank charter to a company that proposes to make loans but not take FDIC-insured deposits, and that is not a statutorily authorized national trust bank. The OCC has claimed the authority under the National Bank Act to issue such a charter, but it has not acted on one such application, and it has been sued in federal court by state banking supervisors who believe that granting such a charter goes beyond the business of banking in the National Bank Act. Professor Omarova’s statements on the potential perils of innovation for supervisors and her general “public interest” concerns may well be relevant on this question.
Second, shortly before and just after President Biden was inaugurated, the OCC granted three trust company charters to digital currency companies, and issued a broad interpretation of permissible digital currency activities under the National Bank Act. The OCC is currently re-examining the bases for such charters, with Acting Comptroller Hsu expressing safety and soundness concerns over certain virtual currency activities. For Professor Omarova, virtual currencies and other digital assets are one of the areas where innovation is most likely to cause systemic risk.[28]
Third, Professor Omarova will be a voting member of the FDIC Board, which determines whether a state industrial bank may receive deposit insurance, and which also must approve any change of control transaction involving an FDIC-insured industrial bank. Under Chair Jelena McWilliams – but with a Republican-appointed Comptroller and Republican-appointed Director of the Consumer Financial Protection Bureau – the FDIC Board approved two such applications, one for Square and one for Nelnet. In one of her earliest articles, Professor Omarova analyzed the historical exemption for industrial banks in the Bank Holding Company Act,[29] and since that writing, Congress has refused to repeal the exemption, and the FDIC has finalized a framework for supervising the parents of industrial banks. It is certainly possible that given her preference was “narrow” banking, Professor Omarova would wish to see a linkage to traditional banking activities, with ancillary activities being preferable when conducted in an agency capacity, when considering such applications.
Finally, many fintechs operate via bank partnerships. Under the Trump Administration, the OCC issued fintech-friendly interpretations regarding the “true lender” and “valid when made” doctrines, which engendered opposition from consumer groups and certain state regulators and attorneys general. Congress used the Congressional Review Act this summer to void the “true lender” rule, but the “valid when made” interpretation remains. Professor Omarova’s criticism of the elasticity of the OCC’s interpretations of the National Bank Act on derivatives matters during the 1990s could extend beyond the derivatives area to bank-fintech partnership issues. Demonstrating a lack of increased risk to banks and the system from such partnerships, therefore, could become significant.
5. The Quarles/Brainard Divide – Likely Positioning
It is also important to note that Professor Omarova’s appointment is not taking place in a vacuum. In several weeks, Vice Chair Randal Quarles’s term as the Federal Reserve Governor in charge of bank supervision will come to an end, although a mere Governor Quarles could remain at the Federal Reserve for another decade. During the last four years, Vice Chair Quarles has shepherded through a number of “reforms to the reform” wrought by the Dodd-Frank Act. Many of the more important actions drew dissents from Governor Lael Brainard, who is one of the contenders to be Governor Quarles’ successor. Of these actions, quite a few implicated rules promulgated by the OCC as well as the Federal Reserve:
- Loosening the regulatory restrictions of the Volcker Rule
- Tailoring capital and liquidity requirements for an institution’s asset size and other factors, with institutions between $100 billion and $250 billion in assets particularly benefiting
- Reducing margin requirements for inter-affiliate uncleared swap transactions
- Proposing to reduce the enhanced supplementary leverage ratio for the largest banks and their holding companies
From her articles, Professor Omarova would appear to be decidedly in Governor Brainard’s camp on these four issues.
Conclusion: The Limits of Bank Supervision and Regulation
In her writings, Professor Omarova is a strong proponent for government intervention in the financial system, and a skeptic of a light-touch supervisory approach. In this way, she is reminiscent of the first de facto Federal Reserve Governor for bank supervision, another banking law professor turned regulator, Daniel Tarullo. Governor Tarullo, of course, oversaw the implementation of a highly prescriptive top-down approach to bank supervision at the Federal Reserve, which even he noted in his “farewell address” may have gone too far in some areas, particularly for non-systemic banks.[30] Professor Omarova also has quite a bit in common with former FDIC Chair Sheila Bair, who herself was a professor of regulatory policy, was critical of bank derivative activities, and pushed the Collins Amendment to the Dodd-Frank Act because of her suspicions regarding internal bank financial models.
But it is also fair to say that neither Governor Tarullo nor Chair Bair appeared to have quite as skeptical views on the limitations of bank supervision and regulation as Professor Omarova. What will a proponent of a new paradigm approach to the American banking industry do in the absence of any legislative appetite for departing from the reigning paradigm since the New Deal?
This is perhaps the most difficult question of all to answer. A logical response, however, is that in those areas that are perceived to pose the greatest risk, such a proponent would double down on the supervisory tools that are currently available in order to counter perceived risks at inception. Large federal banking institutions that depart from core deposit and lending activities should therefore expect searching supervisory reviews of their non-traditional activities.
_________________________
[1] Saule T. Omarova, “The Quiet Metamorphosis: How Derivatives Changed the ‘Business of Banking,’” 63 U. Miami L. Rev. 1041 (2009); Saule Omarova, “From Gramm-Leach-Bliley to Dodd-Frank: The Unfulfilled Promise of Section 23A of the Federal Reserve Act,” 89 N.C. L. Rev. 1683 (2011); Saule T. Omarova and Margaret E. Tahyar, “That Which We Call a Bank: Revisiting the History of Bank Holding Company Regulation in the United States,” 31 Rev. Banking & Fin. L. 113 (2012).
[2] Saule T. Omarova, “Bank Governance and Systemic Stability: The ‘Golden Share’ Approach,” 68 Ala. L. Rev. 1029 (2017); Saule T. Omarova, “New Tech v. New Deal: Fintech as a Systemic Phenomenon,” 36 Yale J. on Reg. 735 (2019); Saule T. Omarova, “Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure,” 27 Cornell J.L. & Pub. Pol’y 797 (2018); Saule T. Omarova, “The ‘Too Big to Fail’ Problem,” 103 Minn. L. Rev. 2495 (2019).
[3] “The ‘Too Big to Fail’ Problem,” supra note 2.
[6] “Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure,” supra note 2.
[7] “Bank Governance and Systemic Stability: The ‘Golden Share’ Approach,” supra note 2.
[8] Meinhard v. Salmon, 164 N.E. 528 (N.Y. 1928).
[9] Saule T. Omarova, “What Kind of Finance Should There Be?”, 83 Law & Contemp. Probs. 195 (2020).
[10] “The Quiet Metamorphosis: How Derivatives Changed the ‘Business of Banking,’” supra note 1.
[11] Saule T. Omarova, “The Merchants of Wall Street: Banking, Commerce, and Commodities,” 98 Minn. L. Rev. 265 (2013).
[12] See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20140114a.htm.
[13] Saule T. Omarova, “The Dodd-Frank Act: A New Deal for A New Age?”, 15 N.C. Banking Inst. 83 (2011)
[14] See https://www.federalreserve.gov/boarddocs/press/boardacts/1996/19961220/ (increasing limit on bank ineligible revenues for Section 20 companies to 25 percent of total revenues).
[15] “What Kind of Finance Should There Be?”, supra note 9.
[16] “From Gramm-Leach-Bliley to Dodd-Frank: The Unfulfilled Promise of Section 23A of the Federal Reserve Act,” supra note 1.
[17] “The Quiet Metamorphosis: How Derivatives Changed the ‘Business of Banking,’” supra note 1.
[18] “New Tech v. New Deal: Fintech as a Systemic Phenomenon,” supra note 2.
[19] “The ‘Too Big to Fail’ Problem,” supra note 2.
[20] “Bank Governance and Systemic Stability: The ‘Golden Share’ Approach,” supra note 2.
[21] “The ‘Too Big to Fail’ Problem,” supra note 2.
[22] Saule T. Omarova, “Bankers, Bureaucrats, and Guardians: Toward Tripartism in Financial Services Regulation,” 37 J. Corp. L. 621 (2012).
[23] Robert C. Hockett & Saule T. Omarova, “Private Wealth and Public Goods: A Case for a National Investment Authority,” 43 J. Corp. L. 437 (2018).
[24] Saule T. Omarova, “License to Deal: Mandatory Approval of Complex Financial Products,” 90 Wash. U. L. Rev. 63 (2012).
[26] Akayla Gardner & Ben Bain, “Wall Street Pay Clawback Rule to Get New Push at SEC,” Bloomberg News (September 22, 2021).
[27] 12 C.F.R. Part 30 (Appendix D).
[28] “New Tech v. New Deal: Fintech as a Systemic Phenomenon,” supra note 2.
[29] “That Which We Call a Bank: Revisiting the History of Bank Holding Company Regulation in the United States,” supra note 1.
[30] See https://www.federalreserve.gov/newsevents/speech/tarullo20170404a.htm.
The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the author, or any of the following members of the firm’s Financial Institutions practice group:
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On Friday, September 24, the White House’s “Safer Federal Workforce Task Force” (“Task Force”) issued new guidance (the “Guidance”) regarding vaccination requirements and other COVID-safety measures for federal contractor employees. This Guidance implements President Biden’s Executive Order regarding COVID precautions for government contractors, issued September 9, 2021.
Key terms of the Guidance include a vaccination mandate for all covered employees of federal contractors, except in “limited circumstances” for workers “legally entitled” to accommodation. The vaccination mandate applies to covered employees working from home and who have recovered from COVID-19. There is no alternative for workers to present a weekly negative COVID test, as expected in the forthcoming Occupational Safety and Health Administration Emergency Temporary Standard (“OSHA ETS”) for large employers. Employers covered by both the Guidance and the OSHA ETS (i.e., federal contractors with 100 or more employees) would be held to this higher standard. The Guidance also directs masking and distancing practices in accordance with CDC guidelines.
This alert provides a brief overview of these and other provisions of the Guidance for contractors.
I. President Biden’s September 9 Executive Order Regarding Vaccinations for Employees of Federal Contractors
The Executive Order for federal contractors called for the Task Force, which the President established in January, to establish vaccination requirements for federal contactors by September 24.[1] The Order is effectuated by directing federal agencies to include a clause in contracts requiring “the contractor and any subcontractors (at any tier)” to “comply with all guidance for contractor or subcontractor workplace locations published by the Safer Federal Workforce Task Force,” “for the duration of the contract.”[2] Under the Order, this clause is to be included in new contracts and extensions and renewals of existing contracts, and “shall apply to any workplace locations . . . in which an individual is working on or in connection with a Federal Government contract.”[3]
The Order cited the Federal Property and Administrative Services Act (the Procurement Act) as authority for the new federal contractor mandate.[4] As noted in prior alerts, there is some question whether the Procurement Act authorizes the imposition of workplace safety standards in this manner, and legal challenges are possible.
II. Key Definitions
The Guidance defines the following key terms:
- A covered contractor is “a prime contractor or subcontractor at any tier who is party to a covered contract.”
- A covered contractor employee is “any full-time or part-time employee of a covered contractor (1) working on or in connection with a covered contract or (2) working at a covered contractor workplace.”
- An employee works “in connection with a covered contract” when he performs “duties necessary to the performance of the covered contract, but who are not directly engaged in performing the specific work called for by the covered contract,” such as human resources, billing, and legal review.
- A covered contractor workplace is a “location controlled by a covered contractor at which any employee of a covered contractor working on or in connection with a covered contract is likely to be present during the period of performance for a covered contract. A covered contractor workplace does not include a covered contractor employee’s residence.”
III. Three Areas of COVID-19-Safety Protocols
The Guidance addresses three key safety requirements for covered contractors and subcontractors at all tiers, except for contracts which are “under the Simplified Acquisition Threshold as defined in section 2.101 of the FAR” and contracts or subcontracts “for the manufacturing of products.”[5] The FAQs go on to state that these safety protocols do not apply to “subcontracts solely for the provision of products” and “covered contractor employees who only perform work outside the United States or its outlying areas.” Thus, the Guidance’s exceptions to the safety protocols largely do not expand or contract the scope of applicable contracts from the Executive Order.
(1) Vaccination:
The Guidance states that all covered contractor employees, including those who previously had COVID-19 as well as covered contractor employees working from home, must be fully vaccinated by December 8. The only exceptions are for employees who are “legally entitled to an accommodation” for medical or religious reasons.
A covered contractor is responsible for reviewing requests for accommodation and determining what, if any, accommodations to offer. Covered contractors are not responsible for providing vaccines to their employees (but may choose to do so), nor are they instructed to pay employees for the time and expenses associated with getting vaccinated (however, this may be a requirement of state and local law and is expected to be a requirement for large employers in the forthcoming OSHA ETS).
Contractors are instructed to review and verify, but not necessarily collect or store, documents to ensure that their employees are fully vaccinated. Acceptable documents include physical or electronic CDC cards, state health records, or private medical records. Unacceptable documents include positive antibody tests and attestations that an employee is vaccinated.
Agencies have discretion to grant temporary exemptions from the vaccine requirement when there is “an urgent, mission-critical need” to have contractors begin work before becoming fully vaccinated. Even then, employees must be fully vaccinated within 60 days of beginning work on the contract. They also must adhere to physical distancing and masking requirements for unvaccinated workers in the meantime.
(2) Physical Distancing and Masks:
Contractors must ensure that all employees and visitors present in covered contractor workplaces follow CDC guidance pertaining to physical distancing and masks. Fully vaccinated employees do not have to physically distance, but unvaccinated employees should maintain six feet of distance from others whenever practicable.
In areas of high community transmission (as determined by the CDC), everyone, including visitors, whether vaccinated or not, must wear masks indoors. In areas of low community transmission, only the unvaccinated must wear masks indoors (they also must wear masks outdoors in certain circumstances). Contractors are responsible for checking the CDC’s website weekly to determine the transmission rate of the local community. When the transmission rate increases, additional safety measures are effective immediately. When the transmission rate decreases to a low or moderate level, safety measures can be removed after two consecutive weeks at that lower level.
These mask mandates apply in all shared spaces and common areas. They do not apply in enclosed office spaces or when individuals are eating or drinking and maintaining appropriate distancing. Contractors can create exceptions to the mask mandate for situations where masks can burden breathing or otherwise pose a safety concern as determined by a workplace risk assessment. And the mask requirements do not apply when employees are working remotely from their residences.
As with the vaccination requirement, employers must review and consider what, if any, religious and medical accommodations to the mask requirement they must offer.
(3) Implementation:
All covered contractors must designate a COVID-safety coordinator. The coordinator is an employee responsible for coordinating, implementing, and enforcing compliance with the Guidance. The coordinator must provide relevant information about the Guidance to employees and visitors likely to enter a covered contractor workplace. The Guidance is silent as to whether a coordinator is required for each worksite or whether a single coordinator can fulfill these responsibilities for more than one worksite.
IV. Relationship to Other Federal and State Mandates
The Guidance purports to apply in all states and municipalities, even those that prohibit employers from imposing vaccination, mask, and distancing requirements. It claims to supersede any contrary state laws and local ordinances. It does not, however, excuse covered contractors from complying with stricter measures imposed by state and local governments. The Guidance also says that agencies may impose additional safety requirements on covered contractor employees while present on federal property.
The Guidance states that all contractors must comply with its COVID-19 protocols, even those employers that will also be subject to the forthcoming OSHA ETS. As we previously explained, the ETS—which is anticipated within weeks of September 9—is expected to require all employers with 100 or more employees to ensure that their workforce is fully vaccinated or to require any workers who remain unvaccinated to produce a negative test result at least weekly before coming to work. However, the Guidance for contractors states that “[c]overed contractors must comply with the requirements set forth in this Guidance regardless of whether they are subject to other workplace safety standards,” such as the forthcoming ETS. Given that the Guidance does not indicate that employees can undergo regular COVID testing in lieu of being vaccinated (and in fact does not mention testing at all), large employers who are also federal contractors will not be able to avoid a vaccination requirement by relying on the ETS testing option.
Finally, new contracts must state that if the Safer Federal Workforce Task Force updates its Guidance to add new requirements, those requirements will apply to existing contracts.
________________________
[1] Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors (Sept. 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/09/09/executive-order-on-ensuring-adequate-covid-safety-protocols-for-federal-contractors/.
[4] Id. (citing 40 U.S.C. 101 et seq).
[5] The Executive Order exempted “(i) grants; (ii) contracts, contract-like instruments, or agreements with Indian Tribes…; (iii) contracts or subcontracts whose value is equal to or less than the simplified acquisition threshold, as that term is defined in section 2.101 of the Federal Acquisition Regulation; (iv) employees who perform work outside the United States or its outlying areas, as those terms are defined in section 2.101 of the Federal Acquisition Regulation; or (v) subcontracts solely for the provision of products.” Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors.
The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Jason C. Schwartz, Katherine V.A. Smith, Jessica Brown, Lucas C. Townsend, Lindsay M. Paulin, Andrew G. I. Kilberg, Chad C. Squitieri, Marie Zoglo, and Josh Zuckerman.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following in the firm’s Administrative Law and Regulatory, Labor and Employment or Government Contracts practice groups.
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U.S. businesses invest significant capital, resources, and time to develop highly valuable technology and processes. Business competitors – and, increasingly, state actors or affiliates of state actors – are stealing that technology at an alarming rate for economic or national strategic advantage to devastating consequences to U.S. industry and national security. This webcast will examine developments regarding the nature of the theft risk, including risk from insiders, cyber intrusions, or other means, and enforcement trends from the Department of Justice and other government agencies.
A team of national security, cyber-crime, and litigation practitioners with experience both inside and outside of government will share their experiences in investigating and defending companies that fall victim to theft of their trade secrets and highlight a number of notable recent criminal prosecutions under the Economic Espionage Act and related statutes. We will discuss best practices for minimizing risk in this important area.
View Slides (PDF)
PANELISTS:
David Burns, a partner in Washington, D.C. and co-chair of the firm’s National Security Practice Group, served in senior positions in both the National Security Division and the Criminal Division of the U.S. Department of Justice. As Principal Deputy Assistant Attorney General of the National Security Division he supervised the Division’s investigations and prosecutions, including counterterrorism, counterintelligence, economic espionage, cyber hacking, FARA, disclosure of classified information, and sanctions and export controls matters. Mr. Burns’ practice focuses on national security, white-collar criminal defense, internal investigations, and regulatory enforcement matters.
Zainab Ahmad, a partner in New York and co-chair of the firm’s National Security Practice Group, previously served as Deputy Chief of the National Security and Cybercrime section at the U.S. Attorney’s Office in the Eastern District of New York. Ms. Ahmad is a decorated former prosecutor who has received both of DOJ’s highest honors, the Attorney General’s Award and the FBI Director’s Award, and whose work prosecuting terrorists was profiled by The New Yorker magazine. Her practice is international and focuses on cross-border white collar defense and investigations, including corruption, anti-money laundering, sanctions and FCPA issues, as well as data privacy and cybersecurity matters.
Alexander Southwell, a partner in the New York office and co-chair of the firm’s Privacy, Cybersecurity and Data Innovation Practice Group, previously served as an Assistant United States Attorney in the United States Attorney’s Office for the Southern District of New York where he focused on cyber-crimes and intellectual property offenses, in addition to securities and commodities and other white collar frauds. Mr. Southwell advises companies and boards across industries victimized by cyber-crimes and which experienced data breaches and he has particular expertise counseling on issues under the Computer Fraud and Abuse Act, the Economic Espionage Act, the Electronic Communications Privacy Act, and related federal and state computer fraud and consumer protection statutes.
Robert Hur, a partner in Washington, D.C. and co-chair of the firm’s Crisis Management Practice Group, served as the 48th United States Attorney for the District of Maryland. During his tenure as United States Attorney, the Office handled numerous high-profile matters including those involving national security, cybercrime, public corruption, and financial fraud. Before serving as United States Attorney, Mr. Hur served as the Principal Associate Deputy Attorney General (“PADAG”) at the Department of Justice, a member of the Department’s senior leadership team and the principal counselor to Deputy Attorney General Rod J. Rosenstein. Mr. Hur assisted with oversight of all components of the Department, including the National Security, Criminal, and Civil Divisions, all 93 U.S. Attorney’s Offices, and the Federal Bureau of Investigation. He also liaised regularly on behalf of the Justice Department with the White House, Congressional committees, and federal intelligence, enforcement and regulatory agencies.
Mark Lyon, a partner in Palo Alto and co-chair of the firm’s Artificial Intelligence and Automated Systems Practice Group, has extensive experience representing and advising clients on the legal, ethical, regulatory, and policy issues arising from emerging technologies. As practice group chair, Mr. Lyon has extensive experience representing and advising clients on the legal, ethical, regulatory, and policy issues arising from emerging technologies like artificial intelligence. As a member of the firm’s Privacy, Cyber Security and Consumer Protection practice group, Mr. Lyon brings a global focus to help his clients develop, implement, and audit appropriate policies and procedures to comply with applicable data privacy and cyber security regulations.
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The U.S. Department of Justice’s increased focus on the private equity sector in recent years has coincided with that sector’s growing investment in the highly regulated healthcare and life sciences industries. That increased focus has been further fueled by the CARES Act and its Paycheck Protection Program, which was in operation from April 2020 through May 31, 2021. In March 2021, the DOJ announced new enforcement priorities focusing on CARES Act fraud. Chief among the potential targets are private equity-backed companies. While private equity firms were ineligible for PPP loans, their portfolio companies may have been eligible, and it is likely that prosecutors and private plaintiffs will seek to hold private equity firms liable under the False Claims Act for a portfolio company’s actions with respect to PPP.
The Small Business Administration released data on the companies that received PPP loans and analysis of this data revealed that over 8,100 privately backed companies were approved for PPP loans of $150,000 or more. Of these, 2,528 were private equity-backed companies. Under the CARES Act, businesses were eligible to receive PPP loans issued by private lenders and credit unions but backed by the SBA. PPP loans were to be used for select purposes including: funding payroll and benefits paying mortgage interest, rent, or utilities; and other worker protection costs related to COVID-19. In April 2020, due to confusion about private equity firms’ eligibility for the loans, the SBA issued an interim final rule stating that private equity firms were ineligible for PPP loans.
Portfolio companies, however, would continue to qualify for the loans if they met special size requirements under the SBA’s affiliation rules. The affiliation analysis under the SBA’s rules involves six different bases for affiliation, including ownership, stock options, control, management, identity of interest, and the existence of franchise and license agreements. While this is a fact-specific analysis, for the purposes of the PPP, a private equity firm was likely to be considered an “affiliate” of a portfolio company, and portfolio companies controlled by the same private equity firm were likely to be “affiliates” of each other. Under the rules, if the aggregate number of employees at the borrower and its affiliates exceeded a certain size, the borrower was ineligible for PPP loans. In addition, upon application, borrowers were required to certify in good faith that the loan was necessary, that they satisfied the affiliation rules for size and eligibility, and that they agreed to use the funds appropriately. If these certification requirements are determined to have not been met, the SBA will seek immediate repayment of the loan.
Originally published by the Daily Journal on September 17, 2021.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s False Claims Act or Private Equity groups, or the authors in San Francisco:
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Corporate carveouts, whether conducted in the context of a sale, spin-off or other divestiture, are among the most complex transactions a company may undertake, but nevertheless, these deals have been an increasingly common means of unlocking value for both the divesting company and business to be separated. Ensuring that the transaction perimeter is appropriately defined is a key area of executing these transactions and can be one of the most time and resource-consuming aspects of the deal. Furthermore, navigating the complexity of the operational separation of the two entities, and ensuring each company is set up to operate independently at close requires detailed planning and executional support, which must also not distract from the ongoing performance of the base business.
This webcast brings together leading divestiture practitioners from both Gibson Dunn and Boston Consulting Group to discuss some of the key areas of consideration in preparing for and executing a carveout, including: (1) appropriately defining the “business,” (2) identifying entities, assets and liabilities within the scope of the business and developing a plan for allocating or splitting up shared assets and liabilities, (3) strategies for utilizing internal and external resources to manage the process efficiently in the preparation, execution, consummation and post-closing stages of the transaction and (4) key learnings and best practices from our experience on the front lines supporting the operational separation during a carveout.
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PANELISTS:
Daniel Angel is a Partner in Gibson Dunn’s New York office, Co-Chair of the firm’s Technology Transactions Practice Group and a member of its Strategic Sourcing and Commercial Transactions Practice Group. He is a transactional attorney who has represented clients on technology-related transactions since 2003. Mr. Angel has worked with a broad variety of clients ranging from market leaders to start-ups in a wide range of industries including financial services, private equity funds, life sciences, specialty chemicals, insurance, energy and telecommunications.
Stephen Glover is a Partner in Gibson Dunn’s Washington, D.C. office and previous Co-Chair of the firm’s Mergers and Acquisitions Practice Group. Mr. Glover has an extensive practice representing public and private companies as well as private equity firms in complex mergers and acquisitions, including spin-offs, carveouts and related transactions, as well as other corporate matters. Mr. Glover’s clients include businesses that operate in many different industries.
Saee Muzumdar is a Partner in Gibson Dunn’s New York office and Co-Chair of the firm’s Mergers and Acquisitions Practice Group. Ms. Muzumdar is a corporate transactional lawyer whose practice includes representing both strategic companies and private equity clients (including their portfolio companies) in connection with all aspects of their domestic and cross-border mergers and acquisitions activities and general corporate counseling.
Ben Aylor is a Managing Director and Senior Partner in the Washington, D.C. office of Boston Consulting Group. He focuses on helping clients meet the challenges of major change efforts including post-merger integrations and broad transformations/ transformational M&A, and also leads BCG’s efforts on manufacturing network design and Global Trade. Ben has led both overall corporate post-merger integration programs and the manufacturing aspects of post-merger integrations, as well as advised several large carveouts and spin-offs in the pharmaceutical industry.
Hob Brooks is a Partner in the Philadelphia office of Boston Consulting Group. Mr. Brooks advises biopharmaceutical and medtech companies on complex large-scale transformation programs and pre-/post-merger transaction planning, execution, and integration. He has worked across several multi-billion dollar carveouts, spin-offs, divestitures and integrations during his tenure with BCG.
MCLE INFORMATION:
This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.
This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an affirmation form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.
Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.
California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.
Join us to listen to this interactive discussion with an exceptional panel comprising some of the key people at the Loan Market Association (LMA), Asia Pacific Loan Market Association (APLMA) and Loan Syndications and Trading Association (LSTA) who were responsible for developing their 2021 Revised Sustainability-Linked Loan Principles together with three finance practitioners from Gibson Dunn’s US, U.K. and Asian finance and ESG practices.
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PANELISTS:
Ben Myers – Panelist
London, Partner, Gibson Dunn
Ben Myers is a partner in Gibson Dunn’s global finance and business restructuring teams. His practice focuses on advising funds, sponsors, corporates and financial institutions with a particular focus on leveraged finance, special situations and restructuring transactions. Mr. Myers is one of the leaders of the firm’s UK ESG practice and a member of the firm’s global ESG practice.
Patricia Tan Openshaw – Panelist
Hong Kong, Partner, Gibson Dunn
Patricia is a partner in Gibson Dunn’s energy, infrastructure and global finance teams. Her practice focuses on project development and finance, mergers and acquisitions, and banking and finance transactions in the energy and infrastructure sector. She has substantial experience representing developers, sponsors, contractors, lenders, government agencies and offtakers in connection with the development, financing, and restructuring of power, rail, toll road, water, casinos and other infrastructure projects. She also advises on financings involving commercial banks, export credit agencies, multilateral agencies, private equity funds and Rule 144A/Regulation S offerings and private placements. She has handled transactions in Africa, Australia, China, Fiji, India, Indonesia, Korea, Myanmar, Pakistan, Philippines, Singapore, Thailand, Vietnam and the United States. Ms. Openshaw is a member of the firm’s global ESG practice.
Yair Galil – Panelist
New York, Of Counsel, Gibson Dunn
Yair is of counsel in Gibson Dunn’s global finance team. His experience includes representation of sponsors, corporate issuers, financial institutions and investment funds in a variety of complex financing transactions. The business contexts for these transactions have ranged from corporate finance (including sustainability‐linked credit facilities), to leveraged acquisitions and dividend recaps, to debt buybacks and other out‐of‐court capital restructuring transactions, to debtor‐in‐ possession and bankruptcy exit financings. Mr. Galil is a member of the firm’s global ESG practice.
Hannah Vanstone – Panelist
London, Legal Associate, Loan Market Association
Hannah joined the LMA’s legal team in November 2018 and assists with the Association’s documentation projects, education and training events and regulatory and lobbying matters. Hannah leads the LMA’s real estate finance work and is also involved in all the LMA’s ESG initiatives. Prior to joining the LMA, Hannah was a banking and finance solicitor at Osborne Clarke LLP where she acted for numerous domestic and international corporate banks and UK and international borrowers on a variety of syndicated finance transactions, with a particular focus on real estate finance.
Rosamund Barker – Panelist
Hong Kong, Head of Legal, Asia Pacific Loan Market Association
Rosamund is currently Head of Legal at the Asia Pacific Loan Market Association based in Hong Kong. She has spent much of her career working in the Banking and Finance and Capital Markets teams at Linklaters in London and Hong Kong, most recently as Counsel. She was also Director of Knowledge for Asia Pacific at Baker McKenzie. She is responsible for green and sustainable lending initiatives at the APLMA and has been active in raising awareness of the Green Loan Principles, Sustainability Linked Loan Principles and Social Loan Principles to Borrowers and Lenders alike. Rosamund read law at Churchill College, Cambridge University and is a qualified solicitor both in Hong Kong and England and Wales.
Tess Virmani – Panelist
New York, Associate General Counsel, Executive Vice President, Public Policy of the Loan Syndications and Trading Association (LSTA)
Tess has a broad range of responsibilities at the LSTA. She leads the LSTA’s sustainable finance and ESG initiatives which seek to foster the development of sustainable lending as well as promote greater ESG disclosure in the loan markets. In addition, Tess engages in the LSTA’s policy initiatives, including market advocacy and spearheading industry solutions to market developments, such as the transition to replacement benchmarks. Tess focuses on maintaining and augmenting the LSTA’s extensive suite of documentation, which includes templates, market standards, and market and regulatory guidance. Finally, she is involved in the development and presentation of the LSTA’s robust education programs. Prior to joining the LSTA, Tess practiced as a finance attorney at Skadden, Arps, Slate, Meagher & Flom LLP in New York. She received a B.S. in International Politics from the Walsh School of Foreign Service at Georgetown University and a J.D. from Fordham University School of Law. She is admitted as an attorney in New York. Tess is an FSA Level II Candidate.
Los Angeles partners Perlette Michèle Jura and Dhananjay Manthripragada discuss the Gibson Dunn recruitment process for summer associates in “How to land a job at Gibson Dunn, according to two partners leading the Big Law firm’s recruiting efforts” [PDF] published by Business Insider on September 7, 2021.
The use of alternative data in investment decision-making—incorporating large volumes of data found outside a company’s public filings—has expanded rapidly in the last several years, as data has increased in availability. Investment funds commonly have data analysts use a variety of alternative data sources, from data on commercial transactions to information about human behavior, to inform investment decisions in trading securities. And the alternative data industry is continuing to grow. In 2020, the industry was valued at $1.72 billion and, by 2028, is expected to reach close to $70 billion.[1] With increasing popularity, it’s unsurprising this growth has led to increased interest from market regulators. While the SEC has shown interest in alternative data in the past, it recently took the significant step in bringing the first enforcement action against an alternative data provider for securities fraud.
The App Annie Settlement
On September 14, 2021, the SEC announced a settled enforcement action against App Annie, Inc., an alternative data provider, and the Company’s co-founder and former CEO and Chairman Bertrand Schmitt, for misrepresentations both to data sources in connection with the collection of data, and to investment firm subscribers regarding the data underlying its product.[2] Without admitting or denying the findings, App Annie and Schmitt consented to a cease-and-desist order finding a violation of Section 10(b) of the Exchange Act and Rule 10b-5, and imposing a penalty of $10 million for App Annie, and $300,000 for Schmitt, and a three-year officer and director bar against him.
App Annie provides market data analytics on mobile application performance. Companies with mobile applications provide App Annie access to their data in return for free analytics. App Annie sells a data analytics product to investment firms and other subscribers for a fee. App Annie’s Terms of Service represented that its data analytics estimates were generated using statistical models from data that was aggregated and anonymized. In reality, according the SEC, between late 2014 and mid-2018, App Annie used actual non-aggregated and non-anonymized performance data from companies to reduce disparities between model-driven estimates and the actual data and thereby make App Annie’s paid subscription product more accurate and more valuable to its trading firm clients.
According to the SEC’s order, App Annie’s use of non-anonymized and non-aggregated data to enhance the accuracy of its analytics product rendered representations made to the sources of data, as well as the subscribers to the analytics, materially misleading. In collecting data from companies’ applications, App Annie represented to the companies providing access to app usage data that all data would be aggregated and anonymized before utilized in its paid subscription product. In addition, App Annie represented to its investment firm subscribers that the Company’s estimates were generated in a manner consistent with the consents it obtained from the underlying data sources, and that App Annie had effective controls to prevent misuse of confidential data and ensure compliance with federal securities laws. However, the SEC found that because App Annie’s estimates used non-aggregated and non-anonymized data, in contradiction to its representations to its data sources, the Company’s estimates were based on data used in a manner inconsistent with its representations to its data providers. According to the order, App Annie understood that investment firm subscribers were using the Company’s product to make investment decisions and that subscribers did in fact trade based on App Annie’s data product.
The order asserts, without explanation, that the data on app usage “often is material to a public company’s financial performance and stock price.” The order also does not explain how App Annie’s incorporation of actual data into its estimates rendered the various representations to subscribers materially misleading as required by Section 10(b) or how the alleged misrepresentations were “in connection with” the purchase or sale of securities. Rather the order asserts that Schmitt “understood it was material to trading firms’ decisions to use App Annie’s estimates for investment purposes.”
The order does not provide for any disgorgement or even provide a Fair Fund to distribute any of the penalty to customers who may have been harmed. Finally, it is notable that Schmitt agreed to a three year officer and director bar even though App Annie is a private company.
Individual Liability for App Annie CEO Bertrand Schmitt
In bringing claims against Schmitt individually, the order emphasizes Schmitt’s direct involvement in the decision to use non-aggregated and non-anonymized data. The SEC further found Schmitt oversaw a “manual estimate alteration process,” during which engineers made manual adjustments to purportedly statistical models to make them more “accurate” in tracking actual company metrics. When the Company learned of Schmitt’s misconduct in June 2018, it ceased manually adjusting its data and stopped using non-aggregated and non-anonymized data in its subscription product. Around the same time, Schmitt resigned as CEO. He served as Chief Strategy Officer of App Annie until he was terminated in January 2020.
After the SEC published the order, Schmitt addressed the settlement on LinkedIn.[3] He noted that “compliance was a critical element of the business” and that he and App Annie “obtained legal advice on compliance procedures and even hired an in-house compliance team.” Nonetheless, the SEC explicitly found that, contrary to the App Annie’s representations, “during the relevant period, the Company did not have effective internal controls and did not conduct regular compliance reviews,” suggesting the SEC did not credit any advice of counsel defense.
Regulatory Risks and Mitigation Strategies
While this settlement represents the first enforcement action in this space, the SEC has been increasing its focus on the growing alternative data sphere for several years. In its 2020 Examination Priorities, the Commission’s Office of Compliance Inspection and Examinations included for the first time a focus on investment advisers’ use of alternative data.[4] The Commission noted that examinations will “focus on firms’ use of these data sets and technologies to interact with and provide services to investors, firms, and other service providers and assess the effectiveness of related compliance and control functions.”[5] The SEC’s press release announcing the App Annie settlement also acknowledged the role of the examination staff in the investigation that led to the enforcement action.[6]
For years, we have counseled clients on risk mitigation strategies for the use of alternative data. While this settlement highlights the regulatory risks accompanying the use of alternative data, it also validates the importance of the compliance oversight that subscribers have employed to manage those risks. Notably, the representations that subscribers received protected them from the government’s allegation against App Annie’s alleged misuse of company data. Accordingly, it bears repeating compliance and oversight mitigate the risks arising from the use of alternative data.
- Compliance Oversight. An important first step in managing risk is to engage compliance before adopting new data sources. This means that firms should have in place a mechanism to require compliance pre-approval before a new data source is accepted.
- Policies and Procedures. While there is no requirement to have policies and procedures specifically addressing the use of alternative data, where an adviser is making significant use of such data, policies and procedures specifically addressing the risks unique to alternative data sources can be a way to demonstrate a firm’s attention to the risks of its business. Policies and procedures for the use of alternative data could encompass requirements for compliance pre-approval, as well as guidance on compliance diligence of potential data vendors, contractual protections, training of investment professionals and periodic review of the use of alternative data sources.
- Due Diligence on Data Vendors. The diligence process should be part of the compliance oversight process. The diligence process can have multiple components which may vary depending on the nature of the data, the vendor, and the variety of legal issues that might be implicated. Questions examined during the diligence process could include, for example, the original source of the data and the alternative data provider’s right to use and sell the data. If appropriate, direct questioning of vendor representatives may be appropriate in evaluating the care and robustness of a vendor’s compliance approach.
- Documentation and Record Keeping. Before finalizing an approval of the vendor, compliance may also involve documentation of certain representations and warranties to mitigate further the potential regulatory risks associated with alternative data. For example, contracts could incorporate representations concerning: (i) the vendor’s right to use and sell the data; (ii) the vendor’s compliance with relevant laws concerning the collection and use of the data; (iii) the absence of material nonpublic information or a duty of confidentiality concerning the data; (iv) the absence of personal identifying information in the data; and (v) in the case of web-scraping services, compliance with the Computer Fraud and Abuse Act and other relevant laws.
- Monitoring and Periodic Review. Given the rapidly evolving market, vendors engage in a continuous search for new sources of data and the development of better analytical insights. Accordingly, effective compliance monitoring can benefit from periodically reviewing the status of existing vendors as part of the annual compliance review, particularly if the vendor’s offerings change over time.
____________________________
[1] Grand View Research, Alternative Data Market Size, Share & Trends Analysis Report by Data Type (Credit & Debit Card Transactions, Social & Sentiment Data, Mobile Application Usage), By Industry, By End User, By Region, And Segment Forecasts 2021 – 2028, Report Overview (Aug. 2021), available at https://www.grandviewresearch.com/industry-analysis/alternative-data-market.
[2] Order Instituting Cease-and-Desist Proceedings, Securities Exchange Act of 1934 Release No. 92975 (Sept. 14, 2021).
[3] Bertrand Schmitt, Lessons Learned, Closing a Chapter, Sept. 14, 2021, available at https://www.linkedin.com/pulse/lessons-learned-closing-chapter-bertrand-schmitt/.
[4] See U.S. Securities and Exchange Commission, Office of Compliance Inspections and Examinations, 2020 Examination Priorities at 14 (OCIE 2020 Priorities), available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf.
[6] SEC Press Release, SEC Charges App Annie and its Founder with Securities Fraud (Sept. 14, 2021), available at https://www.sec.gov/news/press-release/2021-176.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Enforcement Practice Group, or the following authors:
Mark K. Schonfeld – Co-Chair, New York (+1 212-351-2433, mschonfeld@gibsondunn.com)
Richard W. Grime – Co-Chair, Washington, D.C. (+1 202-955-8219, rgrime@gibsondunn.com)
Reed Brodsky – New York (+1 212-351-5334, rbrodsky@gibsondunn.com)
Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Zoey G. Goldnick – New York (+1 212-351-2631, zgoldnick@gibsondunn.com)
Please also feel free to contact any of the following practice group leaders and members:
New York
Zainab N. Ahmad (+1 212-351-2609, zahmad@gibsondunn.com)
Matthew L. Biben (+1 212-351-6300, mbiben@gibsondunn.com)
Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com)
Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com)
Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com)
Barry R. Goldsmith (+1 212-351-2440, bgoldsmith@gibsondunn.com)
Mary Beth Maloney (+1 212-351-2315, mmaloney@gibsondunn.com)
Mark K. Schonfeld (+1 212-351-2433, mschonfeld@gibsondunn.com)
Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com)
Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com)
Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com)
Tina Samanta (+1 212-351-2469, tsamanta@gibsondunn.com)
Washington, D.C.
Stephanie L. Brooker (+1 202-887-3502, sbrooker@gibsondunn.com)
Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com)
M. Kendall Day (+1 202-955-8220, kday@gibsondunn.com)
Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com)
Jeffrey L. Steiner (+1 202-887-3632, jsteiner@gibsondunn.com)
Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com)
F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com)
San Francisco
Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com)
Thad A. Davis (+1 415-393-8251, tadavis@gibsondunn.com)
Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)
Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com)
Palo Alto
Michael D. Celio (+1 650-849-5326, mcelio@gibsondunn.com)
Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com)
Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com)
Denver
Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com)
Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com)
Los Angeles
Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com)
Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com)
Nicola T. Hanna (+1 213-229-7269, nhanna@gibsondunn.com)
Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Gibson, Dunn & Crutcher LLP is pleased to announce that the Asia Pacific Loan Market Association (APLMA) has released an English law term facilities agreement template for Indonesia offshore loans, which is available in the APLMA documentation library.
Gibson Dunn’s lawyers, together with members of the APLMA Indonesian Documentation Steering Committee, worked on the drafting of the English law APLMA template for Single Borrower, Single Guarantor, Single Currency Term Facility Agreement for Indonesia Offshore Loans (the “APLMA Indonesia Template”), to help achieve a degree of consistency amongst financial institutions that lend into Indonesia and facilitate growth of the secondary market there.
The APLMA Indonesia Template not only sets out Indonesia specific provisions that typically are seen in loan documents for Indonesian cross-border transactions, such as those relating to reporting obligations owed to Bank Indonesia and Law No. 24 of 2009 relating to the use of Bahasa Indonesia, but also includes detailed notes to help template users focus on these key Indonesia related issues. A Bahasa Indonesia version of the APLMA Indonesia Template will be published shortly.
The APLMA Indonesian Documentation Steering Committee was founded and spearheaded by Gibson Dunn partner Jamie Thomas, who chairs the committee.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above. Please contact the Gibson Dunn lawyer with whom you usually work, or the lawyers below who worked on the drafting of the APLMA Indonesia Template:
Jamie Thomas – Singapore (+65 6507.3609, jthomas@gibsondunn.com)
U-Shaun Lim – Singapore (+65 6507.3633, ulim@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Recently, the SEC’s Division of Corporation Finance has issued a number of comment letters relating exclusively to climate-change disclosure issues. The letters we have seen to date comment on companies’ most recent Form 10-K filings, including those of calendar year companies who filed their Form 10-K more than 6 months ago, and have been issued by a variety of the Division’s industry review groups, including to companies that are not in particularly carbon-intensive industries. Many of the climate change comments appear to be drawn from the topics and considerations raised in the SEC’s 2010 guidance on climate change disclosure, as reflected in the sample comments that we have attached in the annex to this alert. We expect this is part of a larger Division initiative because the letters are similar (although not identical), contain relatively generic comments, and have been issued in close proximity to one another. Accordingly, it is reasonable to expect that additional comment letters will be issued in the coming weeks and months.
The issuance of these comments and their focus comes as no surprise given the SEC’s Chair and several commissioners have indicated that climate change disclosures are a priority. As detailed in Gibson Dunn’s client alert of June 21, 2021, the SEC also recently announced its anticipated rulemaking agenda, which includes a near-term focus on rules that would prescribe climate change disclosures.
The following Gibson Dunn attorneys assisted in preparing this update: Andrew Fabens, Brian Lane, Courtney Haseley, Elizabeth Ising, James Moloney, Lori Zyskowski, Michael Titera, Thomas Kim, and Ronald Mueller.
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On September 17, 2021, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) imposed sanctions in response to the ongoing humanitarian and human rights crisis in Ethiopia, particularly in the Tigray region of the country.[1] The new sanctions program provides authority to the Secretary of the Treasury, in consultation with the Secretary of State, to impose a wide range of sanctions for a variety of activities outlined in a new Executive Order (“E.O.”). No individuals or entities have yet been designated under the E.O. However, U.S. Secretary of State Antony Blinken has warned that “[a]bsent clear and concrete progress toward a negotiated ceasefire and an end to abuses – as well as unhindered humanitarian access to those Ethiopians who are suffering – the United States will designate imminently specific leaders, organizations, and entities under this new sanctions regime.”
This action comes on the heels of repeated calls by the United States for all parties to the conflict to commit to an immediate ceasefire as evidenced in the Department of State’s press statement on May 15, 2021, and Secretary of State Blinken’s phone call to Ethiopian Prime Minister Abiy Ahmed on July 6, 2021. Similarly, on August 3-4, 2021, U.S. Agency for International Development (“USAID”) Administrator Samantha Power traveled to Ethiopia to “draw attention to the urgent need for full and unhindered humanitarian access in Ethiopia’s Tigray region and to emphasize the United States’ commitment to support the Ethiopian people amidst a spreading internal conflict” according to a USAID press release at the time. And prior to the actions on September 17, on August 23, 2021, OFAC sanctioned General Filipos Woldeyohannes,Chief of Staff of the Eritrean Defense Forces, for engaging in serious human rights abuses under the Global Magnitsky sanctions program and condemned the violence and ongoing human rights abuses in the Tigray region of Ethiopia.
The nature and scope of this new sanctions regime suggests that the Biden administration is taking a measured, flexible, and cautious approach to the situation in Ethiopia. OFAC is able to impose sanctions measures of varying degrees of severity, without those sanctions necessarily flowing down to entities owned by sanctioned parties – which should limit ripple effects on the Ethiopian economy. Alongside the Chinese Military Companies sanctions program, this new sanctions program is one of the very few instances where OFAC’s “50 Percent Rule” does not apply, perhaps signaling a more patchwork approach to sanctions designations going forward. The decision to hold off on any initial designations is also telling, and makes clear the focus on deterrence – as opposed to punishment for past deeds. Moreover, at the outset, OFAC has issued general licenses and related guidance allowing for humanitarian activity in Ethiopia to continue. The approach here, although slightly different, is broadly consistent with the Biden administration’s handling of the situation in Myanmar, in which it has gradually rolled out sanctions designations over a period of many months and prioritized humanitarian aid in its general licenses and guidance.[2]
Menu-Based Sanctions Permit Targeted Application of Restrictions
With respect to persons or entities engaged in certain targeted activities, the E.O. permits the Department of the Treasury to choose from a menu of blocking and non-blocking sanctions measures. In keeping with recent executive orders of its kind, the criteria for designation under the E.O. are exceedingly broad. The E.O. provides that the Secretary of the Treasury, in consultation with the Secretary of State, may designate any foreign person determined:
- to be responsible for or complicit in, or to have directly or indirectly engaged or attempted to engage in, any of the following:
- actions or policies that threaten the peace, security, or stability of Ethiopia, or that have the purpose or effect of expanding or extending the crisis in northern Ethiopia or obstructing a ceasefire or a peace process;
- corruption or serious human rights abuse in or with respect to northern Ethiopia;
- the obstruction of the delivery or distribution of, or access to, humanitarian assistance in or with respect to northern Ethiopia, including attacks on humanitarian aid personnel or humanitarian projects;
- the targeting of civilians through the commission of acts of violence in or with respect to northern Ethiopia, including involving abduction, forced displacement, or attacks on schools, hospitals, religious sites, or locations where civilians are seeking refuge, or any conduct that would constitute a violation of international humanitarian law;
- planning, directing, or committing attacks in or with respect to northern Ethiopia against United Nations or associated personnel or African Union or associated personnel;
- actions or policies that undermine democratic processes or institutions in Ethiopia; or
- actions or policies that undermine the territorial integrity of Ethiopia;
- to be a military or security force that operates or has operated in northern Ethiopia on or after November 1, 2020;
- to be an entity, including any government entity or a political party, that has engaged in, or whose members have engaged in, activities that have contributed to the crisis in northern Ethiopia or have obstructed a ceasefire or peace process to resolve such crisis;
- to be a political subdivision, agency, or instrumentality of the Government of Ethiopia, the Government of Eritrea or its ruling People’s Front for Democracy and Justice, the Tigray People’s Liberation Front, the Amhara regional government, or the Amhara regional or irregular forces;
- to be a spouse or adult child of any sanctioned person;
- to be or have been a leader, official, senior executive officer, or member of the board of directors of any of the following, where the leader, official, senior executive officer, or director is responsible for or complicit in, or who has directly or indirectly engaged or attempted to engage in, any activity contributing to the crisis in northern Ethiopia:
- an entity, including a government entity or a military or security force, operating in northern Ethiopia during the tenure of the leader, official, senior executive officer, or director;
- an entity that has, or whose members have, engaged in any activity contributing to the crisis in northern Ethiopia or obstructing a ceasefire or a peace process to resolve such crisis during the tenure of the leader, official, senior executive officer, or director; or
- the Government of Ethiopia, the Government of Eritrea or its ruling People’s Front for Democracy and Justice, the Tigray People’s Liberation Front, the Amhara regional government, or the Amhara regional or irregular forces, on or after November 1, 2020;
- to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any sanctioned person; or
- to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any sanctioned person.
Upon designation of any such foreign person, the Secretary of the Treasury may select from a menu of sanctions options to implement as follows:
- the blocking of all property and interests in property of the sanctioned person that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, and provide that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in;
- the prohibiting of any United States person from investing in or purchasing significant amounts of equity or debt instruments of the sanctioned person;
- the prohibiting of any United States financial institution from making loans or providing credit to the sanctioned person;
- the prohibiting of any transactions in foreign exchange that are subject to the jurisdiction of the United States and in which the sanctioned person has any interest; or
- the imposing on the leader, official, senior executive officer, or director of the sanctioned person, or on persons performing similar functions and with similar authorities as such leader, official, senior executive officer, or director, any of the sanctions described in (1)-(4) above.
The restrictions above not only prohibit the contribution or provision of any “funds, goods, or services to, or for the benefit of” any sanctioned person, but also the receipt of any such contribution of provision of funds, goods, or services from any sanctioned person. Those persons subject to blocking sanctions would be added to OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”), while those subject to non-blocking sanctions would be added to the Non-SDN Menu-Based Sanctions List (“NS-MBS List”).[3]
In addition to the restrictions described above, the E.O. directs other heads of relevant executive departments and agencies to, as necessary and appropriate, to (1) “deny any specific license, grant, or any other specific permission or authority under any statute or regulation that requires the prior review and approval of the United States Government as a condition for the export or reexport of goods or technology to the sanctioned person” and (2) deny any visa to a leader, official, senior executive officer, director, or controlling shareholder of a sanctioned person.
OFAC’s “50 Percent Rule” Does Not Automatically Apply
Importantly, and unlike nearly all other sanctions programs administered by OFAC, this E.O. stipulates that OFAC’s “50 Percent Rule” does not automatically apply to any entity “owned in whole or in part, directly or indirectly, by one or more sanctioned persons, unless the entity is itself a sanctioned person” and the sanctions outlined within the E.O. are specifically applied. OFAC makes clear in Frequently Asked Questions (“FAQs”) 923 and 924 that such restrictions do not automatically “flow down” to entities owned in whole or in part by sanctioned persons regardless of whether such persons are listed on OFAC’s SDN List or NS-MBS List.
Parallel Issuance of New General Licenses and FAQs to Support Wide Range of Humanitarian Efforts
Recognizing the importance of humanitarian efforts to addressing the ongoing crisis in northern Ethiopia, OFAC concurrently issued three General Licenses and six related FAQs:
- General License 1, “Official Activities of Certain International Organizations and Other International Entities,” authorizes all transactions and activities for the conduct of the official business of certain enumerated international and non-governmental organizations by their employees, grantees, or contractors. FAQ 925 provides additional information on which United Nations organizations are included within this authorization.
- General License 2, “Certain Transactions in Support of Nongovernmental Organizations’ Activities,” authorizes transactions and activities that are ordinarily incident and necessary to certain enumerated activities by non-governmental organizations, including humanitarian projects, democracy-building initiatives, education programs, non-commercial development projects, and environmental or natural resource protection programs. FAQ 926 provides additional examples of the types of transactions and activities involving non-governmental organizations included within this authorization.
- General License 3, “Transactions Related to the Exportation or Reexportation of Agricultural Commodities, Medicine, Medical Devices, Replacement Parts and Components, or Software Updates,” authorizes transactions and activities ordinarily incident and necessary to the exportation or reexportation of agricultural commodities, medicine, medical devices, replacement parts and components for medical devices, and software updates for medical devices to Ethiopia or Eritrea, or to persons in third countries purchasing specifically for resale to Ethiopia or Eritrea. The authorization is limited to those items within the definition of “covered items” as stipulated in the general license, and the general license includes a note that the compliance requirements of other federal agencies, including the licensing requirements of the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), still apply. As of this writing, licenses from BIS for exports to Ethiopia are still required for any items controlled for reasons of chemical and biological weapons (CB1 and CB2), nuclear nonproliferation (NP1), national security (NS1, NS2), missile technology (MT1), regional security (RS1 and RS2), and crime control (CC1 and CC2) unless a license exception under the Export Administration Regulations (15 C.F.R. § 730 et seq.) applies.
Concluding Thoughts and Predictions
The implementation of this new sanctions program targeting “widespread violence, atrocities, and serious human rights abuse” in Ethiopia highlights the Biden administration’s efforts to apply pressure to Ethiopian and Eritrean forces to implement a ceasefire and permit the free flow of humanitarian aid into the Tigray region. We will continue to monitor further developments to see how the Biden administration chooses to deploy the flexible tools of economic pressure that it has created. As noted, we anticipate that, based on the administration’s recent past practice, its approach to designations under the new Ethiopia-related sanctions program will be gradual and measured as opposed to sweeping. Notably, the administration’s decision to create a new sanctions program as opposed to simply designating additional individuals and entities under an existing OFAC program (such as the Global Magnitsky sanctions program) may indicate the administration’s desire to put the Ethiopian and Eritrean governments on alert before additional actions are taken. The new Ethiopian sanctions program’s broad general licenses as well as the non-application of OFAC’s “50 Percent Rule” give further support to this assessment.
Moreover, the new sanctions program appears calibrated to minimize any collateral effects on international and non-governmental organizations operating within the humanitarian aid space, and may signal that the Biden administration will include broad humanitarian allowances in new sanctions actions moving forward.
Although the Department of the Treasury had not yet designated any foreign persons pursuant to this new sanctions regime, companies considering engaging with parties in the Horn of Africa should remain abreast of any new developments and designations, as unauthorized interactions with designated persons can result in significant monetary penalties and reputational harm to individuals and entities in breach of OFAC’s regulations.
__________________________
[1] According to the accompanying press release from the Department of the Treasury, the imposition of new sanctions represents an escalation of the Biden administration’s efforts to hold accountable those persons “responsible for or complicit in actions or policies that expand or extend the ongoing crisis or obstruct a ceasefire or peace process in northern Ethiopia or commit serious human rights abuse.” In the same statement, the Treasury Department made clear the purpose of the E.O. was to target “actors contributing to the crisis in northern Ethiopia” and was not “directed at the people of Ethiopia, Eritrea, or the greater Horn of Africa region.”
[2] For more on Myanmar sanctions developments, please see our prior client alerts on February 16, 2021, and April 2, 2021.
[3] For more background on the NS-MBS List, please see our December 2020 client alert which discussed the designation of Republic of Turkey’s Presidency of Defense Industries (“SSB’) to the then newly created NS-MBS List. To date, SSB remains the only designee on the NS-MBS List.
The following Gibson Dunn lawyers assisted in preparing this client update: Chris Mullen, Audi Syarief, Judith Alison Lee, Adam Smith, Stephanie Connor, Christopher Timura, Allison Lewis, and Scott Toussaint.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade practice group:
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The California Court of Appeal last week issued the first published California appellate decision to expressly confirm that trial courts have the authority to strike an unmanageable Private Attorneys General Act (“PAGA”) claim. In Wesson v. Staples the Office Superstore, LLC, No. B302988, — Cal.App.5th — (Sept. 9, 2021), the Court of Appeal held that trial courts have the inherent authority to manage complex litigation, and under this authority can evaluate whether PAGA claims can be manageably adjudicated at trial; if a PAGA claim cannot be manageably tried, the court may strike the claim. This is a critical ruling for California employers who are litigating PAGA actions in California state courts.
Wesson involved a PAGA claim on behalf of over 300 store managers who contended that Staples had misclassified them as exempt executive employees. After defeating class certification, Staples moved to strike the PAGA claim on the ground that individual variations in evidence relevant to each manager’s proper classification also rendered the PAGA claim unmanageable. The trial court granted Staples’s motion, and the Court of Appeal affirmed.
The Court of Appeal’s opinion emphasized that courts have “inherent authority to fashion procedures and remedies as necessary to protect litigants’ rights and the fairness of trial.” Slip op. at 25. Representative claims under PAGA pose challenges for efficient and fair case management, particularly where adjudicating the claims would require “minitrials . . . with respect to each” represented person. Id. at 28–29. The Court of Appeal further explained that “PAGA claims may well present more significant manageability concerns than those involved in class actions,” because PAGA lacks many of the protections associated with class litigation. Id. at 30 (emphasis added). The court also made clear that trial courts faced with those issues are not “powerless to address the challenges presented by large and complex PAGA actions” or “bound to hold dozens, hundreds, or thousands of minitrials involving diverse questions.” Id. at 31. Instead, if a trial court determines that a PAGA claim would be unmanageable at trial, it “may preclude the use of th[at] procedural device.” Id. at 32.
The California Supreme Court in Williams v. Superior Court, 3 Cal. 5th 531 (2017), had previously suggested in discussing the scope of discovery under PAGA that the “trial of the action” needed to be “manageable.” Id. at 559. And a number of federal district court decisions have recognized that courts have the inherent authority to strike PAGA claims as unmanageable, often based on Williams; Wesson, however, is the first published California appellate decision expressly recognizing that authority. After Wesson, employers who have active PAGA litigation may consider whether to move to strike the PAGA claim on manageability grounds.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these matters. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment practice group, or the following authors:
Katherine V.A. Smith – Co-Chair, Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com)
Megan Cooney – Orange County (+1 949-451-4087, mcooney@gibsondunn.com)
Matt Aidan Getz – Los Angeles (+1 213-229-7754, mgetz@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
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National Security is the highest priority of the Justice Department and remains a key focus for other enforcement agencies, including the Treasury Department, the Commerce Department, and State Department. This webcast will discuss developments and trends in enforcement across a wide range of national security topics. A team of national security practitioners with experience both inside and outside of government will address, among other things:
- Terrorism Financing
- Sanctions & Export Controls
- Theft of Intellectual Property & Economic Espionage
- Cyber Attacks and Ransomware
- The Foreign Agents Registration Act
- Foreign Investment in the United States
View Slides (PDF)
PANELISTS:
Zainab Ahmad, a partner in New York and co-chair of the firm’s National Security Practice Group, previously served as Deputy Chief of the National Security and Cybercrime section at the U.S. Attorney’s Office in the Eastern District of New York. Ms. Ahmad is a decorated former prosecutor who has received both of DOJ’s highest honors, the Attorney General’s Award and the FBI Director’s Award, and whose work prosecuting terrorists was profiled by The New Yorker magazine. Her practice is international and focuses on cross-border white collar defense and investigations, including corruption, anti-money laundering, sanctions and FCPA issues, as well as data privacy and cybersecurity matters.
David Burns, a partner in Washington, D.C. and co-chair of the firm’s National Security Practice Group, served in senior positions in both the National Security Division and the Criminal Division of the U.S. Department of Justice. As Principal Deputy Assistant Attorney General of the National Security Division he supervised the Division’s investigations and prosecutions, including counterterrorism, counterintelligence, economic espionage, cyber hacking, FARA, disclosure of classified information, and sanctions and export controls matters. Mr. Burns’ practice focuses on national security, white-collar criminal defense, internal investigations, and regulatory enforcement matters.
Robert Hur, a partner in Washington, D.C. and co-chair of the firm’s Crisis Management Practice Group, served as the 48th United States Attorney for the District of Maryland. During his tenure as United States Attorney, the Office handled numerous high-profile matters including those involving national security, cybercrime, public corruption, and financial fraud. Before serving as United States Attorney, Mr. Hur served as the Principal Associate Deputy Attorney General (“PADAG”) at the Department of Justice, a member of the Department’s senior leadership team and the principal counselor to Deputy Attorney General Rod J. Rosenstein. Mr. Hur assisted with oversight of all components of the Department, including the National Security Division. Civil, Criminal, and Antitrust Divisions, all 93 U.S. Attorney’s Offices, and the Federal Bureau of Investigation. He also liaised regularly on behalf of the Justice Department with the White House, Congressional committees, and federal intelligence, enforcement and regulatory agencies.
Adam M. Smith, a partner in Washington, D.C., was Senior Advisor to the Director of the U.S. Treasury Department’s OFAC and the Director for Multilateral Affairs on the National Security Council. His practice focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. He routinely advises multi-national corporations regarding regulatory aspects of international business.
Courtney Brown, a senior associate in Washington, D.C., practices in the areas of white collar criminal defense and corporate compliance. Ms. Brown has experience representing and advising multinational corporate clients and boards of directors in internal and government investigations on a wide range of topics, including anti-corruption, anti-money laundering, healthcare fraud, sanctions, securities, and tax. She has participated in two government-mandated FCPA compliance monitorships and conducted compliance trainings for in-house counsel and employees.
MCLE CREDIT INFORMATION:
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Participants should anticipate receiving their certificates of attendance via e-mail in approximately 8 weeks following the webcast.
New York partner Eric Stock, Washington, D.C. partner Michael Perry, and Orange County associate Matthew Parrott are the authors of “Pharma Cos. Should Prepare For New Drug-Rebate Scrutiny,” [PDF] published by Law360 on September 13, 2021.
Yesterday, September 9, President Biden announced several initiatives regarding COVID-19 vaccine requirements for U.S. employers. This alert provides a brief overview of the content and timing of the principal initiatives, and previews certain objections likely to be raised in legal challenges that some governors and others have said they will file.
- OSHA rule requiring all employers with 100+ employees to ensure their workers are vaccinated or tested weekly, and to pay for vaccination time.
The President announced that the Department of Labor’s Occupational Safety and Health Administration (OSHA) is developing an Emergency Temporary Standard (ETS) that will require all employers with 100 or more employees to ensure that their workforce is fully vaccinated or to require any workers who remain unvaccinated to produce a negative test result at least weekly before coming to work. The rule—which is expected to issue within weeks—will require employers with more than 100 employees to provide paid time off for the time it takes for workers to get vaccinated and to recuperate if they experience serious side effects from the vaccination.
OSHA ETS’s are authorized by statute, which permits the Secretary of Labor to promulgate an ETS when he determines (1) “that employees are exposed to grave danger from exposure to substances or agents determined to be toxic or physically harmful or from new hazards,” and (2) “that such emergency standard is necessary to protect employees from such danger.”[1] An ETS may be in place for up to six months, at which point OSHA must issue a permanent standard that has been adopted through ordinary rulemaking processes.[2] This would be OSHA’s second COVID ETS, following an ETS adopted in June that was limited to the health care sector.[3]
OSHA likely does not plan a notice-and-comment process for the forthcoming rule, which is not required for an ETS. As a consequence, the standard’s specific requirements likely will become known the day of publication, with an effective date shortly thereafter. Uncertainties that issuance of the rule should resolve include how it would apply to employees working at home, or to workers at remote locations without contact with other employees.
The decision to adopt the rule as an “emergency” and “temporary” standard, without notice and comment, could be one focus of a legal challenge. A challenge may also target the rule’s wage-payment requirement; wages are not a subject that OSHA ordinarily regulates, and the requirement arguably contrasts with Congress’s decision to let the COVID-related paid leave programs established by the Families First Coronavirus Response Act expire after December 31, 2020. If the ETS requires vaccination for workers who recently had and recovered from COVID-19, that could be targeted also.
- Executive Orders requiring vaccinations for employees of federal contractors, and for all federal workers.
In announcing the OSHA ETS, the President also issued separate Executive Orders regarding vaccination of employees of federal contractors, and regarding vaccination of federal workers.
The federal contractor Order imposes no immediate workplace requirements. Rather, the requirements—which the White House has said will include a vaccine mandate—are to be delineated by September 24 by the White House’s “Safer Federal Workforce Task Force” (Task Force), established by the President in January. Under the Order, by September 24, the Task Force is to provide “definitions of relevant terms for contractors and subcontractors, explanations of protocols required of contractors and subcontractors to comply with workplace safety guidance, and any exceptions to Task Force Guidance that apply to contractor and subcontractor workplace locations and individuals in those locations working on or in connection with a Federal Government contract.”[4] The Task Force Guidance is to be accompanied by a determination, issued by the Director of the Office of Management and Budget (OMB), that the Guidance “will promote economy and efficiency in Federal contracting, if adhered to by Government contractors and subcontractors.”[5] The Order cites the Federal Property and Administrative Services Act (the Procurement Act), as authority for the new federal contractor mandate.[6]
The Order is effectuated by requiring federal agencies to include a clause in contracts requiring “the contractor and any subcontractors (at any tier)” to “comply with all guidance for contractor or subcontractor workplace locations published by the Safer Federal Workforce Task Force,” “for the duration of the contract.”[7] This clause is to be included in new contracts and extensions and renewals of existing contracts, and “shall apply to any workplace locations . . . in which an individual is working on or in connection with a Federal Government contract.”[8]
A legal challenge to the Order is likely to focus on the President’s authority under the Procurement Act to use a White House Task Force to develop workplace safety rules for federal contractors. As discussed in a prior alert, presidents of both parties increasingly use the Procurement Act to regulate terms and conditions of employment at federal contractors, including most recently a $15 minimum wage requirement.[9] A challenge to this COVID Executive Order could produce an important legal precedent on presidential authority in this area.
Separate from the Order regarding contractors, President Biden also signed an Executive Order requiring that all federal executive branch workers be vaccinated, with minimal exceptions.[10] The Order requires federal agencies to “implement, to the extent consistent with applicable law, a program to require COVID-19 vaccination for all of [their] Federal employees.”[11] The Order does not allow employees to avoid vaccination through frequent testing. Instead, “only” those “exceptions . . . required by law” will be permitted.[12] Those exceptions are likely to concern disabilities and religious objections.[13] The President directed the Task Force to “issue guidance within 7 days . . . on agency implementation of” the Order’s requirements for federal employees.[14]
- COVID-19 vaccinations for health care workers at Medicare and Medicaid participating hospitals, and at other health care settings.
The President announced that the Centers for Medicare & Medicaid Services (CMS) will require COVID-19 vaccinations for workers in most health care settings that receive Medicare or Medicaid reimbursement, including but not limited to hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies. This action is an extension of a vaccination requirement for nursing facilities recently announced by CMS, and will apply to nursing home staff as well as staff in hospitals and other CMS-regulated settings, including clinical staff, individuals providing services under arrangements, volunteers, and staff who are not involved in direct patient, resident, or client care.[15]
* * *
We anticipate providing further updates later this month, as actions on the President’s directives proceed.
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[3] See OSHA National News Release, US Department of Labor’s OSHA issues emergency temporary standard
to protect health care workers from the coronavirus (June 10, 2021), https://www.osha.gov/news/newsreleases/national/06102021.
[4] Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors (Sept. 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/09/09/executive-order-on-ensuring-adequate-covid-safety-protocols-for-federal-contractors/.
[6] Id. (citing 40 U.S.C. 101 et seq).
[9] Gibson Dunn, Department of Labor Initiates Rulemaking to Raise the Minimum Wage to $15 Per Hour For Federal Contractors (July 29, 2021), https://www.gibsondunn.com/wp-content/uploads/2021/07/department-of-labor-initiates-rulemaking-to-raise-the-minimum-wage-to-15-dollars-per-hour-for-federal-contractors.pdf.
[10] Executive Order on Requiring Coronavirus Disease 2019 Vaccination for Federal Employees (Sept. 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/09/09/executive-order-on-requiring-coronavirus-disease-2019-vaccination-for-federal-employees/.
[13] Press Briefing by Press Secretary Jen Psaki (September 9, 2021), https://www.whitehouse.gov/briefing-room/press-briefings/2021/09/09/press-briefing-by-press-secretary-jen-psaki-september-9-2021/ (stating that there would be exceptions for “legally recognized reasons, such as disability or religious objections”).
[14] Executive Order on Requiring Coronavirus Disease 2019 Vaccination for Federal Employees (Sept. 9, 2021) at § 2; see also Safer Federal Workforce, https://www.saferfederalworkforce.gov/.
[15] See also CMS, Press Release, Biden-Harris Administration Takes Additional Action to Protect America’s Nursing Home Residents From COVID-19 (Aug. 18, 2021), https://www.cms.gov/newsroom/press-releases/biden-harris-administration-takes-additional-action-protect-americas-nursing-home-residents-covid-19.
The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Helgi C. Walker, Katherine V.A. Smith, Jason C. Schwartz, Jessica Brown, Karl G. Nelson, Amanda C. Machin, Lindsay M. Paulin, Zoë Klein, Chad C. Squitieri, and Marie Zoglo.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following in the firm’s Administrative Law and Regulatory, Labor and Employment or Government Contracts practice groups.
Administrative Law and Regulatory Group:
Eugene Scalia – Washington, D.C. (+1 202-955-8543,escalia@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com)
Labor and Employment Group:
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
Government Contracts Group:
Dhananjay S. Manthripragada – Los Angeles (+1 213-229-7366, dmanthripragada@gibsondunn.com)
Joseph D. West – Washington, D.C. (+1 202-955-8658, jwest@gibsondunn.com)
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.